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, 2003

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. Yes XNo .

The aggregate market value of the voting and non-voting
common equity held by non-affiliates of the registrant, i.e., persons other than
the directors and executive officers of the registrant, was $396,608,699, which
was based upon the last sales price as quoted on the New York Stock Exchange for
June 20, 2003.

The number of shares of common stock outstanding as of June
20, 2003: 11,820,795

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 16, 2003 and any adjournment thereof and which is expected to
be filed with the Securities and Exchange Commission on or about July 29, 2003,
are incorporated by reference in Part III hereof.

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INDEXPART I
    PAGEItem 1.
    Description of Business
    3General
    3Lending Activities
    5Loan 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
    11Consumer and Other Lending
    12Commercial Lending
    12Allowance for Loan Losses
    14Non-Accrual and Past-Due Loans
    20Real Estate Activities
    24Investment Activities
    24Sources of Funds
    29Subsidiary Activities
    33Regulation and Supervision
    34Federal 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 and Related Stockholder Matters
    47Item 6.
    Selected Financial Data
    48Item 7.
    Management's Discussion and Analysis of Financial Condition and
      Results of Operation
    51Asset Liability Management
    51Item 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
    111PART IIIItem 10.
    Directors and Executive Officers of the Registrant
    111Item 11.
    Executive Compensation
    111Item 12.
    Security Ownership of Certain Beneficial Owners and Management and
      Related Stockholder Matters
    111Item 13.
    Certain Relationships and Related Transactions
    112Item 14.
    Controls and Procedures
    112Item 15.
    Principal Accountant Fees and Services
    112PART IVItem 16.
    Exhibits, Financial Statement Schedules, and Reportson Form 8-K
    113


2

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PART I

Forward-Looking Statements

Except for historical information contained herein, the
matters discussed in this report contain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of
1934 (the "Exchange Act"), that involve substantial risks and
uncertainties. When used in this report, or in the documents incorporated by
reference herein, the words "anticipate," "believe,"
"estimate," "may," "intend," "expect"
and similar expressions identify certain of such forward-looking statements.
Actual results of PFF Bancorp, Inc. (the "Bancorp") and PFF Bank &
Trust (the "Bank"), (collectively referred to as the
"Company") could differ materially from such forward-looking
statements contained herein. Factors that could cause future results to vary
from current expectations include, but are not limited to, the following:
changes in economic conditions (both generally and more specifically in the
markets in which the Company operates); changes in interest rates, deposit
flows, loan demand, real estate values and competition; changes in accounting
principles, policies or guidelines and in government legislation and regulation
(which change from time to time and over which the Company has no control);
other factors affecting the Company's operations, markets, products and
services; and other risks detailed in this Form 10-K and in the Company's other
Securities and Exchange Commission filings. Readers are cautioned not to place
undue reliance on these forward-looking statements, which reflect management's
analysis only as of the date hereof. The Company undertakes no obligation to
publicly revise these forward-looking statements to reflect events or
circumstances that arise after the date hereof.

Item 1. Description of Business.

General

The Bancorp completed its initial public offering of
19,837,500 shares of common stock on March 28, 1996, in connection with the
conversion of Pomona First Federal Savings and Loan Association (the
"Association") from the mutual to stock form of ownership (the
"conversion") and the change of the Association's name to PFF Bank
& Trust. The Bancorp received $198.4 million from this initial public
offering before offering expenses of $4.5 million. The Bancorp utilized $105.0
million of the net proceeds of the initial public offering to acquire all of the
issued and outstanding stock of the Bank. The Bancorp is headquartered in
Pomona, California, and its principal business currently consists of the
operations of its wholly owned subsidiary, the Bank. At March 31, 2003, on a
consolidated basis, the Company had total assets of $3.15 billion, total
deposits of $2.33 billion and total stockholders' equity of $273.1 million. The
Bancorp, as a unitary savings and loan holding company, and the Bank, as a
federal savings bank, are subject to regulation by the Office of Thrift
Supervision (the "OTS"), the Federal Deposit Insurance Corporation
(the "FDIC") and the Securities and Exchange Commission (the
"SEC").

The Company is operating 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 consumer loans (collectively the "Four-Cs") and to a
lesser degree, one-to-four family residential mortgages. The Bank engages in
secondary market activities, primarily the purchase of one-to-four family
residential mortgages to supplement internal origination activities. To a lesser
degree, the Company invests in mortgage-backed securities ("MBS"),
collateralized mortgage obligations ("CMO") and other investment
securities (collectively "securities"). The Bank's revenues are
derived principally from interest on its loans, and to a lesser extent, fee
income and interest and dividends on investment securities. The Bank's primary
sources of funds are deposits and Federal Home Loan Bank ("FHLB")
advances and other borrowings and principal and interest payments on loans and
investment securities. Scheduled payments on loans and investment securities are
a relatively stable source of funds, while prepayments on loans and investment
securities and deposit flows are subject to significant fluctuation. The Bank
engages in trust activities through its trust department and offers certain
annuity and mutual fund non-deposit investment products and investment and asset
management services through subsidiaries of the Company.

3

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Available Information

Under the securities Exchange Act of 1934 Sections 13 and
15(d), periodic and current reports must be filed with the Securities and
Exchange Commission ("SEC"). The Company electronically files 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). The Company may also file additional forms. The SEC maintains an
internet site, www.sec.gov, in which all forms filed electronically may
be accessed. Additionally, all forms filed with the SEC and additional
shareholder information is available free of charge on the Company's website:
www.pffbank.com.

Market Area and Competition

The Bank's lending, deposit gathering and trust activities
are concentrated in eastern Los Angeles, San Bernardino, Riverside and northern
Orange counties. The Bank also originates loans on a wholesale basis throughout
Southern California and has expanded its lending to markets outside of Southern
California on a limited basis. The Bank's deposit gathering is concentrated in
the communities surrounding its offices.

The Bank's primary market area is highly competitive for
financial services and the Bank faces significant competition both in making
loans and in attracting deposits. The Bank faces direct competition from a
significant number of financial institutions operating in its market area, many
with a statewide, regional or national presence. Many of these financial
institutions are significantly larger and have greater financial resources than
the Bank. The Bank's competition for loans comes principally from savings and
loan associations, mortgage banking companies, commercial banks, credit unions
and insurance companies. Its most direct competition for deposits has
historically come from savings and loan associations and commercial banks. In
addition, the Bank faces increasing 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, the Bank's operations are significantly influenced by
general economic conditions, the monetary and fiscal policies of the federal
government and the regulatory policies of governmental authorities. Deposit
flows and the costs of interest-bearing liabilities to the Bank are influenced
by interest rates on competing investments and general market interest rates.
Similarly, the Bank's loan volume and yield on loans and securities and the
level of prepayments on loans 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.

Trust and Investment Advisory Activities

In January 1995, the Company acquired the trust operations of
another bank for $3.5 million. As a result of the acquisition, the Company now
has additional fiduciary responsibilities acting as trustee, executor,
administrator, guardian, custodian, record keeper, agent, registrar, advisor and
manager. The trust assets are not the assets of the Company and are not included
in the balance sheet of the Company. Trust fee income for the years ended March
31, 2003 and 2002 was $2.1 million. See "Notes to Consolidated Financial
Statements - Note 20: Trust Operations." Pursuant to federal securities
laws applicable to its trust activities, the Bank operates with a Registered
Investment Advisor ("RIA") designation. During April 2002, as a part
of its strategy to increase fee income associated with its wealth management and
advisory services, the Company formed a second RIA, Glencrest Investment
Advisors, Inc. ("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.

4

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Lending Activities

Loan Portfolio Composition. The Bank's loan portfolio
consists primarily of conventional first mortgage loans secured by one-to-four
family residences. At March 31, 2003, the Bank had total gross loans outstanding
of $3.13 billion, of which $1.41 billion or 45% were one-to-four family
residential mortgage loans. The remainder of the portfolio consisted of $949.0
million of construction and land loans, or 30% of total gross loans; $396.8
million of commercial real estate loans, or 13% of total gross loans; consumer
loans of $160.7 million or 5% of total gross loans; commercial business loans of
$149.2 million or 5% of total gross loans; and $70.6 million of multi-family
mortgage loans, or 2% of total gross loans. At March 31, 2003, approximately
$2.84 billion or 91% of the Bank's total loans had adjustable interest rates of
which approximately $1.24 billion or 44% were indexed to the one-year Constant
Maturity Treasury ("CMT"), approximately $1.05 billion or 37% were
indexed to Wall Street Journal Prime ("Prime"), approximately $373.2
million or 13% were indexed to the 11th FHLB District Cost of Funds Index
("COFI"), approximately $70.8 million or 2% were indexed to the PFF
Bank and Trust Base Rate (which approximates Prime) and the remaining 4% were
indexed to various other indices. The Bank's portfolio of adjustable rate loans
included approximately $888.4 million of loans (28% of total gross loans) 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"). The Bank's hybrid ARMs are primarily indexed to the one year CMT.

The types of loans that the Bank may originate are subject to
federal and state laws and regulations. Interest rates charged by the Bank on
loans are affected by the demand for such loans, 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 the Bank's loan portfolio
in dollar amounts and as a percentage of the portfolio at the dates indicated.



At March 31,2003
    2002
    2001
    2000
    1999Amount
    Percent
      of
      Total
    Amount
    Percent
      of
      Total
    Amount
    Percent
      of
      Total
    Amount
    Percent
      of
      Total
    Amount
    Percent
      of
      Total(Dollars in thousands)Real estate: (1)Residential:One-to-four family
    $ 1,406,606
    44.9%
    $ 1,402,977
    49.8%
    $ 1,338,940
    52.5%
    $ 1,537,233
    60.1%
    $ 1,482,839
    66.8%Multi-family
    70,606
    2.2
    77,964
    2.8
    87,321
    3.4
    85,169
    3.3
    87,856
    4.0Commercial real estate
    396,765
    12.7
    309,335
    11.0
    233,953
    9.2
    169,010
    6.6
    156,474
    7.0Construction and land
    948,993
    30.3
    711,637
    25.3
    597,083
    23.4
    517,659
    20.2
    349,119
    15.7Commercial
    149,232
    4.8
    155,589
    5.5
    133,564
    5.2
    122,095
    4.8
    74,451
    3.3Consumer
    160,673
    5.1
    158,475
    5.6
    160,987
    6.3
    126,424
    5.0
    70,686
    3.2Total loans, gross
    3,132,875
    100.0%
    2,815,977
    100.0%
    2,551,848
    100.0%
    2,557,590
    100.0%
    2,221,425
    100.0%Undisbursed loan funds
    (405,908)
    
    (288,231)
    
    (237,547)
    
    (198,656)
    
    (167,042)Net premiums (discounts) on loans
    (192)
    
    (202)
    
    818
    
    1,215
    
    1,665Deferred loan origination fees, net
    (3,377)
    
    (1,412)
    
    1,793
    
    1,753
    
    (276)Allowance for loan losses
    (31,121)
    
    (31,359)
    
    (31,022)
    
    (27,838)
    
    (26,160)Total loans, net
    2,692,277
    
    2,494,773
    
    2,285,890
    
    2,334,064
    
    2,029,612Less: Loans held for sale
    (3,327)
    
    (106)
    
    (583)
    
    (7,362)
    
    (3,531)Loans receivable, net
    $ 2,688,950
    
    $ 2,494,667
    
    $ 2,285,307
    
    $ 2,326,702
    
    $ 2,026,081(1)
      Includes loans held for sale.


6

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Loan Maturity.

At March 31, 2003One-to-
      Four
      Family
    Multi-
      Family
    Commercial
      Real Estate
    Construction and Land
    Commercial
    Consumer
    Total
      Loans
      Receivable(In thousands)Amounts due:One year or less
    $ 8,933
    8,207
    5,847
    714,107
    79,975
    12,900
    829,969After one year:More than one year to three years
    1,118
    2,363
    22,464
    234,221
    24,592
    238
    284,996More than three years to five years
    3,269
    3,392
    13,515
    125
    39,703
    732
    60,736More than five years to ten years
    11,269
    8,055
    312,206
    -
    3,996
    4,196
    339,722More than ten years to twenty years
    162,485
    38,256
    38,926
    100
    966
    140,190
    380,923More than twenty years
    1,219,532
    10,333
    3,807
    440
    -
    2,417
    1,236,529Total due after March 31, 2004
    1,397,673
    62,399
    390,918
    234,886
    69,257
    147,773
    2,302,906Total amount due
    1,406,606
    70,606
    396,765
    948,993
    149,232
    160,673
    3,132,875Less:Undisbursed loan funds
    -
    -
    -
    (405,908)
    -
    -
    (405,908)Net discounts on loans
    (192)
    -
    -
    -
    -
    -
    (192)Deferred loan origination fees, net
    1,491
    (197)
    (1,247)
    (6,196)
    (327)
    3,099
    (3,377)Allowance for loan losses
    (578)
    (121)
    (1,152)
    (16,271)
    (12,199)
    (800)
    (31,121)Total loans, net
    1,407,327
    70,288
    394,366
    520,618
    136,706
    162,972
    2,692,277Loans held for sale
    (3,327)
    -
    -
    -
    -
    -
    (3,327)Loans receivable, net
    $ 1,404,000
    70,288
    394,366
    520,618
    136,706
    162,972
    2,688,950


7

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The following table sets forth at March 31, 2003, the
  dollar amount of total gross loans receivable contractually due after March
  31, 2004, and whether such loans have fixed or adjustable interest rates.

Due after March 31, 2004Fixed
    Adjustable
    Total(In thousands)Real estate loans: (1)Residential:One-to-four family
    $ 133,164
    1,264,509
    1,397,673Multi-family
    1,746
    60,653
    62,399Commercial real estate
    5,174
    385,744
    390,918Construction and land
    -
    234,886
    234,886Commercial
    48,778
    20,479
    69,257Consumer
    54,528
    93,245
    147,773Total gross loans receivable
    $ 243,390
    2,059,516
    2,302,906(1) Includes loans held for sale.


Origination, Sale, Servicing and Purchase of Loans. The
Bank's lending activities are conducted primarily by loan representatives
through its 26 banking branches, its loan origination center in Rancho
Cucamonga, California, a satellite loan office in Redding, California, a
regional lending office in Sacramento, California and wholesale brokers approved
by the Bank. The Bank originates 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. The Bank also originates equity-based
consumer loans through wholesale brokers. All loans originated by the Bank,
either through internal sources or through wholesale brokers, are underwritten
by the Bank pursuant to the Bank's policies and procedures. The Bank originates
both adjustable-rate and fixed-rate loans. The Bank's ability to originate loans
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, which is affected by the current and expected future
levels of interest rates.

Loan originations were $1.87 billion for fiscal 2003 compared
to $1.43 billion for fiscal 2002. Originations of the Four-Cs aggregated $1.54
billion or 82% of total originations for fiscal 2003 compared to $1.19 billion
or 83% of total originations for fiscal 2002. The very slight decrease in the
percentage of total originations comprised by the Four-Cs reflects a significant
increase in turnover in the one-to-four family residential mortgage portfolio
rather than any reduction in the Company's emphasis on the Four-Cs. Reflecting
the dramatically lower interest rate environment, the weighted average initial
contract rate on total originations was 6.36% for fiscal 2003, compared to 7.30%
for fiscal 2002.

It is the general policy of the Bank to sell substantially
all of the 15 and 30-year fixed-rate mortgage loans that it originates and
retain substantially all of the adjustable-rate mortgage loans that it
originates. The Bank generally retains servicing of the loans sold. At March 31,
2003, the Bank was servicing $141.9 million of loans for others. See "Loan
Servicing." When loans are sold on a servicing retained basis, the Company
records gains or losses from the sale based on the difference between the net
sales proceeds and the allocated basis of the loans sold. The Company
capitalizes 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." The Bank had $357,000 of
MSR as of March 31, 2003, compared to $518,000 at March 31, 2002. Impairment
losses, if any, are recognized through a valuation allowance, with any
associated provision recorded as a component of loan servicing fees. At March
31, 2003, there were $3.3 million of mortgage loans categorized as held for sale
consisting of fixed-rate one-to-four family residential mortgage loans.

To supplement loan production, based upon the Bank's
investment needs and market opportunities, the Bank engages in secondary
marketing activities, including the purchase of whole or participating interests
in loans originated by other institutions. The Bank intends to continue to
purchase various types of loans originated by other institutions both in its
primary market area and, to a limited extent, other geographic areas throughout
the country depending on market opportunities. The Bank generally purchases
loans with servicing retained by the seller.

8

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



For the Years Ended March 31,2003
    2002
    2001(In thousands)Beginning balance (1)
    $ 2,494,773
    2,285,890
    2,334,064Loans originated:One-to-four family
    321,847
    234,926
    70,019Multi-family
    11,329
    10,939
    10,255Commercial real estate
    159,650
    125,544
    103,454Construction and land
    1,046,034
    740,573
    566,101Commercial
    190,133
    192,762
    173,454Consumer
    143,753
    129,077
    126,252Total loans originated
    1,872,746
    1,433,821
    1,049,535Loans purchased
    340,169
    415,287
    18,892Sub-total
    4,707,688
    4,134,998
    3,402,491Less:Principal payments
    (1,869,196)
    (1,573,443)
    (1,049,029)Sales of loans
    (19,174)
    (10,162)
    (23,305)Transfer to foreclosed real estate owned (REO) and loans charged-off
    (6,029)
    (2,331)
    (2,011)Change in undisbursed loan funds
    (117,677)
    (50,684)
    (38,891)Change in allowance for loan losses
    238
    (337)
    (3,184)Other (2)
    (3,573)
    (3,268)
    (181)Total loans
    2,692,277
    2,494,773
    2,285,890Loans held for sale, net
    (3,327)
    (106)
    (583)Ending balance loans receivable, net
    $ 2,688,950
    2,494,667
    2,285,307(1) Includes loans held for sale.(2) Includes net capitalization of fees and amortization of premium or
    accretion of discount on loans.


One-to-Four Family Residential Mortgage Lending

9

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The Bank's 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.
Mortgage loans originated by the Bank generally include due-on-sale clauses
which provide the Bank with the contractual right to deem the loan immediately
due and payable in the event the borrower transfers ownership of the property
without the Bank's consent. Due-on-sale clauses are an important means of
adjusting the rates on the Bank's fixed-rate mortgage loan portfolio and the
Bank has generally exercised its rights under these clauses when it has been
advantageous for the Bank to do so.

At March 31, 2003, the Bank's one-to-four family residential
mortgage loans totaled $1.41 billion or 45% of total gross loans. Of the $1.41
billion, 11% or $159.0 million were loans secured by non-owner-occupied
investment properties and 13% or $178.9 million were loans on owner-occupied
second homes. Of the one-to-four family residential mortgage loans outstanding
at March 31, 2003, 91% were adjustable-rate loans. The Bank emphasizes the
origination of adjustable-rate mortgage loans tied to the one-year CMT index. At
March 31, 2003, the outstanding principal balances of loans subject to negative
amortization totaled $283.9 million, (including $21.4 million of loans serviced
by others in which the Bank has purchased a participating interest) or 20% of
total one-to-four family residential mortgage loans. At March 31, 2003, the
total outstanding negative amortization on these loans (excluding the $21.4
million of loans serviced by others) was $853,000. The negative amortization is
generally capped at 110% of the original loan amount. At March 31, 2003, loans
with original maturities of over 30 years totaled $99.9 million.

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. Negative amortization involves a
greater risk to the Bank 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, the Bank believes that the risk of
default is reduced by negative amortization caps, underwriting criteria and the
stability provided by payment schedules. Prior to March 2000, adjustable rate
loans were offered with maturities up to 40 years. Effective during March 2000,
in response to interest rate risk considerations, the Bank discontinued offering
40-year maturities.

Multi-Family Lending. The Bank originates 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. The Bank offers a loan plan that adjusts
annually based on the one-year CMT Index plus a spread. The Bank also offers a
three year fixed rate loan and a five year fixed rate loan that are fixed for
the respective period and adjust annually thereafter. These loans typically have
an interest rate floor and a lifetime interest rate cap of five percent above
the start rate.In
reaching its decision on whether to make a multi-family loan, the Bank considers
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 the Bank's 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, the Bank generally
requires 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, the Bank also considers
the financial resources and income level of the borrower, the borrower's
experience in owning or managing similar properties, and the Bank's lending
experience with the borrower. The Bank's underwriting policies require that the
borrower be able to demonstrate strong management skills and the ability to
maintain the property from current rental income. 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 its assessment of the
creditworthiness of the borrower, the Bank generally reviews the financial
statements, employment and credit history of the borrower, as well as other
related documentation.

The Bank's multi-family loan portfolio at March 31, 2003
totaled $70.6 million or 2% of total gross loans. At March 31, 2003, 60% of the
Bank's multi-family loans were adjustable-rate indexed to COFI, 37% were indexed
to the one-year CMT, 2% were fixed rate and the remaining one percent were
indexed to various other indices. The Bank's largest multi-family loan at March
31, 2003, had an outstanding balance of $4.8 million and is secured by a 54-unit
apartment complex.

10

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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 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. The Bank seeks to minimize these risks
through its underwriting policies, which require such loans to be qualified at
origination on the basis of the property's income and debt service ratio.

Commercial Real Estate Lending. The Bank originates
commercial real estate loans that are generally secured by properties such as
small office buildings or retail facilities located in Southern California. The
Bank's 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 the Bank 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. The Bank's underwriting standards and procedures are
similar to those applicable to its multi-family loans, whereby the Bank
considers the net operating income of the property and the borrower's expertise,
credit history and profitability. The Bank has generally required that the
properties securing commercial real estate loans have debt service ratios of at
least 120%.

At March 31, 2003, the Bank's commercial real estate loan
portfolio was $396.8 million, or 13% of total gross loans. At March 31, 2003,
74% of these loans were indexed to the one-year CMT, 13% were indexed to COFI,
9% 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 the Bank's
portfolio at March 31, 2003 was $9.7 million and is secured by a three building,
multi-tenant industrial/office project containing approximately 165,685 square
feet.

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. The Bank
seeks to minimize these risks through its 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. The Bank generally
originates construction loans to real estate developers and individuals in
California. The Company's 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. The Bank's 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. The Bank requires an independent
appraisal of the property and generally requires personal guarantees. Loan
proceeds are disbursed as construction progresses and as inspections warrant.
The Bank's inspectors generally visit projects twice a month to monitor the
progress of construction.

The Bank has expanded, on a selective basis, construction
lending to western states other than California. Such expansion has been
undertaken with developers with whom the Bank has had long-term lending
relationships. As of March 31, 2003, the Bank had construction loans outstanding
for development of residential properties located in Nevada, Utah and Arizona
totaling $32.4 million, $18.4 million of which was disbursed. As of March 31,
2003, the remainder of the Bank's construction loans were for development of
real estate located in California. The largest credit exposure in the
construction loan portfolio as of March 31, 2003 consists of a loan for $23.0
million for the development of 202 condominium units in Roseville, California.
The disbursed balance of this loan at March 31, 2003, was $17.0 million. The
second largest credit exposure in the Bank's construction and land portfolio at
March 31, 2003, was a loan for $22.0 million secured by 1,502 lots that will be
separated into 14 tracts. At March 31, 2003, the Bank's construction and land
loan portfolio was $949.0 million or 30% of total gross loans, $543.1 million of
which was disbursed. At March 31, 2003, the aggregate balance of loans for the
construction of properties other than one-to-four family residences was $128.8
million, $73.5 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, the Bank may be confronted with a project, when completed, having a
value that is insufficient to assure full repayment of the Bank's loan.

Consumer and Other Lending.The Bank
offers both fixed-rate equity loans and adjustable rate equity lines of credit
secured by one-to-four family residences made primarily on properties located in
the Bank's primary market area. Loan originations are generated by the Bank's
loan representatives and approved mortgage brokers. The majority of consumer
loans are underwritten and approved on the basis of the applicant's ability and
apparent willingness to pay (credit history). A security interest on the
property is taken as an abundance of caution.

The equity lines of credit offered by the Bank 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.

The Bank's 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 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. The Bank also originates a limited
number of equity loans with loan to values up to 125%. These loans are
originated for the secondary market and substantially all of the originations
are sold upon funding to an investor. These loans also have a higher degree of
risk and are made with strict credit guidelines.

