<PAGE>
 
                       SECURITIES AND EXCHANGE COMMISSION

                              WASHINGTON, DC 20549
                                        
                                   FORM 10-K

                  Annual report pursuant to Section 13 of the
                  Securities Exchange Act of 1934, as amended

                    For the fiscal year ended March 31, 1998

                          Commission File No.: 0-27404

                               PFF BANCORP, INC.
             (exact name of registrant as specified in its charter)

         DELAWARE                                         95-4561623
(State or other jurisdiction of                   (I.R.S. Employer I.D. No.)
 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)

                             NASDAQ NATIONAL MARKET
                     (Name of exchange on which registered)

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

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

     The aggregate market value of the voting stock held by non-affiliates of
the registrant, i.e., persons other than the directors and executive officers of
the registrant, was $ 339,466,088, based upon the last sales price as quoted on
The NASDAQ National Market for June 23, 1998.

     The number of shares of Common Stock outstanding as of June 23, 1998:
17,103,690


                      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, 1998 are incorporated by reference in Part
III hereof.
<PAGE>
 
                                     INDEX
<TABLE>
<CAPTION>
                                    PART I                                 PAGE
                                                                           ----
<C>          <S>                                                           <C>
Item 1.      Description of Business                                         3
Item 2.      Properties                                                     37
Item 3.      Legal Proceedings                                              38
Item 4.      Submission of Matters to a vote of Security Holders            38
 
                                    PART II
Item 5.      Market for Registrant's Common Equity and Related
              Stockholders Matters                                          38
Item 6.      Selected Financial Data                                        39 
Item 7.      Management's Discussion and Analysis of Financial 
              Condition and Results of Operations                           42
Item 7A.     Quantitative and Qualitative Disclosures About Market Risk     56
Item 8.      Financial Statements and Supplementary Data                    57
Item 9.      Changes in and Disagreements with Accountants
              on Accounting and Financial Disclosure                        96
 
                                    PART III
Item 10.     Directors and Executive Officers of the Registrant             96
Item 11.     Executive Compensation                                         96
Item 12.     Security Ownership of Certain Beneficial Owners
              and Management                                                96
Item 13.     Certain Relationships and Related Transactions                 96
 
                                    PART IV
Item 14.     Exhibits, Financial Statement Schedules and Reports
              on Form 8-K                                                   97
</TABLE> 

                                       2
<PAGE>
 
                                     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, as amended (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
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, including but not limited to, year
2000 compliance issues; 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

     PFF Bancorp, Inc. (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 from the mutual
to stock form of ownership and the change of the Association's name to PFF Bank
& Trust (the "Bank"). 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. The Bancorp had no
operations prior to March 28, 1996, and accordingly, the results of operations
prior to that date reflect only those of the Bank and its subsidiaries. At March
31, 1998, on a consolidated basis, the Bancorp and the Bank, (collectively
referred to as the "Company") had total assets of $2.81 billion, total deposits
of $1.74 billion and total stockholders' equity of $254.3 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 Bank's historical focus has been on attracting retail deposits from the
general public in the areas surrounding its branch offices and investing those
deposits, together with funds generated from operations and borrowings,
primarily in one-to-four family residential mortgage loans. To a lesser extent,
the Bank has engaged in secondary market activities and has invested on a
limited basis in multi-family mortgage, commercial real estate, construction and
land, and consumer loans as well as increasing its investment in mortgage-backed
securities ("MBS") and other investment securities. The Bank has begun
increasing its emphasis on attracting business deposit accounts and originating
commercial business, construction and land (primarily tract construction),
commercial real estate and consumer loans. Loan sales come from loans held in
the Bank's portfolio designated as being held for sale or originated during the
period and being so designated. The Bank generally retains all the servicing
rights of loans sold. The Bank's revenues are derived principally from interest
on its mortgage loans, and to a lesser extent, interest and dividends on its
investments and MBS and to a significantly lesser extent income from deposit
related and other fees and loan servicing. The Bank's primary sources of funds
are deposits, principal and interest payments on loans, investments and MBS and
FHLB advances and other borrowings. Scheduled payments on loans and MBS 

                                       3
<PAGE>
 
are a relatively stable source of funds, while prepayments on loans and MBS and
deposit flows are subject to significant fluctuation. The Bank also engages in
trust activities through its trust department and offers certain annuity and
mutual fund non-deposit investment products through a subsidiary.

     The Bank is strongly committed to utilizing emerging technologies for
effective delivery of its products and services and since August 1995, has
maintained an Internet site on the World Wide Web. In April 1997, the Bank
opened a telebanking center as a means of expanding the delivery channels for
its products and services. In addition, the Bank is using a recently developed
system for retail origination of real property loans utilizing laptop computers
and automated uploads of application packages to its loan origination system.
This new system has increased efficiency and reduced processing time for loan
originations. In October 1996, the Bank converted its core electronic data
processing (EDP) systems from a single third party service provider to a
combination of new third party providers. This EDP conversion was necessary to
enable the Bank to support the expanded array of consumer and business products
and services that the Bank has begun offering. Substantially all of the
expenditures associated with the EDP conversion were incurred during fiscal
1997. The costs charged to operations for the year ended March 31, 1997
associated with this EDP conversion totaled approximately $2.1 million,
excluding ongoing monthly contractual charges. Capital outlays for software and
hardware costs during fiscal 1997 in connection with this EDP conversion totaled
approximately $1.8 million.

MARKET AREA AND COMPETITION

     The Bank is a community-oriented savings institution whose lending, deposit
gathering and trust activities are concentrated in eastern Los Angeles, San
Bernardino, Riverside and northern and central Orange counties. The Bank also
originates loans on a wholesale basis throughout Southern California and has
expanded its lending 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 state-wide
or regional presence and in some cases a 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. Competition may also increase as a result of the lifting of
restrictions on the interstate operations of financial institutions.
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 MBS and the level of prepayments on
loans and MBS 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 ACTIVITIES

     In January 1995, the Bank acquired the trust operations of another bank for
$3.5 million. As a result of the acquisition, the Bank 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 Bank and are not included in the balance sheet
of the Bank. Trust fee income for the year ended March 31, 1998 was $1.9
million. See Note 18 to the Consolidated Financial Statements.

                                       4
<PAGE>
 
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, 1998, the Bank had total gross loans outstanding of $1.95 billion, of
which $1.47 billion were one-to-four family residential mortgage loans, or
75.3% of the Bank's total gross loans. The remainder of the portfolio consisted
of $97.4 million of multi-family mortgage loans, or 5.0% of total gross loans;
$144.0 million of commercial real estate loans, or 7.4% of total gross loans;
$185.2 million of construction and land loans, or 9.5% of total gross loans;
consumer loans of $42.8 million or 2.2% of total gross loans and commercial
business loans of $12.5 million or 0.6% of total gross loans. At March 31, 1998,
98.5% of the Bank's mortgage loans had adjustable interest rates. Of the Bank's
adjustable-rate mortgage loans, 65.4% are indexed to the 11th Federal Home Loan
Bank (FHLB) District Cost of Funds Index (COFI).

     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
<PAGE>
 
     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.

<TABLE>
<CAPTION>
                                                                     AT MARCH 31,
                                        ---------------------------------------------------------------------------
                                                 1998                      1997                       1996
                                        ---------------------------------------------------------------------------
                                                      PERCENT                   PERCENT                     PERCENT
                                                         OF                        OF                          OF
                                           AMOUNT      TOTAL         AMOUNT      TOTAL          AMOUNT       TOTAL
                                        ---------------------------------------------------------------------------
                                                                (DOLLARS IN THOUSANDS)
<S>                                     <C>           <C>          <C>           <C>          <C>           <C>
Real estate:
  Residential:
    One-to-four family                  $1,467,857     75.3%       $1,499,858     79.4%       $1,269,099     77.9%
    Multi-Family                            97,350      5.0           108,896      5.8           114,477      7.0
  Commercial real estate                   144,035      7.4           137,169      7.2           148,300      9.1
  Construction and land                    185,225      9.5           113,188      6.0            76,529      4.7
Commercial                                  12,468      0.6             3,100      0.2                 -        -
Consumer                                    42,826      2.2            26,931      1.4            21,853      1.3
                                        -------------------------------------------------------------------------
    Total loans, gross                   1,949,761    100.0%        1,889,142    100.0%        1,630,258    100.0%

Undisbursed loan funds                     (95,457)                  (38,485)                    (25,030)
Unamortized discounts, net                   1,114                    (1,629)                       (803)
Deferred loan origination fees, net         (1,101)                   (1,362)                     (3,384)
Allowance for loan losses                  (26,002)                  (27,721)                    (19,741)
                                        ----------                ----------                  ----------
    Total loans, net                     1,828,315                 1,819,945                   1,581,300
Less:
Loans held for sale(2)                        (701)                     (736)                     (6,365)
                                        ----------                ----------                  ----------
    Loans receivable, net               $1,827,614                $1,819,209                  $1,574,935
                                        ==========                ==========                  ==========
</TABLE>

<TABLE>
<CAPTION>
                                                           AT MARCH 31,
                                        -----------------------------------------------
                                                 1995                     1994(1)
                                        -----------------------------------------------
                                                      PERCENT                   PERCENT
                                                         OF                        OF  
                                           AMOUNT      TOTAL         AMOUNT      TOTAL 
                                        -----------------------------------------------
                                                      (DOLLARS IN THOUSANDS)
<S>                                     <C>           <C>          <C>           <C>   
Real estate:
  Residential:
    One-to-four family                  $1,291,300     78.0%       $1,069,175     73.7%
    Multi-Family                           119,802      7.2           123,674      8.5
  Commercial real estate                   146,746      8.9           155,976     10.8
  Construction and land                     76,007      4.6            79,732      5.5
Commercial                                       -        -                 -        -
Consumer                                    22,606      1.3            21,425      1.5
                                        ----------------------------------------------
    Total loans, gross                   1,656,461    100.0%        1,449,982    100.0%

Undisbursed loan funds                     (25,934)                   (32,625)
Unamortized discounts, net                  (1,158)                      (897)
Deferred loan origination fees, net         (4,400)                    (4,464)
Allowance for loan losses                  (19,294)                   (11,723)
                                        ----------                 ----------
    Total loans, net                     1,605,675                  1,400,273
Less:
Loans held for sale(2)                           -                     (4,775)
                                        ----------                 ----------
    Loans receivable, net               $1,605,675                 $1,395,498
                                        ==========                 ==========
</TABLE> 
------------------
(1) Loans held for accelerated disposition at March 31, 1994 are not included in
    March 31, 1994 amounts.
(2) All loans held for sale were one-to-four family residential mortgage loans.
    Loans held for sale are stated at cost before valuation adjustments of
    $350,000 and $54,000 at March 31, 1996, and 1994 respectively, to reflect
    carrying value at lower of cost or market. Loans classified as held for sale
    at March 31, 1994 were transferred to loans receivable held for investment
    in August 1994.

                                       6
<PAGE>
 
     Loan Maturity.  The following table shows the contractual maturity of the
Bank's gross loans at March 31, 1998.

<TABLE>
<CAPTION>
                                                                        AT MARCH 31, 1998
                                          --------------------------------------------------------------------------------------
                                            ONE-TO-                                                                     TOTAL
                                             FOUR      MULTI-    COMMERCIAL    CONSTRUCTION                             LOANS
                                            FAMILY     FAMILY    REAL ESTATE     AND LAND     COMMERCIAL   CONSUMER   RECEIVABLE
                                          --------------------------------------------------------------------------------------
                                                                      (DOLLARS IN THOUSANDS)
<S>                                       <C>          <C>       <C>           <C>            <C>          <C>        <C>
Amounts due:
  One year or less                        $    4,249      519      14,333        172,364         8,294      36,478      236,237
  After one year:
    More than one year to three years.         4,113      721      16,337          1,358         2,744         136       25,409
    More than three years to five years        6,494    4,565      15,282            131         1,430         133       28,035
    More than five years to ten years         23,372   10,569      25,255          1,793             -         304       61,293
    More than 10 years to 20 years           171,157   34,087      69,195          8,200             -       5,775      288,414
    More than 20 years                     1,258,472   46,889       3,633          1,379             -           -    1,310,373
                                          -------------------------------------------------------------------------------------
      Total due after March 31, 1999       1,463,608   96,831     129,702         12,861         4,174       6,348    1,713,524
                                          -------------------------------------------------------------------------------------
        Total amount due                   1,467,857   97,350     144,035        185,225        12,468      42,826    1,949,761
  Less:
    Undisbursed loan funds                         -        -           -        (95,457)            -           -      (95,457)
    Unamortized discounts, net                 1,092       22           -              -             -           -        1,114
    Deferred loan origination fees, net        1,063     (299)       (495)        (1,857)          267         220       (1,101)
    Allowance for loan losses                (11,020)  (3,133)     (3,898)        (4,454)       (3,024)       (473)     (26,002)
                                          -------------------------------------------------------------------------------------
        Total loans, net                   1,458,992   93,940     139,642         83,457         9,711      42,573    1,828,315
    Loans held for sale                         (701)       -           -              -             -           -         (701)
                                          -------------------------------------------------------------------------------------
        Loans receivable, net             $1,458,291   93,940     139,642         83,457         9,711      42,573    1,827,614
                                          =====================================================================================
</TABLE>

                                       7
<PAGE>
 
     The following table sets forth at March 31, 1998, the dollar amount of
total gross loans receivable contractually due after March 31, 1999, and whether
such loans have fixed interest rates or adjustable interest rates.

<TABLE>
<CAPTION>
                                               DUE AFTER MARCH 31, 1999
                                      -----------------------------------------
                                        FIXED         ADJUSTABLE        TOTAL
                                      -----------------------------------------
                                                (DOLLARS IN THOUSANDS)
<S>                                   <C>             <C>             <C>
Real estate loans:
  Residential:
    One-to-four family                $28,546         1,435,062       1,463,608
    Multi-family                          409            96,422          96,831
    Commercial real estate                  -           129,702         129,702
    Construction and land                   -            12,861          12,861
Commercial                                  -             4,174           4,174
Consumer                                    -             6,348           6,348
                                      -----------------------------------------
      Total gross loans receivable    $28,955         1,684,569       1,713,524
                                      =========================================
</TABLE>

     Origination, Sale, Servicing and Purchase of Loans. The Bank's mortgage 
lending activities are conducted primarily by loan representatives through its
23 banking branches, its loan origination center and wholesale brokers approved
by the Bank. 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 mortgage loans. The Bank's ability to originate loans is influenced
by the relative customer demand for fixed-rate or adjustable-rate mortgage
loans, which is affected by the current and expected future levels of interest
rates. Loan originations were $557.4 million for fiscal 1998 compared to $499.7
million for fiscal 1997. Beginning during fiscal 1997, the Bank began reducing
its emphasis on the origination of one-to-four family residential mortgage loans
with a corresponding increased emphasis on the origination of tract
construction, commercial business, commercial real estate and consumer loans as
a means of enhancing the Bank's yield on interest-earning assets. This change in
emphasis is reflected in an increase in the weighted average initial contract
rate on originations from approximately 7.93% for fiscal 1997 to approximately
8.75% for fiscal 1998. It is the general policy of the Bank to sell 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 utilizes 10-day Federal National Mortgage Association (FNMA)
forward commitments in connection with the origination and funding of fixed-rate
loans held for sale. The Bank generally retains servicing of the loans sold. At
March 31, 1998, the Bank was servicing $390.2 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. Effective January 1,
1997, the Company adopted Statement of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," ("SFAS No. 125"). In accordance with SFAS No. 125, the Company
capitalizes mortgage servicing rights ("MSRs") acquired through either the
purchase or origination of mortgage loans for sale or securitization with
servicing rights retained. The total cost of the mortgage loans designated for
sale is allocated to the MSRs and the mortgage loans without the MSRs based on
their relative fair values. MSRs are included in the financial statements in the
category of "other assets." Impairment losses are recognized through a valuation
allowance, with any associated provision recorded as a component of loans
servicing fees. At March 31, 1998, there were $701,000 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 one-to-four family mortgage 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. During
fiscal 1998, in connection with the Bank's efforts to diversify the repricing
characteristics of its loan

                                       8
<PAGE>
 
portfolio, $149.6 million of single family loans indexed to COFI were sold and a
similar amount of loans indexed to the one-year Constant Maturity Treasury
("CMT") index were purchased.