At March 31, 2003, the Bank's total consumer loan portfolio
was $160.7 million or 5% of total gross loans, composed primarily of $107.0
million in home equity lines of credit and $52.5 million in secured and
unsecured personal loans and lines of credit. At March 31, 2003, 61% of these
loans were indexed to Prime, 35% were fixed rate, 3% were indexed to COFI and 1%

Commercial Lending. During the past six years, the Bank
has expanded its operations to include lending to small and medium-sized
businesses. Loan products include working capital lines of credit, capital and
equipment term loans, Small Business Administration ("SBA") and other
government loan guarantee programs, and contractor financing for residential
housing rehabilitation. The Bank's 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, 2003, the Bank's total commercial loan
commitments were $304.3 million, of which $149.2 million or 5% of total gross
loans was outstanding. At March 31, 2003, 48% of the commercial loans
outstanding were indexed to the PFF Bank and Trust Base Rate (which approximates
Prime), 4% were indexed to Prime and the remaining 48% were fixed rate. At March
31, 2003, the largest amount of commercial loans outstanding to one borrower was
$12.5 million to a manufacturer and lessor of vehicles used in food service and
package delivery. 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 $11.4 million to an equipment leasing company. This
loan is also secured by the assignment of leases and underlying equipment as
well as inventory and accounts receivable. Repayment of both loans is expected
to come from lessee payments or, alternatively, from liquidation of equipment
and assets of the borrowers or guarantors.

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. The Bank generally
requires personal guarantees on its 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, the Bank monitors the
performance of its 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 the
Bank's commercial lending portfolio.

Industry
    Balance
      Outstanding
    Percent of
      Total Balance
      Outstanding
    Total
      Commitment
    Number of
      Loans
    Average
      Balance
      Outstanding
    Largest
      Commitment(Dollars in thousands)Agriculture,
      forestry &
      Fishing
    $ 495
    0.3%
    $ 583
    13
    $ 38
    $ 223Construction
    13,350
    8.9
    32,326
    129
    104
    5,163Manufacturing
    13,780
    9.2
    18,999
    87
    315
    3,792Transportation,
      communication
      & utilities
    1,896
    1.3
    2,592
    30
    64
    515Wholesale trade
    7,259
    4.9
    10,974
    44
    166
    3,140Retail trade
    8,211
    5.5
    10,406
    76
    108
    2,715Finance,
      insurance &
      real estate
    36,043
    24.2
    67,070
    94
    395
    14,049Services
    62,867
    42.1
    146,749
    513
    227
    17,754Other
    5,331
    3.6
    14,609
    21
    312
    5,137Total
    $149,232
    100.0%
    $304,308
    1,007


Loan Approval Procedures and Authority. The Board of
Directors establishes the lending policies of the Bank 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 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: mortgage loans and consumer loans in amounts up
to $299,999 may be approved by the Bank's staff underwriters; mortgage loans and
consumer loans in excess of $299,999 and up to $599,999 may be approved by
certain department managers; commercial business loans up to $499,999 may be
approved by the Commercial Credit Administrator or Chief Lending Officer;
mortgage loans and consumer loans in excess of $599,999 and up to $999,999 may
be approved by the Major Loan Manager, the Senior Executive Vice President or
Chief Lending Officer; mortgage loans in excess of $999,999 and up to
$9,999,999, and commercial business loans in excess of $499,999 and up to
$4,999,999 must be approved by the Management Loan Committee; and mortgage loans
of $10.0 million or more, consumer loans in excess of $999,999 and commercial
business loans of $5.0 million or more require the approval of the LOARC. The
LOARC presently reviews commercial business loans in excess of $4,999,999, post
funding, for consistency with the Bank's goals and objectives. Since March 31,
1998 the Bank has also contracted with an independent credit review firm for the
post funding review of all commercial business loans in excess of $500,000 and
selected smaller loans. This credit review firm is comprised of experienced
former federal bank examiners. During fiscal 2003, the Bank hired a former
federal bank examiner to strengthen its internal credit review capabilities. As
a result, the Bank has begun phasing out the use of the external credit review
firm.

13

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The Bank will not make loans-to-one borrower that are in
excess of regulatory limits. Pursuant to OTS regulations, loans-to-one borrower
cannot exceed 15% of the Bank's unimpaired capital and surplus. At March 31,
2003, the Bank's limit on loans-to-one borrower was $42.3 million.

Loan Servicing. The Bank services 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 have
been sold by the Bank. At March 31, 2003, the Bank was servicing $141.9 million
of loans for others. The Bank does not purchase servicing rights related to
mortgage loans originated by other institutions.

Delinquencies and Classified Assets

For commercial business loans, management conducts an ongoing
review of all loans 15 or more days delinquent. The procedures undertaken by the
Bank with respect to delinquencies may vary depending on the nature of the loan,
the period of delinquency, and the quality of collateral or guaranties. The Bank
generally sends 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 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 Losses.

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

14

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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. The Company's
asset monitoring process includes the use of asset classifications to segregate
the assets, largely loans and real estate, into various risk categories. The
Company uses 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 classifications follows:













The asset classifications from the internal asset review
process are used in the following manner to determine the amount of the
allowance for loan losses:

- General valuation allowances ("GVA"): This element relates to
    assets with no well-defined deficiency or weakness (i.e. assets classified
    pass) and takes into consideration losses that are imbedded within the
    portfolio but have not yet been realized. Generally, borrowers are impacted
    by events well in advance of a lender's knowledge that may ultimately result
    in loan default and eventual loss. Examples of such loss-causing events
    would be borrower's job loss, divorce or medical crisis in the case of
    single family residential and consumer loans, or loss of a major tenant in
    the case of commercial real estate loans. General valuation allowances are
    determined by applying factors that take into consideration past loss
    experience, current trends, etc. for each major asset type.

- Specific valuation allowances ("SVA"): A loan 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 the Company determines that a loss is probable, the
    Company establishes a SVA for the amount of the loss by determining the
    difference between the Company's recorded investment in the loan and the
    estimated net realizable value. If the loan is collateral dependent the fair
    value of the collateral is used to determine the SVA.
- Large borrower risk : The Company has a number of borrowers who,
    individually or in the aggregate, have large lending relationships with the
    Company -- defined as aggregating $10.0 million or more for construction
    loans and $5.0 million or more for commercial business loans. Because of the
    risk inherent in these types of credits, if one loan should default or show
    material weaknesses it can adversely affect the borrower's ability to
    perform on other indebtedness to the Company. The Company's policy is to
    review all construction loans whose committed balances (1) individually
    equal or exceed $5.0 million or (2) aggregate at least $10.0 million.
    Utilizing the above aggregate balance thresholds, at March 31, 2003, the
    Company had 50 construction loan borrowers with aggregate committed balances
    averaging $15.9 million and 10 commercial business borrowers with aggregate
    outstanding balances averaging $5.6 million. It is the Company's position
    that there is an inherently greater risk in the large borrower portfolios
    since defaults on one loan to a multiple borrower may trigger defaults or
    adverse classification of other loans to the same borrower. Based upon the
    number of multiple borrower relationships and historical loss history
    adjusted for current economic conditions, the Company applied a probable
    default factor to these multiple borrower relationships in determining an
    appropriate level of allowance for loan losses. This methodology resulted in
    the inclusion of $6.3 million applicable to large borrower risk in the
    Company's March 31, 2003 allowance for loan losses.

15

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At March 31, 2003, the Company's allowance for loan losses
was $31.1 million or 0.99% of gross loans and 167.57% of non-performing loans
compared to $31.4 million or 1.11% of gross loans and 697.80% of non-performing
loans at March 31, 2002. At March 31, 2003, the Company had non-performing loans
of $18.6 million or 0.59% of gross loans compared to $4.5 million or 0.16% of
gross loans at March 31, 2002. See "Non-Accrual and Past Due Loans."
The Company will continue to monitor and modify its allowance for loan losses
based upon economic conditions, loss experience, changes in portfolio
composition and other factors.

The following table sets forth activity in the Company's
allowance for loan losses for the periods indicated.

For the Year Ended March 31,2003
    2002
    2001
    2000
    1999(Dollars in thousands)Beginning balance
    $ 31,359
    31,022
    27,838
    26,160
    26,002Provision for loan losses
    4,840
    5,000
    5,004
    4,000
    4,020Charge-offs:Real estate:One-to-four family
    (69)
    (78)
    (524)
    (1,522)
    (3,361)Multi-family
    -
    -
    -
    (319)
    (115)Commercial real estate
    -
    -
    (216)
    -
    -Construction and land
    -
    (3,012)
    -
    -
    (31)Commercial
    (4,978)
    (612)
    (223)
    -
    -Consumer
    (692)
    (1,069)
    (898)
    (549)
    (372)Total
    (5,739)
    (4,771)
    (1,861)
    (2,390)
    (3,879)Recoveries
    661
    108
    41
    68
    17Ending balance
    $ 31,121
    31,359
    31,022
    27,838
    26,160Net charge-offs to average gross
      loans outstanding
    0.19%
    0.17
    0.07
    0.11
    0.17


For the fiscal years ended March 31, 2002 and 2003, the
provisions for loan losses approximated the levels of net charge-offs. During
these periods, the proportion of the loan portfolio comprised by the Four-Cs
increased from 44% at March 31, 2001, to 47% at March 31, 2002, and 53% at March
31, 2003. 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 losses. However, based upon a reduction in historical loss
experience and a reduction in the Company's estimate of incurred losses inherent
in the loan portfolio after giving consideration to current economic conditions,
the Company has reduced the probable loss rates used in determining the GVA. In
determining the amount of the GVA, the Company stratifies its loan portfolio
into approximately 105 segments based upon loan type, internal classification,
etc. Each of these strata is assigned a separate probable loss factor.

16

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

Probable Loss Factors (basis points)Loan Type
    Pass
    Special
      Mention
    Substandard
    DoubtfulOne-to-four family
    2-88
    150-500
    300-1,000
    5,000Multi-family
    2-132
    200-300
    500-600
    5,000Commercial real estate
    4-161
    500
    1,200
    5,000Construction and land
    4-161
    500
    1,200
    5,000Commercial
    13-500
    700-900
    1,350-1,650
    5,000Consumer (1)
    2-4,086
    150-3,000
    300-5,000
    5,000(1) When certain consumer loans are criticized as special
mention, they are charged-off. As a result, the high-end loss factor for pass is
greater than that for special mention.


The Bank's determination as to the classification of its
assets and the amount of its 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 losses, there can be no assurance
that regulators, in reviewing the Bank's loan portfolio, will not request the
Bank to materially increase its allowance for loan losses, thereby negatively
affecting the Bank's financial condition and earnings. Although management
believes that an adequate allowance for loan losses has been established,
further additions to the level of allowance for loan losses may become
necessary.

Management reviews and classifies the Company's assets
monthly and reports the results of its review to the Board of Directors. The
Company classifies assets in accordance with the management guidelines described
above. REO is classified as Substandard. The Company utilizes an internal
appraisal staff and Board approved independent appraisers to conduct appraisals
at the time of foreclosure and subsequent appraisals on REO on a periodic basis.
Qualified personnel are also utilized for annual property inspections on all
income producing real properties securing a loan balance over $1.0 million 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, 2003 and 2002 the Company had $22.3 million and
$25.2 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, 2003 were: 20 loans totaling $4.5 million secured by one-to-four
family residences; and five non-homogeneous loans (defined as loans with unpaid
principal balances in excess of $500,000) totaling $16.0 million. The
composition of the non-homogeneous loans is as follows: one commercial real
estate loan totaling $501,000 and four commercial loans totaling $15.5 million.
At March 31, 2003, the Company had $37.5 million of assets, net of specific
allowances of $5.6 million, classified as Substandard, compared to $71.6
million, net of specific allowances of $3.1 million, classified as Substandard
at March 31, 2002. Included in Substandard assets at March 31, 2003 are
construction loans aggregating $3.7 million, net of specific allowances of $1.9
million, on a project in Castaic, California, and $11.5 million, net of specific
allowances of $191,000, on a project in Murrieta, California. See
"Non-Accrual and Past-Due Loans."

17

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The Company's 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 2003, the
Company 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, 2003, there were no assets classified as Loss or
Doubtful compared to no assets classified as Loss and three assets totaling
$253,000 classified as Doubtful at March 31, 2002. The composition of assets
classified Substandard at March 31, 2003 and 2002 is set forth on the following
page.

18

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At March 31, 2003Loans
    REO
    Total Substandard AssetsGross
      Balance
    Net
      Balance(1)
    Number
      of Loans
    Gross
      Balance
    Net
      Balance(1)
    Number
      of Loans
    Gross
      Balance
    Net
      Balance(1)
    Number
      of Loans(Dollars In thousands)Real estate:Residential:One-to-four family
    $ 3,683
    $ 3,581
    28
    $ 75
    $ 75
    1
    $ 3,758
    $ 3,656
    29Multi-family
    -
    -
    -
    -
    -
    -
    -
    -
    -Commercial real estate
    1,745
    1,745
    1
    -
    -
    -
    1,745
    1,745
    1Construction and land
    22,783
    20,677
    8
    -
    -
    -
    22,783
    20,677
    8Sub-total
    28,211
    26,003
    37
    75
    75
    1
    28,286
    26,078
    38Commercial
    14,271
    10,915
    18
    -
    -
    -
    14,271
    10,915
    18Consumer
    542
    518
    15
    -
    -
    -
    542
    518
    15Total
    $ 43,024
    $ 37,436
    70
    $ 75
    $ 75
    1
    $ 43,099
    $ 37,511
    71At March 31, 2002Loans
    REO
    Total Substandard AssetsGross
      Balance
    Net
      Balance(1)
    Number
      of Loans
    Gross
      Balance
    Net
      Balance(1)
    Number
      of Loans
    Gross
      Balance
    Net
      Balance(1)
    Number
      of Loans(Dollars in thousands)Real Estate:Residential:One-to-four family
    $ 8,592
    $ 8,532
    69
    $ 507
    $ 507
    6
    $ 9,099
    $ 9,039
    75Multi-family
    1,154
    1,154
    1
    -
    -
    -
    1,154
    1,154
    1Commercial real estate
    2,576
    2,419
    3
    -
    -
    -
    2,576
    2,419
    3Construction and land
    42,139
    39,361
    8
    -
    -
    -
    42,139
    39,361
    8Sub-total
    54,461
    51,466
    81
    507
    507
    6
    54,968
    51,973
    87Commercial
    19,324
    19,288
    9
    -
    -
    -
    19,324
    19,288
    9Consumer
    359
    312
    15
    -
    -
    -
    359
    312
    15Total
    $ 74,144
    $ 71,066
    105
    $ 507
    $ 507
    6
    $ 74,651
    $ 71,573
    111(1) Net balances are reduced for specific loss allowances established against
Substandard loans and REO.


19

---

Non-Accrual and Past-Due Loans. The following table sets
forth information regarding non-accrual loans, REO and TDR loans. There were two
TDR loans and one REO property at March 31, 2003. It is the policy of the
Company to cease accruing and to establish an allowance for all previously
accrued but unpaid interest on loans 90 days or more past due. For the years
ended March 31, 2003, 2002, 2001, 2000 and 1999, 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 $1.0
million, $330,000, $733,000, $466,000 and $1.1 million, respectively, none of
which was recognized.

The Bank has a total of $5.6 million in loans outstanding on
a 296 home residential development project in Castaic with an aggregate
commitment of $5.6 million. The project incurred cost overruns and construction
delays which caused the Bancorp to determine that its one loan in the amount of
$3.0 million was impaired as of December 31, 2000. Accordingly, during the
quarter ended December 31, 2000, the Bancorp placed this loan on non-accrual
status and established an allowance for loss for the full amount of this loan.
During the quarter ended December 31, 2001, the Bancorp charged this loan off
against the previously established allowance. The Bank has determined that it is
still probable that it will collect all amounts contractually due on the
remaining $5.6 million of loans outstanding on this project. The Bank has taken
an assignment of the borrower's interest on two projects, on which the Bank has
no indebtedness from the borrower, to enhance the overall collateral position of
the Bank. Management is continuing to closely monitor the status of these loans.
The status of this project as of March 31, 2003 was as follows: 279 of the 296
homes have been sold and closed and 17 homes are in escrow. The 17 homes in
escrow are currently under construction and will close upon completion. During
the quarter ended March 31, 2003, 44 homes closed escrow. The Bank's Castaic
loans were designated as TDRs as of March 31, 2002 and 2003, due to maturity
extensions granted as a result of cost overruns and delays in completion of the
project.

Included in non-accrual construction and land loans at March
31, 2003 is a $11.7 million residential construction loan for the acquisition
and development of 66 residential lots and single family homes in Murrieta,
California. The first phase of 21 homes and four models have been built and
closed (the models are being leased back by the developer from the buyers). The
second phase of 20 homes is under construction and all sold (in escrow awaiting
completion). This phase of homes has had significant delays due to the equity
partner removing and replacing the original developer and remediation work
necessary due to the long construction delays. The homes are anticipated to be
delivered in the third calendar quarter of 2003. The final 21 lots are virtually
completed and will be marketed by the borrower to other builders. The lot sales
transaction is anticipated to also be finalized in the third calendar quarter of
the year. As of March 31, 2003, the Bank had no SVA on this loan.

Included in non-accrual commercial loans at March 31, 2003,
is a $2.7 million loan to a chain of retail jewelry stores. The stores entered
bankruptcy during November 2002. During April 2003, the Bank took possession of
the inventory collateralizing this loan. As of March 31, 2003, the Bank had a
$2.1 million SVA on this loan.

During the years ended March 31, 2003 and 2002, the Company's
average investment in impaired loans was $34.6 million and $46.9 million,
respectively. Interest income recorded during these periods was $1.3 million and
$1.9 million, respectively, of which none was recorded utilizing the cash basis
method of accounting.

20

---





At March 31,2003
    2002
    2001
    2000
    1999(Dollars in thousands)Non-accrual loans:Residential real estate:One-to-four family
    $ 2,776
    3,049
    5,420
    4,415
    10,061Multi-family
    -
    -
    -
    -
    122Commercial real estate
    -
    285
    -
    -
    -Construction and land (3)
    11,680
    -
    4,572
    -
    647Commercial
    3,513
    65
    437
    243
    -Consumer
    603
    1,095
    1,052
    769
    182Total
    18,572
    4,494
    11,481
    5,427
    11,012REO, net (1)
    75
    507
    351
    1,466
    5,318Non-performing assets
    $ 18,647
    5,001
    11,832
    6,893
    16,330TDR loans (3)
    $ 3,729
    27,941
    3,012
    1,950
    11,291Classified assets, gross
    $ 43,099
    74,904
    62,102
    37,354
    39,058Allowance for loan losses as a
      percent of gross loans receivable
    0.99%
    1.11
    1.22
    1.09
    1.18Allowance for loan losses as a
      percent of total non-performing
      loans (2)
    167.57
    697.80
    270.20
    512.96
    237.56Non-performing loans as a percent
      of gross loans receivable (2)
    0.59
    0.16
    0.45
    0.21
    0.50Non-performing assets as a percent
      of total assets (2)
    0.59
    0.16
    0.51
    0.23
    0.56(1) REO balances are shown net of related loss allowances.(2) Non-performing assets consist of non-performing loans and REO.
    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 is included in non-accrual and TDR loans. At March 31, 2002 and
    2003, the Bank's loans on the Castaic development are the only loans
    reported as TDR.


21

---

The following table sets forth delinquencies in the Bank's loan portfolio as
of the dates indicated.

At March 31, 2003
    At March 31, 200260-89 Days
    90 Days or More(1)
    60-89 Days
    90 Days or More(1)Number
      of Loans
    Principal
      Balance
      of Loans
    Number
      of Loans
    Principal
      Balance
      of Loans
    Number
      of Loans
    Principal
      Balance
      of Loans
    Number
      of Loans
    Principal
      Balance
      of Loans(Dollars in thousands)One-to-four family
    5
    $ 984
    18
    $ 2,776
    5
    $ 607
    22
    $ 3,049Multi-family
    -
    -
    -
    -
    -
    -
    -
    -Commercial real estate
    -
    -
    -
    -
    -
    -
    1
    285Construction and land
    5
    11,104
    3
    11,680
    -
    -
    -
    -Commercial
    -
    -
    8
    3,513
    -
    -
    10
    65Consumer
    3
    61
    50
    603
    1
    34
    57
    1,095Total
    13
    $ 12,149
    79
    $ 18,572
    6
    $ 641
    90
    $ 4,494At March 31, 200160-89 Days
    90 Days or More(1)Number
      of Loans
    Principal
      Balance
      of Loans
    Number
      of Loans
    Principal
      Balance
      of Loans(Dollars in thousands)One-to-four family
    18
    $ 1,847
    43
    $ 5,420Multi-family
    -
    -
    -
    -Commercial real estate
    1
    242
    -
    -Construction and land
    -
    -
    2
    4,572Commercial
    -
    -
    5
    437Consumer
    8
    256
    27
    1,052Total
    27
    $ 2,345
    77
    $ 11,481Loans 90 days or more past due are included in non-accrual loans. See
    "Non-Accrual and Past Due Loans."The $11.7 million in construction and land that is 90 days or more
    delinquent is comprised of a loan on a
    residential development in Murrieta, California for which the Bank has
    determined no SVA is required. See
    "Lending Activities - Non-Accrual and Past Due Loans."


22

---

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

At March 31,2003
    2002
    2001Amount
    Percent of
      Allowance
      to Total
      Allowance
    Percent of
      Gross Loans
      in each
      Category to
      Total Gross
      Loans
    Amount
    Percent of
      Allowance
      to Total
      Allowance
    Percent of
      Gross Loans
      in each
      Category to
      Total Gross
      Loans
    Amount
    Percent of
      Allowance
      to Total
      Allowance
    Percent of
      Gross Loans
      in each
      Category to
      Total Gross
      Loans(Dollars in thousands)One-to-four family
    $ 578
    1.86%
    44.90%
    $ 672
    2.14%
    49.82%
    $ 1,549
    5.00%
    52.47%Multi-family
    121
    0.39
    2.25
    191
    0.61
    2.77
    228
    0.73
    3.42Commercial real estate
    1,152
    3.70
    12.67
    2,829
    9.02
    10.98
    891
    2.87
    9.17Construction and land
    16,271
    52.28
    30.29
    19,588
    62.47
    25.27
    17,835
    57.50
    23.40Commercial
    12,199
    39.20
    4.76
    5,947
    18.96
    5.53
    5,334
    17.19
    5.23Consumer
    800
    2.57
    5.13
    2,132
    6.80
    5.63
    5,185
    16.71
    6.31Unallocated
    -
    -
    -
    -
    -
    -
    -
    -
    -Total allowance for
      loan losses
    $ 31,121
    100.00%
    100.00%
    $ 31,359
    100.00%
    100.00%
    $ 31,022
    100.00%
    100.00%At March 31,2000
    1999Amount
    Percent of
      Allowance
      to Total
      Allowance
    Percent of
      Gross Loans
      in each
      Category to
      Total Gross
      Loans
    Amount
    Percent of
      Allowance
      to Total
      Allowance
    Percent of
      Gross Loans
      in each
      Category to
      Total Gross
      Loans(Dollars in thousands)One-to-four family
    $ 3,453
    12.40%
    60.10%
    $ 5,721
    21.87%
    66.75%Multi-family
    783
    2.81
    3.33
    2,026
    7.74
    3.95Commercial real estate
    1,593
    5.72
    6.61
    2,048
    7.83
    7.04Construction
    12,186
    43.78
    20.24
    8,911
    34.06
    15.72Commercial
    6,367
    22.88
    4.78
    2,761
    10.56
    3.36Consumer
    3,455
    12.41
    4.94
    4,690
    17.93
    3.18Unallocated
    1
    -
    -
    3
    0.01
    -Total allowance for
      loan losses
    $ 27,838
    100.00%
    100.00%
    $ 26,160
    100.00%
    100.00%


23

---

Real Estate Activities

At March 31, 2003, the Company had $75,000 of REO, net of
allowances, and no real estate acquired for investment ("REI"). If the
Company acquires any REO, it is initially recorded at fair value. If there is a
further deterioration in value, the Company provides for a specific valuation
allowance and charges operations for the diminution in value. It is the policy
of the Company to obtain an appraisal on all REO at the time of possession.

The following table sets forth certain information with
regard to the Bank's REO and REI.

At March 31,2003
    2002
    2001
    2000
    1999(In thousands)REOProperties acquired in
      settlement of loans
    $ 75
    507
    400
    1,466
    5,763Allowance for losses
    -
    -
    (49)
    -
    (445)Total REO, net
    75
    507
    351
    1,466
    5,318REIProperties wholly owned
    -
    -
    -
    558
    558Mezzanine real estate financing
    -
    -
    -
    4,370
    5,813Allowance for losses
    -
    -
    -
    -
    -Total REI, net
    -
    -
    -
    4,928
    6,371Total real estate, net
    $ 75
    507
    351
    6,394
    11,689


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 the time TB73 was issued, the Bank's aggregate investment in
such securities of $52.4 million exceeded the OTS limitation by $23.0 million.
The Bank applied for and was granted a waiver by the OTS permitting the Bank to
continue to hold its trust preferred securities. At March 31, 2003, the Bank's
aggregate investment in trust preferred securities is $43.4 million which
represents 17% 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 its 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, 2003, the Bancorp had direct
equity investments of $5.0 million, investments in equity mutual funds of $4.2
million and investments in corporate debt obligations (trust preferred debt
securities) of $6.0 million. Given the non-rated nature of the Bancorp's
investments in trust preferred debt securities along with the longer-term
(typically 30 years) structure of the obligations, the Bancorp undertakes a
review of the historical and current financial condition and operating results
of the issuer prior to making an investment. These reviews are updated
periodically during the holding periods for the investments.