The following tables set forth the Bank's loan originations, purchases, sales
and principal repayments for the periods indicated:

<TABLE>
<CAPTION>
                                                FOR THE YEARS ENDED MARCH 31,
                                          ----------------------------------------
                                             1998           1997           1996
                                          ----------------------------------------
                                                   (DOLLARS IN THOUSANDS)
<S>                                       <C>             <C>            <C>
Beginning balance(1)                      $1,819,945      1,580,950      1,605,675
  Loans originated:
    One-to-four family                       248,224        354,391        179,765
    Multi-family                               2,721          4,844          1,755
    Commercial real estate                    16,693          2,656          6,578
    Construction and land                    226,321        109,747         59,431
    Commercial                                19,988          3,719              -
    Consumer                                  43,481         24,310         17,681
                                          ----------------------------------------
Total loans originated                       557,428        499,667        265,210
  Loans purchased                            163,045         28,417          9,303
                                          ----------------------------------------
      Total                                2,540,418      2,109,034      1,880,188
Less:
  Principal payments                        (471,544)      (225,996)      (192,237)
  Sales of loans                            (163,035)       (27,019)        (9,279)
  Securitization of loans                          -              -        (73,407)
  Accelerated disposition of loans                 -              -         (6,080)
  Transfer to foreclosed real
    estate owned (REO)                       (25,274)       (15,661)       (19,409)
  Change in undisbursed loan funds           (56,972)       (13,695)           904
  Change in allowance for loan losses          1,719         (7,980)          (447)
  Other(2)                                     3,003          1,262            717
                                          ----------------------------------------
Total loans                                1,828,315      1,819,945      1,580,950
  Loans held for sale, net                      (701)          (736)        (6,015)
                                          ----------------------------------------
Ending balance loans receivable, Net      $1,827,614      1,819,209      1,574,935
                                          ========================================
</TABLE>
------------------------
(1)  Includes loans held for sale.
(2)  Includes net capitalization of fees, amortization of premium or discount on
     loans and gain or loss on sale of loans.

                                       9
<PAGE>
 
     One-to-Four Family Residential Mortgage Lending. The Bank offers both 
fixed-rate and adjustable-rate mortgage loans with maturities up to 40 years
secured by one-to-four family residences substantially all of which are located
in the Bank's primary market area. Loan originations are obtained from the
Bank's loan representatives and their contacts with the local real estate
industry, existing or past customers, members of the local communities and
wholesale brokers who are compensated on a fee basis.

     At March 31, 1998, the Bank's total gross loans outstanding were $1.95
billion, of which $1.47 billion or 75.3% were one-to-four family residential
mortgage loans. Of the $1.47 billion of loans, 33.1% were classified as loans
secured by non-owner-occupied properties, which 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 income to cover debt service and any operating expenses. Of the one-
to-four family residential mortgage loans outstanding at March 31, 1998, 98.1%
were adjustable-rate loans. The Bank's one-to-four family residential 
adjustable-rate mortgage loans have historically been primarily indexed to COFI;
however, the Bank has been increasing the origination of adjustable-rate
mortgage loans indexed to other indices, primarily the one-year CMT index. The
Bank currently offers a number of adjustable-rate mortgage loan programs with
interest rates that adjust monthly, semi-annually or annually. A portion of the
Bank's adjustable-rate mortgage loans have introductory terms below the fully
indexed rate. In underwriting such loans, the Bank qualifies the borrowers based
upon the fully indexed rate. At the end of the introductory period, such loans
will adjust either monthly, semi-annually or annually according to their terms.
The Bank's adjustable-rate mortgage loans generally provide for periodic and
overall caps on the increase or decrease in interest rate at any adjustment date
and over the life of the loan. The Bank currently has a number of mortgage loan
programs that may be subject to negative amortization. At March 31, 1998, the
outstanding principal balances of these loans totaled $522.3 million (including
$37.3 million of loans serviced by others in which the Bank has purchased a
participating interest), or 35.6% of total one-to-four family residential
mortgage loans. At March 31, 1998, the total outstanding negative amortization
on these loans (excluding the $37.3 million of loans serviced by others) was
$3.2 million. The negative amortization is generally capped at up to 110% of the
original loan amount. 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. However, the Bank believes that the risk
of default is reduced by negative amortization caps, underwriting criteria and
the stability provided by payment schedules.

     The Bank's policy is to originate one-to-four family residential mortgage
loans in amounts up to 85% 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.

     Multi-Family Lending. The Bank originates multi-family mortgage loans
generally secured by properties located in Southern California. As a result of
declining economic conditions in its primary market area during the period of
1990 to 1995, the Bank de-emphasized the origination of multi-family loans
through fiscal 1996. However with an improving Southern California economy
during fiscal 1997, the Bank has selectively increased loan originations in this
type of product. 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 120-125%. Properties securing these
loans are appraised and title insurance is required on all loans. Declines in
the real estate values in the Bank's primary market area as a result of adverse
economic conditions over the past several years, have resulted in an increase in
the loan-to-value ratios on some 

                                       10
<PAGE>
 
mortgage loans subsequent to origination. However, many segments of the Bank's
primary market area are presently experiencing economic recovery and real estate
value appreciation.

     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.

     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.

     The Bank's multi-family loan portfolio at March 31, 1998 totaled $97.4
million or 5.0% of total gross loans. At March 31, 1998, substantially all of
the Bank's multi-family loans were adjustable-rate indexed to COFI. The Bank's
largest multi-family loan at March 31, 1998, had an outstanding balance of $3.0
million and is secured by a 52-unit apartment complex.

     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. These loans may be made with terms
up to thirty years and have generally been indexed to COFI. However, the Bank
has begun to originate loans of this type which are indexed to either the 
one-year CMT or six-month London Interbank Offered Rate (LIBOR) in an effort to
diversify away from COFI indexed loan products, and terms have been reduced to 5
to 7 years with 25 to 30 year amortization. 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%. The largest commercial real estate loan in the
Bank's portfolio at March 31, 1998 was $8.2 million and is secured by a retail
center in La Jolla, California. At March 31, 1998, the Bank's commercial real
estate loan portfolio was $144.0 million, or 7.4% of total gross loans.

     Loans secured by commercial real estate properties, like multi-family
loans, 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 or management of the properties, repayment of such loans may be
influenced to a great extent by adverse 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
and land development loans to real estate developers and individuals in Southern
California. The Bank has expanded, on a selective basis, construction and land
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, 1998, the Bank had construction and land loans
outstanding for development of residential properties located in Colorado,
Nevada, Utah and Oregon totaling $11.4 million, $7.0 million of which was
disbursed. As of March 31, 1998, the remainder of the Bank's construction and
land loans were for development of real estate located in California. The Bank's
construction loans primarily are made to finance tract construction and 

                                       11
<PAGE>
 
the construction of one-to-four family residential properties. These loans are
all adjustable-rate with maturities of one year 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. 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 on a weekly basis to monitor the progress of
construction. Land loans are underwritten on an individual basis, but generally
they do not exceed 65% of the actual cost or current appraised value of the
property, whichever is less. The largest credit exposure in the construction and
land loan portfolio as of March 31, 1998 consists of a group of loans to one
borrower with original balances totaling $21.1 million (individual loans of $4.9
million, $5.3 million, $5.5 million and $5.4 million) for the acquisition and
development of 97 residential lots and houses being built in phases in Rancho
Mirage, California. The aggregate disbursed balance of these loans at March 31,
1998 was $7.9 million. Repayment is to come from the sale of the finished homes
to end-users. The second largest loan in the Bank's construction and land loan
portfolio at March 31, 1998 had a balance of $15.0 million and is for the
acquisition and development of 188 attached and 212 detached home sites in
Rancho Bernardo. Repayment will come from phased construction loans for the
homes. The aggregate outstanding balance of this loan at March 31, 1998 was
$14.3 million. At March 31, 1998, the balance of the Bank's construction and
land loan portfolio was $185.2 million (9.5% of total gross loans), $89.8
million of which was disbursed.

     Construction and land financing is generally considered to involve a higher
degree of credit risk than long-term financing on improved, owner-occupied real
estate. 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 which is
insufficient to assure full repayment of the Bank's loan.

     Consumer and Other Lending. The Bank's originated consumer loans consist
primarily of home equity lines of credit ($35.1 million) and secured personal
loans and lines of credit ($4.2 million). At March 31, 1998, the Bank's total
consumer loan portfolio was $42.8 million or 2.2% of total gross loans.

     Commercial Business Lending. The Bank has expanded its operations to
include commercial business lending. The year ended March 31, 1997 was the
Bank's first full year of originating commercial business loans. Total term and
revolving line of credit loans in the portfolio as of March 31, 1998 were $24.2
million, $12.5 million of which was outstanding. The largest loan in the
commercial portfolio is a $2.0 million line of credit (none of which is
currently outstanding) to an established residential retirement facility. The
purpose of the revolving line is to facilitate ongoing upgrades to the facility.

     Commercial business lending is generally considered to involve a higher
degree of credit risk than the forms of secured real estate lending that the
Bank has traditionally engaged in. 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.

     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 

                                       12
<PAGE>
 
includes four of the seven 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 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 in amounts up to $299,999 and consumer loans
in amounts up to $199,999 may be approved by the Bank's staff underwriters;
mortgage loans in excess of $299,999 and up to $499,999 and consumer loans in
excess of $199,999 and up to $299,999 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 in
excess of $499,999 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 $2,999,999, consumer loans in excess of $299,999
and up to $449,999 and commercial business loans in excess of $499,999 and up to
$1,999,999 must be approved by the Management Loan Committee; and mortgage loans
of $3.0 million or more, consumer loans in excess of $450,000 and commercial
business loans of $2.0 million or more require the approval of the LOARC. The
LOARC presently reviews all commercial business loans, post funding, for
consistency with the Bank's goals and objectives. 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, 1998 the Bank's limit on loans-to-one borrower
was $32.0 million.

     Loan Servicing. The Bank also 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 insurance and
tax payments on behalf of the borrowers 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, 1998, the Bank was servicing $390.2 million of
loans for others. The Bank currently does not purchase servicing rights related
to mortgage loans originated by other institutions.

     Delinquencies and Classified Assets. The Board of Directors generally
performs a monthly review of all delinquent loans ninety days or more past due.
In addition, management reviews on an ongoing basis all loans 15 or more days
delinquent. The procedures taken by the Bank with respect to delinquencies vary
depending on the nature of the loan and period of delinquency. When a borrower
fails to make a required payment on a loan, the Bank takes a number of steps to
have the borrower cure the delinquency and restore the loan to current status.
The Bank generally sends the borrower a written notice of non-payment 15 days
after the loan is first past due. In the event payment is not then received,
additional letters and phone calls generally are made. If the loan is still not
brought current and it becomes necessary for the Bank to take legal action,
which typically occurs after a loan is delinquent at least 30 days or more, the
Bank will commence foreclosure proceedings against the real property that
secures the loan. If a foreclosure action is instituted and the loan is not
brought current, paid in full, or refinanced before the foreclosure sale, the
real property securing the loan generally is sold by the Bank following
foreclosure.

     Federal regulations and the Bank's Classification of Assets Policy require
that the Bank utilize an internal asset classification system as a means of
reporting problem and potential problem assets. The Bank has incorporated the
OTS internal asset classifications as a part of its credit monitoring system.
The Bank currently classifies problem and potential problem assets as
"Substandard," "Doubtful," or "Loss" assets. An asset is considered Substandard
if it is inadequately protected by the current net worth and paying capacity of
the obligor or of the collateral pledged, if any. Substandard assets include
those characterized by the "distinct possibility" that the Bank will sustain
"some loss" if the deficiencies are not corrected. Assets classified as Doubtful
have all of the weaknesses inherent in those classified Substandard with the
added characteristic that the weaknesses present make "collection or liquidation
in full," on the basis of currently existing facts, conditions, and values,
"highly questionable and improbable." Assets classified as Loss are those
considered "uncollectible" and of such little value that their continuance as
assets without the establishment of a specific loss allowance is not warranted.
Assets which do not currently expose the Bank to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are required to be designated "Special Mention."

                                       13
<PAGE>
 
     When the Bank classifies one or more assets, or portions thereof, as
Substandard or Doubtful, under current OTS policy, the Bank is required to
consider establishing a valuation allowance in an amount deemed prudent by
management to recognize the inherent credit risk associated with the asset. When
the Bank classifies one or more assets, or portions thereof, as Loss, it is
required either to establish a valuation allowance equal to 100% of the amount
of the asset so classified or to charge off such amount. The Bank has adopted a
policy of charging off all amounts classified as Loss.

     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. Generally, the policy statement recommends that institutions have
effective systems and controls to identify, monitor and address asset quality
problems; that management has analyzed all significant factors that affect the
collectibility of the portfolio in a reasonable manner; and that management has
established acceptable allowance evaluation processes that meet the objectives
set forth in the policy statement. As a result of the declines in local and
regional real estate market values and the significant losses experienced by
many financial institutions in the past, there has been a greater level of
scrutiny by regulatory authorities of the loan portfolios of financial
institutions undertaken as part of the examination of institutions by the OTS
and the FDIC. 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 at that time 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, actual
losses are dependent upon future events and, as such, further additions to the
level of allowances for loan losses may become necessary.

     The LOARC reviews and classifies the Bank's assets monthly and reports the
results of its review to the Board of Directors. The Bank classifies assets in
accordance with the management guidelines described above. REO is classified as
Substandard. The Bank 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 staff appraisers are
also utilized for annual property inspections on all income producing properties
with 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, 1998, the Bank had $15.3 million of assets classified as
Special Mention, net of allowances of $248,000 compared to $6.7 million
classified as Special Mention, net of allowances of $93,000 at March 31, 1997.
The main component of assets classified as Special Mention net of allowances
were: 33 loans totaling $4.2 million secured by one-to-four family residences;
and four large non-homogeneous loans (defined as loans with unpaid principal
balances in excess of $500,000) which aggregated $6.2 million. At March 31,
1998, the Bank had $41.7 million of assets classified as Substandard, net of
allowances of $5.1 million, compared to $48.0 million classified as Substandard,
net of allowances of $8.5 million at March 31, 1997. The $6.3 million decrease
in assets classified as Substandard, net between March 31, 1997 and 1998 was
primarily attributable to improvement in the one-to-four family residential
assets. One-to-four family residential loans classified as Substandard,
decreased from 224 loans totaling $29.9 million, before allowances at March 31,
1997, to 172 loans totaling $21.1 million, before allowances at March 31, 1998.
Commercial real estate loans classified as Substandard increased from 8 loans
totaling $7.0 million, before allowances at March 31, 1997 to 10 loans totaling
$10.2 million, before allowances at March 31, 1998. Multi-family loans
classified as Substandard decreased from 17 loans totaling $8.8 million, before
allowances at March 31, 1997 to 17 loans totaling $6.1 million, before
allowances at March 31, 1998.

                                       14
<PAGE>
 
     The Bank's present policy is generally to continue to classify a troubled-
debt restructured (TDR) loan as Substandard until the asset has performed at
normal contact terms for a period of six to twelve months. Where there has been
a forgiveness of principal or interest or a submarket interest rate granted, the
loan is generally considered a troubled-debt restructure. Although the economy
in general improved during fiscal 1998, the Bank 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, 1998 and 1997, there were no assets classified as Loss
and only one asset at March 31, 1998 classified as Doubtful for $17,000. The
composition of assets classified Substandard at March 31, 1998 and 1997 is set
forth below.

                                       15
<PAGE>
 
<TABLE>
<CAPTION>
                                                                   AT MARCH 31, 1998
                            ---------------------------------------------------------------------------------------------------
                                          LOANS                             REO                    TOTAL SUBSTANDARD ASSETS
                            ---------------------------------------------------------------------------------------------------
                             GROSS       NET        NUMBER     GROSS       NET        NUMBER     GROSS       NET        NUMBER
                            BALANCE   BALANCE(1)   OF LOANS   BALANCE   BALANCE(1)   OF LOANS   BALANCE   BALANCE(1)   OF LOANS
                            ---------------------------------------------------------------------------------------------------
                                                                 (DOLLARS IN THOUSANDS)
<S>                         <C>       <C>          <C>        <C>       <C>          <C>        <C>       <C>          <C>
Real Estate:
  Residential:
    One-to-four family      $21,084    $18,537       172      $5,956     $5,956         74      $27,040    $24,493       246
    Multi-family              6,102      4,725        17         414        414          2        6,516      5,139        19
  Commercial real estate     10,197      9,644        10         512        512          1       10,709     10,156        11
  Construction and land         996        996         2       1,316        713          5        2,312      1,709         7
                            ------------------------------------------------------------------------------------------------
    Sub Total                38,379     33,902       201       8,198      7,595         82       46,577     41,497       283
Commercial                      183        183         3           -          -          -          183        183         3
                            ------------------------------------------------------------------------------------------------
Grand Total                 $38,562    $34,085       204      $8,198     $7,595         82      $46,760    $41,680       286
                            ================================================================================================
</TABLE> 

<TABLE> 
<CAPTION> 
                                                                   AT MARCH 31, 1997
                            ---------------------------------------------------------------------------------------------------
                                          LOANS                             REO                    TOTAL SUBSTANDARD ASSETS
                            ---------------------------------------------------------------------------------------------------
                             GROSS       NET        NUMBER     GROSS       NET        NUMBER     GROSS       NET        NUMBER
                            BALANCE   BALANCE(1)   OF LOANS   BALANCE   BALANCE(1)   OF LOANS   BALANCE   BALANCE(1)   OF LOANS
                            ---------------------------------------------------------------------------------------------------
                                                                 (DOLLARS IN THOUSANDS)
<S>                         <C>       <C>          <C>        <C>       <C>          <C>        <C>       <C>          <C>
Real Estate:
  Residential:
    One-to-four family      $29,853    $25,137       224      $4,085     $4,052         50      $33,938    $29,189        274
    Multi-family              8,807      6,717        17           -          -          -        8,807      6,717         17
  Commercial real estate      6,993      6,123         8         342        342          1        7,335      6,465          9
  Construction and land       2,395      1,910         2       3,647      3,351          6        6,042      5,261          8
                            -------------------------------------------------------------------------------------------------
Grand Total                 $48,048    $39,887       251      $8,074     $7,745         57      $56,122    $47,632        308
                            =================================================================================================
</TABLE>
-------------------------
(1)  Net balances are reduced for loss allowances established against
     Substandard loans and REO.

                                       16
<PAGE>
 
  Non-Accrual and Past-Due Loans. The following table sets forth information
  regarding non-accrual loans, TDR loans and REO. There were 32 and 82 REO
  properties at March 31, 1998. It is the policy of the Bank to cease accruing
  and establish an allowance for all previously accrued but unpaid interest on
  loans 90 days or more past due. For the years ended March 31, 1998, 1997,
  1996, 1995, and 1994, 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 $1.7 million, $2.2 million,
  $858,000, $987,000, and $2.7 million, respectively, none of which was
  recognized. During the year ended March 31, 1998 and 1997, the Company's
  average investment in impaired loans was $20,988 and $24,940, respectively and
  interest income recorded during these periods was $776 and $764, respectively
  of which $845 and $784, respectively was recorded utilizing the cash basis
  method of accounting. For the same period, the amount of interest income that
  would have been recognized on TDR loans if such loans had continued to perform
  in accordance with their contractual terms was $1.2 million, $1.3 million,
  $1.2 million, $506,000, and $513,000, respectively; $779,000, $942,000,
  $891,000, $326,000, and $391,000, of which was recognized. The decrease in TDR
  loans from $14.6 million at March 31, 1997 to $12.5 million at March 31, 1998
  reflects a decrease in the number of TDR loans from 38 at March 31, 1997 to 32
  at March 31, 1998.

<TABLE>
<CAPTION>
                                                                           AT MARCH 31,
                                              -----------------------------------------------------------------------
                                                1998            1997            1996            1995           1994(1)
                                              -----------------------------------------------------------------------
                                                                      (DOLLARS IN THOUSANDS)
<S>                                           <C>              <C>             <C>             <C>             <C>
Non-accrual loans:
Residential real estate:
    One-to-four family                        $13,834          19,258          17,794          14,418          22,556
    Multi-family                                  467             790           1,558           4,331           1,068
Commercial real estate                          2,717           1,331               -               -           6,349
Construction and land                             131           1,447           3,254           4,521           1,475
Consumer                                           40             524             345             443             477
                                              -----------------------------------------------------------------------
      Total                                    17,189          23,350          22,951          23,713          31,925
REO, net(2)                                     7,595           7,745           6,733           8,007          14,350
TDR loans                                      12,505          14,559          13,810           4,896           5,122
                                              -----------------------------------------------------------------------
Non-performing assets                         $37,289          45,654          43,494          36,616          51,397
                                              =======================================================================
Classified assets, gross                      $46,758          56,462          53,702          41,329          63,521
Allowance for loan losses as a
  percent of gross loans receivable(3)           1.33%           1.47%           1.21%           1.16%           0.81%
Allowance for loan losses as a
  percent of total non-performing
  loans(4)                                     151.27          118.72           86.01           81.36           36.72
Non-performing loans as a percent
  of gross loans receivable(3)(4)                0.88            1.24            1.41            1.43            2.20
Non-performing assets as a percent
  of total assets(4)                             1.33            1.80            2.17            1.99            3.11
</TABLE>
------------------------
(1) Loans held for accelerated disposition at March 31, 1994 are included in
    non-accrual loans.
(2) REO balances are shown net of related loss allowances.
(3) Gross loans include loans receivable held for investment and loans
    receivable held for sale and excludes loans held for accelerated
    disposition.
(4) Non-performing assets consist of non-performing loans, TDR loans and REO.
    Non-performing loans consist of all loans 90 days or more past due and all
    other non-accrual loans.

                                       17
<PAGE>
 
The following table sets forth delinquencies in the Bank's loan portfolio as of
the dates indicated:

<TABLE>
<CAPTION>

                                       AT MARCH 31, 1998                                  AT MARCH 31, 1997
                         ----------------------------------------------------------------------------------------------------
                              60-89 DAYS            90 DAYS OR MORE(1)           60-89 DAYS            90 DAYS OR MORE(1)
                                     PRINCIPAL                 PRINCIPAL                 PRINCIPAL                 PRINCIPAL
                         NUMBER       BALANCE      NUMBER       BALANCE      NUMBER       BALANCE      NUMBER       BALANCE
                        OF LOANS     OF LOANS     OF LOANS     OF LOANS     OF LOANS     OF LOANS     OF LOANS     OF LOANS
                        ----------------------------------------------------------------------------------------------------
                                                             (DOLLARS IN THOUSANDS)
<S>                     <C>          <C>          <C>          <C>          <C>          <C>          <C>          <C>
One-to-four family         38         $3,774        117         $13,834        46         $2,629         56         $19,258
Multi-family                -              -          3             467         1            118          2             790
Commercial real estate      -              -          5           2,717         2            675          2           1,331
Construction and land       -              -          1             131         -              -          1           1,447
Consumer                    5             46         16              40       188            283        215             524
                        ---------------------------------------------------------------------------------------------------
  Total                    43         $3,820        142         $17,189       237         $3,705        276         $23,350
                        ===================================================================================================
</TABLE>

<TABLE>
<CAPTION>
                                                     AT MARCH 31, 1996
                               --------------------------------------------------------------
                                        60-89 DAYS                     90 DAYS OR MORE(1)
                               --------------------------------------------------------------
                                                  PRINCIPAL                         PRINCIPAL
                                NUMBER             BALANCE           NUMBER          BALANCE
                               OF LOANS            OF LOANS         OF LOANS         OF LOANS
                               --------------------------------------------------------------
                                                  (DOLLARS IN THOUSANDS)
<S>                            <C>                <C>               <C>             <C>
One-to-four family                27               $2,966              140           $17,794
Multi-family                       -                    -                5             1,558
Commercial real estate             -                    -                -                 -
Construction and land              -                    -                3             3,254
Consumer                          26                   29               76               345
                               -------------------------------------------------------------
  Total                           53               $2,995              224           $22,951
                               =============================================================
</TABLE>
--------------------
(1)  Loans 90 days or more past due are included in non-accrual loans.  See
     "Non-Accrual and Past Due Loans."

                                       18
<PAGE>
 
     Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risks inherent in the Bank's loan portfolio and the general economy. The
allowance for loan losses is maintained at an amount management considers
adequate to cover losses on loans receivable, which are deemed probable and
estimable. The allowance is based upon a number of factors, including current
economic conditions, actual loss experience and industry trends. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to make additional provisions for loan losses based upon
information available at the time of the review. At March 31, 1998, the Bank's
allowance for loan losses was $26.0 million or 1.33% of gross loans as compared
to $27.7 million or 1.47% of gross loans at March 31, 1997. At March 31, 1998,
the Bank had non-accrual loans of $17.2 million or 0.88% of gross loans compared
to $23.4 million or 1.24% of gross loans at March 31, 1997. The Bank will
continue to monitor and modify its allowance for loan losses as conditions
dictate.

     During the year ended March 31, 1994, in connection with a program for the
rapid reduction of problem loans, the Bank identified loans for accelerated
disposition with an aggregate principal balance of $33.3 million, which resulted
in a $10.7 million provision for loan losses and a charge-off of the same amount
for the year ended March 31, 1994. During the year ended March 31, 1995, and
prior to the consummation of the sale of the $33.3 million of loans, additional
loans with aggregate principal balances of $4.0 million were added to the
accelerated disposition program. The inclusion of this additional $4.0 million
in the accelerated disposition coupled with receipt of final pricing on the
entire $37.3 million of loans held for accelerated disposition resulted in a
$2.1 million charge to the provision for loan losses during the fiscal year
ended March 31, 1995. The closing of the sale of the $37.3 million of loans held
for accelerated disposition occurred in September, 1994. During the year ended
March 31, 1996, the Bank identified loans for accelerated disposition with an
aggregate principal balance of $8.8 million, which resulted in a $2.7 million
provision for loan losses and a charge-off of the same amount for the year ended
March 31, 1996. The closing of the sale of the $8.8 million of loans held for
accelerated disposition occurred in December 1995.

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

<TABLE>
<CAPTION>
                                                               FOR THE YEAR ENDED MARCH 31,
                                          -----------------------------------------------------------------------
                                            1998            1997            1996            1995            1994
                                          -----------------------------------------------------------------------
                                                                  (DOLLARS IN THOUSANDS)
<S>                                       <C>              <C>            <C>              <C>            <C>
Beginning balance                         $27,721          19,741          19,294          11,723           6,391
Provision for loan losses                   7,099          13,661          10,895          13,901          20,796
Charge-offs:
  Real estate:
    One-to-four family                     (7,251)         (4,190)         (5,089)         (3,493)         (2,849)
    Multi-family                             (316)           (134)         (1,635)            (98)            (97)
    Commercial real estate                   (188)           (842)              -            (420)           (603)
    Construction and land                  (1,012)           (313)           (589)           (113)         (1,125)
  Loans held for accelerated
    disposition                                 -               -          (2,716)         (2,090)        (10,700)
  Consumer                                   (343)           (303)           (422)           (121)           (112)
                                          -----------------------------------------------------------------------
      Total                                (9,110)         (5,782)        (10,451)         (6,335)        (15,486)
Recoveries                                    292             101               3               5              22
                                          -----------------------------------------------------------------------
Ending balance                            $26,002          27,721          19,741          19,294          11,723
                                          =======================================================================
Net charge-offs to average gross
  loans outstanding                          0.47%           0.31%           0.64%           0.38%           1.07%
</TABLE>

                                       19
<PAGE>
 
     The following tables set forth the amount of the Bank'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.