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.

At March 31, 2003, the Company had $99.8 million in
investment securities consisting primarily of investment grade corporate and
U.S. agency securities. Eighty-three percent of the Company's MBS portfolio is
comprised of adjustable-rate securities tied to the one-year CMT including 70%
of the portfolio comprised by hybrid ARMs. The remainder of the Company's MBS
portfolio is comprised primarily of seasoned fixed-rate securities (7% of the
portfolio) and five and seven year balloon securities (7% of the portfolio). At
March 31, 2003, the carrying value of the Company's MBS portfolio totaled $215.3
million. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Comparison of Financial Condition at March 31, 2003
and March 31, 2002." All of the Company's MBS are insured or guaranteed by
either 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.
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.

The Company's $15.2 million CMO portfolio consists
principally of adjustable rate securities tied to the one month LIBOR ($3.2
million) or the Prime rate ($12.0 million). The adjustment intervals for these
securities are generally monthly. All of the Company's CMO are 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 Company evaluates all of its securities on an individual
basis no less frequently than quarterly for "other-than-temporary"
impairment. In conducting this evaluation, the Company determines if it is
probable that it will be unable to collect 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 the
Company's intent and ability to hold the securities to maturity. At March 31,
2003, the Company determined that there was no other-than-temporary impairment
of its securities.

25

---

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

At March 31,2003
    2002
    2001Carrying
      Value
    Fair
      Value
    Carrying
      Value
    Fair
      Value
    Carrying
      Value
    Fair
      Value(In thousands)Available-for-sale:GNMA
    $ 15,369
    15,369
    20,450
    20,450
    12,221
    12,221FHLMC
    39,127
    39,127
    45,717
    45,717
    83,851
    83,851FNMA
    160,770
    160,770
    130,413
    130,413
    206,892
    206,892Total available-for-sale
    $ 215,266
    215,266
    196,580
    196,580
    302,964
    302,964


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

At March 31,2003
    2002
    2001Carrying
      Value
    Fair
      Value
    Carrying
      Value
    Fair
      Value
    Carrying
      Value
    Fair
      Value(In thousands)Held-to-maturity:U.S. government and
      federal agency obligations
    $ 5,753
    5,957
    703
    703
    702
    772Total held-to-maturity
    5,753
    5,957
    703
    703
    702
    772Available-for-sale:Corporate debt securities
    49,398
    49,398
    55,236
    55,236
    51,808
    51,808Equity securities:
      Direct (1)
    4,982
    4,982
    5,440
    5,440
    4,900
    4,900Mutual funds
    39,714
    39,714
    33,144
    33,144
    2,429
    2,429U.S. government and
      federal agency obligations
    -
    -
    -
    -
    -
    -Total available-for-sale
    94,094
    94,094
    93,820
    93,820
    59,137
    59,137Total
    $ 99,847
    100,051
    94,523
    94,523
    59,839
    59,909(1) The Bancorp's direct equity investments include zero and $2.3 million
managed by the Bank's trust department as of March 31, 2003 and 2002,
respectively.


26

---

The following table sets forth certain information regarding the carrying and
fair values of the Company's collateralized mortgage obligations at the dates
indicated.

At March 31,2003
    2002
    2001Carrying
      Value
    Fair
      Value
    Carrying
      Value
    Fair
      Value
    Carrying
      Value
    Fair
      Value(In thousands)Available-for-sale:Collateralized mortgage
      obligations:FHLMC
    $ 12,387
    12,387
    43,928
    43,928
    57,236
    57,236FNMA
    2,813
    2,813
    18,850
    18,850
    25,079
    25,079Total
    $ 15,200
    15,200
    62,778
    62,778
    82,315
    82,315


27

---

The table below sets forth certain information regarding the carrying value,
weighted average yields and maturities of the Company's mortgage-backed
securities, investment securities and collateralized mortgage obligations as of
March 31, 2003. The table presented represents stated final maturities and does
not reflect scheduled principal payments.

At March 31, 2003One Year or less
    More than One
      Year to Five Years
    More than Five
      Years to Ten Years
    More than Ten
      Years
    TotalCarrying
      Value
    Weighted
      Average
      Yield
    Carrying
      Value
    Weighted
      Average
      Yield
    Carrying
      Value
    Weighted
      Average
      Yield
    Carrying
      Value
    Weighted
      Average
      Yield
    Carrying
      Value
    Weighted
      Average
      Yield(Dollars in thousands)Mortgage-backed securities:Available-for-sale:GNMA
    $ 3
    9.00%
    $ 10
    9.00%
    $ -
    -%
    $ 15,356
    4.59%
    $ 15,369
    4.59%FHLMC
    448
    6.54
    3,240
    5.55
    227
    9.26
    35,212
    4.37
    39,127
    4.52FNMA
    2,349
    6.65
    10,732
    6.09
    2,783
    7.56
    144,906
    3.96
    160,770
    4.20Total mortgage-backed securities
    $ 2,800
    6.64%
    $ 13,982
    6.01%
    $ 3,010
    7.66%
    $ 195,474
    4.17%
    $ 215,266
    4.28%Investment securities:Held-to-maturity:U.S. government and Federal agency Obligations
    $ -
    -%
    $ 5,753
    3.48%
    $ -
    -%
    $ -
    -%
    $ 5,753
    3.48%Total held-to-maturity
    -
    -
    5,753
    3.48
    -
    -
    -
    -
    5,753
    3.48Available-for-sale:Corporate debt securities
    -
    -
    -
    -
    -
    -
    49,398
    3.46
    49,398
    3.46Equity securities:Direct
    -
    -
    -
    -
    -
    -
    4,982
    46.49
    4,982
    46.49Mutual funds
    -
    -
    -
    -
    -
    -
    39,714
    4.37
    39,714
    4.37Total available-for-sale
    -
    -
    -
    -
    -
    -
    94,094
    4.75
    94,094
    4.75Total investment securities
    $ -
    -%
    $ 5,753
    3.48%
    $ -
    -%
    $ 94,094
    4.75%
    $ 99,847
    4.68%Collateralized mortgage obligations:Available-for-sale:FHLMC
    $ -
    -%
    $ -
    -%
    $ -
    -%
    $ 12,387
    -15.14%
    $ 12,387
    -15.14%FNMA
    -
    -
    -
    -
    
    -
    2,813
    -4.92
    2,813
    -4.92Total collateralized mortgage obligations
    $ -
    -%
    $ -
    -%
    $ -
    -%
    $ 15,200
    -13.24%
    $ 15,200
    -13.24%


28

---

Sources of Funds

General. The Bank's funds for lending, investing and
other general purposes are deposits, loan and securities repayments and
prepayments, proceeds from sales of loans, cash flows generated from operations
and FHLB advances and other borrowings.

Deposits. The Bank offers a variety of deposit accounts
with a range of interest rates and terms. The Bank's deposits consist of
passbook accounts, NOW and other demand accounts, money market savings accounts
(collectively "core deposits") and certificate accounts. The terms of
the fixed-rate certificate accounts offered by the Bank vary from 90 days to 71
months. Offering rates are established by the Bank on a weekly basis. Once an
account is established, no additional amounts are permitted to be deposited into
fixed-rate accounts. The Bank presently offers a variable rate certificate whose
rate is indexed to the one year CMT and on which additions are permitted. The
Bank also offers a 12 month step-up certificate account that permits additions
and the ability to increase the interest rate one time if the offering rate
increases during the term of the account. Specific terms of an individual
account vary according to the type of account, the minimum balance required, the
time period funds must remain on deposit and the interest rate, among other
factors. The flow of deposits is influenced significantly by general economic
conditions, prevailing interest rates and competition. At March 31, 2003, the
Bank had $651.9 million of certificate accounts maturing in less than one year.
The Bank expects to retain a substantial portion of these maturing dollars. The
Bank's deposits are obtained predominantly from the areas in which its branch
offices are located. The Bank relies primarily on customer service and
long-standing relationships with customers to attract and retain these deposits.

The following table presents the deposit activity of the Bank for the
    periods indicated.



For the Year Ended March 31,2003
    2002
    2001(In thousands)Net deposits
    $ 103,599
    76,898
    22,662Interest credited on deposit accounts
    53,545
    70,805
    92,065Total increase in deposit accounts
    $ 157,144
    147,703
    114,727


At March 31, 2003, the Bank had $385.5 million in certificate accounts in
amounts of $100,000 or more maturing as follows:

Maturity Period
    Amount
    Weighted
      Average Rate(In thousands)Three months or less
    $ 103,452
    2.31%Over three through six months
    88,520
    2.88Over six through 12 months
    60,637
    2.65Over 12 months
    132,896
    4.52Total
    $ 385,505
    3.25


29

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The following table sets forth the distribution of the Bank's 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,
|------------------------------------- | ----------------------------
|                                      | 2003                        
|                                      | Average
      Balance       
|                                      | (Dollars in thousands)      
|                                      |                             
|Passbook accounts                     | $ 132,796                   
|Money market savings accounts         | 452,640                     
|NOW accounts                          | 550,260                     
|Non-interest bearing accounts         | 138,178                     
|Total core deposits                   | 1,273,874                   
|                                      |                             
|Certificate accounts:                 |                             
|Variable-rate certificates of deposit | 13,631                      
|Step-up certificates of deposit       | 46,537                      
|Less than 6 months                    | 66,937                      
|6 through 11 months                   | 173,236                     
|12 through 23 months                  | 388,904                     
|24 through 47 months                  | 165,697                     
|48 months or greater                  | 119,907                     
|Other                                 | 2                           
|Total certificate accounts            | 974,851                     
|Total average deposits                | $2,248,725                  

30

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The following table presents, by various rate
categories, the periods to maturity of the certificate accounts outstanding at
March 31, 2003 and the amount of certificate accounts outstanding at the dates
indicated.

|                   | Period to Maturity from March 31, 2003 | March 31,             
|------------------ | -------------------------------------- | ----------------------
|                   | Less than
      One Year               | One to
      Two Years
|                   | (In thousands)                        
|                   |                                        |                       
|0.00 through 4.00% | $ 597,199                              | 76,146                
|4.01 through 5.00% | 38,976                                 | 19,185                
|5.01 through 6.00% | 7,910                                  | 8,119                 
|6.01 through 7.00% | 7,346                                  | 3,404                 
|7.01 through 8.00% | 483                                    | -                     
|Total              | $ 651,914                              | 106,854               

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FHLB Advances and Other Borrowings.
The Bank utilizes FHLB advances and reverse repurchase agreements as alternative
sources of funds to retail deposits. The Bancorp also utilizes reverse
repurchase agreements. These borrowings are collateralized by securities and, in
the case of certain FHLB advances, certain of the Bank's mortgage loans and
secondarily by the Bank's 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, including the Bank, 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, 2003, the Bancorp had outstanding reverse repurchase agreements of
$4.4 million at a weighted average cost of 2.15%. 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, 2003, the Bank had outstanding FHLB advances of
$481.0 million at a weighted average cost of 3.30%. The original terms of the
FHLB advances outstanding at March 31, 2003 range from 1 day to 10 years. The
Bank expects 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 and deposit activities. In the past, FHLB advances and
reverse repurchase agreements were also used as a primary funding vehicle for
the Bank's investment in securities. An increase in deposit inflows coupled with
the Bank's continued de-emphasis on securities activities has substantially
reduced the use of these alternative funding sources.

During fiscal 1998, the Bank 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, the Bank grants to
the FHLB an option to "put" the advance back to the Bank at specified
quarterly "put" dates prior to maturity but after the conclusion of a
specified lock out period. Under the putable advance program, the Bank obtains
funds below the cost of non-putable FHLB advances which have fixed maturities
between the first "put" date and the final maturity date of the
putable advance. In exchange for this favorable funding rate, the Bank is
exposed to the risk that the advance is "put" back to the Bank
following an increase in the general level of interest rates causing the Bank to
initiate a new borrowing at a less advantageous cost. The Bank's use of putable
advances allowed the Bank to extend the term to maturity and initial
"put" dates of its funding in connection with increased investment in
hybrid and balloon MBS products. The Bank has not initiated any new putable
advances since May 1998. At March 31, 2003, 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."

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

At or for the Years Ended March 31,2003
    2002
    2001(Dollars in thousands)FHLB advances:Average amount outstanding during the year
    $ 465,631
    597,173
    771,869Maximum amount outstanding at any
      month-end during the year
    523,000
    655,000
    886,000Amount outstanding at year end (1)
    481,000
    558,000
    575,000Average interest rate:For the year
    4.06%
    5.01
    6.25At year end
    3.30
    4.16
    5.98Reverse repurchase agreements:Average amount outstanding during the year
    $ 800
    -
    -Maximum amount outstanding at any
      month-end during the year
    4,385
    -
    -Amount outstanding at year end
    4,385
    -
    -Average interest rate:For the year
    2.15%
    -
    -At year end
    2.15
    -
    -(1) Included in the balance of FHLB advances outstanding
    at March 31, 2003 is a putable borrowing of $15.0 million. The next maturity
    date for this borrowing is February 2008, with quarterly put dates from May
    2003 through the final maturity date.


Subsidiary Activities

Diversified Builder Services, Inc. ("DBS"),
incorporated in California on February 25, 2003, and commenced operations in
April 2003 as a wholly owned subsidiary of the Bancorp. DBS will be engaged in
real estate consulting services, property entitlement, loan and equity placement
and opportunity and mezzanine lending.

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. For the year ended March 31,
2003, GIA had a consolidated net loss of $850,000.

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. For the year ended March 31, 2003, GIS had net
earnings of $354,000.

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. For the year ended March 31, 2003, PFS had net
earnings of $280,000.

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, 2003, DSI had minimal activity and a nominal loss.

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Personnel

As of March 31, 2003, the Bank had 529 full-time employees
and 110 part-time employees. The employees are not represented by a collective
bargaining unit and the Bank considers its relationship with its employees to be
good. See "Item 11 - Executive Compensation" for a description of
certain compensation and benefit programs offered to the Bank's employees.

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 Securities and Exchange
Commission (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 holding companies are limited to financially related activities permissible
for bank holding companies, as defined under the GLB Act.

34

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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.



Federal Savings Institution Regulation

Business Activities

Lending and Investment Powers.

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

Loans-to-One-Borrower Limitations. Under HOLA, the Bank
is generally subject to the same limits on loans-to-one borrower as a national
bank. With specified exceptions, the Bank's total loans 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 additional amounts up to 10% of its unimpaired capital and surplus, if
the loans or extensions of credit are fully-secured by readily-marketable
collateral. The Bank currently complies with applicable loans-to-one-borrower
limitations.

35

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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, 2003, 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.

36

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The following table presents the Bank's capital position at March 31, 2003.

Actual
    Required
    Excess
    Actual
      Percentage
    Required
      Percentage(Dollars in thousands)Tangible
    $ 256,148
    47,016
    209,132
    8.17%
    1.50Core (Leverage)
    256,148
    125,376
    130,772
    8.17
    4.00Risk-based
    281,680
    190,206
    91,474
    11.85
    8.00


As the foregoing table indicates, at March 31, 2003, 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 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.



37

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The Bancorp does not expect that the changes made by
Regulation W will have a material adverse effect on its business.

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 employees of the Company.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.

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.

38

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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
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.

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

At March 31, 2003, 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 2003 ranged from 1.6 to
1.7 basis points and the premium paid for this period was $368,000 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.

39

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Federal Home Loan Bank System.

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 bank, 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. The FHLB of San Francisco has not yet set an
implementation date for its capital plan. However, the implementation date must
occur within three years of June 12, 2002, the date of the Federal Finance
Housing Board's approval.

Assessments

Branching. OTS regulations permit nationwide branching by
federally chartered savings institutions to the extent allowed by federal
statute. This permits federal savings institutions to establish interstate
networks and to geographically diversify their loan portfolios and lines of
business. The OTS 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 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.

Trust Activities Regulation. The Bank derives its trust
activity powers from Section 5 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, howeverereafter, 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.

Trust Activities Regulation. The Bank derives its trust
activity powers from Section 5 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.

40

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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, 2003, the trust
department of the Bank maintained approximately $231.0 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.

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 Securities and Exchange Commission (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.

41

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- 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
    the company's 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, the Company reviews those rules and complies as required.

Furthermore, the New York Stock Exchange (the
"NYSE") has also proposed corporate governance rules which would
implement the mandates of the Sarbanes- Oxley Act. The proposed NYSE rules
include ensuring that a majority of the board of directors are independent of
management, establishing and publishing a code of conduct for directors and
officers and requiring stockholder approval of all new stock option plans and
all modifications. The NYSE rules are still tentative in nature because they are
subject to SEC review and approval, which is expected to occur later this year.
Once finalized, the rules will not be effective until at least January 1, 2004.
These rules, if adopted, would affect the Bancorp because its common stock is
listed on the NYSE under the symbol "PFB."

Although the Company anticipates that it 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.

42

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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.
- Section 326 of the Act authorizes the Secretary of the Department of
    Treasury, in conjunction with other bank regulators, to issue regulations by
    October 26, 2002, that provide for minimum standards with respect to
    customer identification at the time new accounts are opened. On July 23,
    2002, the FDIC and the other federal bank regulators jointly issued proposed
    rules to implement Section 326. The proposed rules require financial
    institutions to establish a program specifying procedures for obtaining
    identifying information from customers seeking to open new accounts. This
    identifying information would be essentially the same information currently
    obtained by most financial institutions for individual customers generally.
    A financial institution's program would also have to contain procedures to
    verify the identity of customers within a reasonable period of time,
    generally through the use of the same forms of identity verification
    currently in use, such as through driver's licenses, passports, credit
    reports and other similar means.
- 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. The interim rules state that a due
    diligence program is reasonable if it comports with existing best practices
    standards for banks that maintain correspondent accounts for foreign banks
    and evidences good faith efforts to incorporate due diligence procedures for
    accounts posing increased risk of money laundering. In addition, an enhanced
    due diligence program is reasonable if it comports with best practices
    standards and focuses enhanced due diligence measures on those correspondent
    accounts posing a particularly high risk of money laundering based on the
    bank's overall assessment of the risk posed by the foreign corespondent
    bank. Finally, a private banking due diligence program must be reasonably
    designed to detect and report money laundering and the existence of proceeds
    of foreign corruption. Such a program is reasonable if it focuses on those
    private banking accounts that present a high risk of money laundering.
- 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.

43

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- 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



44

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FEDERAL AND STATE TAXATION

Federal Taxation

General. The Company reports its income on a fiscal year
basis using the accrual method of accounting and 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. The
Company files 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 1998 tax year. 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 the Company.

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%. The Company does not
expect to be subject to the AMT.

Dividends Received Deduction and Other Matters. The
Company may exclude from its 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 the Company 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 the Company);
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, 2003, PFF Bank & Trust was conducting its
business through 26 banking branches, two trust offices (one of which is
domiciled in one of the Bank's branch banking buildings), a regional loan
center, a satellite loan office, a regional lending office, a human resources
and training center, plus one executive administrative building and one records
center.

The executive offices for the Bank and the Bancorp are
located at 350 South Garey Avenue, Pomona, California.

Of the 26 banking branches, 18 of the buildings and the land
on which they are located are owned, two buildings are owned on leased land, and
six buildings and the land on which they are located are leased. The separate
trust office, the administrative office and the land on which they are located
are leased. The regional loan center and the land on which it is located are
owned and the satellite loan office and regional lending office are leased. The
human resources and training center and the records center and land occupied by
them are owned.

As of March 31, 2003, the net book value of owned real estate
including the branch located on leased land totaled $14.9 million. The net book
value of leased offices was $2.0 million. The net book value of furniture,
fixtures and electronic data processing equipment was $4.2 million.

Item 3. Legal Proceedings.

The Bancorp and subsidiaries have been named as defendants in
various lawsuits arising in the normal course of business. The outcome of these
lawsuits cannot be predicted, but the Bancorp intends to vigorously defend the
actions and is of the opinion that the lawsuits will not have a material effect
on the Bancorp.

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

None.

46

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PART II

Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.

The common stock of PFF Bancorp, Inc. 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 PFF Bancorp, Inc.'s common stock. As of March 31,
2003, there were approximately 3,380 holders of common stock of the Company,
which includes those holding shares in street name.

High
    Low
    ClosingYear Ended March 31, 2003First Quarter
    $ 38.50
    30.70
    38.40Second Quarter
    38.41
    26.00
    27.72Third Quarter
    35.75
    23.50
    31.25Fourth Quarter
    34.20
    30.64
    32.09Year Ended March 31, 2002First Quarter
    $ 25.13
    19.25
    25.00Second Quarter
    28.85
    22.90
    27.50Third Quarter
    28.00
    22.50
    27.70Fourth Quarter
    31.64
    25.65
    31.20


Dividend activity during the fiscal years ended March 31, 2003 and March 31,
2002 was as follows:

AmountRecord Date
    Payment Date
    per shareJune 14, 2002
    June 28, 2002
    $.08September 13, 2002
    September 27, 2002
    $.08December 13, 2002
    December 27, 2002
    $.10March 14, 2003
    March 28, 2003
    $.10June 15, 2001
    June 29, 2001
    $.06September 15, 2001
    September 27, 2001
    $.06December 14, 2001
    December 28, 2001
    $.08March 15, 2002
    March 29, 2002
    $.08


PFF Bancorp, Inc. 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.

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

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Item 6. Selected Financial Data.

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

At March 31,2003
    2002
    2001
    2000
    1999(In thousands)Selected Balance Sheet Data:Total assets
    $3,154,024
    3,042,932
    2,886,431
    3,034,023
    2,935,980Investment securities held-to-
      maturity
    5,753
    703
    702
    701
    709Investment securities available-for-
      sale
    94,094
    93,820
    59,137
    87,810
    82,387Mortgage-backed securities held-to-maturity
    -
    -
    -
    -
    556Mortgage-backed securities available-for-sale
    215,266
    196,580
    302,964
    381,277
    525,560Collateralized mortgage obligations available-for-sale
    15,200
    62,778
    82,315
    85,653
    102,700Trading securities
    -
    2,334
    2,375
    4,318
    4,271Investment in real estate
    -
    -
    -
    4,928
    6,371Loans held for sale
    3,327
    106
    583
    7,362
    3,531Loans receivable, net(1)
    2,688,950
    2,494,667
    2,285,307
    2,326,702
    2,026,081Deposits
    2,326,108
    2,168,964
    2,021,261
    1,906,534
    1,843,538FHLB advances and other borrowings
    485,385
    558,000
    575,000
    884,000
    814,000Stockholders' equity, substantially restricted
    273,132
    284,077
    257,998
    221,831
    242,665




(continued on next page)

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For the Year Ended March 31,2003
    2002
    2001
    2000
    1999(Dollars in thousands, except per share amounts)Selected Operating Data:Interest income
    $ 185,376
    215,731
    239,949
    214,952
    206,579Interest expense
    72,247
    104,624
    143,471
    126,539
    130,356Net interest income
    113,129
    111,107
    96,478
    88,413
    76,223Provision for loan losses
    4,840
    5,000
    5,004
    4,000
    4,020Net interest income after provision for
      loan losses
    108,289
    106,107
    91,474
    84,413
    72,203Non-interest income
    19,898
    17,043
    14,319
    17,628
    15,924Non-interest expense:General and administrative expense
    67,466
    62,127
    57,066
    55,506
    54,960Foreclosed real estate operations, net
    (190)
    (102)
    (324)
    (278)
    (45)Total non-interest expense
    67,276
    62,025
    56,742
    55,228
    54,915Earnings before income taxes
    60,911
    61,125
    49,051
    46,813
    33,212Income taxes
    25,489
    25,761
    20,791
    20,215
    14,208Net earnings
    $ 35,422
    35,364
    28,260
    26,598
    19,004Basic earnings per share
    $ 2.94
    2.84
    2.32
    2.13
    1.35Diluted earnings per share
    $ 2.83
    2.74
    2.24
    2.05
    1.30


(continued on next page)

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At or for the Year Ended March 31,2003
    2002
    2001
    2000
    1999(Dollars in thousands)Performance Ratios (2):Return on average assets
    1.16%
    1.19
    0.95
    0.90
    0.64Return on average equity
    12.39
    12.80
    11.81
    11.91
    7.92Average equity to average assets
    9.40
    9.28
    8.04
    7.54
    8.08Equity to total assets at end of period
      8.66
    9.34
    8.94
    7.31
    8.27Net interest spread (3)
    3.59
    3.51
    2.93
    2.81
    2.46Effective interest spread (4)
    3.81
    3.83
    3.31
    3.09
    2.70Average interest-earning assets to
      average interest-bearing liabilities
    109.16
    108.91
    107.72
    106.22
    105.16Efficiency ratio (5)
    50.72
    48.48
    51.51
    52.34
    59.64General and administrative
      expense to average assets
    2.22
    2.09
    1.92
    1.87
    1.85Capital (2)(6):Tangible capital ratio
    8.17
    8.63
    8.28
    6.77
    6.95Core capital ratio
    8.17
    8.63
    8.28
    6.77
    6.95Risk-based capital ratio
    11.85
    12.87
    12.72
    11.00
    12.52Book value per share outstanding
    $23.21
    21.75
    19.49
    16.66
    15.71Tangible book value per share
      outstanding (9)
    23.10
    21.66
    19.37
    16.52
    15.57Shares outstanding at end of period
    11,769,788
    13,058,784
    13,238,627
    13,314,505
    15,445,481Asset Quality (2):Non-performing loans as a percent of gross loans receivable (7)
    0.59%
    0.16
    0.45
    0.21
    0.50Non-performing assets as a percent of total assets (7)
    0.59
    0.16
    0.41
    0.23
    0.56Allowance for loan losses as a
      percent of gross loans receivable (8)
    0.99
    1.11
    1.22
    1.09
    1.18Allowance for loan losses as a Percent of non-performing
      loans (7) (8)
    167.57
    697.80
    270.20
    512.96
    237.56Net charge-offs
    $ 5,078
    4,663
    1,816
    2,322
    3,862Number of full-service customer Facilities
    26
    24
    24
    23
    24Loan originations
    $1,872,746
    1,433,821
    1,049,535
    1,268,324
    987,604(1) The allowances for loan losses at March 31, 2003,
    2002, 2001, 2000, and 1999 were $31.1 million $31.4 million $31.0 million,
    $27.8 million and, $26.2 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 REO. 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 Losses" for a discussion of factors and
    methodology utilized in determination of allowance for loan losses.(9) Stated book value minus goodwill.


50

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

Critical Accounting Policies

The following are critical accounting policies that require
the most significant estimates and assumptions that are particularly susceptible
to significant change in the preparation of the financial statements:

- Allowance for losses on loans and real estate. For further information,
    see "Item 1 - Lending Activities - Allowance for Loan 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."

Asset/Liability Management

The Company's earnings depend primarily on its 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.

The Company's Asset/Liability Committee ("ALCO") is
responsible for implementing the interest rate risk policies designed to manage
its 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 the Company's exposure to interest rate risk
is shown in the following table which sets forth the repricing frequency of its
major assets and liabilities as of March 31, 2003. Repricing frequencies of
assets are based upon contractual maturities, repricing opportunities, scheduled
principal payments and estimated prepayments. Repricing of liabilities are based
upon the contractual maturities, estimated decay rates for core deposits, and
the earliest repricing opportunity for variable and floating rate instruments.
The Company also had $15.0 million of putable FHLB advances on the balance sheet
as of March 31, 2003 that are assumed to reprice at maturity. The interest rate
sensitivity of the Company's assets and liabilities illustrated in the following
table would vary substantially if different assumptions were used, or if actual
experience differed from that assumed.

51

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March 31, 20033 Months
      or Less
    More than 3
      Months to 6
      Months
    More than 6
      Months to 12
      Months
    More than 12
      Months to 3
      Years
    More than 3
      Years to 5
      Years
    More than 5
      Years
    Total(In thousands)Interest-earning assets:Cash, investment securities,
      collateralized mortgage obligations and FHLB stock (1)
    $ 98,925
    152
    290
    993
    6,516
    88,431
    195,307Loans and mortgage-backed
      securities: (1)Mortgage-backed securities (2)
    27,738
    24,223
    42,478
    71,464
    40,327
    9,036
    215,266Loans receivable, net (2)
    1,331,240
    335,973
    387,033
    443,886
    127,598
    63,220
    2,688,950Total loans and mortgage-backed
      securities
    1,358,978
    360,196
    429,511
    515,350
    167,925
    72,256
    2,904,216Total interest-earning assets
    1,457,903
    360,348
    429,801
    516,343
    174,441
    160,687
    3,099,523Non-interest earning assets
    -
    -
    -
    -
    -
    54,501
    54,501Total assets
    $ 1,457,903
    360,348
    429,801
    516,343
    174,441
    215,188
    3,154,024Interest-bearing liabilities:Fixed maturity deposits
    $ 274,844
    201,028
    176,043
    156,996
    112,753
    705
    922,369Core deposits (3)
    351,503
    351,503
    700,733
    -
    -
    -
    1,403,739Total deposits
    626,347
    552,531
    876,776
    156,996
    112,753
    705
    2,326,108Borrowings (4)
    157,385
    46,000
    157,000
    110,000
    15,000
    -
    485,385Total interest-bearing liabilities
    783,732
    598,531
    1,033,776
    266,996
    127,753
    705
    2,811,493Non-interest bearing liabilities
    -
    -
    -
    -
    -
    69,399
    69,399Equity
    -
    -
    -
    -
    -
    273,132
    273,132Total liabilities and stockholders'
      equity
    $ 783,732
    598,531
    1,033,776
    266,996
    127,753
    343,236
    3,154,024Interest sensitivity gap
    $ 674,171
    (238,183)
    (603,975)
    249,347
    46,688
    (128,048)
    -Cumulative interest sensitivity gap
    674,171
    435,988
    (167,987)
    81,360
    128,048
    -
    -Cumulative interest sensitivity gap as a percentage of total assets
    21.37%
    13.82
    (5.33)
    2.58
    4.06
    -Cumulative interest-earning assets as a percentage of cumulative interest-
      bearing liabilities
    186.02
    131.54
    93.05
    103.03
    104.56
    110.24(1) Based upon contractual maturities, repricing date and forecasted principal
  payments assuming normal amortization and, where applicable prepayments.(2) Projected constant prepayment rates (CPR) range from 12 to 49% based on
  product type and weighted average coupon rate.(3) Assumes 100% of core deposits are subject to repricing in year one.(4) Putable borrowings are presented based upon their contractual maturity date.


52

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The Company's one year GAP at March 31, 2003, was (5.33%)
(i.e., more interest bearing liabilities re-price within one year than
interest-earning assets); this compares with (9.95%) at March 31, 2002. The
Company's one-year gap has become less negative (less liability sensitive) due,
in part, to the continued high level of loan, MBS and CMO prepayments. The
reduced liability sensitivity was also impacted by the greater percentage of
assets comprised by the Four-Cs which typically have shorter durations and more
frequent rate resets. If CPR speeds were to slow by 25% (i.e. from the 12 to 49%
used in the accompanying gap table to 9 to 37%), the March 31, 2003 cumulative
one year gap would decrease from (5.33%) to (8.90%) -- a level which would be
comparable to the one year cumulative gap at March 31, 2002.

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 the Company's 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 the Company's
exposure to these and other components of interest rate risk, management relies
on an internally maintained, externally supported asset/liability simulation
model.

The Company forecasts its net interest income for the next
twelve months, and its 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, the Company subjects its 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. The model then re-forecasts net interest income and NPV. The table
below indicates the results of the Company's internal modeling of its balance
sheet as of March 31, 2003 and 2002. The internal calculation of the Company's
sensitivity to interest rate changes would vary substantially if different
assumptions were used, or if the Company's or its customers' responses to
changes in interest rates resulted in changes in the structure of the Company's
balance sheet.

March 31, 2003
    March 31, 2002Percentage ChangeChange in Interest Rates
      (in basis points) (3)
    Net InterestIncome (1)
    Net Portfolio
      Value (2)
    Net Interest
      Income (1)
    Net Portfolio
      Value (2)+200
    4.34%
    (0.56)
    0.38
    0.29+100
    2.42
    (0.08)
    (0.03)
    0.23-100
    (1.82)
    (0.09)
    0.03
    (0.51)(1) This percentage change represents the impact to net interest income for
      a one-year period assuming the Company does not change the structure of
      its balance sheet.(2) This percentage change represents the NPV of the Company assuming no
      changes to the structure of its balance sheet.(3) A -200 basis point shock was not run as of March 31, 2003 or 2002 due
      to the low level of current interest rates.


The results from the asset/liability model indicate net
interest income was more sensitive to rate movements as of March 31, 2003 than
it was at March 31, 2002. The increase in potential volatility of net interest
income between March 31, 2002 and 2003, can be attributed to several factors
including a shortening of asset durations resulting from higher levels of loan,
MBS and CMO prepayments, and the increase in the proportion of the asset base
comprised by the Four-Cs. The Four-C products are generally of shorter duration
and are tied to indices (e.g. Prime) which exhibit greater sensitivity to
changes in interest rates than do traditional mortgage loans. Additionally, an
increasing proportion of the mortgage loans currently on the Company's balance
sheet are hybrid ARMs which have exhibited a higher level of prepayment activity
around the first payment reset than traditional ARM loans. The increase in
potential volatility of net interest income from changes in the composition of
the loan portfolio and prepayment activity is partially offset by an expected
reduction in net interest income volatility arising from an increase in the
proportion of the deposit portfolio comprised by core deposits. In modeling net
interest income, core deposits are assumed to exhibit lower sensitivity to
changes in rates than certificates of deposit (CDs). This assumption is
supported by empirical data developed from historical analysis of the Company's
deposit portfolio. As rates have declined, interest sensitive depositors have
been able to obtain higher rates and greater liquidity on certain core deposit
products than are available on shorter-term CDs. The Company believes that a
portion of these core deposits will move back into CDs in response to an
increase in rates. As a result, the Company has assumed that core deposits will
exhibit greater sensitivity to changes in rates than they have exhibited
historically. Nevertheless, the projected sensitivity of core deposits remains
below that expected from CDs. This lower sensitivity to changes in interest
rates exhibited by core deposits is of value to the Company by providing greater
stability to funding costs. This value is referred to as a "deposit
intangible" and while it is not recognized on the Company's financial
statements, it is included in the calculation of NPV.

53

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The low level of NPV sensitivity to interest rate changes of
+ or - 100 basis points at March 31, 2003, reflects the fact that the
anticipated change in the value of the Company's deposit intangible and the
anticipated change in market value of the Company's assets are expected to
approximately offset each other when rates move by + or - 100 basis points. When
rates rise by 200 basis points, the increase in the value of the deposit
intangible is anticipated to be less than the decrease in the market value of
the Company's assets causing NPV to decrease. Among the factors contributing to
the greater reduction in asset market value and NPV at a 200 basis point rate
shock is the duration extension that occurs when rates rise and the incentive
for borrowers to refinance is reduced. For any given change in interest rates,
asset market value volatility increases with extension in duration. Therefore,
this duration extension accentuates the reduction in the market value of loans,
MBS and CMO when rates rise, resulting in a corresponding reduction in post rate
shock NPV. Additionally, as rates increase more significantly, the likelihood of
core deposit customers demanding higher rates (and/or moving into higher cost
CDs) increases, reducing the value of the deposit intangible.

The value of the deposit intangible moves inversely (although
not necessarily proportionally) with the sensitivity of deposits/depositors to
movements in interest rates. As noted above, in response to observed customer
behavior with respect to core deposits and CDs, between March 31, 2002 and 2003,
the Company revised its deposit intangible downward in calculating NPV. This
downward revision contributed to the reductions in post-shock NPV for the upward
rate shocks between March 31, 2002 and 2003. Contributing to the generally lower
level of NPV volatility at March 31, 2003 compared to March 31, 2002 was the
shortening of asset durations arising from higher prepayment activity caused by
the lower interest rate environment.

The OTS produces an analysis of the Bank's interest rate risk
using its own model, based upon data submitted on the Bank's quarterly Thrift
Financial Reports. The results of the OTS model may vary from the Bank's
internal model primarily due to differences in assumptions utilized in the two
models. These differences include market rates, prepayment rates, and deposit
decay rates. As of March 31, 2003 the Bank's sensitivity measure (percentage
change in NPV), as calculated by the OTS, was a negative 0.15% assuming a
downward shock of 100 basis points. At March 31, 2002, the Bank's OTS calculated
sensitivity measure was a negative 1.39%. The OTS does not model the volatility
of net interest income to changes in interest rates.

54

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Average Balance Sheets

The following table sets forth certain information relating
to the Company for the years ended March 31, 2003, 2002 and 2001. The yields and
costs are derived by dividing income or expense by the average balances of
assets or liabilities, respectively, for the periods shown. Average balances are
derived from average daily balances. The yields include fees that are considered
adjustments to yields.

Year Ended March 31,2003
    2002
    2001Average
      Balance
    Interest
    Average
      Yield/
      Cost
    Average
      Balance
    Interest
    Average
      Yield/
      Cost
    Average
      Balance
    Interest
    Average
      Yield/
      Cost(Dollars in thousands)Assets:Interest-earning assets:Interest-earning deposits and short-term investments
    $ 48,113
    $ 736
    1.53%
    $ 55,504
    $ 1,385
    2.50%
    $ 32,979
    $ 2,011
    6.10%Investment securities, net
    113,792
    4,784
    4.20
    94,802
    5,241
    5.53
    88,290
    6,386
    7.23Mortgage-backed securities, net
    150,911
    8,203
    5.44
    246,814
    15,610
    6.32
    338,956
    22,274
    6.57Collateralized mortgage obligations, net
    49,974
    92
    0.18
    72,486
    3,214
    4.43
    86,267
    6,393
    7.41Loans receivable, net
    2,573,543
    169,954
    6.60
    2,393,264
    188,131
    7.86
    2,323,919
    199,511
    8.59FHLB stock
    29,296
    1,607
    5.49
    36,039
    2,150
    5.97
    46,094
    3,374
    7.32Total interest-earning assets
    2,965,629
    185,376
    6.25
    2,898,909
    215,731
    7.44
    2,916,505
    239,949
    8.23Non-interest-earning assets
    76,243
    
    
    77,542
    
    
    59,426Total assets
    $3,041,872
    
    
    $2,976,451
    
    
    $2,975,931Liabilities and Stockholders' Equity:Interest-bearing liabilities:Passbook accounts
    $ 132,796
    941
    0.71
    $ 124,855
    1,646
    1.32
    $ 128,955
    2,756
    2.14Money market savings accounts
    452,640
    9,762
    2.16
    446,821
    13,938
    3.12
    385,973
    18,684
    4.84NOW and other demand deposit accounts
    688,438
    10,050
    1.46
    317,163
    2,900
    0.91
    239,064
    1,957
    0.82Certificate accounts
    974,851
    32,038
    3.29
    1,173,249
    57,531
    4.90
    1,178,726
    71,592
    6.07Total
    2,248,725
    52,791
    2.35
    2,062,088
    76,015
    3.69
    1,932,718
    94,989
    4.91FHLB advances and other borrowings
    468,110
    19,456
    4.16
    599,749
    28,609
    4.77
    774,750
    48,482
    6.26Total interest-bearing liabilities
    2,716,835
    72,247
    2.66
    2,661,837
    104,624
    3.93
    2,707,468
    143,471
    5.30Non-interest-bearing liabilities
    39,190
    
    
    38,275
    
    
    29,215Total liabilities
    2,756,025
    
    
    2,700,112
    
    
    2,736,683Stockholders' equity
    285,847
    
    
    276,339
    
    
    239,248Total liabilities and stockholders' equity
    $3,041,872
    
    
    $2,976,451
    
    
    $2,975,931Net interest income
    
    $ 113,129
    
    
    $ 111,107
    
    
    $ 96,478Net interest spread
    
    
    3.59
    
    
    3.51
    
    
    2.93Effective interest spread
    
    
    3.81
    
    
    3.83
    
    
    3.31Ratio of interest-earning assets to interest-
      bearing liabilities
    109.16%
    
    
    108.91%
    
    
    107.72%


55

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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 the Company's 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, 2003
      Compared to
      Year Ended March 31, 2002
    Year Ended March 31, 2002
      Compared to
      Year Ended March 31, 2001Increase (Decrease)
      Due to
    Increase (Decrease)
      Due toVolume
    Rate
    Rate/
      Volume
    Net
    Volume
    Rate
    Rate/
      Volume
    Net(In thousands)Interest-earning assets:Interest-earning deposits and short-term investments
    $ (185)
    (539)
    75
    (649)
    1,374
    (1,189)
    (811)
    (626)Investment securities, net
    1,050
    (1,257)
    (250)
    (457)
    471
    (1,502)
    (114)
    (1,145)Mortgage-backed securities, net
    (6,061)
    (2,183)
    837
    (7,407)
    (6,054)
    (832)
    222
    (6,664)Collateralized mortgage obligations, net
    (997)
    (3,078)
    953
    (3,122)
    (1,021)
    (2,567)
    409
    (3,179)Loans receivable, net
    14,170
    (30,082)
    (2,265)
    (18,177)
    5,957
    (16,945)
    (392)
    (11,380)FHLB stock
    (403)
    (175)
    35
    (543)
    (736)
    (624)
    136
    (1,224)Total interest-earning assets
    7,574
    (37,314)
    (615)
    (30,355)
    (9)
    (23,659)
    (550)
    (24,218)Interest-bearing liabilities:Passbook accounts
    105
    (763)
    (47)
    (705)
    (88)
    (1,060)
    38
    (1,110)Money market savings accounts
    182
    (4,304)
    (54)
    (4,176)
    2,945
    (6,641)
    (1,050)
    (4,746)NOW and other demand deposit accounts
    3,379
    1,744
    2,027
    7,150
    640
    226
    77
    943Certificate accounts
    (9,721)
    (18,931)
    3,159
    (25,493)
    (332)
    (13,749)
    20
    (14,061)FHLB advances and other borrowings
    (6,279)
    (3,681)
    807
    (9,153)
    (10,955)
    (11,543)
    2,625
    (19,873)Total interest-bearing liabilities
    (12,334)
    (25,935)
    5,892
    (32,377)
    (7,790)
    (32,767)
    1,710
    (38,847)Change in net interest income
    $ 19,908
    (11,379)
    (6,507)
    2,022
    7,781
    9,108
    (2,260)
    14,629


56

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Comparison of Operating Results for the Years Ended March 31, 2003 and March
31, 2002

General

Net earnings were virtually unchanged between fiscal 2002 and
2003 at $35.4 million, as a $2.0 million increase in net interest income and a
$2.9 million increase in total non-interest income were offset by a $5.3 million
increase in non-interest expense. Net interest income was $113.1 million for
fiscal 2003 compared to $111.1 million for fiscal 2002. The increase in net
interest income was attributable to an 8 basis point expansion in net interest
spread from 3.51% for fiscal 2002 to 3.59% for fiscal 2003 coupled with a $66.7
million increase in average interest-earning assets from $2.90 billion for
fiscal 2002 to $2.97 billion for fiscal 2003. The provision for credit losses
was $4.8 million for fiscal 2003 compared to $5.0 million for fiscal 2002.

Interest Income

Interest income decreased $30.4 million from $215.7 million
for fiscal 2002 to $185.4 million for fiscal 2003 due to a 119 basis point
decrease in average yield on interest-earning assets from 7.44% for fiscal 2002
to 6.25% for fiscal 2003. The decrease in average yield on interest-earning
assets was caused by the lower interest rate environment during fiscal 2003
compared to fiscal 2002.

Average yield on loans receivable, net decreased 126 basis
points from 7.86% for fiscal 2002 to 6.60% for fiscal 2003. Approximately $2.84
billion or 91 percent of the Company's loans are adjustable rate in nature. This
includes $888.4 million or 31 percent of the portfolio that is in hybrid ARMs.
Given the repricing profile of the loan portfolio, its yield will be
directionally consistent with changes in the general level of interest rates.

The dramatically lower interest rate environment during
fiscal 2003 also contributed to a significant increase in the turnover of the
loan portfolio. This turnover created an additional downward bias to the yield
on the loan portfolio as older, higher yielding loans were replaced by loans
originated or purchased at lower market rates. Loan principal repayments
increased $295.8 million from $1.57 billion for fiscal 2002 to $1.87 billion for
fiscal 2003. Loan originations increased $438.9 million from $1.43 billion for
fiscal 2002 to $1.87 billion for fiscal 2003. Loan purchases were $340.2 million
for fiscal 2003 compared to $415.3 million for fiscal 2002.

Continued emphasis on the Four-Cs mitigated some of the
interest rate environment driven downward movement in the loan portfolio yield.
The Four-Cs increased $203.0 million during fiscal 2003 from $1.05 billion or 42
percent of loans receivable, net at March 31, 2002 to $1.25 billion or 46
percent of loans receivable, net at March 31, 2003. Originations of the Four-Cs
totaled $1.54 billion or 82 percent of total originations for fiscal 2003
compared to $1.19 billion or 83 percent of total originations for fiscal 2002.
The very slight decrease in the percentage of total originations comprised by
the Four-Cs reflects a significant increase in turnover in the one-to-four
family residential mortgage portfolio rather than any reduction in the Company's
emphasis on the Four-Cs.

Average yield on securities decreased 165 basis points from
5.81% for fiscal 2002 to 4.16% for fiscal 2003. The decrease in average yield on
securities was attributable primarily to the decrease in the general level of
interest rates. The one-year CMT index to which 43% of the Company's March 31,
2003 securities portfolio is tied averaged 1.75% during fiscal 2003 compared to
2.91% during fiscal 2002. Three month LIBOR, to which 12% of the Company's March
31, 2003 securities portfolio is tied averaged 1.63% during fiscal 2003 compared
to 2.82% during fiscal 2002. Prime, to which 4% of the Company's March 31, 2003
securities portfolio is tied, averaged 4.55% during fiscal 2003 compared to
5.95% during fiscal 2002.

Paydowns on the Company's CMO portfolio during fiscal 2003
totaled $48.3 million (79 percent of the March 31, 2002 balance) compared to
$20.6 million (25 percent of the March 31, 2001 balance) during fiscal 2002.
Premium amortization associated with these paydowns was $1.4 million for fiscal
2003 compared to $181,000 for fiscal 2002. This premium amortization reduced
average yield on securities, and average yield on interest-earning assets for
fiscal 2003 by 46 and five basis points respectively, compared to four and one
basis point, respectively, for fiscal 2002. At March 31, 2003, total unamortized
premium on CMO was $367,000 and total unamortized premium on the entire
securities portfolio was $4.6 million.

57

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The average balance of loans receivable, net increased $180.3
million from $2.39 billion for fiscal 2002 to $2.57 billion for fiscal 2003 and
the aggregate average balance of securities decreased $99.4 million from $414.1
million for fiscal 2002 to $314.7 million for fiscal 2003. For the past several
years, the Company's strategy has emphasized growth in loans and deposits with a
corresponding de-emphasis on wholesale leverage (securities funded with FHLB
advances and other borrowings). This strategy was undertaken in connection with
the Company's focus on enhancing its net interest spread and earnings stream
through asset and liability bases comprised to a greater extent by the Four-Cs
and core deposits, respectively. Strong Four-Cs origination volumes have
provided an investment alternative for the Company which is preferable to
securities, and is consistent with its long term strategic objectives. The
proportion of total average interest-earning assets comprised by loans
receivable increased from 83 percent for fiscal 2002 to 87 percent for fiscal
2003. The Company's current strategy is to attempt to maintain loans receivable,
net at approximately 90 percent of total interest-earning assets.

Interest Expense

Interest expense decreased $32.4 million from $104.6 million
for fiscal 2002 to $72.2 million for fiscal 2003. The decrease was attributable
to a 127 basis point decrease in the average cost of interest-bearing
liabilities from 3.93% for fiscal 2002 to 2.66% for fiscal 2003.

Average cost of deposits decreased 134 basis points from
3.69% for fiscal 2002 to 2.35% for fiscal 2003. Average cost of CDs decreased
161 basis points from 4.90% for fiscal 2002 to 3.29% for fiscal 2003 and average
cost of core deposits decreased 45 basis points from 2.08% for fiscal 2002 to
1.63% for fiscal 2003. Contributing to the decrease in average cost of deposits
was an increase in the proportion of the portfolio comprised by core deposits.
The average balance of core deposits grew by $385.0 million from $888.8 million
or 43 percent of average total deposits for fiscal 2002 to $1.27 billion or 57
percent of average total deposits for fiscal 2003. At March 31, 2003, core
deposits totaled $1.40 billion or 60 percent of total deposits compared to $1.08
billion or 50 percent of total deposits one year earlier. Average cost of FHLB
advances and other borrowings decreased 61 basis points from 4.77% for fiscal
2002 to 4.16% for fiscal 2003.