<TABLE>
<CAPTION>
                                                                      AT MARCH 31,
                          ---------------------------------------------------------------------------------------------------------
                                         1998                               1997                                1996
                          ---------------------------------------------------------------------------------------------------------
                                                PERCENT OF                          PERCENT OF                          PERCENT OF
                                                GROSS LOANS                         GROSS LOANS                         GROSS LOANS
                                   PERCENT OF     IN EACH              PERCENT OF     IN EACH              PERCENT OF     IN EACH
                                   ALLOWANCE    CATEGORY TO            ALLOWANCE    CATEGORY TO            ALLOWANCE    CATEGORY TO
                                    TO TOTAL    TOTAL GROSS             TO TOTAL    TOTAL GROSS             TO TOTAL    TOTAL GROSS
                          AMOUNT   ALLOWANCE       LOANS      AMOUNT   ALLOWANCE       LOANS      AMOUNT   ALLOWANCE       LOANS
                          ---------------------------------------------------------------------------------------------------------
                                                                 (DOLLARS IN THOUSANDS)
<S>                       <C>      <C>          <C>           <C>      <C>          <C>           <C>      <C>          <C>
One-to-four family        $10,766    41.40%        75.28%     $13,841    49.93%        79.39%     $ 9,687    49.07%        77.85%
Multi-family                3,133    12.05          4.99        3,410    12.30          5.77        3,468    17.57          7.02
Commercial real estate      3,898    14.99          7.39        4,648    16.77          7.26        3,116    15.78          9.10
Construction and land       4,454    17.13          9.50        4,103    14.80          5.99        2,413    12.22          4.69
Commercial                  3,024    11.63          0.64           56     0.20          0.16            -        -             -
Consumer                      473     1.82          2.20        1,586     5.72          1.43          730     3.70          1.34
Unallocated                   254     0.98             -           77     0.28             -          327     1.66             -
                          ------------------------------------------------------------------------------------------------------
Total allowance
 for loan losses          $26,002   100.00%       100.00%     $27,721   100.00%       100.00%     $19,741   100.00%       100.00%
                          ======================================================================================================
</TABLE>

<TABLE>
<CAPTION>
                                                                    AT MARCH 31,
                              -----------------------------------------------------------------------------------------
                                                1995                                           1994
                              -----------------------------------------------------------------------------------------
                                                            PERCENT OF                                      PERCENT OF
                                                            GROSS LOANS                                     GROSS LOANS
                                            PERCENT OF        IN EACH                       PERCENT OF        IN EACH
                                             ALLOWANCE      CATEGORY TO                      ALLOWANCE      CATEGORY TO
                                             TO TOTAL       TOTAL GROSS                      TO TOTAL       TOTAL GROSS
                              AMOUNT         ALLOWANCE         LOANS          AMOUNT         ALLOWANCE         LOANS
                              -----------------------------------------------------------------------------------------
                                                               (DOLLARS IN THOUSANDS)
<S>                           <C>           <C>             <C>               <C>           <C>             <C>
One-to-four family            $ 9,710         50.33%           77.96%        $ 5,117           43.65%          73.73%
Multi-family                    2,485         12.88             7.23           1,278           10.90            8.53
Commercial real estate          2,160         11.20             8.86           2,436           20.78           10.76
Construction and land           3,826         19.83             4.59           2,109           17.99            5.50
Commercial                          -             -                -               -               -               -
Consumer                          653          3.38             1.36             660            5.63            1.48
Unallocated                       460          2.38                -             123            1.05               -
                              --------------------------------------------------------------------------------------
Total allowance for
 loan losses                  $19,294        100.00%          100.00%        $11,723          100.00%         100.00%
                              ======================================================================================
</TABLE>

                                       20
<PAGE>
 
REAL ESTATE

     At March 31, 1998, the Bank had $8.3 million of REO and real estate
acquired for development (REI), net of allowances.  If the Bank acquires any
REO, it is initially recorded at fair value less estimated costs to sell.  If
there is a further deterioration in value, the Bank provides for a specific
valuation allowance and charges operations for the diminution in value.  It is
the policy of the Bank to obtain an appraisal on all REO at the time of
possession.  REI consists of a former branch facility and land acquired for a
new branch site which the Bank subsequently decided to not pursue and a security
interest in 26 lots held for development through the Bank's service corporation.
The former branch facility was disposed of during the year ended March 31, 1996
and one of the parcels of REI with a carrying value of $418,000 was sold in
April 1996 at a gain of $68,000.  The Bank is currently exploring opportunities
for sale of the land originally acquired for the new branch site. The following
table sets forth certain information with regard to the Bank's REO and REI.



<TABLE>
<CAPTION>
 
                                                                  AT MARCH 31,
                              -------------------------------------------------------------------------------------
                                   1998                  1997            1996              1995            1994
                              -------------------------------------------------------------------------------------
                                                              (DOLLARS IN THOUSANDS)
<S>                              <C>                    <C>             <C>               <C>              <C>
REO                              $8,198                  8,074           11,495           13,028           17,708
Allowance for REO losses           (603)                  (329)          (4,762)          (5,021)          (3,358)
                              -------------------------------------------------------------------------------------
  REO, net                        7,595                  7,745            6,733            8,007           14,350
                              -------------------------------------------------------------------------------------
REI                                 731                  1,113              911            1,449            1,556
Allowance for REI losses              -                      -                -             (419)            (396)
                              -------------------------------------------------------------------------------------
  REI, net                          731                  1,113              911            1,030            1,160
                              -------------------------------------------------------------------------------------
Total real estate, net           $8,326                  8,858            7,644            9,037           15,510
                              =====================================================================================
</TABLE>


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.  Additionally, the Bank must maintain minimum
levels of investments that qualify as liquid assets under OTS regulations.  See
"Regulation and Supervision - Federal Savings Institution Regulation -
Liquidity."  Historically, the Bank has maintained liquid assets above the
minimum OTS requirements and at a level considered to be adequate to meet its
normal daily activities.

     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 and 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 MBS and other non-government guaranteed securities, including corporate debt
obligations, that are investment grade.

     The investment powers of the Bancorp are substantially broader than those
permitted of 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, 1998, the Bancorp had direct equity
investments of $6.2 million, investments in equity mutual funds of $7.5 million
and investments in non-rated corporate debt obligations (trust preferred debt
securities) of $17.4 million.  Given the non-rated nature of the Company's
investments in trust preferred debt securities along with the longer-term
(typically 30 years) structure of the obligations, the 

                                       21
<PAGE>
 
Company 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.

     A portion of Company's direct equity investments are managed by the Bank's
trust department on a no fee basis.  The Company's equity mutual fund
investments are placed with fund managers with whom the Company's Senior
Management is familiar.  The performance of the Company's direct and mutual fund
equity investments is reviewed no less frequently than monthly by the Company's
Senior Management.

     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 effecting the issuers of the securities.

     At March 31, 1998, the Company had $317.1 million in investment securities
consisting primarily of investment grade corporate and U.S. agency securities
including $125.7 million of U.S. agency securities that are callable at par by
the issuers at specified dates prior to maturity. The Company invests in such
callable securities when the yields to each call date and to final maturity
exceed those available from comparable term and credit quality non-callable
securities by amounts which management deems sufficient to compensate the
Company for the call options inherent in the securities. The Company's MBS
portfolio consists of adjustable-rate securities tied to the one-year CMT (26.0%
of the portfolio), or six-month LIBOR (1.6% of the portfolio), seasoned fixed-
rate securities (20.5% of the portfolio) and five and seven year balloon
securities (49.6% of the portfolio). At March 31, 1998, the carrying value of
the Company's MBS portfolio totaled $483.0 million, $481.6 million, 99.7% of
which was classified as available-for-sale. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Comparison of
Financial Condition at March 31, 1998 and March 31, 1997." All of the Company's
MBS were insured or guaranteed by either the Government National Mortgage
Association (GNMA), 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 any premium or accretion of any discount
relating to such instruments, thereby reducing 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 Collateralized Mortgage
Obligations (CMO) portfolio consists principally of adjustable rate securities
tied to the one or three month LIBOR or the Prime rate. The adjustment intervals
for these securities are generally monthly. Of the Company's $223.5 CMO
portfolio, $220.8 million is backed by mortgages insured by FNMA or FHLMC. As
with MBS, CMOs involve a risk that actual levels of prepayments will require an
adjustment to the amortization of any premium or accretion of any discounts on
the security with an adverse impact on the yield on the security. Additionally,
the structure of many CMOs is such that their cash flows exhibit greater
sensitivity to changes in prepayments than do traditional MBS.

                                       22
<PAGE>
 
     The following table sets forth certain information regarding the carrying
and fair values of the Company's mortgage-backed securities at the dates
indicated.

<TABLE>
<CAPTION>
                                                                      AT MARCH 31,
                              ------------------------------------------------------------------------------------------
                                            1998                          1997                         1996
                              ------------------------------------------------------------------------------------------
                                  CARRYING           FAIR        CARRYING         FAIR         CARRYING         FAIR
                                   VALUE             VALUE         VALUE          VALUE          VALUE          VALUE
                              ------------------------------------------------------------------------------------------
                                                              (DOLLARS IN THOUSANDS)
<S>                               <C>                <C>         <C>              <C>          <C>              <C> 
Held-to-maturity:
 FHLMC                               $1,373          1,375          5,490          5,509          7,134          7,180
                              ------------------------------------------------------------------------------------------
  Total held-to-maturity              1,373          1,375          5,490          5,509          7,134          7,180
                              ------------------------------------------------------------------------------------------
Available-for-sale:
 GNMA                                35,094         35,094         56,682         56,682         17,165         17,165
 FHLMC                              137,706        137,706        149,788        149,788         80,819         80,819
 FNMA                               308,820        308,820        279,539        279,539         27,604         27,604
                              ------------------------------------------------------------------------------------------
  Total available-for-sale          481,620        481,620        486,009        486,009        125,588        125,588
                              ------------------------------------------------------------------------------------------
Total mortgage-backed
 securities                        $482,993        482,995        491,499        491,518        132,722        132,768
                              ==========================================================================================
</TABLE>


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

<TABLE>
<CAPTION>
                                                                    AT MARCH 31,
                           ------------------------------------------------------------------------------------------------
                                          1998                         1997                             1996
                           ------------------------------------------------------------------------------------------------
                                CARRYING         FAIR         CARRYING          FAIR          CARRYING             FAIR
                                 VALUE          VALUE          VALUE           VALUE           VALUE               VALUE
                           ------------------------------------------------------------------------------------------------
                                                                (DOLLARS IN THOUSANDS)
<S>                          <C>               <C>            <C>              <C>            <C>                  <C>
Held-to-maturity
  Domestic corporate         $      -                -           15,000           15,000           24,936           24,975
  Collateralized mortgage
    obligations                     -                -              472              474            2,374            2,395
  U.S. government and
    federal agency
     obligations                  714              725              718              739              716              739
                           ------------------------------------------------------------------------------------------------
Total held-to-maturity       $    714              725           16,190           16,213           28,026           28,109
                           ------------------------------------------------------------------------------------------------
Available-for-sale:
  Collateralized mortgage
    obligations              $223,502          223,502           24,437           24,437            4,950            4,950
  FHLMC non-cumulative
    preferred stock             5,768            5,768            5,600            5,600                -                -
  Trust preferred debt
    securities                 17,359           17,359                -                -                -                -
  Equity securities
    Direct                      6,239            6,239                -                -                -                -
    Mutual funds                7,490            7,490                -                -                -                -
  U.S. government and
    federal agency
     obligations               56,052           56,052           57,610           57,610            4,982            4,982
                           ------------------------------------------------------------------------------------------------
Total available-for-sale      316,410          316,410           87,647           87,647            9,932            9,932
                           ------------------------------------------------------------------------------------------------
      Total                  $317,124          317,135          103,837          103,860           37,958           38,041
                           ================================================================================================
</TABLE>

                                       23
<PAGE>
 
     The table below sets forth certain information regarding the carrying
value, weighted average yields and maturities of the Company's investment
securities and mortgage-backed securities as of March 31, 1998.


<TABLE>
<CAPTION>

                                                                             AT MARCH 31, 1998
                                           ------------------------------------------------------------------------------------
                                                                                MORE THAN ONE               MORE THAN FIVE
                                                  ONE YEAR OR LESS            YEAR TO FIVE YEARS          YEARS TO TEN YEARS
                                           ------------------------------------------------------------------------------------
                                                               WEIGHTED                      WEIGHTED                  WEIGHTED
                                               CARRYING        AVERAGE         CARRYING      AVERAGE      CARRYING      AVERAGE
                                                 VALUE          YIELD           VALUE         YIELD        VALUE         YIELD
                                           ------------------------------------------------------------------------------------
                                                                  (DOLLARS IN THOUSANDS)
<S>                                            <C>             <C>             <C>           <C>          <C>          <C>
Mortgage-backed securities
 Held-to-maturity:
  FHLMC                                        $    -              -%         $  1,373        6.39%        $      -         -%
  FNMA                                              -              -                 -           -                -         -
  GNMA                                              -              -                 -           -                -         -
                                           ------------------------------------------------------------------------------------
 Total held-to-maturity                             -              -             1,373        6.39                -         -
 Available-for-sale
  FHLMC                                             -              -            60,690        6.23           20,260      6.58
  FNMA                                              -              -            46,282        6.17          129,534      6.52
  GNMA                                              -              -                 -           -              128      9.10
                                           ------------------------------------------------------------------------------------
 Total available-for-sale                           -              -           106,972        6.20          149,922      6.53
                                           ------------------------------------------------------------------------------------
Total mortgage-backed securities               $    -              -%         $108,345        6.21%        $149,922      6.53%
                                           ====================================================================================
Investment securities:
 Held-to-maturity:
  U.S. government and Federal agency
      obligations                              $    -              -%         $    714        7.08%        $      -         -%
                                           ------------------------------------------------------------------------------------
 Total held-to-maturity                             -              -               714        7.08                -         -
                                           ------------------------------------------------------------------------------------
 Available-for-sale:
  collateralized mortgage obligations               -              -                 -           -                -         -
  FHLMC non-cumulative preferred stock              -              -                 -           -                -         -
  Trust preferred debt securities                   -              -                 -           -                -         -
  Equity securities
   Direct (1)                                       -              -                 -           -                -         -
   Mutual funds (1)                                 -              -                 -           -                -         -
  U.S. government and federal agency
      obligations                               4,997           6.02            51,055        6.34                -         -
                                           ------------------------------------------------------------------------------------
 Total available-for-sale                       4,997           6.02            51,055        6.34                -         -
                                           ------------------------------------------------------------------------------------
Total investment securities                    $4,997           6.02%          $51,769        6.35%        $      -         -%
                                           ====================================================================================
<CAPTION>

                                                                AT MARCH 31, 1998
                                           -----------------------------------------------------------
                                                     MORE THAN TEN
                                                         YEARS                        TOTAL
                                           -----------------------------------------------------------
                                                               WEIGHTED                      WEIGHTED
                                               CARRYING        AVERAGE         CARRYING      AVERAGE
                                                 VALUE          YIELD           VALUE         YIELD
                                           -----------------------------------------------------------
                                                                (DOLLARS IN THOUSANDS)
<S>                                          <C>               <C>            <C>            <C>
Mortgage-backed securities
 Held-to-maturity:
  FHLMC                                      $      -              -%         $  1,373        6.39%
  FNMA                                              -              -                             -
  GNMA                                              -              -                 -           -
                                           -----------------------------------------------------------
 Total held-to-maturity                             -              -             1,373        6.39
 Available-for-sale
  FHLMC                                        56,756           7.05           137,706        6.62
  FNMA                                        133,004           7.21           308,820        6.77
  GNMA                                         34,966           7.28            35,094        7.29
                                           -----------------------------------------------------------
 Total available-for-sale                     224,726           7.18           481,620        6.77
                                           -----------------------------------------------------------
Total mortgage-backed securities             $224,726           7.18%         $482,993        6.76%
                                           ===========================================================
Investment securities:
 Held-to-maturity:
  U.S. government and Federal agency
      obligations                            $      -              -%         $    714        7.08%
                                           -----------------------------------------------------------
 Total held-to-maturity                             -              -               714        7.08
                                           -----------------------------------------------------------
 Available-for-sale:
  collateralized mortgage obligations         223,502           6.67           223,502        6.67
  FHLMC non-cumulative preferred stock          5,768           6.13             5,768        6.13
  Trust preferred debt securities              17,359           7.98            17,359        7.98
  Equity securities
   Direct (1)                                   6,239          14.02             6,239       14.02
   Mutual funds (1)                             7,490          36.68             7,490       36.68
  U.S. government and federal agency
      obligations                                   -              -            56,052        6.31
                                           -----------------------------------------------------------
 Total available-for-sale                     260,358           6.75           316,410        6.67
                                           -----------------------------------------------------------
Total investment securities                  $260,358           6.75%         $317,124        6.67%
                                           ===========================================================
</TABLE>
------------------------------

(1)  "Yield" derived from unrealized change in market value of equity securities
     is not included in totals for purposes of the calculation of weighted
     average yield on the portfolio here or on average balance sheets in 
     Item 7 - "Managements Discussion and Analysis of Financial Condition and
     Results of Operations".