Average interest-bearing liabilities increased $55.0 million
from $2.66 billion for fiscal 2002 to $2.72 billion for fiscal 2003. The average
balance of total deposits increased $186.6 million from $2.06 billion for fiscal
2002 to $2.25 billion for fiscal 2003 and the average balance of FHLB advances
and other borrowings decreased $131.6 million from $599.7 million for fiscal
2002 to $468.1 million for fiscal 2003.

Provision for Loan Losses

Provision for loan losses was $4.8 million for fiscal 2003
compared to $5.0 million for fiscal 2002. Non-accrual loans were $18.6 million
or 0.59% of gross loans receivable at March 31, 2003 compared to $4.5 million or
0.16% of gross loans receivable at March 31, 2002.

The allowance for loan losses decreased from $31.4 million or
1.11% of gross loans receivable at March 31, 2002 to $31.1 million or 0.99% of
gross loans receivable at March 31, 2003. The decrease in the allowance for loan
losses was due principally to the charge-off of $4.5 million of a $4.9 million
commercial business loan. Total charge-offs for fiscal 2003 were $5.7 million
compared to $4.8 million for fiscal 2002.

In determining the adequacy of the allowance for loan losses,
consideration is given to levels and trends in the following factors: (1) the
volume and composition of non-accrual loans; (2) the volume, severity and
composition of classified assets; and (3) changes in the composition of the loan
portfolio by type and by collateral. Each of these factors is discussed more
fully below.

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Between March 31, 2002 and 2003 non-accrual loans increased
by $14.1 million. The $18.6 million of non-accrual loans at March 31, 2003 is
comprised of $2.8 million of loans secured by one-to-four family residential
mortgages and $15.8 million of Four-Cs loans. The composition of these balances
is discussed under "Lending Activities -- Non-Accrual and Past Due
Loans."

Total classified assets decreased from $74.9 million at March
31, 2002 to $43.1 million at March 31, 2003. The March 31, 2002, balance
included a loan in the amount of $18.2 million to a business equipment leasing
company. During fiscal 2003, this loan was upgraded to Special Mention and
removed from classified assets. Total classified assets at March 31, 2003 and
2002 also included loans on the Castaic project aggregating $5.6 million and
$29.7 million, respectively.

Between March 31, 2002 and 2003, the disbursed balance of the
Four-Cs increased by $203.0 million. This increased the proportion of loans
receivable, net comprised by the Four-Cs from 42 percent to 53 percent. It also
contributed to an increase in the Company's average loan size from $155,000 at
March 31, 2002, to $186,000 at March 31, 2003. For a discussion of the larger
credits under each loan type, see "Lending Activities."

While the level of non-accrual loans increased between March
31, 2002 and 2003, the allowance for loan losses was maintained at its current
level based upon the following: (1) the decrease in the level of classified
assets; and (2) a reduction in the probable loss exposure on certain segments of
the loan portfolio. See "Lending Activities -- Allowance for Loan
Losses."

Non-Interest Income

Non-interest income increased from $17.0 million for fiscal
2002 to $19.9 million for fiscal 2003. Deposit and related fees increased from
$9.4 million for fiscal 2002 to $10.6 million for fiscal 2003. The increase in
deposit and related fees reflects the additional fee opportunities associated
with the growth in core deposits. Trust fees were $2.1 million for both fiscal
2002 and 2003. Assets under management or custody were $231.0 million at March
31, 2003 compared to $251.6 million at March 31, 2002.

Loan and servicing fees increased from $5.0 million for
fiscal 2002 to $5.3 million for fiscal 2003 due principally to the higher volume
of loan payoff activity noted earlier. Included in loan and servicing fees for
fiscal 2003 and 2002 is $225,000 and $598,000 of expense associated with
amortization ($74,000 and $175,000, respectively) and impairment ($151,000 and
$423,000, respectively) of originated mortgage servicing rights (MSR). At March
31, 2003, the Company's MSR asset is $357,000.

The net loss from trading activity was $575,000 for fiscal
2003 compared to $107,000 for fiscal 2002. The increase in net loss from trading
activities between fiscal 2002 and 2003 was due to the direction and magnitude
of changes in the equity markets.

During fiscal 2003, the Company sold $79.8 million of
available for sale securities, generating a net gain of $1.3 million compared to
a net gain of $25,000 from the sale of $8.5 million of available for sale
securities during fiscal 2002. The securities sold during fiscal 2003 were
principally higher coupon MBS that had been experiencing or were expected to
experience increased levels of prepayment.

The origination of loans for sale is not an area of primary
focus for the Company. However, during fiscal 2003, the Company sold fixed rate
loans totaling $19.2 million, generating a net gain of $559,000 compared to
sales of $10.2 million at a net gain of $359,000 during fiscal 2002.

Non-Interest Expense

Non-interest expense increased from $62.0 million for fiscal
2002 to $67.3 million for fiscal 2003. 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. Compensation and benefits
accounted for $3.0 million, or 57%, of the increase in general and
administrative expense. A portion of the increase in compensation and benefits
expense from $34.3 million for fiscal 2002 to $37.3 million for fiscal 2003 was
attributable to the hiring of experienced personnel to generate and support the
higher volumes of Four-Cs and core deposits. The increase in compensation and
benefits also reflects the Bank's opening of two new full-service retail
branches during fiscal 2003, and the formation and staffing of Glencrest
Investment Advisors. Included in compensation and benefits expense for fiscal
2003 and fiscal 2002, respectively, are non-cash charges of $5.8 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 ended
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. The allocation of shares under the Bank's ESOP will continue in
generally equal installments through fiscal 2006. The amount charged to expense
under the ESOP moves upward or downward with changes in the market price of the
Company's common stock. ESOP expense for fiscal 2003 and 2002 was $5.8 million
and $4.3 million, respectively.

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The deterioration in the efficiency ratio from 48.48% for
fiscal 2002 to 50.72% for fiscal 2003 reflects the temporary lag between
incurring the costs of building infrastructure and bringing on the revenues
associated with the increases in loan and deposit volumes. The constrained
growth in net interest income caused by the lower interest rate environment also
contributed to the deterioration in the efficiency ratio.

Contributing to the increase in compensation and benefits
expense was a decrease in pension income (expense) from $317,000 for fiscal 2002
to $(346,000) for fiscal 2003 applicable to the Bank's frozen defined benefit
pension plan (the "Plan"). The decrease in pension income reflects a
reduction in the value of Plan assets coupled with an increase in the projected
Plan benefit obligation arising from a reduction in the discount rate used to
value the obligation. As of March 31, 2003, the market value of Plan assets was
$18.4 million, compared to $19.5 million at March 31, 2002. As of March 31,
2003, the projected Plan benefit obligation was $22.3 million compared to $21.2
million at March 31, 2002. As a result, included in accumulated other
comprehensive loss as of March 31, 2003 and 2002 are net minimum pension
liabilities of $8.1 million and $5.1 million, respectively, arising from the
shortfalls between Plan assets and liabilities. During fiscal 2002, the Company
began moving a substantial portion of Plan assets into fixed income investments
under an investment immunization program. This strategy is expected to
significantly reduce the future earnings and asset/liability value mismatch
volatility arising from the Plan. As of March 31, 2003, approximately 54% of
Plan assets were in fixed income investments whose cash flows are projected to
closely match the corresponding benefit obligation payments.

The increase in marketing and professional services expense
from $7.0 million for fiscal 2002 to $7.8 million for fiscal 2003 was
attributable to the marketing efforts associated with the two new branch
openings as well as an increase in expenditures associated with increased
marketing efforts directed toward the Hispanic segments of the communities
served by the Bank.

Income Taxes

Income taxes were $25.5 million for fiscal 2003 compared to
$25.8 million for fiscal 2002. The effective income tax rate was 41.8% for
fiscal 2003 compared to 42.1% for fiscal 2002.

Comparison of Financial Condition at March 31, 2003 and March 31, 2002

Total assets increased $111.1 million from $3.04 billion at
March 31, 2002 to $3.15 billion at March 31, 2003. Reflecting the Company's
strategy of increasing the loan orientation of its asset base, loans receivable,
net increased $194.3 million from $2.49 billion at March 31, 2002 to $2.69
billion at March 31, 2003, while securities decreased $23.6 million from $353.9
million at March 31, 2002 to $330.3 million at March 31, 2003. Cash and cash
equivalents decreased $55.6 million from $106.0 million at March 31, 2002 to
$50.3 million at March 31, 2003. The cash balance at March 31, 2002 was high as
a result of very strong deposit inflows during the quarter ended March 31, 2002,
that materialized faster than the funds could be optimally deployed to fund
loans and repay maturing borrowings (all of which were subject to prepayment
penalties).

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Total liabilities increased $125.1 million from $2.76 billion
at March 31, 2002 to $2.88 billion at March 31, 2003. Total deposits increased
$157.1 million from $2.17 billion at March 31, 2002 to $2.33 billion at March
31, 2003. The Bank's emphasis on growing the lower cost, more stable segments of
its deposit portfolio is reflected in a $319.3 million increase in core deposits
from $1.08 billion or 50 percent of total deposits at March 31, 2002 to $1.40
billion or 60 percent of total deposits at March 31, 2003. FHLB advances and
other borrowings decreased $72.6 million from $558.0 million at March 31, 2002
to $485.4 million at March 31, 2003.

Total stockholders' equity decreased $10.9 million from
$284.1 million at March 31, 2002 to $273.1 million at March 31, 2003. The $10.9
million decrease is comprised principally of a $10.8 million decrease in
retained earnings, substantially restricted and a $3.8 million decrease in
additional paid-in-capital, partially offset by a $1.8 million decrease in
unearned stock-based compensation and a $1.9 million decrease in accumulated
other comprehensive loss.

The $10.8 million decrease in retained earnings,
substantially restricted reflects net earnings of $35.4 million for fiscal 2003
offset by: (1) $42.0 million attributable to the amount paid to repurchase
1,813,200 shares of common stock at prices in excess of the $10.00 per share
original issuance price of the stock. The 1,813,200 shares of common stock were
repurchased at a weighted average price of $33.15 per share; and (2) $4.3
million of cash dividends declared during fiscal 2003. Cash dividends of $0.08
per share were declared and paid during the first two quarters of fiscal 2003.
The cash dividend was increased to $0.10 per share effective with the December
2002 dividend.

The Company's increased emphasis on the Four-Cs coupled with
a corresponding de-emphasis on wholesale leverage has resulted in a relatively
low rate of growth in the total asset base over the past several years as growth
in loans has been offset to a degree by decreases in securities. As a result,
the Company's rate of capital formation through retention of earnings has
exceeded the level required to support the growth in the total asset base. The
Company has utilized share repurchases as a means of deploying some of this
excess capital and enhancing earnings per share and return on average equity.

The $3.8 million decrease in additional paid-in-capital was
attributable to: (1) an $18.1 million reduction representing the removal from
additional paid in capital of the March 1996 original purchase price of the
shares that were repurchased during fiscal 2003; (2) a $10.7 million increase
representing the amounts paid by directors and officers to exercise stock
options granted to them under the 1996 and 1999 Incentive Plans along with the
tax benefit to the Company arising therefrom; and (3) a $3.6 million increase
attributable to amortization of shares under the 1996 Incentive Plan. During
fiscal 2003 options to purchase 541,919 shares of the Company's common stock
were exercised at a weighted average exercise price of $14.20 per share.

The $1.8 million decrease in unearned stock-based
compensation was attributable to amortization under the Company's ESOP.

The $1.9 million decrease in other comprehensive loss was
comprised principally of a $1.9 million change in the unrealized gain/(loss),
net of tax on the Company's portfolio of securities available for sale from
($1.3 million) at March 31, 2002 to $620,000 at March 31, 2003. A $3.1 million
change in the minimum pension liability adjustment was offset by a $3.1 million
tax benefit associated therewith.

Comparison of Operating Results for the Years Ended March 31, 2002 and March
31, 2001

General

Net earnings rose $7.1 million or 25% from $28.3 million for
fiscal 2001 to $35.4 million for fiscal 2002. The improvement in operating
results between fiscal 2001 and 2002 was attributable principally to a $14.6
million increase in net interest income from $96.5 million for fiscal 2001 to
$111.1 million for fiscal 2002. The increase in net interest income reflects a
58 basis point expansion in net interest spread from 2.93% for fiscal 2001 to
3.51% for fiscal 2002. Total non-interest income increased $2.7 million or 19
percent and total non-interest expense increased $5.3 million or 9 percent
between fiscal 2001 and 2002.

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Interest Income

Interest income decreased $24.2 million from $239.9 million
for fiscal 2001 to $215.7 million for fiscal 2002 attributable principally to a
79 basis point decrease in average yield on interest-earning assets from 8.23%
for fiscal 2001 to 7.44% for fiscal 2002. The decrease in average yield on
interest-earning assets was caused by the lower interest rate environment during
fiscal 2002 compared to fiscal 2001. Average interest-earning assets remained
relatively stable at $2.92 billion for fiscal 2001 compared to $2.90 billion for
fiscal 2002.

Average yield on loans receivable, net decreased 73 basis
points from 8.59% for fiscal 2001 to 7.86% for fiscal 2002, reflecting the
adjustable rate nature of the Company's loan portfolio.

The dramatically lower interest rate environment during
fiscal 2002 also contributed to a significant increase in the turnover of the
loan portfolio. This turnover created an additional downward bias to the yield
on the loan portfolio as older, higher yielding loans were replaced by
originated or purchased loans at lower market rates. Loan principal repayments
increased $524.4 million from $1.05 billion for fiscal 2001 to $1.57 billion for
fiscal 2002. Loan originations increased $384.3 million from $1.05 billion for
fiscal 2001 to $1.43 billion for fiscal 2002. In response to the higher level of
loan repayments, loan purchases were increased from $18.9 million during fiscal
2001 to $415.3 million for fiscal 2002.

Continued emphasis on the Four-Cs mitigated some of the
interest rate environment driven downward movement in the loan portfolio yield.
The Four-Cs increased $158.8 million during fiscal 2002 to $1.05 million or 42
percent of loans receivable, net at March 31, 2002 from $888.0 million or 39
percent of loans receivable, net at March 31, 2001. Originations of the Four-Cs
totaled $1.19 billion or 83 percent of total originations for fiscal 2002
compared to $969.3 million or 92 percent of total originations for fiscal 2001.
The decrease in the percentage of total originations comprised by the Four-Cs
reflects the significant increase in turnover in the single-family residential
mortgage portfolio rather than any reduction in the Company's emphasis on the
Four-Cs.

Average yield on securities decreased from 6.82% for fiscal
2001 to 5.81% for fiscal 2002. The decrease in average yield on securities was
attributable primarily to the decrease in the general level of interest rates.
The one-year CMT index, to which 28% of the Company's March 31, 2002, securities
portfolio is tied, averaged 2.91% during fiscal 2002 compared to 5.71% during
fiscal 2001. Three month LIBOR, to which 13% of the Company's March 31, 2002,
securities portfolio is tied, averaged 2.82% during fiscal 2002 compared to
6.30% during fiscal 2001. Prime, to which 13% of the Company's March 31, 2002
securities portfolio is tied, averaged 5.95% during fiscal 2002 compared to
9.22% during fiscal 2001.

The average balance of loans receivable, net increased $69.3
million from $2.32 billion for fiscal 2001 to $2.39 billion for fiscal 2002 and
the aggregate average balance of securities decreased $99.4 million from $513.5
million for fiscal 2001 to $414.1 million for fiscal 2002 reflecting the
Company's strategy of emphasizing growth in loans and deposits with a
corresponding de-emphasis on wholesale leverage. The proportion of total average
interest-earning assets comprised by loans receivable, net increased from 80%
for fiscal 2001 to 83% for fiscal 2002.

Interest Expense

Interest expense decreased $38.8 million from $143.5 million
for fiscal 2001 to $104.6 million for fiscal 2002. The decrease was attributable
principally to a 137 basis point decrease in the average cost of
interest-bearing liabilities from 5.30% for fiscal 2001 to 3.93% for fiscal
2002.

Average cost of deposits decreased 122 basis points from
4.91% for fiscal 2001 to 3.69% for fiscal 2002. Average cost of CDs decreased
117 basis points from 6.07% for fiscal 2001 to 4.90% for fiscal 2002 and average
cost of core deposits decreased 102 basis points from 3.10% for fiscal 2001 to
2.08% for fiscal 2002. Contributing to the reduction in average cost of deposits
was an increase in the proportion of the portfolio comprised by core deposits.
The average balance of core deposits increased by $134.8 million from$754.0 million for fiscal 2001 to $888.8 million for
fiscal 2002. At March 31, 2002, core deposits totaled $1.08 billion or 50
percent of total deposits compared to $803.9 million or 40 percent of total
deposits one year earlier. The average cost of FHLB advances and other
borrowings decreased from 6.26% for fiscal 2001 to 4.77% for fiscal 2002.

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Average interest-bearing liabilities decreased $45.6 million
from $2.71 billion for fiscal 2001 to $2.66 billion for fiscal 2002. The
decrease in the average balance of interest-bearing liabilities was attributable
to a $175.0 million decrease in the average balance of FHLB advances and other
borrowings from $774.8 million for fiscal 2001 to $599.7 million for fiscal
2002. The average balance of total deposits increased $129.4 million from $1.93
billion for fiscal 2001 to $2.06 billion for fiscal 2002.

Provision for Loan Losses

Provision for loan losses was $5.0 million for fiscal 2001
and 2002. Non-accrual loans were $4.5 million or 0.16% of gross loans receivable
at March 31, 2002, compared to $11.5 million or 0.45% of gross loans receivable
at March 31, 2001. Non-accrual loans at March 31, 2001, include a $3.0 million
loan on the 296 residential home development in Castaic, California. During
fiscal 2001, this $3.0 million loan was determined to be impaired and an
allowance for loss was established for the full amount of the loan. During
fiscal 2002, this loan was charged off, reducing total non-accrual loans and the
total allowance for loan losses by $3.0 million. As a result, the allowance for
loan losses was little changed between March 31, 2001 ($31.0 million) and March
31, 2002 ($31.4 million).

Growth in the loan portfolio reduced the ratio of allowance
for loan losses to gross loans receivable from 1.22% at March 31, 2001 to 1.11%
at March 31, 2002. Had the $3.0 million Castaic loan been charged off at March
31, 2001, it would have reduced the ratio of allowance for loan losses to gross
loans at that time to 1.10%, a level that would have been very comparable to the
March 31, 2002, ratio of 1.11%.

In determining the adequacy of the allowance for loan losses,
consideration is given to levels and trends in the following factors: (1) The
volume and composition of non-accrual loans; (2) the volume, severity and
composition of classified assets; and (3) changes in the composition of the loan
portfolio by type and by collateral.

Between March 31, 2001 and 2002, the volume of non-accrual
loans decreased by $7.0 million (including the $3.0 million reduction
attributable to the charge-off of the Castaic loan). The $4.5 million of
non-accrual loans at March 31, 2002 includes $3.0 million of loans secured by
one-to-four family residential mortgages and $1.4 million of Four-Cs loans.

Total classified assets increased from $62.1 million at March
31, 2001 to $74.9 million at March 31, 2002. The March 31, 2002, balance
includes a loan in the amount of $18.2 million to a business equipment leasing
company. Total classified assets at March 31, 2001 and 2002, also include loans
on the Castaic project aggregating $39.0 million and $29.7 million,
respectively.

Between March 31, 2001 and 2002, disbursed balance of the
Four-Cs increased by $158.8 million. This increased the proportion of loans
receivable, net comprised by the Four-Cs from 39 percent to 42 percent. It also
contributed to an increase in the Company's average loan size from $130,000 at
March 31, 2001, to $155,000 at March 31, 2002. For a discussion of the larger
credits under each loan type, see "Lending Activities."

While the level of non-accrual loans decreased between March
31, 2001 and 2002, the allowance for loan losses was maintained at its current
level based upon: (1) the increase in the level and individual credit exposure
of classified assets; and (2) the shift in the composition of the loan portfolio
away from one to four family residential mortgages to Four-Cs. See "Lending
Activities -- Allowance for Loan Losses."

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Non-Interest Income

Non-interest income increased from $14.3 million for fiscal
2001 to $17.0 million for fiscal 2002. Deposit and related fees were $9.4
million for fiscal 2002 compared to $9.0 million for fiscal 2001. The increase
in deposit and related fees reflects the additional fee opportunities associated
with growth in core deposits. Trust fees were $2.1 million for fiscal 2002
compared to $1.8 million for fiscal 2001. Assets under management or custody
increased from $239.3 million at March 31, 2001 to $251.6 million at March 31,
2002. Trust fees for fiscal 2001 are net of a $291,000 non-recurring downward
adjustment of fees.

Loan and servicing fees increased from $3.9 million for
fiscal 2001 to $5.0 million for fiscal 2002 due principally to the much higher
volume of loan payoff activity noted earlier. Included in loan and servicing
fees for fiscal 2002 and 2001 is $598,000 and $255,000 of expense associated
with amortization ($175,000 and $99,000, respectively) and impairment ($423,000
and $156,000, respectively) of MSRs.

The net loss from trading activity was $107,000 for fiscal
2002 compared to $1.5 million for fiscal 2001. The reduction in net loss from
trading activities between fiscal 2001 and 2002 was due, in part, to the
direction and magnitude of changes in the equity markets. The improvement in
performance for fiscal 2002 was also attributable to a change in personnel and
portfolio management philosophy.

Non-Interest Expense

Non-interest expense increased from $56.7 million for fiscal
2001 to $62.0 million for fiscal 2002. General and administrative expense
increased from $57.1 million or 1.92% of average assets for fiscal 2001 to $62.1
million or 2.09% of average assets for fiscal 2002. Compensation and benefits
accounted for $4.0 million, or 78%, of the increase in general and
administrative expense. The increase in compensation and benefits expense from
$30.3 million for fiscal 2001 to $34.3 million for fiscal 2002 was attributable,
in part, to the hiring of experienced personnel to generate and support the
higher volumes of Four-Cs and core deposits. Included in compensation and
benefits expense for fiscal 2002 and fiscal 2001, respectively are non-cash
charges of $5.7 million and $5.8 million associated with the Bank's ESOP ($4.3
million and $3.2 million, respectively) and 1996 Incentive Plan ($1.4 million
and $2.5 million, respectively).

Also contributing to the increase in compensation and
benefits expense was a decrease in pension income from $979,000 for fiscal 2001
to $317,000 for fiscal 2002. The decrease in pension income reflects a
significant reduction in the value of Plan assets, the majority of which had
been invested in equity securities. As of March 31, 2002, the market value of
Plan assets was $19.5 million, compared to $23.8 million at March 31, 2001. As
of March 31, 2002, the projected Plan benefit obligation was $21.2 million
compared to $19.9 million at March 31, 2001. As a result, included in
accumulated other comprehensive loss as of March 31, 2002 is $5.1 million
applicable to the March 31, 2002 shortfall between Plan assets and liabilities.

The increase in marketing and professional services expense
from $6.3 million for fiscal 2001 to $7.0 million for fiscal 2002 was
attributable, in part, to an increase in Hispanic marketing expenditures and
promotional expenditures associated with the Bank's opening of its twenty-fourth
full service branch in La Quinta, California in February 2001.

Income Taxes

Income taxes were $25.8 million for fiscal 2002 compared to
$20.8 million for fiscal 2001. The effective income tax rate was 42.1% for
fiscal 2002 compared to 42.4% for fiscal 2001.

Liquidity and Capital Resources

The objective of liquidity management is to ensure the
Company has the continuing ability to maintain cash flows that are adequate to
fund operations and meet other obligations on a timely and cost-effective basis.
The Company's most liquid assets are cash and short-term investments. The levels
of these assets are dependent on the Company's operating, financing, lending and
investing activities during any given period. At March 31, 2003, cash and
short-term investments totaled $50.3 million.

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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.

The Company's primary sources of funds are deposits,
principal and interest payments on loans and securities, FHLB advances and other
borrowings, and to a lesser extent, proceeds from the sale of loans or
securities. While maturities and scheduled amortization of loans 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.

Management's strategy is to manage liquidity by investing
excess cash flows in higher yielding interest-earning assets, such as loans 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 and securities, the Company initiates FHLB advances
and other borrowings, or if necessary and of economic benefit, sells loans
and/or securities. Only when no other alternatives exist will the Company
constrain loan originations as a means of addressing a liquidity shortfall. The
Company has not found it necessary to constrain loan growth due to liquidity
considerations.

The Company's 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 $87.0
million, $50.9 million and $54.0 million for the years ended March 31, 2003,
2002 and 2001, respectively.

Net cash used in investing activities consists primarily of
disbursements for loan originations and purchases and purchases of securities,
offset by principal collections on loans and proceeds from maturation and
paydowns on securities. Principal payments on loans were $1.87 billion, $1.57
billion, and $1.05 billion for the years ended March 31, 2003, 2002 and 2001,
respectively. Disbursements for loan originations and purchases, excluding loans
originated for sale, were $2.19 billion, $1.84 billion and $1.05 billion for the
years ended March 31, 2003, 2002 and 2001, respectively. Disbursement for
purchases of securities were $199.9 million, $108.6 million and $5.0 million for
the years ended March 31, 2003, 2002 and 2001, respectively. Proceeds from the
maturation and paydown of securities were $147.8 million, $187.9 million and
$122.9 million for the years ended March 31, 2003, 2002 and 2001, respectively.

The primary sources of net cash from financing activities are
net activity in deposit accounts and FHLB advances and other borrowings. Net
cash provided by (used in) financing activities was $27.2 million, $117.4
million and $(199.2) million for the years ended March 31, 2003, 2002 and 2001,
respectively. The net increases in deposits were $157.1 million, $147.7 million
and $114.7 million for the years ended March 31, 2003, 2002 and 2001,
respectively. As a result of these strong deposit inflows, the Company reduced
its use of FHLB advances and other borrowings by $72.6 million, $17.0 million
and $309.0 million for the years ended March 31, 2003, 2002 and 2001,
respectively. 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 the Company to meet its
funding needs with deposits, FHLB advances and other borrowings provide a
readily available source of liquidity. As of March 31, 2003 and 2002, the Bank
had maximum unused borrowing capacity from the FHLB of San Francisco of $1.21
billion and $1.18 billion, respectively. Based upon pledged collateral in place,
the available borrowing capacity was $195.8 million and $283.9 million at March
31, 2003 and 2002, respectively. The Company also has the ability to borrow
funds under reverse repurchase agreements collateralized by securities. The
Company had $4.4 million and zero of borrowings under reverse repurchase
agreements outstanding at March 31, 2003 and 2002, respectively.

At March 31, 2003, the Bank exceeded all of its regulatory
capital requirements with a tangible capital level of $256.1 million, or 8.17%
of adjusted total assets, which is above the required level of $47.0 million, or
1.50%; core capital of $256.1 million, or 8.17% of adjusted total assets, which
is above the required level of $125.4 million, or 4.00% and total risk-based
capital of $281.7 million, or 11.85% of risk-weighted assets, which is above the
required level of $190.2 million, or 8.00%. See "Item 1 -- Description of
Business -- Regulation and Supervision -- Federal Savings Institution
Regulation."

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The Company currently has no material contractual obligations
or commitments for capital expenditures. See "Item 1 -- Description of
Business -- General." At March 31, 2003 the Bank had outstanding
commitments to originate and purchase loans of $81.5 million and $53.0 million,
respectively, compared to $61.0 million and zero, respectively, at March 31,
2002. The Company anticipates that it will have sufficient funds available to
meet these commitments. At March 31, 2003 and 2002 the Company 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, 2003 totaled $651.9 million. The Bank
expects that a substantial portion of the funds from maturing certificate
accounts will be retained by the Bank at maturity either in certificate or
liquid accounts. The low interest rate environment during fiscal 2003 has
resulted in a reduction in the differential between certificate accounts and
more liquid instruments such as money market accounts. Accordingly, a portion of
the Bank's 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.

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 the Company's operations. Unlike
industrial companies, nearly all of the assets and liabilities of the Company
are monetary in nature. As a result, interest rates have a greater impact on the
Company's 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

The Company, through the branch network of the Bank and the
investment advisory firm, provides 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 and investment advisory
services. While the Company's chief decision makers monitor the revenue streams
of the various Company products and services, operations are managed and
financial performance is evaluated on a Company-wide basis. Accordingly, all of
the Company's operations are considered by management to be aggregated in one
reportable operating segment.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

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

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Item 8. Financial Statements and Supplementary Data.Index to Financial Statements
    PAGEConsolidated Balance Sheets - March 31, 2003 and 2002
    68Consolidated Statements of Earnings - Years ended March 31, 2003,
      2002 and 2001
    69Consolidated Statements of Comprehensive Earnings - Years ended March
      31, 2003,
      2002 and 2001
    70Consolidated Statements of Stockholders' Equity - Years ended March 31,
      2003,
      2002 and 2001
    71Consolidated Statements of Cash Flows - Years ended March 31, 2003,
      2002 and 2001..
    72Notes to Consolidated Financial Statements
    74Independent Auditors' Report
    110


67

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PFF BANCORP, INC. AND SUBSIDIARIESConsolidated Balance Sheets
(Dollars in thousands, except per share data)

March 31,2003
    2002AssetsCash and equivalents
    $ 50,323
    105,965Investment securities held-to-maturity (estimated fair value
      of $5,957 and $703 at March 31, 2003 and 2002)
    5,753
    703Investment securities available-for-sale, at fair value
    94,094
    93,820Mortgage-backed securities available-for-sale, at fair value
    215,266
    196,580Collateralized mortgage obligations available-for-sale, at fair value
    15,200
    62,778Trading securities, at fair value
    -
    2,334Loans held-for-sale
    3,327
    106Loans receivable, net
    2,688,950
    2,494,667Federal Home Loan Bank (FHLB) stock, at cost
    26,610
    35,133Accrued interest receivable
    14,162
    15,653Real estate acquired through foreclosure, net
    75
    507Property and equipment, net
    23,325
    21,575Prepaid expenses and other assets
    16,939
    13,111Total assets
    $ 3,154,024
    3,042,932Liabilities and Stockholders' EquityLiabilities:Deposits
    $ 2,326,108
    2,168,964FHLB advances and other borrowings
    485,385
    558,000Deferred income taxes payable
    7,521
    6,849Accrued expenses and other liabilities
    61,878
    25,042Total liabilities
    2,880,892
    2,758,855Commitments 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 20,936,555 and 20,412,351; outstanding
      11,769,788 and 13,058,784 at March 31, 2003 and 2002,
      respectively
    208
    203Additional paid-in capital
    131,770
    135,540Retained earnings, substantially restricted
    150,282
    161,123Unearned stock-based compensation
    (3,996)
    (5,750)Treasury stock (9,166,767 and 7,353,567 at March 31, 2003 and 2002,
      respectively)
    (92)
    (73)Accumulated other comprehensive losses
    (5,040)
    (6,966)Total stockholders' equity
    273,132
    284,077Total liabilities and stockholders' equity
    $ 3,154,024
    3,042,932See accompanying notes to consolidated financial statements.


68

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PFF BANCORP, INC. AND SUBSIDIARIESConsolidated Statements of Earnings
(Dollars in thousands, except per share data)

Year Ended March 31,2003
    2002
    2001Interest income:Loans receivable
    $ 169,954
    $ 188,131
    199,511Mortgage-backed securities
    8,203
    15,610
    22,274Collateralized mortgage obligations
    92
    3,214
    6,393Investment securities and deposits
    7,127
    8,776
    11,771Total interest income
    185,376
    215,731
    239,949Interest on deposits
    52,791
    76,015
    94,989Interest on borrowings
    19,456
    28,609
    48,482Total interest expense
    72,247
    104,624
    143,471Net interest income
    113,129
    111,107
    96,478Provision for loan losses
    4,840
    5,000
    5,004Net interest income after provision for loan losses
    108,289
    106,107
    91,474Non-interest income:Deposit and related fees
    10,561
    9,427
    8,969Loan and servicing fees
    5,262
    4,972
    3,854Trust fees
    2,142
    2,086
    1,846Gain on sale of loans, net
    559
    359
    390Gain (loss) on sale of securities, net
    1,343
    25
    (16)Loss on trading securities, net
    (575)
    (107)
    (1,490)Other non-interest income
    606
    281
    766Total non-interest income
    19,898
    17,043
    14,319Non-interest expense:General and administrative:Compensation and benefits
    37,323
    34,319
    30,332Occupancy and equipment
    12,158
    11,905
    11,792Marketing and professional services
    7,787
    6,969
    6,310Other general and administrative
    10,198
    8,934
    8,632Total general and administrative
    67,466
    62,127
    57,066Foreclosed real estate operations, net
    (190)
    (102)
    (324)Total non-interest expense
    67,276
    62,025
    56,742Earnings before income taxes
    60,911
    61,125
    49,051Income taxes
    25,489
    25,761
    20,791Net earnings
    $ 35,422
    $ 35,364
    28,260Basic earnings per share
    $ 2.94
    $ 2.84
    2.32Weighted average shares outstanding for basic
      earnings per share
    12,048,609
    12,455,711
    12,182,855Diluted earnings per share
    $ 2.83
    $ 2.74
    2.24Weighted average shares outstanding for diluted
      earnings per share
    12,524,255
    12,919,745
    12,640,281See accompanying notes to consolidated financial statements.


69

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PFF BANCORP, INC. AND SUBSIDIARIESConsolidated Statements of Comprehensive Earnings
(Dollars in thousands)

Year Ended
      March 31,2003
    2002
    2001Net earnings
    $ 35,422
    35,364
    28,260Other comprehensive earnings (losses), net
      of income taxes:Unrealized gains (losses) on securities
      available-for-sale:Investment securities available-for-sale, at fair
      Value
    1,773
    (261)
    1,604Mortgage-backed securities available-for-sale,
      at fair value
    840
    459
    4,686Collateralized mortgage obligations
      available-for-sale, at fair value
    12
    989
    485Reclassification of realized gains (losses) included in earnings
    (699)
    (271)
    3121,926
    916
    7,087Minimum pension liability adjustment
    (3,054)
    (5,079)
    -Tax benefit on minimum pension liability
    3,054
    -
    -Other comprehensive gains (losses)
    1,926
    (4,163)
    7,087Comprehensive earnings
    $ 37,348
    31,201
    35,347See accompanying notes to consolidated financial statements.


70

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PFF BANCORP, INC. AND SUBSIDIARIESConsolidated Statements of Stockholders' Equity
(Dollars in thousands, except per share data)

Number of
      Shares
    Common
      Stock
    Additional
      Paid-in
      Capital
    Retained Earnings Substantially Restricted
    Unearned
      Stock-based
      Compensation
    Treasury
      Stock
    Accumulated Other Comprehensive Losses
    TotalBalance at March 31, 2000
    13,314,505
    200
    131,370
    113,521
    (13,303)
    (67)
    (9,890)
    221,831Net earnings
    -
    -
    -
    28,260
    -
    -
    -
    28,260Purchase of treasury stock
    (145,000)
    -
    (1,449)
    (1,117)
    -
    (1)
    -
    (2,567)Amortization under stock-based compensation
      plans
    -
    -
    1,403
    -
    4,350
    -
    -
    5,753Stock options exercised
    69,122
    -
    595
    -
    -
    -
    -
    595Dividends ($0.24 per share for 2001)
    -
    -
    -
    (2,961)
    -
    -
    -
    (2,961)Changes in unrealized gains on
      securities available-for-sale, net
    -
    -
    -
    -
    -
    -
    7,087
    7,087Balance at March 31, 2001
    13,238,627
    200
    131,919
    137,703
    (8,953)
    (68)
    (2,803)
    257,998Net earnings
    -
    -
    -
    35,364
    -
    -
    -
    35,364Purchase of treasury stock
    (510,100)
    -
    (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
    -
    -
    5,659Stock options exercised
    330,257
    3
    3,777
    -
    -
    -
    -
    3,780Dividends ($0.28 per share for 2002)
    -
    -
    -
    (3,513)
    -
    -
    -
    (3,513)Changes in unrealized gains on
      securities available-for-sale, net
    -
    -
    -
    -
    -
    -
    916
    916Tax benefit from stock options
    -
    -
    2,484
    -
    -
    -
    -
    2,484Balance at March 31, 2002
    13,058,784
    203
    135,540
    161,123
    (5,750)
    (73)
    (6,966)
    284,077Net earnings
    -
    -
    -
    35,422
    -
    -
    -
    35,422Purchase of treasury stock
    (1,813,200)
    -
    (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
    -
    -
    5,370Stock options exercised
    524,204
    5
    7,101
    -
    -
    -
    -
    7,106Dividends ($0.36 per share for 2003)
    -
    -
    -
    (4,281)
    -
    -
    -
    (4,281)Changes in unrealized gains on
      securities available-for-sale, net
    -
    -
    -
    -
    -
    -
    1,926
    1,926Tax benefit from stock options and minimum
      pension liability
    -
    -
    3,626
    -
    -
    -
    3,054
    6,680Balance at March 31, 2003
    11,769,788
    $ 208
    $ 131,770
    $ 150,282
    $ (3,996)
    $ (92)
    $ (5,040)
    $273,132See accompanying notes to consolidated financial statements.


71

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PFF BANCORP, INC. AND SUBSIDIARIES

Year Ended March 31,2003
    2002
    2001Cash flows from operating activities:Net earnings
    $ 35,422
    35,364
    28,260Adjustments to reconcile net earnings to net cash
      provided by operating activities:Amortization of premiums net of discount
      accretion on loans and securities
    2,086
    824
    1,192Amortization of deferred loan origination fees
    1,229
    2,955
    (276)Loan fees collected
    732
    343
    237Dividends on FHLB stock
    (1,713)
    (2,358)
    (3,284)Provisions for losses on:Loans
    4,840
    5,000
    5,004Real estate
    -
    -
    49Gains on sales of loans, mortgage-backed securities
      available-for-sale, real estate and property
      and equipment
    (2,049)
    (625)
    (646)Proceeds from sale of trading securities
    1,805
    -
    466(Gains) losses on trading securities
    575
    107
    1,490Depreciation and amortization of property and
      equipment
    2,792
    3,006
    3,396Loans originated for sale
    (22,395)
    (9,685)
    (16,341)Proceeds from sale of loans held-for-sale
    19,656
    10,497
    23,439Amortization of unearned stock-based
      compensation
    5,370
    5,659
    5,753Increase (decrease) in accrued expenses and
      other liabilities
    41,031
    (3,565)
    5,640(Increase) decrease in:Accrued interest receivable
    1,491
    2,813
    118Prepaid expenses and other assets
    (3,828)
    527
    (471)Net cash provided by operating activities
    87,044
    50,862
    54,026Cash flows from investing activities:Loans originated for investment
    (1,850,351)
    (1,424,136)
    (1,033,194)Increase in construction loans in process
    117,677
    50,684
    38,891Purchases of loans held-for-investment
    (340,169)
    (415,287)
    (18,892)Principal payments on loans
    1,869,196
    1,573,443
    1,049,029Principal payments on mortgage-backed securities
      available-for-sale
    99,453
    127,387
    83,794Principal payments on collateralized mortgage
      obligations available-for-sale
    48,323
    20,601
    4,103Purchases of investment securities held-to-maturity
    (5,056)
    -
    -Purchases of investment securities available-for-sale
    (65,023)
    (83,395)
    (5,000)


72

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PFF BANCORP, INC. AND SUBSIDIARIESConsolidated Statements of Cash Flows, Continued
(Dollars in thousands)

Year Ended March 31,2003
    2002
    2001Redemption of FHLB stock
    $ 10,236
    13,346
    1,713Purchases of mortgage-backed securities available-
      for-sale
    (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
    67
    39,881
    35,000Proceeds from sale of investment securities available-
      for-sale
    67,198
    8,525
    1,951Proceeds from sale of real estate
    1,390
    1,977
    2,993Investment in or proceeds from real estate
      held for investment
    -
    -
    5,155Purchases of property and equipment
    (4,542)
    (1,651)
    (3,968)Net cash provided by (used in) investing activities
    (169,926)
    (113,861)
    161,575Cash flows from financing activities:Proceeds from FHLB advances and other borrowings
    406,885
    561,400
    494,800Repayment of FHLB advances and other borrowings
    (479,500)
    (578,400)
    (803,800)Net change in deposits
    157,144
    147,703
    114,727Proceeds from exercise of stock options
    7,106
    3,780
    595Cash dividends
    (4,281)
    (3,513)
    (2,961)Purchase of treasury stock
    (60,114)
    (13,532)
    (2,567)Net cash provided by (used in) financing activities
    27,240
    117,438
    (199,206)Net increase (decrease) in cash and cash equivalents
    (55,642)
    54,439
    16,395Cash and cash equivalents, beginning of year
    105,965
    51,526
    35,131Cash and cash equivalents, end of year
    $ 50,323
    105,965
    51,526Supplemental information:Interest paid, including interest credited
    $ 74,235
    107,111
    142,689Income taxes paid
    17,050
    25,078
    19,200Loans to facilitate
    -
    256
    -Non-cash investing and financing activities:Net transfers from loans receivable to real estate
      acquired through foreclosure
    634
    2,331
    2,011See accompanying notes to consolidated financial statements.


73

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(1) Summary of Significant Accounting Policies

Effective March 28, 1996, pursuant to a plan of conversion,
Pomona First Federal Savings and Loan Association (the "Association")
reorganized from a federally chartered mutual savings and loan association to
PFF Bank & Trust (the "Bank"), a federally chartered stock savings
bank. PFF Bancorp, Inc. (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. Any
references to financial information for periods before March 28, 1996, refer to
the Association prior to the conversion (see "Note 23" for further
discussion).

The following accounting policies, together with those
disclosed elsewhere in the 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. and its subsidiaries, PFF Bank & Trust and
Glencrest Investment Advisors, Inc. (collectively, the "Company"). The
Company's business is conducted primarily through PFF Bank & Trust and its
subsidiary, Pomona Financial Services, Inc. The accounts of Diversified
Services, Inc. are included in Pomona Financial 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. Certain reclassifications have been made to the prior years'
consolidated financial statements to conform to the current year's presentation.

The consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America. In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets, liabilities and contingent liabilities as of the dates of the
consolidated balance sheets, and revenues and expenses reflected in the
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 $42,817 and $37,638 and short-term deposits in banks of $7,506 and
$68,327 at March 31, 2003 and 2002, respectively. The Company considers 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, the Company
designates the security as either held-to-maturity, available-for-sale or
trading based on the Company's investment objectives, operational needs and
intent. The Company then monitors its investment activities to ensure that those
activities are consistent with the established guidelines and objectives.

74

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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
the intent of the Company and the Company has the ability, to hold these
securities until maturity as part of its 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.

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 performed by the Company 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. The Company capitalizes 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 without the MSR
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,
the Company's 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.

75

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Loans Receivable

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

Uncollected interest on loans 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 are recorded as a reduction of principal or as
interest income depending on management's assessment of the ultimate
collectibility of the loan principal. Such loans 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.

Loan Origination, Commitment Fees and Related Costs

For loans receivable held-for-investment, loan origination
fees and direct loan 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 using the interest method. Accretion or amortization is
discontinued in the event the loan becomes contractually delinquent by more than
ninety days. 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,
the remaining net unamortized commitment fees at the time of exercise are
recognized over the life of the loan using the interest method.

Valuation Allowances for Loans Receivable and Real Estate

Valuation allowances for loan 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 the Company's past loan loss experience, current and economic
conditions and management's ongoing evaluation of the credit risk inherent in
the portfolio.

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

Management believes that allowances for loan losses and real
estate are adequate. While management uses available information to recognize
losses on loans and real estate, 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 the Company's allowances for loan and real estate losses.
Such agencies may require the Company to recognize additions to the allowances
based on their judgments of the information available to them at the time of
their examinations.

76

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Management considers classified loans with a principal
balance of $500 or more for purposes of evaluation for impairment. A loan is
considered impaired if it is probable that the creditor will be unable to
collect all contractual amounts due (principal and interest) as scheduled in the
loan agreement. Impaired loans are measured based on either an estimate of the
present value of expected future cash flows discounted at the loan's effective
interest rate or the loan's market value or the fair value of collateral if the
loan is collateral dependent. The amount by which the recorded investment in the
loan exceeds the measure of the impaired loan is recognized by recording a
valuation allowance with a corresponding charge to operations. The Company will
charge-off a portion of an impaired loan against the valuation allowance when it
is probable that there is no possibility of recovering the full amount of the
impaired loan.

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

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

Real Estate Acquired Through Foreclosure

Real estate properties held for sale or development are
carried at the lower of cost or fair value less estimated cost to sell. Once
real estate properties are acquired, evaluations are periodically performed by
management and an allowance for losses is established by a charge to operations
if the carrying value of a property exceeds its fair value. Costs related to
development and improvement of properties are capitalized, whereas costs
relating to holding the properties are expensed. During the development period,
the portion of interest costs related to development of real estate 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, the Company acquired the trust operations of
another bank for $3,470. The excess cost over net assets acquired was
capitalized and was being amortized on a straight-line basis over the estimated
average life of the trust relationships acquired of 11 years. In fiscal 2003,
the Company 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, the Company reviews its 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 such
asset is considered to be 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

The Company enters 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 the consolidated balance sheets. The dollar amount
of securities underlying the agreements remains in the respective asset account.

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

The Company files 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

The Company accounted for the original issuance of the
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
the Company's common stock. However, any such compensation expense fluctuations
result in an equal and offsetting adjustment to additional paid-in capital.

Stock Option Plan

On October 23, 1996, the Company 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. The Black-Scholes model was used 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. The Company has elected to apply the provisions of APB 25
and provide the pro forma disclosure provisions of SFAS 123.

78

---

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

Assumptions Used in Determining Options' ValuesGrant Date
    Number
      Granted
    Exercise
      Price
    Expected
      Term in
      Years
    Risk-free
      Rate(1)
    Expected
      Volatility
    Dividend
      Yield
    Calculated
      Value of
      Each
      OptionOptions Granted During the Year Ended March 31, 2003July 24, 2002
    10,243
    $32.20
    6.5
    3.81%
    40.60%
    1.11%
    $13.46December 19, 2002
    3,850
    32.75
    6.5
    3.81
    40.60
    1.11
    13.69December 19, 2002
    24,107
    32.75
    6.5
    3.81
    40.60
    1.11
    13.69February 26, 2003
    2,300
    31.80
    6.5
    3.81
    40.60
    1.11
    13.29Options Granted During the Year Ended March 31, 2002June 27, 2001
    732
    $24.00
    6.0
    5.28%
    42.06%
    1.10%
    $10.56October 24, 2001
    26,129
    24.50
    6.0
    5.28
    42.06
    1.10
    10.78November 28, 2001
    524,686
    26.65
    6.0
    5.28
    42.06
    1.10
    11.73February 27, 2002
    3,213
    29.01
    6.0
    5.28
    42.06
    1.10
    12.77Options Granted During the Year Ended March 31, 2001May 24, 2000
    1,268
    $14.25
    8.00
    4.78%
    42.10%
    1.27%
    $ 6.77May 24, 2000
    30,000
    14.25
    8.00
    4.78
    42.10
    1.27
    6.77June 28, 2000
    1,366
    16.63
    8.00
    4.78
    42.10
    1.27
    7.89November 22, 2000
    7,323
    16.00
    8.00
    4.78
    42.10
    1.27
    7.60(1) The risk-free rate is the market rate for U.S. Government
securities with the same maturities as the options.


79

---

The Company applies APB No. 25 in accounting for its Plan
and, accordingly, under the intrinsic value method no compensation cost has been
recognized for its stock options in the consolidated financial statements. Had
the Company determined compensation cost based on the fair value at the grant
date for its stock options exercisable under SFAS 123, the Company's results of
operations would have been adjusted to the pro forma amounts indicated below:



2003
    2002
    2001Net earnings:As reported
    $ 35,422
    35,364
    28,260Add: Stock-based employee compensation expense included
      in reported net income, net of related tax effects
      3,123
    3,274
    3,314Deduct: Total stock-based employee
      compensation expense determined under
      fair value based method for all awards,
      net of related tax effects
    (5,022)
    (5,169)
    (4,990)Pro forma Net Earnings
    $ 33,523
    33,469
    26,584Earnings per shareBasic - as reported
    $2.94
    2.84
    2.32Basic - pro forma
    2.78
    2.69
    2.18Diluted - as reported
    $2.83
    2.74
    2.24Diluted - pro forma
    2.68
    2.59
    2.10


The Company has 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. The Company does not agree to purchase the
underlying shares from the broker and does not guarantee, or underwrite, in any
way the arrangement between the option holders and the broker. The Company
considers this arrangement to meet the criteria to allow for fixed award
accounting under Opinion 25.

Segment Reporting

The Company, through the branch network of the Bank and the
investment advisory firm, provides 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 and investment advisory
services. While the Company's chief decision makers monitor the revenue streams
of the various Company products and services, operations are managed and
financial performance is evaluated on a Company-wide basis. Accordingly, all of
the Company's operations are considered by management to be aggregated in one
reportable operating segment.

Treasury Stock

The Company records treasury stock purchases at cost. The
excess of cost over par value is allocated between additional paid-in-capital
and retained earnings. During fiscal 2003 and 2002, the Company repurchased
1,813,200 and 510,100 shares of stock, respectively at an average price of
$33.15 and $26.53, respectively.