                                       24
<PAGE>
 
SOURCES OF FUNDS


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

     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 and certificate
accounts. The terms of the fixed-rate certificate accounts offered by the Bank
vary from 90 days to five years and the offering rates are established by the
Bank on a weekly basis. Once an account is established, no additional amounts
are permitted to be deposited in fixed-rate accounts. The Bank's 12-month and
18-month (which is no longer offered) step-up certificates permit additions to
the account and the ability to increase the interest rate one time if the
offering rate increases during the term of the account. Variable-rate
certificates offer rates that change each month relative to COFI and additions
to the account are permitted. 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,
changes in money market rates, prevailing interest rates and competition. During
the later stages of fiscal 1996, prior to the downstreaming of $105.0 of capital
to the Bank from the Bancorp in connection with the Bancorp's initial public
offering, the Bank intentionally constrained its growth in assets and deposits
in order to maintain its regulatory capital ratios at a level which would
continue to qualify the Bank as a "Awell capitalized" institution under the OTS
prompt corrective action regulations. See ARegulation and Supervision - Federal
Savings Institution Regulation@. At March 31, 1998, the Bank had $987.1 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; however, market interest
rates and rates offered by competing financial institutions significantly affect
the Bank's ability to attract and retain deposits.

     During the fourth quarter of fiscal 1998, the Bank opened a wholesale
deposit operation (Money Desk) through its telebanking center.  The Bank's Money
Desk solicits deposits directly from individual and institutional investors.  At
March 31, 1998 the Bank's certificate accounts include $8.7 million generated
through the Money Desk.  The weighted average interest rate on these deposits
was 5.58% at March 31, 1998.

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

<TABLE>
<CAPTION>
                                                           FOR THE YEAR ENDED MARCH 31,
                                                     1998               1997              1996
                                               ----------------------------------------------------
                                                             (DOLLARS IN THOUSANDS)
<S>                                               <C>                <C>                 <C>
Net deposits (withdrawals)                        $(49,543)           (42,601)           (60,762)
Interest credited on deposit accounts               79,318             71,577             73,419
                                               ----------------------------------------------------
      Total increase in deposit accounts          $ 29,775             28,976             12,657
                                               ====================================================
</TABLE>


     At March 31, 1998, the Bank had $306.2 million in certificate accounts in
amounts of $100,000 or more maturing as follows:

<TABLE>
<CAPTION>
                                                                         WEIGHTED
          MATURITY PERIOD                             AMOUNT           AVERAGE RATE
-------------------------------------------------------------------------------------
                                                       (DOLLARS IN THOUSANDS)
<S>                                                <C>                 <C> 
Three months or less                               $ 69,211                5.52%
Over three through six months                       106,994                5.67
Over six through 12 months                           90,949                5.62
Over 12 months                                       39,033                5.99
                                               --------------------------------------
      Total                                        $306,187                5.66%
                                               ======================================
</TABLE>

                                       25
<PAGE>
 
   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.


<TABLE>
<CAPTION>

                                                                      FOR THE YEAR ENDED MARCH 31,
                                   -------------------------------------------------------------------------------------------------

                                                 1998                             1997                           1996
                                   -------------------------------------------------------------------------------------------------

                                                 PERCENT                         PERCENT                         PERCENT
                                                 OF TOTAL   WEIGHTED             OF TOTAL   WEIGHTED             OF TOTAL   WEIGHTED
                                       AVERAGE   AVERAGE    AVERAGE    AVERAGE   AVERAGE    AVERAGE    AVERAGE   AVERAGE    AVERAGE
                                       BALANCE   DEPOSITS     RATE     BALANCE   DEPOSITS     RATE     BALANCE   DEPOSITS     RATE
                                   -------------------------------------------------------------------------------------------------

                                                                          (DOLLARS IN THOUSANDS)
<S>                                  <C>         <C>        <C>       <C>        <C>        <C>        <C>       <C>        <C>
Passbook accounts                    $162,874     9.48%       2.58%   $192,520   11.48%       2.87%    $115,878     6.93%    2.29%
Money market savings accounts         193,146    11.25       4.13      111,793    6.66       3.52       159,276     9.52     2.52
NOW accounts                          126,244     7.35       0.96      106,355    6.34       0.91       119,849     7.16     0.95
Non-interest bearing accounts          33,054     1.92          -       27,292    1.63          -         5,287     0.31        -
                                   -------------------------------------------------------------------------------------------------
    Total                             515,318    30.00                 437,960   26.11                  400,290    23.92
Certificate accounts:
  Variable-rate certificates of
   deposit                             26,852     1.56       5.03       45,395    2.71       4.88        57,216     3.42     5.20
  Step-up certificates of deposit     126,123     7.35       5.50      303,595   18.10       5.77       397,981    23.79     6.10
  Less than 6 months                   49,145     2.86       4.60      171,594   10.23       4.94       100,582     6.01     5.24
  6 through 11 months                 234,850    13.68       5.41      184,274   10.98       5.09       237,340    14.19     5.42
  12 though 23 months                 581,927    33.89       5.66      304,984   18.18       5.35       259,603    15.52     6.03
  24 months through 47 months          76,129     4.43       5.68       85,515   5.10        5.64        82,890     4.95     5.56
  48 months or greater                 96,835     5.64       5.82      111,648   6.65        5.78       110,600     6.61     6.04
  Jumbo                                 9,800      .57       5.99       31,021   1.85        5.39        23,434     1.40     5.74
  Acquired certificates of
   deposit(1)                             328      .02       4.14        1,484   0.09        4.28         3,236     0.19     5.03
                                   -------------------------------------------------------------------------------------------------

    Total certificate accounts      1,201,989    70.00       5.55%   1,239,510   73.89       5.55%    1,272,882    76.08     5.80%
                                   -------------------------------------------------------------------------------------------------

      Total average deposits       $1,717,307   100.00%             $1,677,470  100.00%              $1,673,172   100.00%
                                   =================================================================================================


</TABLE>

----------------------------
(1) These certificates of deposit were acquired in connection with various
    acquisitions of branch offices from other institutions.

                                       26
<PAGE>
 
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at March 31, 1998.


<TABLE>
<CAPTION>

                                        PERIOD TO MATURITY FROM MARCH 31, 1998                              AT MARCH 31,
                    --------------------------------------------------------------------------------------------------------------
                     LESS THAN    ONE TO       TWO TO       THREE TO     FOUR TO     MORE THAN
                     ONE YEAR    TWO YEARS   THREE YEARS   FOUR YEARS   FIVE YEARS   FIVE YEARS       1998       1997       1996
                    --------------------------------------------------------------------------------------------------------------
                                                         (DOLLARS IN THOUSANDS)
<S>                 <C>          <C>         <C>           <C>          <C>          <C>         <C>         <C>         <C>
0.00 to 4.00%       $    684          11           2            4           -              1           702         828       2,046
4.01 to 5.00%         58,476       2,132          37           91           -              4        60,740     116,684     143,539
5.01 to 6.00%        880,629     108,904      20,060       11,869       11,435         2,614     1,035,511   1,034,377     772,541
6.01 to 7.00%         47,294      20,465      10,607          823        1,804            93        81,086      87,082     330,461
7.01 to 8.00%              -         325           -           24            -             -           349       1,006       9,868
8.01 to 9.00%              -           -           -            -            -             -             -           -         376
Over 9.01%                 -         127           -            -            -             -           127         254         127
                    --------------------------------------------------------------------------------------------------------------
      Total         $987,083     131,964      30,706       12,811       13,239         2,712     1,178,515   1,240,231   1,258,958
                    ==============================================================================================================
</TABLE>

                                       27
<PAGE>
 
  FHLB Advances and Other Borrowings.  The Bank utilizes FHLB advances and
reverse repurchase agreements as alternative sources of funds to retail
deposits.  These borrowings are collateralized by MBS and other investment
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 ARegulation 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 OTS and FHLB.

  At March 31, 1998, the Bank had outstanding FHLB advances and other borrowings
of $785.9 million at a weighted average cost of 5.70% secured by GNMA, FNMA and
FHLMC MBS and other investment securities.  The original terms of the FHLB
advances and other borrowings outstanding at March 31, 1998, range from 1 day to
10 years.  The Bank expects to continue to utilize FHLB advances and other
borrowings including reverse repurchase agreements as secondary sources of funds
to deposit liabilities.  FHLB advances and other borrowings are utilized to
balance the differential net cash flows arising from loan and deposit activities
and as a primary funding vehicle for the Bank=s investment in MBS and other
investment securities.  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.

  During fiscal 1998, the Bank increased its use of putable 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 increased use of putable
advances has allowed the Bank to extend the term to maturity and initial "put"
dates of its funding in connection with increased investment in balloon MBS
products.  See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Asset/Liability Management".

  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.  See "Sources of Funds - FHLB
Advances and Other Borrowings".

                                       28
<PAGE>
 
The following table sets forth certain information regarding the Bank's borrowed
funds at or for the periods ended on the dates indicated:


<TABLE>
<CAPTION>

                                                          AT OR FOR THE YEARS ENDED MARCH 31,
                                             ------------------------------------------------------------
                                                     1998                  1997                 1996
                                             ------------------------------------------------------------
                                                            (DOLLARS IN THOUSANDS)
<S>                                              <C>                     <C>                   <C>
FHLB advances:
  Average balance outstanding                     $601,078               $335,188              $19,768
  Maximum amount outstanding at any
    month-end during the year                      790,086                545,400               68,985
  Balance outstanding at end of year(1)            735,886                480,000               19,722
  Weighted average interest rate during
    the year                                          5.87%                  5.78%                5.66%
  Weighted average interest rate end
    of year                                           5.70%                  5.78%                5.52%

Reverse repurchase agreements:
  Average balance outstanding                      $50,000                $10,129              $63,839
  Maximum amount outstanding at any
    month-end during the year                       50,000                 50,000               96,681
  Balance outstanding at end of year(1)             50,000                 50,000                    -
  Weighted average interest rate during
    the year                                          5.87%                  5.96%                5.97%
  Weighted average interest rate end
    of year                                           5.87%                  5.87%                   -

</TABLE>
-----------------------------------------

(1)  Included in the balances of FHLB advances and reverse repurchase agreements
     outstanding at March 31, 1998 are putable borrowings of $250.0 million and
     $50.0 million, respectively, with initial put dates ranging from June 1998
     to February 2003 and February 1999 to December 1999, respectively. The
     weighted average term to maturity for these putable borrowings are 55 and
     46 months, respectively, and the weighted average terms to first put dates
     are 26 and 22 months, respectively.

SUBSIDIARY ACTIVITIES

     Pomona Financial Services, Inc.("PFS"), is a wholly owned subsidiary of the
Bank.  PFS acts as a holding company for the service corporations described
below and acts as trustee under deeds of trusts.  For the year ended March 31,
1998, PFS had net earnings of $138,000.

     PFF Insurance Service ("PFFIS") is a wholly owned subsidiary of PFS.  Prior
to July 1994, PFFIS operated as an agency selling various personal and business
insurance policies strictly as an adjunct to the Bank's traditional thrift
business.  As part of the Bank's strategy to diversify the products and services
it offers and restructure its balance sheet, a decision was made to expand the
role of PFFIS.  In July 1994, PFFIS was authorized to sell fixed annuities to
the Bank's customers through the Bank's branches.  In August 1995, PFFIS was
further authorized to offer variable annuities and mutual funds through a
relationship with a third party marketer of annuity and mutual fund non-deposit
investment products.  In addition, PFFIS is working with vendors of other
insurance products, such as auto, home and life insurance, to further expand the
products and services offered to the Bank's customers and members of the local
community.  For the year ended March 31, 1998, PFFIS had net earnings of
$377,000.

     Diversified Services, Inc. ("DSI") is a wholly owned subsidiary of PFS.
DSI participates as an investor in residential real estate projects.  For the
year ended March 31, 1998, DSI had net earnings of $33,000.  DSI has not
participated to any material extent in real estate activities over the past
several years 

                                       29
<PAGE>
 
due to local real estate market conditions. DSI may consider additional real
estate activities as market conditions warrant.

PERSONNEL

     As of March 31, 1998, the Bank had 464 full-time employees and 125 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

GENERAL

     The Bancorp, as a savings and loan holding company, is required to file
certain reports with, and otherwise comply with the rules and regulations of the
OTS under the Home Owners' Loan Act, as amended (the "HOLA").  In addition, the
activities of savings institutions, such as the Bank, are governed by the HOLA
and the Federal Deposit Insurance Act ("FDI Act").

     The Bank is subject to extensive regulation, examination and supervision by
the OTS, as its primary federal regulator, and the FDIC, as the 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
regulatory requirements and policies, whether by the OTS, the FDIC or the
Congress, could have a material adverse impact on the Bancorp, the Bank and
their operations.  Certain of the regulatory requirements applicable to the Bank
and to the Bancorp are referred to below or elsewhere herein.  The description
of statutory provisions and regulations applicable to savings institutions and
their holding companies set forth in this Form 10-K does not purport to be a
complete description of such statutes and regulations and their effects on the
Bank and the Bancorp.

HOLDING COMPANY REGULATION

     The Bancorp is a nondiversified unitary savings and loan holding company
within the meaning of the HOLA.  As a unitary savings and loan holding company,
the Bancorp generally is not restricted under existing laws as to the types of
business activities in which it may engage, provided that the Bank continues to
be a qualified thrift lender ("QTL"). See "Federal Savings Institution
Regulation - QTL Test." Upon any non-supervisory acquisition by the Bancorp of
another savings institution or savings bank that meets the QTL test and is
deemed to be a savings institution by the OTS, the Bancorp would become a
multiple savings and loan holding company (if the acquired institution is held
as a separate subsidiary) and would be subject to extensive limitations on the
types of business activities in which it could engage. The HOLA limits the
activities of a multiple savings and loan holding company and its non-insured
institution subsidiaries primarily to activities permissible for bank holding
companies under Section 4(c)(8) of the Bank Holding Company Act ("BHC Act"),
subject to the prior approval of the OTS, and certain activities authorized by
OTS regulation, and no multiple savings and loan holding company may acquire
more than 5% the voting stock of a company engaged in impermissible activities.