80

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PFF BANCORP, INC. AND SUBSIDIARIESNotes to Consolidated Financial Statements, Continued
(Dollars in thousands)

Earnings Per Share

The Company calculates 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 the Company's
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. Presently, the Company does not intend
to adopt the fair value method. For further information regarding accounting for
stock options, see Note 14 on page 89.

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 are effective for financial statements
of interim or annual periods ending after December 15, 2002. The implementation
of FIN 45 has not had a significant impact on the Company.

Financial Accounting Standards Board Interpretation 46,
"Consolidation of Variable Interest Entities" ("FIN 46"),
provides guidance to improve financial reporting for variable interest entities,
off-balance sheet structures and similar entities. FIN 46 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, a company included another entity in its consolidated financial
statements only if it controlled the entity through voting interests. FIN 46
also requires disclosures about variable interest entities that the company is
not required to consolidate but in which it has a significant variable interest.
The consolidated requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidated requirements apply to
older entities in the first fiscal year or interim period beginning after June
15, 2003. Certain disclosure requirements apply in all financial statements
issued after January 31, 2003, regardless of when the variable interest entity
was established. The implementation of FIN 46 has not had a significant impact
on the Company.

81

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PFF BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)

(2) Investment Securities

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

March 31, 2003Amortized
      Cost
    Gross
      Unrealized
      Gains
    Gross
      Unrealized
      Losses
    Estimated
      Fair
      ValueHeld-to-maturity:Bonds, notes and debentures at amortized cost:U.S. Government and federal agency obligations
    $ 5,753
    204
    -
    5,957Total
    $ 5,753
    204
    -
    5,957Available-for-sale:Corporate debt securities
    $ 53,340
    658
    (4,600)
    49,398Equity securities:Direct
    1,950
    3,032
    -
    4,982Mutual funds
    38,507
    1,234
    (27)
    39,714Total Equity securities
    40,457
    4,266
    (27)
    44,696Total
    $ 93,797
    4,924
    (4,627)
    94,094


During the years ended March 31, 2003, 2002 and 2001, the
Company realized net gains (losses) on sales of investment securities
available-for-sale of $1,492, $25 and ($154), respectively.

March 31, 2002Amortized
      Cost
    Gross
      Unrealized
      Gains
    Gross
      Unrealized
      Losses
    Estimated
      Fair
      ValueHeld-to-maturity:Bonds, notes and debentures at amortized cost:U.S. Government and federal agency obligations
    $ 703
    -
    -
    703Total
    $ 703
    -
    -
    703Available-for-sale:Corporate debt securities
    $ 61,301
    44
    (6,109)
    55,236Equity securities:Direct
    2,600
    2,840
    -
    5,440Mutual funds
    32,015
    1,134
    (5)
    33,144Total Equity securities
    34,615
    3,974
    (5)
    38,584Total
    $ 95,916
    4,018
    (6,114)
    93,820


82

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PFF BANCORP, INC. AND SUBSIDIARIESNotes to Consolidated Financial Statements, Continued
(Dollars in thousands)

The amortized cost and estimated fair value of investment
securities held-to-maturity and available-for-sale at March 31, 2003, by
contractual maturity are presented below:

Held-to-maturity
    Available-
      for-saleMaturity
    Amortized
      Cost
    Estimated
      Fair
      Value
    Estimated
      Fair
      ValueWithin one year
    -
    -
    -After one to five years
    $ 5,753
    5,957
    -After five to ten years
    -
    -
    -After ten years
    -
    -
    94,094Total
    $ 5,753
    5,957
    94,094


(3) Mortgage-Backed Securities

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

March 31, 2003Amortized
      Cost
    Gross
      Unrealized
      Gains
    Gross
      Unrealized
      Losses
    Estimated
      Fair
      ValueAvailable-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




March 31, 2002Amortized
      Cost
    Gross
      Unrealized
      Gains
    Gross
      Unrealized
      Losses
    Estimated
      Fair
      ValueAvailable-for-sale:GNMA
    $ 21,676
    140
    (1,366)
    20,450FHLMC
    45,505
    427
    (215)
    45,717FNMA
    128,936
    1,777
    (300)
    130,413Total
    $ 196,117
    2,344
    (1,881)
    196,580


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 $3.8 million whose remaining maturity is 34 years.

83

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PFF BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)

(4) Collateralized Mortgage Obligations

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

March 31, 2003Amortized
      Cost
    Gross
      Unrealized
      Gains
    Gross
      Unrealized
      Losses
    Estimated
      Fair
      ValueAvailable-for-sale:FHLMC
    $ 12,665
    -
    (278)
    12,387FNMA
    2,902
    -
    (89)
    2,813Total
    $ 15,567
    -
    (367)
    15,200




|                    | March 31, 2002      
|------------------- | --------------------
|                    | Amortized
      Cost
|Available-for-sale: |                     
|FHLMC               | $ 44,239            
|FNMA                | 19,121              
|Total               | $ 63,360            

(5) Loans Receivable

Loans receivable are summarized as follows:

March 31,2003
    2002Mortgage loans:Residential:One-to-four family
    $ 1,403,279
    1,402,871Multi-family
    70,606
    77,964Commercial real estate
    396,765
    309,335Construction and land
    948,993
    711,637Total mortgage loans
    2,819,643
    2,501,807Commercial
    149,232
    155,589Consumer
    160,673
    158,475Total loans
    3,129,548
    2,815,871Less:Undisbursed portion of construction loans
    (405,908)
    (288,231)Net discount on loans
    (192)
    (202)Net deferred loan origination fees (costs)
    (3,377)
    (1,412)Allowance for loan losses (Note 7)
    (31,121)
    (31,359)Total loans receivable, net
    $ 2,688,950
    2,494,667Weighted average yield
    6.60%
    7.86%


84

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PFF BANCORP, INC. AND SUBSIDIARIESNotes to Consolidated Financial Statements, Continued
(Dollars in thousands)

Loans receivable from officers and directors of the Company
were as follows:

March 31,2003
    2002Beginning balance
    $ 2,203
    2,249Additions
    115
    12Repayments
    (68)
    (58)Ending balance
    $ 2,250
    2,203


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

|                   | March 31, 2003                            
|------------------ | ------------------------------------------
|                   | Loans with
      Specific
      Allowances
|Carrying value     | $ 20,789                                  
|Specific allowance | 5,181                                     
|Net balance        | $ 15,608                                  
|                  
|                   | March 31, 2002                            
|                   | Loans with Specific
      Allowances      
|Carrying value     | $ 36,569                                  
|Specific allowance | 2,935                                     
|Net balance        | $ 33,634                                  

The average recorded investment in impaired loans totaled
$34,592 in 2003 and $46,892 in 2002. During 2003, total interest recognized on
the impaired loan portfolio was $1,259, compared to $1,855 in 2002 and $1,818 in
2001. Income recorded utilizing the cash basis method of accounting was zero for
fiscal 2003, 2002 and 2001.

The aggregate amount of non-accrual loans receivable that are
contractually past due 90 days or more as to principal or interest were $18,572
and $4,494 at March 31, 2003 and 2002, respectively. The aggregate amount of
loans that are contractually past due 90 days or more as to principal or
interest but still accruing were zero and $20 at March 31, 2003 and 2002,
respectively.

Interest due on non-accrual loans, but excluded from interest
income, was approximately $1,012 for 2003, $330 for 2002 and $733 for 2001.

85

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PFF BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)

(6) Real Estate

Real estate acquired through foreclosure is summarized as
follows:

|                                           | March 31,
|------------------------------------------ | ---------
|                                           | 2003     
|                                           |          
|Properties acquired in settlement of loans | $ 75     
|Allowance for losses (Note 7)              | -        
|Total                                      | $ 75     

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

|                                                   | Year Ended March 31,
|-------------------------------------------------- | --------------------
|                                                   | 2003                
|                                                   |                     
|(Gain) loss on sale of foreclosed real estate, net | $ (256)             
|Real estate (income) expense                       | 66                  
|Provision for losses on real estate                | -                   
|Total                                              | $ (190)             

(7) Allowances for Losses on Loans Receivable and Real Estate

Activity in the allowances for losses on loans and real
estate is summarized as follows:

Year Ended March 31,2003
    2002
    2001Loans receivable:Beginning balance
    $ 31,359
    31,022
    27,838Provision
    4,840
    5,000
    5,004Charge-offs
    (5,739)
    (4,771)
    (1,861)Recoveries
    661
    108
    41Ending balance
    31,121
    31,359
    31,022Foreclosed real estate:Beginning balance
    -
    49
    -Provision
    -
    -
    49Charge-offs
    -
    (49)
    -Ending balance
    -
    -
    49Total loans receivable and real estate:Beginning balance
    31,359
    31,071
    27,838Provision
    4,840
    5,000
    5,053Charge-offs
    (5,739)
    (4,820)
    (1,861)Recoveries
    661
    108
    41Ending balance
    $ 31,121
    31,359
    31,071


86

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PFF BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)

(8) Accrued Interest Receivable

Accrued interest receivable is summarized as follows:

March 31,2003
    2002Investment securities
    $ 428
    456Mortgage-backed securities
    897
    1,235Collateralized mortgage obligations
    36
    175Loans receivable
    12,801
    13,787Total
    $ 14,162
    15,653


(9) Property and Equipment, net

Property and equipment, net is summarized as follows:

March 31,2003
    2002
    Estimated LifeLand
    $ 5,945
    5,945
    -Buildings and improvements
    23,038
    22,541
    40Leasehold improvements
    2,343
    2,277
    (a)Furniture, fixtures and equipment
    29,896
    28,389
    7Automobiles
    156
    156
    3Construction in progress
    1,855
    129
    -63,233
    59,437Accumulated depreciation and
      amortization
    (39,908)
    (37,862)Total
    $ 23,325
    21,575(a) Amortized over the shorter of the life of the
  improvement or the length of the lease.


87

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PFF BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)

(10) Mortgage Servicing Rights

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

2003
    2002
    2001Mortgage servicing rights, net, beginning of
      period
    $ 518
    1,091
    1,282Additions
    64
    25
    64Amortization
    (74)
    (175)
    (99)Impairment write-down
    (151)
    (423)
    (156)Mortgage servicing rights, net, end of period
    $ 357
    518
    1,091Estimated fair value
    $ 357
    518
    1,091At period endMortgage loans serviced for others
    $141,883
    189,656
    256,478Weighted average interest rate on loans serviced
    5.46%
    5.58
    5.25


(11) Deposits

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

March 31,2003
    2002Weighted
      Average
      Rate
    Amount
    Weighted
      Average
      Rate
    AmountRegular passbook
    0.47%
    $ 141,347
    0.85%
    $ 128,571NOW and other demand
      deposit accounts
    1.01
    793,609
    1.61
    505,879Fixed and variable-rate
      certificate accounts
    2.95
    922,369
    3.82
    1,084,535Money market checking
      and savings
    1.55
    468,783
    2.59
    449,979Total
    1.85%
    $ 2,326,108
    2.87%
    $ 2,168,964


Certificate accounts maturing subsequent to March 31, 2003,
are summarized as follows:

Year Ending March 31,
    Amount2004
    $ 651,9142005
    106,8542006
    50,1422007
    36,5202008
    76,233Thereafter
    706Total
    $ 922,369


88

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PFF BANCORP, INC. AND SUBSIDIARIESNotes to Consolidated Financial Statements, Continued
(Dollars in thousands)

Interest expense on deposits is summarized as follows:

Year Ended March 31,2003
    2002
    2001Regular passbook
    $ 941
    1,647
    2,756NOW and other demand deposit
      accounts
    10,050
    2,900
    1,956Money market checking and savings
    9,762
    13,938
    18,684Certificates of deposit
    32,038
    57,530
    71,593Total
    $ 52,791
    76,015
    94,989


At March 31, 2003 and 2002, the Company had accrued interest
payable on deposits of $983 and $1,498, respectively, which is included in other
liabilities in the accompanying consolidated balance sheets.

At March 31, 2003 and 2002, $32,244 and $34,014 of public
funds on deposit were secured by loans receivable, mortgage-backed securities,
investment securities and collateralized mortgage obligations with aggregate
carrying values of $36,694 and $46,326, respectively.

Accounts which are greater than $100 at March 31, 2003 and
2002, total $954,534 and $756,025, respectively. For deposit accounts with
balances in excess of $100, that portion in excess of $100 may not be federally
insured.

89

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PFF BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)

(12) FHLB Advances and Other Borrowings

The Company utilizes 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. The Company only transacts
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 $481,000 and $4,385 and $558,000 and zero at March 31, 2003 and March 31,
2002, respectively. (See Note 13)

March 31,2003
    2002
    2001FHLB advances:Average amount outstanding during the year
    $ 465,631
    597,173
    771,869Maximum amount outstanding at any month end
    523,000
    655,000
    886,000Amount outstanding at year end (1)
    481,000
    558,000
    575,000Average interest rate:For the year
    4.06%
    5.01
    6.25At year end
    3.30
    4.16
    5.98Reverse repurchase agreements:Average amount outstanding during the year
    $ 800
    -
    -Maximum amount outstanding at any month end
    4,385
    -
    -Amount outstanding at year end
    4,385
    -
    -Average interest rate:For the year
    2.15%
    -
    -At year end
    2.15
    -
    -(1) Included in the balance of FHLB advances outstanding at
  March 31, 2003, is a putable borrowing of $15.0 million with a final maturity
  date of February 2008. The advance is subject to quarterly puts from May 2003
  through the final maturity date.


FHLB advances have the following final maturities at March
  31, 2003.

Amount2004
    $ 356,0002005
    110,0002006
    -thereafter
    15,000Total
    $ 481,000


90

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PFF BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)

Interest expense on borrowings is summarized as follows:

Year ended March 31,2003
    2002
    2001FHLB advances
    $ 19,395
    29,907
    48,434Reverse repurchase agreements
    8
    -
    -Other interest expense (1)
    53
    (1,298)
    48Total
    $ 19,456
    28,609
    48,482(1) Fiscal 2002, includes $1,258 recovery of interest expense resulting
      from favorable determination of a disputed state income tax matter.


(13) Lines of Credit

At March 31, 2003 and 2002, the Company had maximum borrowing
capacity from the FHLB of San Francisco in the amount of $1,205,953 and
$1,181,134, respectively. Based upon pledged collateral in place, the Company
had available borrowing capacity of $195,757 and $283,919 as of March 31, 2003
and 2002, respectively. Pledged collateral consists of certain loans receivable,
mortgage-backed securities, investment securities and collateralized mortgage
obligations aggregating $751,150 and $841,919 as of March 31, 2003 and 2002,
respectively and the Company's required investment in one hundred dollar par
value capital stock of the FHLB of San Francisco. At March 31, 2003 and 2002,
the cost basis of this FHLB capital stock was $26,610 and $35,133, respectively.

(14) Employee Benefit Plans

Pension Plan

The Company maintains a defined benefit Pension Plan
("Pension Plan") covering a majority of its 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. The Company also maintains a Retirement Plan for all directors and a
Supplemental Plan for all senior officers of the Company. Effective December 31,
1995, the Company 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.

91

---

PFF BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)

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 31,2003
    2002PensionPlan
    Directors'Retirement andSupplemental
      Plans
    Pension
      Plan
    Directors'Retirement andSupplemental
      PlansChange in benefit obligationProjected benefit obligation,
      beginning of year
    $ 21,196
    2,675
    19,946
    2,716Interest cost
    1,335
    168
    1,350
    183Benefits paid
    (1,332)
    (207)
    (1,315)
    (198)Actuarial loss (gain)
    1,103
    68
    1,215
    (26)Projected benefit obligation,
      end of year
    $ 22,302
    2,704
    21,196
    2,675Change in plan assetsPlan assets, beginning of year
    $ 19,527
    -
    23,808
    -Actual return on plan assets
    (939)
    -
    (2,966)
    -Employer contribution
    1,100
    207
    -
    198Benefits paid
    (1,332)
    (207)
    (1,315)
    (198)Plan assets, end of year
    $ 18,356
    -
    19,527
    -Funded status
    $ (3,946)
    (2,705)
    (1,669)
    (2,675)Unrecognized transition obligation
    -
    -
    -
    -Unrecognized prior service cost
    -
    -
    -
    -Unrecognized loss
    8,091
    553
    5,060
    526Prepaid (accrued) benefit cost
    $ 4,145
    (2,152)
    3,391
    (2,149)


Net periodic pension costs for 2003, 2002 and 2001 included
the following components:

Year ended March 31,2003
    2002
    2001Pension
      Plan
    Directors'
      Retirement
      and Supple-
      mental Plans
    Pension
      Plan
    Directors'
      Retirement
      and Supple-
      mental Plans
    Pension
      Plan
    Directors'
      Retirement
      and Supple-
      mental PlansComponents of net periodic benefit cost

  Interest cost
    $ 1,335
    168
    1,350
    183
    1,354
    200Expected return on plan assets
    (1,274)
    -
    (1,678)
    -
    (1,933)
    -Amortization of unrecognized transition obligation
    -
    -
    -
    33
    -
    33Amortization of unrecognized prior service cost
    -
    -
    11
    -
    70
    -Amortization of unrecognized (gain)/loss
    285
    42
    -
    38
    (470)
    33Net periodic pension (income) expense
    $ 346
    210
    (317)
    254
    (979)
    266


92

---

PFF BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)

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 31,2003
    2002Pension
      Plan
    Directors'
      Retirement
      and Supple-
      mental Plans
    Pension
      Plan
    Directors'
      Retirement
      and Supple-
      mental PlansWeighted-average assumptionsDiscount rate
    6.00%
    6.00
    6.50
    6.50Expected long-term rate of return onplan assets
    6.75
    -
    6.75
    -


Capital Accumulation Plan

In 1985, the Company established a capital accumulation plan
(401(k) Plan) which is available to all full-time employees over 21 years of age
with more than six months of service. Under the 401(k) Plan, the Company
contributes funds in an amount equal to 100% of the first one percent and 50% of
the next six percent (for a total maximum possible contribution of four percent)
of employee contributions. In 2003, 2002 and 2001, the total 401(k) Plan expense
was $571, $575 and $449, respectively.

Deferred Compensation Plans

The Company provides a non-qualified Directors' Deferred
Compensation Plan and a non-qualified Employees' Deferred Compensation Plan that
offer directors and senior officers of the Company, respectively, 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 depositors of
the Company or, at the Participants' election, investment earnings or losses
equivalent to that of the Company's common stock. At March 31, 2003, the $295
liability for these plans is included in accrued expenses and other liabilities.

Post retirement medical benefits

The Company currently provides post retirement medical
coverage to eligible employees. At March 31, 2003 and 2002, the expected cost
associated with this coverage was $21 and $11, respectively, and is included in
accrued expenses and other liabilities.

93

---

PFF BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)

Employee Stock Ownership Plan

As part of the reorganization to the stock form of ownership,
the ESOP purchased 1,587,000 shares of the Company's common stock at ten dollars
per share, or $15,870, which was funded by a loan from the Bancorp. The loan is
being repaid from the Bank's discretionary contributions over a period of 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, 2003, 2002 and 2001, 177,848, 176,910 and 181,281 ESOP shares, respectively
were allocated to the participants. At March 31, 2003 and 2002, 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, 2003, the fair value of the unearned
ESOP shares is $12,950. Compensation expense associated with the ESOP was
$5,852, $4,265 and $3,230 for the years ended March 31, 2003, 2002 and 2001,
respectively. At March 31, 2003 the allocated and unallocated shares in the ESOP
totaled 1,183,455 and 403,545, respectively. At March 31, 2002 the allocated and
unallocated shares in the ESOP totaled 1,005,607 and 581,393, respectively.

1996 and 1999 Incentive Plans

During October, 1996, the stockholders of the Company
approved the PFF Bancorp, Inc. 1996 Incentive Plan (the "1996 Plan").
During September, 1999, the stockholders of the Company approved the PFF
Bancorp, Inc. 1999 Incentive Plan (the "1999 Plan"). The 1996 Plan
authorized the granting of options to purchase the Company's common stock,
option related awards, and grants of common stock (collectively
"Awards"). The 1999 Plan authorized the granting of options to
purchase the Company's common stock. Concurrent with the approval of the 1996
Plan, the Company adopted SFAS No. 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 No. 25) method of accounting. If the Company elects to account for options
granted under the intrinsic-value-based method, it must make certain disclosures
with respect thereto. The Company has 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 2,777,250 shares, with 1,983,750 shares reserved for purchase
pursuant to options and 793,500 shares reserved for grants of the Company's
common stock. The maximum number of shares reserved under the 1999 Plan is
625,000 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 the
Company's common stock at the time of grant and the term of the options may not
exceed 10 years. Of the 793,500 shares reserved for stock grants, 770,542 shares
with a fair value of $9,890 were granted to directors and executive officers
during the year ended March 31, 1997. 532,500 of the 770,542 shares represented
grants to employees with the remaining shares granted to directors of the
Company. An additional 15,000 shares with a fair value of $214 at the time of
grant, were granted to an executive officer of the Company during the year ended
March 31, 1998. During the year ended March 31, 2003 the remaining 7,958 shares,
with a fair value of $258, were granted to executive officers of the Company.
Stock grants vested in five equal annual installments with the exception of the
7,958 shares which vested in one installment. With respect to shares of the
Company's 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.
Compensation expense, associated with the stock grants recognized based upon the
market price of the common stock at the time of grant, was zero, $1,429, and
$2,538 for the years ended March 31, 2003, 2002 and 2001, respectively.

94

---

PFF BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)

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

For the Year Ended March 31,2003
    2002
    2001Balance at beginning of period
    1,847,132
    1,668,346
    1,749,950Granted
    40,500
    554,760
    39,957Canceled or expired
    (28,247)
    (1,427)
    (18,858)Exercised
    (541,919)
    (374,547)
    (102,703)Balance at end of period
    1,317,466
    1,847,132
    1,668,346Options exercisable
    1,003,373
    1,261,102
    1,246,118Options available for grant
    39,908
    52,161
    605,494Weighted average option price per share:Outstanding
    $ 18.73
    17.21
    13.19Exercisable
    16.22
    13.13
    13.12Exercised
    14.20
    13.14
    12.86Granted
    32.56
    26.56
    14.65Expired
    26.23
    12.75
    15.30


The following table summarizes information with respect to
  the Company's stock options outstanding as of March 31, 2003.

Options Outstanding
    Options ExercisableRange of
      Exercise
      Prices
    Number
      Outstanding
      At
      March 31, 2003
    Weighted-average
      Remaining
      Contractual Life
      (Years)
    Weighted-
      average
      Exercise Price
    Number
      Outstanding
      at March 31, 2003
    Weighted-
      Average
      Exercise Price$12 to 14
    665,494
    3.5
    $12.75
    665,494
    $12.7514 to 16
    69,671
    5.3
    15.09
    58,323
    15.1416 to 18
    47,206
    4.1
    16.34
    45,656
    16.3118 to 20
    5,953
    5.6
    18.40
    4,279
    18.5120 to 22
    6,673
    5.4
    21.11
    5,361
    20.9922 to 24
    732
    8.2
    24.00
    146
    24.0024 to 26
    24,281
    8.6
    24.50
    6,904
    24.5026 to 28
    453,843
    8.7
    26.65
    215,604
    26.6528 to 30
    3,213
    8.9
    29.01
    1,606
    29.0130 to 34
    40,400
    9.6
    32.56
    -
    -1,317,466
    
    
    1,003,373


95

---

PFF BANCORP, INC. AND SUBSIDIARIESNotes to Consolidated Financial Statements, Continued
(Dollars in thousands)

(15) Income Taxes

Income taxes (benefit) is summarized as follows:



Current
    Deferred
    TotalYear Ended March 31, 2003Federal
    $ 17,992
    2,320
    20,312State
    5,169
    8
    5,177Total
    $ 23,161
    2,328
    25,489Year Ended March 31, 2002Federal
    $ 20,888
    (1,215)
    19,673State
    6,548
    (460)
    6,088Total
    $ 27,436
    (1,675)
    25,761Year Ended March 31, 2001Federal
    $ 13,586
    2,008
    15,594State
    5,174
    23
    5,197Total
    $ 18,760
    2,031
    20,791


For the years ended March 31, 2003, 2002 and 2001, $4,159,
$1,665 and $644 of current Federal taxes, respectively was due to exercise of
stock options that are deductible for tax purposes but not for GAAP.

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 31,2003
    2002
    2001Amount
    Percent
    Amount
    Percent
    Amount
    PercentComputed "expected" taxes
    $ 21,319
    35%
    $ 21,394
    35%
    $ 17,168
    35%Increase in taxes Resulting from:California franchise tax, net
      of Federal tax benefit
    3,365
    6
    3,956
    6
    3,378
    7Other items
    805
    1
    411
    1
    245
    1Total
    $ 25,489
    42%
    $ 25,761
    42%
    $ 20,791
    43%


96

---

PFF BANCORP, INC. AND SUBSIDIARIESNotes to Consolidated Financial Statements, Continued
(Dollars in thousands)

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,
      2003
    Taxes
      (Benefit)
    March 31,
      2002
    Taxes
      (Benefit)
    March 31,
      2001Deferred tax assets:Allowance for real estate
      loan losses
    $ (11,704)
    620
    (12,324)
    (1,943)
    (10,381)California franchise tax
    (2,785)
    371
    (3,156)
    (369)
    (2,787)Accrued expenses
    (1,029)
    (459)
    (570)
    180
    (750)Core deposit intangibles
      Amortization
    (115)
    128
    (243)
    (20)
    (223)Non-accrual interest
    (419)
    (71)
    (348)
    (85)
    (263)Unrealized gains (loss) on
      securities available-for-sale, net
    487
    1,398
    (911)
    675
    (1,586)Minimum pension liability
    (3,054)
    (3,054)
    -
    -
    -Other
    (987)
    140
    (1,127)
    1,270
    (2,397)(19,606)
    (927)
    (18,679)
    (292)
    (18,387)Deferred tax liabilities:Deferred loan origination fees
    22,099
    3,181
    18,918
    1,399
    17,519Unredeemed FHLB stock
      Dividends
    5,209
    (1,207)
    6,416
    (1,357)
    7,773Pension plan liability
    830
    2
    828
    (298)
    1,126Accumulated depreciation
    (864)
    (164)
    (700)
    (156)
    (544)Customer early withdrawal
      penalty depreciation
    -
    (23)
    23
    (35)
    58Accrued interest on pre-
      1985 loans
    72
    (5)
    77
    5
    72Excess servicing rights
      amortization
    61
    (12)
    73
    (6)
    79Other
    (280)
    (173)
    (107)
    (260)
    15327,127
    1,599
    25,528
    (708)
    26,236Net deferred tax liability
    $ 7,521
    672
    6,849
    (1,000)
    7,849


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 the Company's current and historical pretax
earnings, adjusted for significant items, management believes it is more likely
than not that the Company will realize the benefit of the deferred tax asset at
March 31, 2003. Management believes the existing net deductible temporary
differences will reverse during periods in which the Company generates net
taxable income. However, there can be no assurance that the Company 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. The Company, therefore, is required to use the specific
charge-off method on its 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 years ended March 31, 1996 and 1995. Alternately, a qualified savings
institution could compute its bad debt deduction based upon actual loan loss
experience (the experience method). Retained earnings at March 31, 2003 and 2002
include approximately $25,300 for which no deferred income tax liability has
been recognized.

97

---

PFF BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)

(16) Regulatory Capital

Savings institutions 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 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.

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.
Management believes that at March 31, 2003, 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, 2003:

PFF Bank & Trust's
      Regulatory Capital RequirementTangible
      Capital
    Core
      Capital
    Risk-based
      CapitalCapital of the Bank presented on a GAAP
      basis
    $ 255,626
    255,626
    255,626Adjustments to GAAP capital to arrive
      at regulatory capital:Unrealized losses on securities
      available-for-sale, net
    2,047
    2,047
    2,047Investments in and advances to
      non-includable consolidated subsidiaries
    (199)
    (199)
    (199)Goodwill and other intangible assets
    (1,290)
    (1,290)
    (1,290)General loan valuation allowance (1)
    -
    -
    25,532Disallowed Assets
    (36)
    (36)
    (36)Regulatory capital
    256,148
    256,148
    281,680Regulatory capital requirement
    47,016
    125,376
    190,206Amount by which regulatory capital
      exceeds requirement
    $ 209,132
    130,772
    91,474(1) Limited to 1.25% of risk-weighted assets.


98

---

PFF BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)

The following table summarizes the Bank's actual capital and
required capital under prompt corrective action provisions of FDICIA as of March
31, 2003 and 2002.

Actual
    For Capital
      Adequacy Purposes
    To be Well
      Capitalized Under
      Prompt Corrective
      Action ProvisionsMarch 31, 2003
    Amount
    Ratio
    Amount
    Ratio
    Amount
    RatioTotal 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)




Actual
    For Capital
      Adequacy Purposes
    To be Well
      Capitalized Under
      Prompt Corrective
      Action ProvisionsMarch 31, 2002
    Amount
    Ratio
    Amount
    Ratio
    Amount
    RatioTotal capital (to risk-weighted assets)
  $288,757
    12.87%
    $179,514
    >8.00%
    $224,392
    >10.00%Tier 1 (Core) capital (to adjusted total assets)
  260,771
    8.63
    120,914
    >4.00
    151,142
    >5.00Tier 1 (Core) capital (to risk-weighted assets)
  260,771
    11.62
    -
    - (1)
    134,635
    >6.00Tangible capital (to tangible assets)
  260,771
    8.63
    45,343
    >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.

(17) Other Non-Interest Expense

Other non-interest expense amounts are summarized as follows:

Year Ended March 31,2003
    2002
    2001SAIF insurance premiums
$ 840
    825
    1,164Office supplies and expense
3,382
    2,705
    2,408Savings and NOW account expenses
1,541
    1,461
    1,605Loan expenses
921
    669
    410Other
    3,514
    3,274
    3,045Total
    $ 10,198
    8,934
    8,632


99

---

PFF BANCORP, INC. AND SUBSIDIARIESNotes to Consolidated Financial Statements, Continued
(Dollars in thousands)

(18) Commitments and Contingencies

The Company and subsidiaries 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

The Company and subsidiaries have been named as defendants in
various lawsuits arising in the normal course of business. The outcome of these
lawsuits cannot be predicted, but the Company intends to vigorously defend the
actions and is of the opinion that the lawsuits will not have a material effect
on the Company.

Leases

The Company leases various office facilities under
noncancellable operating leases that expire through 2022. Net rent expense under
operating leases included in occupancy and equipment expense for the years ended
March 31, 2003, 2002 and 2001, was $732, $759, and $750, respectively. A summary
of future minimum lease payments under these agreements at March 31, 2003
follows.

|                      | Amount 
|--------------------- | -------
|Year ending March 31, |        
|2004                  | $ 896  
|2005                  | 813    
|2006                  | 519    
|2007                  | 395    
|2008                  | 394    
|thereafter            | 2,833  
|Total                 | $ 5,850

(19) Off-Balance Sheet Risk

Concentrations of Operations and Assets

The Company's operations are primarily located within
Southern California. At both March 31, 2003 and 2002, approximately 87% of the
Company's mortgage loans were secured by real estate in Southern California. In
addition, substantially all of the Company's real estate is located in Southern
California.

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

In the normal course of meeting the financing needs of its
customers and reducing exposure to fluctuating interest rates, the Company is a
party to financial instruments with off-balance-sheet risk. These financial
instruments (commitments to originate loans and commitments to purchase loans)
include elements of credit risk in excess of the amount recognized in the
accompanying consolidated financial statements. The contractual amounts of those
instruments reflect the extent of the Company's involvement in these particular
classes of financial instruments.

100

---

PFF BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)

The Company's 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 31,2003
    2002Commitments to originate loans:Variable-rate
    $ 79,044
    58,263Fixed-rate
    2,446
    2,760Total
    $ 81,490
    61,023Interest rate range for fixed-rate loans
    4.92%-7.69%
    6.37%-9.51%Commitments to purchase variable rate loans
    $ 53,000
    -


Commitments to originate fixed- and variable-rate loans
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. The Company uses
the same credit policies in making commitments to originate and purchase loans
as it does for on-balance sheet instruments. The Company controls 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 issued
by the Bank to guarantee the performance of a customer to a third party. At
March 31, 2003 and 2002, the Bank had standby letters of credit of $7,338 and
$1,421, respectively.

The Company does not require collateral or other security to
support off-balance-sheet financial instruments with credit risk. However, when
the commitment is funded, the Company receives collateral to the extent
collateral is deemed necessary, with the most significant category of collateral
being real property underlying mortgage loans.

(20) Trust Operations

Included in prepaid expenses and other assets is the net
unamortized trust acquisition cost of $1,267 at March 31, 2003 and 2002.
Amortization of trust acquisition cost was $323 for the years ended March 31,
2002 and 2001. For the year ended March 31, 2003, the amortization of the trust
acquisition cost was discontinued in accordance with SFAS 142.

As a result of the acquisition, the Company now has certain
additional fiduciary responsibilities which include acting as trustee, executor,
administrator, guardian, custodian, record keeper, agent, registrar, advisor and
manager. In addition, the Company's Trust department holds assets for the
benefit of others. These assets are not the assets of the Company and are not
included in the consolidated balance sheets of the Company at March 31, 2003 and
2002.

101

---

PFF BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)

(21) Loan Servicing and Sale Activities

Loan servicing and sale activities are summarized as follows:

As of and for the Year Ended March 31,2003
    2002
    2001Balance sheet information:Loans held for sale
    $ 3,327
    106
    583Statement of earnings information:Loan servicing fees
    443
    280
    761Amortization of servicing asset
    27
    95
    17Loan servicing fees, net
    $ 470
    375
    778Gain on sale of loans
    $ 559
    359
    390Statement of cash flows information:Loans originated for sale
    $ 22,395
    9,685
    16,341Proceeds from sale of loans
    $ 19,656
    10,497
    23,439


The Company originates mortgage loans which, depending upon
whether the loans meet the Company's investment objectives, may be sold in the
secondary market or to other private investors. The servicing of these loans may
or may not be retained by the Company. Indirect non-deferrable costs associated
with origination, servicing and sale activities cannot be presented as these
operations are integrated with and not separable from the origination and
servicing of portfolio loans, and as a result, cannot be accurately estimated.

At March 31, 2003, 2002 and 2001, the Company was servicing
loans and participations in loans owned by others of $141,883, $189,656 and
$256,478, 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.

102

---

PFF BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)

The estimated fair values of the Company's financial
instruments are as follows:

March 31, 2003
    March 31, 2002Carrying
      Value
    Fair
      Value
    Carrying
      Value
    Fair
      ValueFinancial assets:Cash & cash equivalents
    $ 50,323
    50,323
    105,965
    105,965Loans held-for-sale
    3,327
    3,327
    106
    106Investment securities held-to-maturity
    5,753
    5,957
    703
    703Investment securities available-for-sale
    94,094
    94,094
    93,820
    93,820Mortgage-backed securities available- for-sale
    215,266
    215,266
    196,580
    196,580Collateralized mortgage obligations available-for-sale
    15,200
    15,200
    62,778
    62,778Trading securities
    -
    -
    2,334
    2,334Loans receivable, net
    2,688,950
    2,719,152
    2,494,667
    2,495,737Federal Home Loan Bank stock
    26,610
    26,610
    35,133
    35,133Financial liabilities:Deposits
    2,326,108
    2,343,527
    2,168,964
    2,177,608FHLB advances and other borrowings
    485,385
    495,453
    558,000
    563,527


The following methods and assumptions were used in estimating
the Company's 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 performed by the Company using prevailing market
assumptions.

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.

Trading securities: Fair values were based on quoted market
prices.

Loans 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 credit losses. The fair value of fixed and variable rate loans was estimated
using a discounted cash flow analysis based on an estimated current rate at
which similar loans 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, 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 as of March 31, 2003 and 2002, includes the carrying amount of
non-accrual loans.

103

---

PFF BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)

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 had a notional amount of $81,490 at March 31, 2003. 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 $7,338 at March
31, 2003.

(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 19,837,500 shares of its
common stock (par value $.01 per share) at a price of $10 per share. The
proceeds, net of $4,500 in conversion costs, received by the Bancorp from the
conversion (before deduction of $15,870 to fund the Employee Stock Ownership
Plan) amounted to $193,875. The Bancorp used $105,000 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 $109,347, which is 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 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, 2003 is $19,624.

The Company 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.

104

---

PFF BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)

(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 31,2003
    2002AssetsCash and cash equivalents
    $ 2,667
    6,286Equity securities available-for-sale, at fair value
    9,160
    9,464Trust preferred securities available-for-sale, at fair
      value
    6,048
    5,052Trading securities, at fair value
    -
    2,334Loans
    232
    237Investment in Bank subsidiary
    257,608
    259,588Other assets
    4,329
    3,672Total assets
    $ 280,044
    286,633Liabilities and Stockholders' EquityOther liabilities
    $ 6,912
    2,556Stockholders' equity
    273,132
    284,077Total liabilities and stockholders' equity
    $ 280,044
    286,633


Condensed Statements of Earnings

Year ended March 31,2003
    2002
    2001Interest and other income
    $ 2,416
    1,949
    1,182Provision for loan losses
    -
    -
    3,012General and administrative expense
    1,356
    3,416
    3,416Earnings (loss)before equity in undistributed earnings
      of subsidiary before income taxes
    1,060
    (1,467)
    (5,246)Dividend from Bank subsidiary
    43,993
    4,150
    -Equity in earnings of subsidiary before income taxes
    15,858
    58,442
    54,297Earnings before income taxes
    60,911
    61,125
    49,051Income taxes
    25,489
    25,761
    20,791Net earnings
    $ 35,422
    35,364
    28,260


105

---

PFF BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)

Condensed Statements of Cash Flows

Year Ended March 31,2003
    2002
    2001Cash flows from operating activities:Net earnings
    $ 35,422
    35,364
    28,260Adjustments to reconcile net earnings to cash used by
      operating activities:Amortization of premiums on investments and mortgage-backed securities
    7
    5
    5Losses on trading securities
    -
    107
    1,490Provision for loan losses
    -
    -
    3,012(Increase) decrease in trading securities
    2,334
    (66)
    76Amortization of unearned stock-based compensation
    1,154
    3,013
    4,125Losses on sale of mortgage-backed securities and
      investments available-for-sale
    -
    -
    156Undistributed (earnings) loss of subsidiary
    10,980
    (22,671)
    (31,409)(Increase) decrease in other assets
    (657)
    (2,206)
    (897)Increase (decrease) in other liabilities
    3,798
    2,606
    (877)Net cash provided by operating activities
    53,038
    16,152
    3,941Cash flow from investing activities:Increase in real estate held for investment
    -
    -
    460(Increase) decrease in residential loans
    5
    4
    (241)Decrease in construction loans
    -
    478
    1,303(Increase) decrease in equity securities available-for-sale
    627
    (1,085)
    2,111Net cash provided by (used in) investing activities
    632
    (603)
    3,633Cash flows from financing activities:Proceeds from exercise of stock options
    7,106
    3,780
    595Purchase of treasury stock
    (60,114)
    (13,532)
    (2,567)Cash dividends
    (4,281)
    (3,513)
    (2,961)Net cash used in financing activities
    (57,289)
    (13,265)
    (4,933)Net (decrease) increase in cash during the year
    (3,619)
    2,284
    2,641Cash and cash equivalents, beginning of year
    6,286
    4,002
    1,361Cash and cash equivalents, end of year
    $ 2,667
    6,286
    4,002


106

---

PFF BANCORP, INC. AND SUBSIDIARIESNotes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)

(25) Earnings Per Share

A reconciliation of the components used to derive basic and
diluted earnings per share for the years ended March 31, 2003, 2002 and 2001
follows:

Net
      Earnings
    Weighted Average Shares Outstanding
    Per Share
      Amount2003 (1)Basic earnings per share
    $ 35,422
    12,048,609
    $ 2.94Effect of dilutive stock options and awards
    -
    475,646
    .11Diluted earnings per share
    $ 35,422
    12,524,255
    $ 2.832002 (2)Basic earnings per share
    $ 35,364
    12,455,711
    $ 2.84Effect of dilutive stock options and awards
    -
    464,034
    .10Diluted earnings per share
    $ 35,364
    12,919,745
    $ 2.742001 (3)Basic earnings per share
    $ 28,260
    12,182,855
    $ 2.32Effect of dilutive stock options and awards
    -
    457,426
    .08Diluted earnings per share
    $ 28,260
    12,640,281
    $ 2.24(1) Options to purchase 27,957 shares of common stock at a weighted average
    price of $32.75 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.(2) Options to purchase 527,899 shares of common stock at a weighted average
    price of $26.66 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.(3) Options to purchase 8,433 shares of common stock at a weighted average
    price of $21.00 per share were outstanding during the fiscal year ended
    March 31, 2001, 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 October 22,
    2002, and November 23, 2004, were still outstanding at March 31, 2001.


107

---

PFF BANCORP, INC. AND SUBSIDIARIESNotes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)

(26) Quarterly Results of Operations (Unaudited)

Three Months EndedJune 30,
      2002
    September 30,
      2002
    December 31,
      2002
    March 31,
      2003
    Total
      2003Net 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
    $ 0.70
    0.68
    0.73
    0.82
    2.94Diluted earnings per share
    $ 0.66
    0.65
    0.70
    0.79
    2.83Three Months EndedJune 30,
      2001
    September 30,
      2001
    December 31,
      2001
    March 31,
      2002
    Total
      2002Net interest income
    $ 25,138
    27,877
    29,344
    28,748
    111,107Provision for loan losses
    1,250
    1,250
    1,250
    1,250
    5,000Other income
    4,304
    3,711
    4,652
    4,376
    17,043Other expenses
    14,508
    14,695
    16,270
    16,552
    62,025Earnings before income taxes
    13,684
    15,643
    16,476
    15,322
    61,125Income taxes
    5,760
    6,575
    6,923
    6,503
    25,761Net earnings
    $ 7,924
    9,068
    9,553
    8,819
    35,364Basic earnings per share
    $ 0.64
    0.73
    0.76
    0.70
    2.84Diluted earnings per share
    $ 0.61
    0.69
    0.73
    0.68
    2.74


108

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PFF BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)

(27) Incorporation of New Subsidiary

On February 25, 2003, Diversified Builder Services, Inc.
("DBS") was incorporated in the State of California. DBS is a wholly
owned subsidiary of the Company. It is engaged in real estate consulting
services, property entitlement, loan and equity placement and opportunity and
mezzanine lending. DBS commenced operations in April 2003.

109

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Independent Auditors' Report



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, 2003 and 2002 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, 2003. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
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, 2003 and 2002 and
the results of their operations and their cash flows for each of the years in
the three-year period ended March 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.

/s/ KPMG LLP

Los Angeles, California
April 17, 2003

110

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

None.

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,
2003, pursuant to Regulation 14 A in connection with PFF Bancorp, Inc.'s Annual
Meeting of Stockholders to be held on September 16, 2003 (the "Proxy
Statement") under the captions "Election of Directors" and
"Executive Officers Who Are Not Directors" is incorporated herein by
reference.

Item 11. Executive Compensation.

The information appearing in the definitive Proxy Statement
Statement to be filed with the Securities and Exchange Commission on or about
July 29, 2003 for the 2003 Annual Meeting of Stockholders under the caption
"Executive Compensation" is incorporated herein by reference,
excluding the Stock Performance Graph and Compensation Committee Report.

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
definitive Proxy Statement to be filed with the Securities and Exchange
Commission on or about July 29, 2003 for the 2003 Annual Meeting of
Stockholders.

The following table presents the equity compensation plan
information as of March 31, 2003.

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

111

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Item 13. Certain Relationships and Related Transactions.

The information relating to certain relationships and related
transactions is incorporated herein by reference to the definitive Proxy
Statement to be filed with the Securities and Exchange Commission on or about
July 29, 2003 for the 2003 Annual Meeting of Stockholders.

Item 14. Controls and Procedures.

Within the 90 days prior to the date of this report, the
Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-14(c). Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company required to be included in the
Company's periodic Securities and Exchange Commission filings.

There have been no significant changes in the Company's
internal controls or in other factors that could significantly affect these
controls subsequent to the evaluation date and we identified no significant
deficiencies or material weaknesses requiring corrective action with respect to
those controls.

Item 15. Principal Accountant Fees and Services.

Information regarding principal accountant fees and services
is presented under the heading "Audit Committee Report" in PFF
Bancorp's definitive Proxy Statement for the 2003 Annual Meeting of Stockholders
to be held on September 17, 2003, which will be filed with the SEC on or about
July 29, 2003 and is incorporated herein by reference.

112

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PART IV

Item 16. 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)                                                                     
|    |                                                                         
|    |                                                                         
|    |                                                                         
|    |                                                                         
|    |                                                                         
|    |                                                                         
|    |                                                                         
|    |                                                                         
|    |                                                                         
|    |                                                                         
|    |                                                                         
|    |                                                                         
|    |                                                                         
|    |                                                                         
|    |                                                                         
|    |                                                                         
|    |                                                                         
|    |                                                                         
|    |                                                                         
|    |                                                                         
|    |                                                                         
|    | (b)                                                                     
|    |                                                                         
|    |                                                                         

113

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|(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)                                                                                                                                                                                                                                                                                                                                                                     | Incorporated herein by reference from the Form 10-K
      filed on June 27, 2002.                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                            
|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 the
        Company's internet site, www.pffbank.com, by clicking on "Investor
        Relations" located on the home page, proceeding to
        "Financial" and then to "SEC filings."
|                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                            
|The Company 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

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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:
    /s/ LARRY M. RINEHARTLarry M. RinehartDATED: June 25, 2003
    
    President, Chief Executive Officerand Director


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 25, 2003Larry M. Rinehart
    President, Chief Executive
      Officer and Director
      (Principal Executive Officer)/s/ GREGORY C. TALBOTT
    
    June 25, 2003Gregory C. Talbott
    Executive Vice President, Chief
      Financial Officer and Treasurer
      (Principal Financial and
      Accounting Officer)/s/ DONALD R. DESCOMBES
  June 25, 2003Donald R. DesCombes
    Director/s/ ROBERT W. BURWELL
    
    June 25, 2003Robert W. Burwell
    Director/s/ STEPHEN C. MORGAN
    
    June 25, 2003Stephen C. Morgan
    Director/s/ CURTIS W. MORRIS
    
    June 25, 2003Curtis W. Morris
    Director/s/ JIL H. STARK
    
    June 25, 2003Jil H. Stark
    Director/s/ ROYCE A. STUTZMAN
    
    June 25, 2003Royce A. Stutzman
    Director


115

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CERTIFICATION

I, Larry M. Rinehart, certify that:

1. I have reviewed this annual report on Form 10-K of PFF Bancorp, Inc.;

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

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

> (a) designed such disclosure controls and procedures to ensure that material
>       information relating to the registrant, including its consolidated
>       subsidiaries, is made known to us by others within those entities,
>       particularly during the period in which this annual report is being
>       prepared;
>   (b) evaluated the effectiveness of the registrant's disclosure controls and
>       procedures as of a date within 90 days prior to the filing date of this
>       annual report (the "Evaluation Date"); and
>   (c) presented in this annual report our conclusions about the effectiveness
>       of the disclosure controls and procedures based on our evaluation as of
>       the Evaluation Date; and

> (a) all significant deficiencies in the design or operation of internal
>       controls which could adversely affect the registrant's ability to record,
>       process, summarize and report financial data and have identified for the
>       registrant's auditors any material weaknesses in internal controls; and
>   (b) any fraud, whether or not material, that involves management or other
>       employees who have a significant role in the registrant's internal
>       controls; and





Date: June 25, 2003
    /s/ Larry M. RinehartLarry M. Rinehart
      President, Chief Executive Officer and Director


116

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CERTIFICATION

I, Gregory C. Talbott, certify that:

1. I have reviewed this annual report on Form 10-K of PFF Bancorp, Inc.;

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

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

> (a) designed such disclosure controls and procedures to ensure that material
>       information relating to the registrant, including its consolidated
>       subsidiaries, is made known to us by others within those entities,
>       particularly during the period in which this annual report is being
>       prepared;
>   (b) evaluated the effectiveness of the registrant's disclosure controls and
>       procedures as of a date within 90 days prior to the filing date of this
>       annual report (the "Evaluation Date"); and(c) presented in this annual report our conclusions about the effectiveness
>       of the disclosure controls and procedures based on our evaluation as of
>       the Evaluation Date; and

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

> (a) all significant deficiencies in the design or operation of internal
>       controls which could adversely affect the registrant's ability to record,
>       process, summarize and report financial data and have identified for the
>       registrant's auditors any material weaknesses in internal controls; and
>   (b) any fraud, whether or not material, that involves management or other
>       employees who have a significant role in the registrant's internal
>       controls; and

6. The registrant's other certifying officer and I have indicated in this
    annual report whether there were significant changes in internal controls or
    in other factors that could significantly affect internal controls
    subsequent to the date of our most recent evaluation, including any
    corrective actions with regard to significant deficiencies and material
    weaknesses.



Date: June 25, 2003
    /s/ Gregory C. TalbottGregory C. Talbott
      Executive Vice President, Chief Financial Officer and Treasurer


117