                                       30
<PAGE>
 
     The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution or holding company thereof,
without prior written approval of the OTS or acquiring or retaining control of a
depository institution that is not insured by the FDIC.  In evaluating
applications by holding companies to acquire savings institutions, the OTS must
consider the financial and managerial resources and future prospects of the
company and institution involved, the effect of the acquisition on the risk to
the insurance funds, the convenience and needs of the community and competitive
factors.

     The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions:  (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies and (ii) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions.  The
states vary in the extent to which they permit interstate savings and loan
holding company acquisitions.

     Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, HOLA does prescribe such restrictions on subsidiary
savings institutions as described below. The Bank must notify the OTS 30 days
before declaring any dividend to the Bancorp.  In addition, the financial impact
of a holding company on its subsidiary institution is a matter that is evaluated
by the OTS and the agency has authority to order cessation of activities or
divestiture of subsidiaries deemed to pose a threat to the safety and soundness
of the institution.

FEDERAL SAVINGS INSTITUTION REGULATION

     CAPITAL REQUIREMENTS.  The OTS capital regulations require savings
institutions to meet three minimum capital standards:  a 1.5% tangible capital
ratio, a 3% leverage (core) capital ratio and an 8% risk-based capital ratio.
In addition, the prompt corrective action standards discussed below also
establish, in effect, a minimum 2% tangible capital standard, a 4% leverage
(core) capital ratio (3% for institutions receiving the highest rating on the
CAMELS financial institution rating system), and, together with the risk-based
capital standard itself, a 4% Tier I risk-based capital standard.  Core capital
is defined as common stockholders' equity (including retained earnings), certain
noncumulative perpetual preferred stock and related surplus, and minority
interests in equity accounts of consolidated subsidiaries less intangibles other
than certain mortgage servicing rights and credit card relationships. The OTS
regulations also require that, in meeting the tangible, leverage (core) and 
risk-based capital standards, institutions must generally deduct investments in
and loans to subsidiaries engaged in activities as principal that are not
permissible for a national bank.

     The risk-based capital standard for savings institutions requires the
maintenance of Tier I (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively.  In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, as assigned by the OTS capital regulation based on the
risks OTS believes are inherent in the type of asset.  The components of Tier I
(core) capital are equivalent to those discussed earlier.  The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock and the allowance for loan and lease losses
limited to a maximum of 1.25% of risk-weighted assets.  Overall, the amount of
supplementary capital included as part of total capital cannot exceed 100% of
core capital.

     The OTS regulatory capital requirements also incorporate an interest rate
risk component.  Savings institutions with "above normal" interest rate risk
exposure are subject to a deduction from total capital for purposes of
calculating their risk-based capital requirements.  A savings institution's
interest rate risk is measured by the decline in the net portfolio value of its
assets (i.e., the difference between incoming and outgoing discounted cash flows
from assets, liabilities and off-balance sheet contracts) that would result from
a hypothetical 200 basis point increase or decrease in market interest rates
divided by the estimated economic 

                                       31
<PAGE>
 
value of the institution's assets. In calculating its total capital under the
risk-based capital rule, a savings institution whose measured interest rate risk
exposure exceeds 2% must deduct an amount equal to one-half of the difference
between the institution's measured interest rate risk and 2%, multiplied by the
estimated economic value of the institution's assets. The Director of the OTS
may waive or defer a savings institution's interest rate risk component on a
case-by-case basis. A savings institution with assets of less than $300 million
and risk-based capital ratios in excess of 12% is not subject to the interest
rate risk component, unless the OTS determines otherwise. For the present time,
the OTS has deferred implementation of the interest rate risk component. At
March 31, 1998, the Bank met each of its capital requirements and it is
anticipated that the Bank would not be subject to the interest rate risk
component.

     The following table presents the Bank's capital position at March 31, 1998.


<TABLE>
<CAPTION>

                                                                            ACTUAL         REQUIRED
                            ACTUAL         REQUIRED         EXCESS        PERCENTAGE      PERCENTAGE
                         ----------------------------------------------------------------------------
                                                   (DOLLARS IN THOUSANDS)
<S>                        <C>             <C>             <C>            <C>             <C>
Tangible                   $195,298         41,280         154,018          7.10%           1.50%
Core (Leverage)             195,298         82,559         112,739          7.10            3.00
Risk-based                  213,617         120,481         93,136         14.17            8.00

</TABLE>

     PROMPT CORRECTIVE REGULATORY ACTION.  Under the OTS prompt corrective
action regulations, the OTS is required to take certain supervisory actions
against undercapitalized institutions, the severity of which depends upon the
institution's degree of under capitalization.  Generally, a savings institution
is considered "well capitalized" if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of Tier I (core) capital to risk-weighted
assets is at least 6%, its ratio of core capital to total assets is at least 5%,
and it is not subject to any order or directive by the OTS to meet a specific
capital level. A savings institution generally is considered "adequately
capitalized" if its ratio of total capital to risk-weighted assets is at least
8%, its ratio of Tier I (core) capital to risk-weighted assets is at least 4%,
and its ratio of core capital to total assets is at least 4% (3% if the
institution receives the highest CAMELS rating). A savings institution that has
a ratio of total capital to risk weighted assets of less than 8%, a ratio of
Tier I (core) capital to risk-weighted assets of less than 4% or a ratio of core
capital to total assets of less than 4% (3% or less for institutions with the
highest examination rating) is considered to be "undercapitalized." A savings
institution that has a total risk-based capital ratio less than 6%, a Tier 1
capital ratio of less than 3% or a leverage ratio that is less than 3% is
considered to be "significantly undercapitalized" and a savings institution that
has a tangible capital to assets ratio equal to or less than 2% is deemed to be
"critically undercapitalized." Subject to a narrow exception, the banking
regulator is required to appoint a receiver or conservator for an institution
that is "critically undercapitalized." The regulation also provides that a
capital restoration plan must be filed with the OTS within 45 days of the date a
savings institution receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." Compliance
with the plan must be guaranteed by any parent holding company. In addition,
numerous mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The OTS could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.

  INSURANCE OF DEPOSIT ACCOUNTS.  Deposits of the Bank are presently insured by
the SAIF.  On September 30, 1996, the President signed into law the Deposit
Insurance Funds Act of 1996 (the "Funds Act") which, among other things, imposed
a special one-time assessment on SAIF member institutions, including the Bank,
to recapitalize the SAIF.  The SAIF was undercapitalized due primarily to a
statutory requirement that SAIF members make payments on bonds issued in the
late 1980s by the Financing Corporation ("FICO") to recapitalize the predecessor
to the SAIF.  As required by the Funds Act, the FDIC imposed a special
assessment of 65.7 basis points on SAIF assessable deposits held as of March 31,
1995, payable November 27, 1996 (the "SAIF Special Assessment").  The SAIF
Special Assessment was recognized by the Bank as an expense in the quarter ended
September 30, 1996 and was generally tax 

                                       32
<PAGE>
 
deductible. The SAIF Special Assessment recorded by the Bank amounted to $10.9
million on a pre-tax basis and $6.3 million on an after-tax basis.

  The Funds Act also spreads the obligations for payment of the FICO bonds
across all SAIF and Bank Insurance Fund ("BIF") members.  The BIF is the fund
that primarily insures commercial bank deposits.  Beginning on January 1, 1997,
BIF deposits were assessed for a FICO payment of approximately 1.3 basis points,
while SAIF deposits pay approximately 6.5 basis points. Full pro rata sharing
of the FICO payments between BIF and SAIF members will occur on the earlier of
January 1, 2000 or the date the BIF and SAIF are merged.  The Funds Act
specifies that the BIF and SAIF will be merged on January 1, 1999, provided no
savings associations remain as of that time.

  As a result of the Funds Act, the FDIC voted to effectively lower SAIF
assessments to 0 to 27 basis points as of January 1, 1997, a range comparable to
that of BIF members.  SAIF members will also continue to make the FICO payments
described above.  Management cannot predict the level of FDIC insurance
assessments on an on-going basis, whether the savings association charter will
be eliminated or whether the BIF and SAIF will eventually be merged.

  The Bank's assessment rate for fiscal 1998 ranged from 6.1 to 6.5 basis points
and the premium paid for this period was $1.5 million.  A significant increase
in SAIF insurance premiums would likely have an adverse effect on the operating
expenses and results of operations of the Bank.

  Under the FDI Act, 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.

  THRIFT RECHARTERING LEGISLATION.  The Funds Act provides that the BIF and SAIF
will merge on January 1, 1999 if there are no more savings associations as of
that date.  Various proposals to eliminate the federal thrift charter, create a
uniform financial institutions charter and abolish the OTS have been introduced
in Congress.  Some bills would require federal savings institutions to convert
to a national bank or some type of state charter by a specified date under some
bills, or they would automatically become national banks.  Under some proposals,
converted federal thrifts would generally be required to conform their
activities to those permitted for the charter selected and divestiture of
nonconforming assets would be required over a two year period, subject to two
possible one year extensions.  State chartered thrifts would become subject to
the same federal regulation as applies to state commercial banks.  A more recent
bill passed by the House Banking Committee would allow savings institutions to
continue to exercise activities being conducted when they convert to a bank
regardless of whether a national bank could engage in the activity.  Holding
companies for savings institutions would become subject to the same regulation
as holding companies that control commercial banks, with some limited
grandfathering, including savings and loan holding company activities.  The
grandfathering would be lost under certain circumstances such as a change in
control of the Bancorp.  The Bank is unable to predict whether such legislation
would be enacted or the extent to which the legislation would restrict or
disrupt its operations.

  LOANS TO ONE BORROWER.  Under the HOLA, savings institutions are generally
subject to the limits on loans to one borrower applicable to national banks.
Generally, savings institutions may not make a loan or extend credit to a single
or related group of borrowers in excess of 15% of its unimpaired capital and
surplus.  An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if such loan is secured by readily marketable collateral, which is
defined to include certain financial instruments and bullion.  At March 31,
1998, the Bank's limit on loans to one borrower was $32.0 million.  At March 31,
1998, the Bank's largest aggregate outstanding balance of loans to one borrower
was $19.6 million.

  QTL TEST.  The HOLA requires savings institutions to meet a QTL test.  Under
the QTL test, a savings and loan association must either qualify as a "domestic
building and loan association" as defined in the Internal Revenue Code or
maintain at least 65% of its "portfolio assets" (total assets less: (i)
specified 

                                       33
<PAGE>
 
liquid assets up to 20% of total assets; (ii) intangibles, including goodwill;
and (iii) the value of property used to conduct business) in certain "qualified
thrift investments" (primarily residential mortgages and related investments,
including certain mortgage-backed securities) in at least 9 months out of each
12 month period.

  A savings institution that fails the QTL test is subject to certain operating
restrictions and may be required to convert to a bank charter.  As of March 31,
1998, the Bank maintained 81.8% of its portfolio assets in qualified thrift
investments and, therefore, met the QTL test.  Recent legislation has expanded
the extent to which education loans, credit card loans and small business loans
may be considered "qualified thrift investments."

  LIMITATION ON CAPITAL DISTRIBUTIONS.  OTS regulations impose limitations upon
all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital.  The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level.  An institution that exceeds
all fully phased-in capital requirements before and after a proposed capital
distribution ("Tier 1 Bank") and has not been advised by the OTS that it is in
need of more than normal supervision, could, after prior notice but without
obtaining approval of the OTS, make capital distributions during a calendar year
equal to the greater of (i) 100% of its net earnings to date during the calendar
year plus the amount that would reduce by one-half its "surplus capital ratio"
(the excess capital over its fully phased-in capital requirements) at the
beginning of the calendar year or (ii) 75% of its net income for the previous
four quarters.  Any additional capital distributions would require prior
regulatory approval.  In the event the Bank's capital fell below its regulatory
requirements or the OTS notified it that it was in need of more than normal
supervision, the Bank's ability to make capital distributions could be
restricted.  In addition, the OTS could prohibit a proposed capital distribution
by any institution, which would otherwise be permitted by the regulation, if the
OTS determines that such distribution would constitute an unsafe or unsound
practice.  In December 1994, the OTS proposed amendments to its capital
distribution regulation that would generally authorize the payment of capital
distributions without OTS approval provided that the payment does not cause the
institution to be undercapitalized within the meaning of the prompt corrective
action regulation.  However, institutions in a holding company structure would
still have a prior notice requirement.  At March 31, 1998, the Bank was a Tier 1
Bank.

  LIQUIDITY.  The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage of its net withdrawal deposit accounts plus short-term borrowings.
This liquidity requirement was 4% at March 31, 1998, but is subject to change
from time to time by the OTS to any amount within the range of 4% to 10%
depending upon economic conditions and the savings flows of member institutions.
OTS regulations also formerly required each savings institution to maintain an
average daily balance of short-term liquid assets of at least 1% of the total of
its net withdrawal deposit accounts and borrowings payable in one year or less.
Monetary penalties may be imposed for failure to meet these liquidity
requirements.  The OTS has recently eliminated the 1% short-term liquid asset
requirement. The Bank's liquidity ratio for March 31, 1998 was 4.6%, which
exceeded the applicable requirement.  The Bank has never been subject to
monetary penalties for failure to meet its liquidity requirements.

  ASSESSMENTS.  Savings institutions are required to pay assessments to the OTS
to fund the agency's operations.  The general assessments, paid on a semi-annual
basis, are computed upon the savings institution's total assets, including
consolidated subsidiaries, as reported in the Bank's latest quarterly thrift
financial report.  The assessments paid by the Bank for the fiscal year ended
March 31, 1998 totaled $395,000.

  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.

                                       34
<PAGE>
 
  TRANSACTIONS WITH RELATED PARTIES.  The Bank's authority to engage in
transactions with related parties or "affiliates" (e.g., any company that
controls or is under common control with an institution, including the Bancorp
and its non-savings institution subsidiaries) is limited by Sections 23A and 23B
of the Federal Reserve Act ("FRA"). Section 23A limits the aggregate amount of
covered transactions with any individual affiliate to 10% of the capital and
surplus of the savings institution. The aggregate amount of covered transactions
with all affiliates is limited to 20% of the savings institution's capital and
surplus. Certain transactions with affiliates are required to be secured by
collateral in an amount and of a type described in Section 23A and the purchase
of low quality assets from affiliates is generally prohibited. Section 23B
generally provides that certain transactions with affiliates, including loans
and asset purchases, must be on terms and under circumstances, including credit
standards, that are substantially the same or at least as favorable to the
institution as those prevailing at the time for comparable transactions with 
non-affiliated companies. In addition, savings institutions are prohibited from
lending to any affiliate that is engaged in activities that are not permissible
for bank holding companies and no savings institution may purchase the
securities of any affiliate other than a subsidiary.

  The Bank's authority to extend credit to executive officers, directors and 10%
shareholders ("insiders"), as well as entities such persons control, is governed
by Sections 22(g) and 22(h) of the FRA and Regulation O thereunder.  Among other
things, such loans are required to be made on terms substantially the same as
those offered to unaffiliated individuals and to not involve more than the
normal risk of repayment.  Recent legislation created an exception for loans
made pursuant to a benefit or compensation program that is widely available to
all employees of the institution and does not give preference to insiders over
other employees.  Regulation O also places individual and aggregate limits on
the amount of loans the Bank may make to insiders based, in part, on the Bank's
capital position and requires certain board approval procedures to be followed.

  ENFORCEMENT.  Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring actions
against the institution and all institution-affiliated parties, including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution.  Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors to institution of receivership, conservatorship or termination of
deposit insurance.  Civil penalties cover a wide range of violations and can
amount to $25,000 per day, or even $1 million per day in especially egregious
cases.  Under the FDI Act, the FDIC has the authority to recommend to the
Director of the OTS enforcement action to be taken with respect to a particular
savings institution.  If action is not taken by the Director, the FDIC has
authority to take such action under certain circumstances.  Federal law also
establishes criminal penalties for certain violations.

  STANDARDS FOR SAFETY AND SOUNDNESS.  The federal banking agencies have adopted
Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") and a final rule to implement safety and soundness standards
required under the FDI Act.  The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes impaired.  The
standards set forth in the Guidelines address internal controls and information
systems; internal audit system; credit underwriting; loan documentation;
interest rate risk exposure; asset growth; asset quality; earnings; and
compensation, fees and benefits.  If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
Guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard, as required by the FDI
Act.  The final rule establishes deadlines for the submission and review of such
safety and soundness compliance plans when such plans are required.

FEDERAL RESERVE SYSTEM

  The Federal Reserve Board regulations require savings institutions to maintain
non-interest earning reserves against their transaction accounts (primarily NOW
and regular checking accounts).  The Federal Reserve Board regulations generally
required for most of 1997 that reserves be maintained against aggregate
transaction accounts as follows:  for accounts aggregating $49.3 million or less
(subject to adjustment by the 

                                       35
<PAGE>
 
Federal Reserve Board) the reserve requirement was 3%; and for accounts
aggregating greater than $49.3 million, the reserve requirement was $1.48
million plus 10% (subject to adjustment by the Federal Reserve Board between 8%
and 14%) against that portion of total transaction accounts in excess of $49.3
million. The first $4.4 million of otherwise reservable balances (subject to
adjustments by the Federal Reserve Board) were exempted from the reserve
requirements. The Bank maintained compliance with the foregoing requirements.
For 1998, the Federal Reserve Board has decreased from $49.3 to $47.8 million
the amount of transaction accounts subject to the 3% reserve requirement and
increased the amount of exempt reservable balances from $4.4 million to $4.7
million. The balances maintained to meet the reserve requirements imposed by the
Federal Reserve Board may be used to satisfy liquidity requirements imposed by
the OTS.


                           FEDERAL AND STATE TAXATION

FEDERAL TAXATION

     General.  The Bancorp reports its income on a calendar 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 and its
subsidiary file federal income tax returns on a consolidated basis.  The Bank
has been audited by the IRS through the 1990 tax year and the California
Franchise Tax Board through the 1985 tax year and for the 1993 tax year.  The
statute of limitations has closed for all tax years for both IRS and California
Franchise Tax Board purposes through the 1992 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 Bank or 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.  The
Bank's deduction with respect to "qualifying loans," ( generally loans secured
by certain interests in real property), could be computed using a percentage
based on the Bank's actual loss experience, (the "experience method"), or a
percentage equal to eight percent of the Bank's taxable income before such
deduction (the "percentage of taxable income method").  Each year the Bank
selected the more favorable way to calculate the deduction attributable to an
addition to the bad debt reserve.

     Pursuant to the Small Business Job Protection Act of 1996 (the "Act"),
Congress repealed the reserve method of accounting for bad debts for savings
institutions, effective for taxable years beginning after 1995.  The Bank
changed its method of accounting for bad debts from the reserve method formerly
permitted under section 593 of the Internal Revenue Code of 1986, as amended
(the "Code") to the "specific charge-off" method.  Under the specific charge-off
method, which is governed by section 166 of the Code and the regulations
thereunder, tax deductions may be taken for bad debts only if loans become
wholly or partially worthless. Although the Act requires that qualifying thrifts
recapture (i.e., include in taxable income) over a six-year period a portion of
their existing bad debt reserves equal to their "applicable excess reserves,"
the Bank does not have applicable excess reserves subject to recapture. However,
the Bank's 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 excess of the bad debt reserve deduction using
the percentage of taxable income method over the deduction that would have been
allowable under the experience method is treated as a preference item for
purposes of computing the AMTI.  

                                       36
<PAGE>
 
Only 90% of AMTI can be offset by net operating loss carryovers of which the
Bank currently has none. AMTI is increased by an amount equal to 75% of the
amount by which the Bank's adjusted current earnings exceeds its AMTI
(determined without regard to this preference and prior to reduction for net
operating losses). In addition, for taxable years beginning after December 31,
1996 and before January 1, 1996, an environmental tax of .12% of the excess of
AMTI (with certain modifications) over $2.0 million is imposed on corporations,
including the Bank, whether or not an Alternative Minimum Tax ("AMT") is paid.
The Bank does not expect to be subject to the AMT, but may be subject to the
environmental tax liability.

     Dividends Received Deduction and Other Matters.  The Bancorp may exclude
from its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations.  The corporate dividends received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Bancorp and the Bank will not file a consolidated tax return,
except that if the Bancorp or the Bank own more than 20% of the stock of a
corporation distributing a dividend then 80% of any dividends received may be
deducted.

STATE AND LOCAL TAXATION

     State of California.  The California franchise tax rate applicable to the
Bank 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 Bank); however, the total tax rate cannot
exceed 11.7%.  Under California regulations, bad debt deductions are available
in computing California franchise taxes using a three or six-year weighted
average loss experience method.  The Bancorp and its California subsidiary file
California state franchise tax returns on a combined basis.  Assuming that the
holding company form of organization is continued 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 for the Bank.

     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.

ITEM 2.  PROPERTIES.
------------------- 

     PFF Bank & Trust, as of March 31, 1998, conducted its business through
twenty-three banking branches, two separate trust offices, a regional loan
center, a human resource and training center, plus one executive administrative
building and one records center.  The Bank opened its twenty-fourth full service
banking branch on April 1, 1998.

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

     Of the twenty-three bank branches, seventeen of the buildings and the land
on which they are located are owned, one building is owned on leased land, and
five buildings and the land on which they are located are leased. The two
separate trust offices and the administrative offices and land on which they are
located are leased, and the human resources and training center and the records
center and land occupied by them are owned.

     As of March 31, 1998, the net book value of owned real estate including the
branch located on leased land totaled $18.5 million. The net book value of
leased branch offices was $2.1 million. The net book value of furniture,
fixtures and electronic data processing equipment was $7.0 million.

                                       37
<PAGE>
 
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.


                                    PART II
                                        

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

     The Common Stock of PFF Bancorp, Inc. is traded over-the-counter on the
NASDAQ National Market under the symbol "PFFB."  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. common stock.  To date, the
Bancorp has not paid a dividend to its stockholders.  In the future, the Board
of Directors may consider a policy of paying cash dividends on the Common Stock.
As of March 31, 1998, there were 4,752 holders of the Common Stock of the
Company, which includes the approximate number of shares held in street name.

<TABLE>
<CAPTION>
                                           HIGH                LOW             CLOSING
                                    ------------------------------------------------------
<S>                                       <C>                  <C>             <C>
Year Ended March 31, 1998
    First Quarter                         $19.00                13.25            18.75
    Second Quarter                         20.13                17.75            19.38
    Third Quarter                          22.19                17.94            19.88
    Fourth Quarter                         21.13                16.88            20.63

Year Ended March 31, 1997
    First Quarter                         $11.75                10.50            11.13
    Second Quarter                         12.75                10.25            12.38
    Third Quarter                          14.88                12.13            14.88
    Fourth Quarter                         17.00                14.00            14.38

</TABLE>

                                       38
<PAGE>
 
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
consolidated financial statements of the Company and notes thereto - See Item 8
- "Financial Statements and Supplementary Data".

<TABLE>
<CAPTION>
                                                                    AT MARCH 31,
                                         ----------------------------------------------------------------------
                                            1998        1997           1996            1995            1994
                                         ----------------------------------------------------------------------
                                                               (DOLLARS IN THOUSANDS)
<S>                                      <C>          <C>             <C>             <C>             <C>
SELECTED BALANCE SHEET DATA:
Total assets                             $2,812,384   2,535,767       2,008,139       1,842,877       1,654,879
Investment securities held-to-
  maturity(1)                                   714      16,190          28,026          40,059          78,796
Investment securities
 available-for-sale(1)                      316,410      87,647           9,932           6,881               -
Mortgage-backed securities held-
  to-maturity(1)                              1,373       5,490           7,134          80,778           4,026
Mortgage-backed securities
  available-for-sale(1)                     481,620     486,009         125,588               -               -
Loans held for sale                             701         736           6,015               -           4,721
Loans held for accelerated
  disposition                                     -           -               -               -          22,593
Loans receivable, net(2)                  1,827,614   1,819,209       1,574,935       1,605,675       1,395,498
Deposits                                  1,740,824   1,711,049       1,682,073       1,669,416       1,523,647
FHLB advances and other
  borrowings                                785,886     530,000          19,722          49,095               -
Stockholders' equity, substantially
  restricted                                254,278     265,526         289,071         108,053         112,281
</TABLE>
                                                        (continued on next page)

                                       39
<PAGE>
 
<TABLE>
<CAPTION>
                                                              FOR THE YEAR ENDED MARCH 31,
                                         -------------------------------------------------------------------
                                            1998        1997           1996            1995            1994
                                         -------------------------------------------------------------------
                                                   (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                      <C>          <C>             <C>             <C>             <C>
SELECTED OPERATING DATA:
Interest income                          $  191,368   168,515         136,173         108,009         109,190
Interest expense                            118,517    99,306          87,556          62,066          54,939
                                         --------------------------------------------------------------------
Net interest income before
  provision for loan losses                  72,851    69,209          48,617          45,943          54,251
Provision for loan losses                     7,099    13,661          10,895          13,901          20,796
                                         --------------------------------------------------------------------
Net interest income after
  provision for loan losses                  65,752    55,548          37,722          32,042          33,455
Non-interest income                          14,280    10,227           8,139           4,912           6,507
Non-interest expense:
  General and administrative
    expense                                  51,560    49,381          40,475          39,534          39,229
  SAIF recapitalizatiion assessment               -    10,900               -               -               -
  Real estate operations, net                   473      (325)          1,670           4,691           4,839
                                         --------------------------------------------------------------------
Total non-interest expense                   52,033    59,956          42,145          44,225          44,068
                                         --------------------------------------------------------------------
Earnings (loss) before income
  Taxes                                      27,999     5,819           3,716          (7,271)         (4,106)
Income taxes (benefit)                       12,019     3,087           1,651          (3,112)         (1,198)
                                         --------------------------------------------------------------------
Net earnings (loss)                      $   15,980     2,732           2,065          (4,159)         (2,908)
                                         ====================================================================
Basic earnings per share (10)            $     1.00      0.15             N/A             N/A             N/A
                                         ====================================================================
Diluted earnings per share (10)          $      .95      0.15             N/A             N/A             N/A
                                         ====================================================================
</TABLE>
                                                        (continued on next page)

                                       40
<PAGE>
 
<TABLE>
<CAPTION>
                                                               AT OR FOR THE YEAR ENDED MARCH 31,
                                             ------------------------------------------------------------------------
                                               1998           1997            1996            1995            1994
                                             ------------------------------------------------------------------------
                                                                      (DOLLARS IN THOUSANDS)
<S>                                          <C>              <C>             <C>             <C>             <C>
PERFORMANCE RATIOS:
  Return on average assets                       0.60%           0.12            0.11           (0.24)          (0.18)
  Return on average equity                       6.07            0.96            1.86           (3.68)          (2.47)
  Average equity to average assets               9.87           12.10            5.88            6.60            7.14
  Equity to total assets at end of                   
   period                                        9.04           10.47           14.39            5.86            6.78
  Average interest rate spread(4)                2.41            2.52            2.51            2.63            3.23
  Net interest margin(5)                         2.82            3.05            2.66             2.8            3.42
  Average interest-earning assets to
    average interest-bearing                         
     liabilities                               108.98          112.04          103.17          104.52           15.66
  Efficiency ratio(6)                           59.18           62.16           71.31           77.74           64.57
  General and administrative
    expense to average assets                    1.93            2.10            2.14            2.31            2.38
REGULATORY CAPITAL RATIOS(3)(7):
  Tangible capital                               7.10            8.46           10.53            5.67            6.77
  Core capital                                   7.10            8.46           10.53            5.67            6.77
  Risk-based capital                            14.17           16.54           20.93           10.56           11.31
ASSET QUALITY RATIOS(3):
  Non-performing loans as a percent
   of gross loans receivable(8)(9)               0.88            1.24            1.41            1.43            2.20
  Non-performing assets as a percent
    of total assest(9)                           1.33            1.80            2.17            1.99            3.11
  Allowance for loan losses as a
    percent of gross loans                           
     receivable(8)                               1.33            1.47            1.21            1.16            0.81
  Allowance for loan losses as a
    percent of non-performing                        
     loans(9)                                  151.27          118.72           86.01           81.36           36.72
  Allowance for loan losses as a
    percent of total assets                      0.92            1.09            0.98            1.05            0.71
  NUMBER OF FULL-SERVICE CUSTOMER
    FACILITIES                                     23              23              22              22              21
Loan originations                            $557,428         499,667         265,210         403,073         494,134
</TABLE>
____________________________
(1)  The Bank adopted Statement of Financial Accounting Standards ("SFAS") No.
     115, "Accounting for Certain Investments in Debt and Equity Securities,"
     effective as of April 1, 1994.  Prior to the adoption of SFAS No. 115,
     investment securities and mortgage-backed securities held-for-sale were
     carried at the lower of amortized cost or market value, as adjusted for
     amortization of premiums and accretion of discounts over the remaining
     terms of the securities from the dates of purchase.
(2)  The allowance for loan losses at March 31, 1998, 1997, 1996, 1995, and 1994
     were $26.0 million, $27.7 million $19.7 million, $19.3 million, and $11.7
     million, respectively.
(3)  Asset Quality Ratios and Regulatory Capital Ratios are end of period
     ratios. All ratios are based on average monthly balances during the
     indicated periods.
(4)  The average interest rate spread represents the difference between the
     weighted average yield on interest-earning assets and the weighted average
     cost of interest-bearing liabilities.
(5)  The net interest margin represents net interest income as a percent of
     average interest-earning assets.
(6)  The efficiency ratio represents general and administrative expense as a
     percent of net interest income before provision for loan losses plus non-
     interest income.
(7)  For definitions and further information relating to the Bank's regulatory
     capital requirements, see "Regulation - Federal Savings Institution
     Regulation - Capital Requirements".
(8)  Gross loans receivable includes loans receivable held for investment and
     loans held for sale and excludes loans held for accelerated disposition.
(9)  Non-performing assets consist of non-performing loans, TDR 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 "Business of the Bank - Non-Accrual
     and Past Due Loans" and "Real Estate".
(10) Earnings per share have been restated to reflect the adoption of Statement
     of Financial Accounting Standards No. 128, "Earnings Per Share".

                                       41
<PAGE>
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
         OF OPERATIONS.
         ------------- 

ASSET/LIABILITY MANAGEMENT

     The Company's earnings depend primarily on its net interest income.  Net
interest income is affected by the amount of, and the difference between yields
on interest earning assets and the cost of interest-bearing liabilities
("interest rate spread").  Changes in interest rate 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 or "limits" designed to provide sufficient net interest income and
market value of shareholder 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, 1998. Repricing frequencies of assets are based upon
contractual maturities, repricing opportunities, and the scheduled principal
payments and estimated prepayments. Repricing of liabilities are based upon the
contractual maturities, estimated decay rates for passbook, NOW and other demand
accounts and money market savings accounts ("Core Deposits"), and the earliest
repricing opportunity for variable and floating rate instruments. The Company
also had $300 million of putable borrowings on the balance sheet as of March
31, 1998 that are assumed to reprice at their final maturity. The interest rate
sensitivity of the Company's assets and liabilities illustrated in this document
would vary substantially if different assumptions were used, or if actual
experience differed from that assumed.

                                       42
<PAGE>
 
<TABLE>
<CAPTION>

                                                MORE THAN 3    MORE THAN 6     MORE THAN 12    MORE THAN 3
                                    3 MONTHS    MONTHS TO 6    MONTHS TO 12    MONTHS TO 3     YEARS TO 5    MORE THAN 5
                                    OR LESS     MONTHS         MONTHS          YEARS           YEARS         YEARS         TOTAL
                                    ------------------------------------------------------------------------------------------------

                                                                  (DOLLARS IN THOUSANDS)
<S>                                 <C>         <C>            <C>             <C>             <C>           <C>           <C>
Interest-earning assets:
  Investment securities and
   FHLB stock(1)                    $  257,352    6,115          2,102          35,995          34,287        34,195         370,046
Loans and mortgage-backed
 securities:(1)
    Mortgage-backed securities          68,532   60,372         93,793         145,260          87,411        27,625         482,993
    Loans receivable, net              943,111  335,863        182,307         317,293          30,755        18,986       1,828,315
                                    ------------------------------------------------------------------------------------------------
    Total loans and mortgage-backed
     securities                      1,011,643  396,235        276,100         462,553        118,166         46,611       2,311,308
                                    ------------------------------------------------------------------------------------------------
     Total interest-earning assets   1,268,995  402,350        278,202         498,548        152,453         80,806       2,681,354
  Non-interest earning assets                -        -              -               -              -        131,030         131,030
                                    ------------------------------------------------------------------------------------------------
     Total Assets                    1,268,995  402,350        278,202         498,548        152,453        211,836       2,812,384
                                    ================================================================================================
Interest-bearing liabilities:
  Fixed maturity deposits              314,432  386,944        328,736         123,388         23,649          1,366       1,178,515
  Core deposits(2)                      34,285   34,285         68,568         274,272        130,761         20,138         562,309
                                    ------------------------------------------------------------------------------------------------
     Total deposits                    348,717  421,229        397,304         397,660        154,410         21,504       1,740,824
  Borrowings(3)                        251,000  147,886         72,000          60,000        240,000         15,000         785,886
                                    ------------------------------------------------------------------------------------------------
     Total interest-bearing
      liabilities                      599,717  569,115        469,304         457,660        394,410         36,504       2,526,710
                                            
  Non-interest bearing liabilities           -        -              -               -              -         31,396          31,396
  Equity                                     -        -              -               -              -        254,278         254,278
                                    ------------------------------------------------------------------------------------------------
     Total liabilities and
      stockholders' equity          $  599,717  569,115        469,304         457,660        394,410        322,178       2,812,384
                                    ================================================================================================
Interest sensitivity gap            $  669,278 (166,765)      (191,102)         40,888       (241,957)      (110,342)
Cumulative interest sensitivity
 gap                                $  669,278  502,513        311,411         352,299        110,342              0
Cumulative interest sensitivity
 gap as a percentage of total
 assets                                  23.80%   17.87%          11.07%         12.53%          3.92%          5.50%
Cumulative interest-earning assets
 as a percentage of cumulative
 interest-bearing liabilities           211.60%  142.99%         119.01%        116.81%        104.43%        106.12%
</TABLE>
------------------------------------------
(1) Based upon contractual maturities, repricing date, and forecasted principal
    payments assuming normal amortization and, where applicable prepayments.
(2) Assumes annual decay rates ranging from 17%-35%. 
(3) Putable borrowings are presented based upon contractual final maturities.

                                       43
<PAGE>
 
     The Company's one year GAP at March 31, 1998, was 11.07% (i.e., more
interest earning assets reprice within one year than interest-bearing
liabilities). This compares with 6.00% at March 31, 1997. The increase in the
Company's one-year repricing GAP between March 31, 1997 and 1998 is
attributable, in part, to an acceleration in the assumed level of principal
prepayments on loans and MBS between the two years. The Company's continuing
strategy to limit its interest rate risk exposure is (i) emphasizing the
origination of adjustable rate loans indexed to more responsive indices such as
the one year CMT and the Prime rate, (ii) purchasing short-term (five to seven
year) balloon maturity MBS and floating rate securities, and, (iii) attempting
to more closely match the sensitivity of liabilities to the anticipated
repricing characteristics of assets through the use of putable borrowings and
growth in Core Deposits.

     Although the table indicates the Company is better protected against rising
interest rates, a GAP table is limited to measuring the timing risk and does not
reflect the impact of customer options or basis risk.  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 of 100, 200, 300 and 400 basis points 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, 1998.  Once again, it
should be noted that 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 response to changes in interest rates included changes
in the structure of its balance sheet.
<TABLE>
<CAPTION>
                                                 PERCENTAGE CHANGE
     CHANGE IN INTEREST RATES    -----------------------------------------------
         (IN BASIS POINTS)       NET INTEREST INCOME(1)   NET PORTFOLIO VALUE(2)
--------------------------------------------------------------------------------
<S>                              <C>                      <C>
                200                   (13.3)%                       (16.7)%
                100                    (4.9)                         (3.9)
               (100)                   (0.1)                         (0.3)
               (200)                    2.1                          (3.6)
</TABLE> 
-------------------
(1)  This percentage change represents the impact to net interest income for
     the period from April 1, 1998 through March 31, 1999 assuming the
     Company does not change the structure of its balance sheet.
(2)  This percentage represents the NPV of the Company assuming no changes to
     the balance sheet.

  Although the GAP table indicates the Company's net interest income would
perform better in a rising rate environment, results from the asset/liability
simulation model indicate that yield compression would occur decreasing net
interest income over the next twelve months.  These results reflect the impact
rising rates would have in decreasing prepayments, assets encountering periodic
and lifetime caps, certain borrowings being "put" back to the Bank, and other
factors that are not included in the GAP table.

  The OTS produces an analysis 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 between
assumptions utilized in the Bank's internal model and the OTS model, including
estimated loan market rates, prepayment rates, reinvestment rates and deposit
decay rates.  As of March 31, 1998, the Bank's sensitivity measure, as
calculated by the OTS, was a negative 1.22%.  This represents a decrease in
sensitivity of 146 basis points from the March 31, 1997 results.

                                       44
<PAGE>
 
AVERAGE BALANCE SHEETS

  The following table sets forth certain information relating to the Company
for the years ended March 31, 1998, 1997, and 1996.  The yields and costs are
derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods shown.  Average balances are derived
from average daily balances.  The yields and costs include fees that are
considered adjustments to yields.
<TABLE>
<CAPTION>
                                                                          YEAR ENDED MARCH 31,
                                 ---------------------------------------------------------------------------------------------------
                                                1998                             1997                             1996
                                 ---------------------------------------------------------------------------------------------------
                                                         AVERAGE                           AVERAGE                           AVERAGE
                                 AVERAGE                 YIELD/   AVERAGE                  YIELD/   AVERAGE                  YIELD/
                                 BALANCE      INTEREST   COST     BALANCE       INTEREST   COST     BALANCE       INTEREST   COST
                                 ---------------------------------------------------------------------------------------------------
                                                                         (DOLLARS IN THOUSANDS)
<S>                              <C>          <C>        <C>      <C>           <C>        <C>      <C>           <C>        <C>
ASSETS:
 Interest-earning assets:
  Interest-earning deposits
   and short-term investments    $   30,158   $  1,590   5.27%    $   35,676    $  2,005   5.62%    $   38,381    $  2,117   5.52%
  Investment securities,
   net (1)(2)                       179,895     11,931   6.63         62,671       4,292   6.85         48,382       2,682   5.54
  Loans receivable, net (3)(4)    1,853,686    142,815   7.70      1,743,487     133,116   7.64      1,574,520     119,776   7.61
  Mortgage-backed securities,
   net (1)(5)                       489,562     33,167   6.77        406,703      27,723   6.82        150,986      10,853   7.19
  FHLB stock                         30,911      1,865   6.03         21,383       1,379   6.45         14,680         745   5.07
                                 ---------------------            ----------------------            ----------------------
      Total interest-earning
       assets                     2,584,212    191,368   7.41      2,269,920     168,515   7.42      1,826,949     136,173   7.45
  Non-interest-earning assets        85,842                           78,368                            60,934
                                 ----------                       ----------                        ----------
      Total assets               $2,670,054                       $2,348,288                        $1,887,883
                                 ==========                       ==========                        ==========
LIABILITIES AND STOCKHOLDERS'
 EQUITY:
 Interest-bearing liabilities:
   Passbook accounts             $  162,874      4,205   2.58     $  192,520       5,525   2.87     $  115,878       2,657   2.29
   Money market savings accounts    193,146      7,981   4.13        111,793       3,935   3.52        159,276       4,012   2.52
   NOW and other demand
    deposit accounts                159,298      1,214   0.76        133,647       1,096   0.82        125,136       1,752   1.40
   Certificate accounts           1,201,989     66,755   5.55      1,239,510      68,690   5.55      1,272,882      73,830   5.80
                                 ---------------------            ----------------------            ----------------------
       Total                      1,717,307     80,155   4.67      1,677,470      79,246   4.72      1,673,172      82,251   4.92
   FHLB advances and other
    borrowings                      651,078     38,233   5.87        345,317      19,981   5.79         83,607       4,920   5.88
   Other                              2,910        129   4.43          3,223          79   2.45         14,088         385   2.73
                                 ---------------------            ----------------------            ----------------------
       Total interest-bearing
        liabilities               2,371,295    118,517   5.00      2,026,010      99,306   4.90      1,770,867      87,556   4.94
                                               -------                            ------                            ------
   Non-interest-bearing
    liabilities                      35,318                           38,143                             5,963
                                 ----------                       ----------                        ----------
       Total liabilities          2,406,613                        2,064,153                         1,776,830
 Stockholders' Equity               263,441                          284,135                           111,053
                                 ----------                       ----------                        ----------
       Total liabilities and
        stockholders' equity     $2,670,054                       $2,348,288                        $1,887,883
                                 ==========                       ==========                        ==========
Net interest income before
 provision for loan losses                    $ 72,851                          $ 69,209                          $ 48,617
                                              ========                          ========                          ========
Net interest rate spread (6)                             2.41                              2.52                              2.51
Net interest margin (7)                                  2.82%                             3.05%                             2.66%
Ratio of interest-earning assets
 to interest-bearing liabilities     108.98%                          112.04%                           103.17%
</TABLE>
                                       45
<PAGE>
 
_______________________________
(1)  Includes related assets available-for-sale and unamortized discounts
     and premiums.

(2)  Included in the average balance of investment securities for the years
     ended March 31, 1998, 1997 and 1996 are average investment securities
     available-for-sale of $173.4 million, $50.1 million, and $4.7 million,
     respectively.  Interest income recognized on investment securities
     available-for-sale during these periods was $11.6 million, $3.6 million,
     and $281,000, respectively, resulting in average yields of 6.42%, 7.10%,
     and 5.96%, respectively.  Yields on average investment securities
     available-for-sale have been calculated based upon the historical cost
     bases of the underlying securities.

(3)  Amount is net of deferred loan origination fees, undisbursed loan funds,
     unamortized discounts and allowance for loan losses and includes loans held
     for sale and non-performing loans.  See "Lending Activities".

(4)  Included in the average balance of loans receivable, net for the years
     ended March 31, 1998, 1997, and 1996 are loans held for sale of $49.4
     million, $4.0 million, and $1.1 million, respectively.  Interest income
     recognized on loans held for sale during these periods was $3.6 million,
     $286,000, and $80,000, respectively, resulting in average yields of 7.24%,
     7.12%, and 7.18%, respectively.

(5)  Included in the average balance of mortgage-backed securities, net for the
     years ended March 31, 1998, 1997 and 1996 are average mortgage-backed
     securities available-for-sale of $487.8 million, $400.6 million and $46.4
     million, respectively.  Interest income recognized on mortgage-backed
     securities available-for-sale during the years ended March 31, 1998, 1997
     and 1996 was $32.9 million, $27.3 million and  $3.3 million, respectively
     resulting in an average yield of 6.76%, 6.81% and 7.09%, respectively.

(6)  Net interest rate spread represents the difference between the yield
     on interest-earning assets and the cost of interest-bearing
     liabilities.

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

                                       46
<PAGE>
 
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); and (iii) the net change.  The changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
                                                 YEAR ENDED MARCH 31, 1998   YEAR ENDED MARCH 31, 1997
                                                       COMPARED TO                  COMPARED TO
                                                 YEAR ENDED MARCH 31, 1997   YEAR ENDED MARCH 31, 1996
                                                 -----------------------------------------------------
                                                   INCREASE (DECREASE)         INCREASE (DECREASE)
                                                          DUE TO                     DUE TO
                                                 -----------------------------------------------------
                                                 VOLUME    RATE     NET      VOLUME   RATE      NET
                                                 -----------------------------------------------------
                                                                (DOLLARS IN THOUSANDS)
<S>                                              <C>       <C>      <C>      <C>      <C>       <C>
INTEREST-EARNING ASSETS:
    Interest-earning deposits and short-term              
     investments                                 $  (310)   (105)     (415)    (149)      37      (112)
    Investment securities, net (1)(2)              8,028    (389)    7,639      792      818     1,610
    Loans receivable, net (3)(4)                   8,414   1,285     9,699   12,854      486    13,340
    Mortgage-backed securities, net (1)(5)         5,648    (204)    5,444   18,381   (1,511)   16,870
    FHLB stock                                       614    (128)      486      340      294       634
                                                 -----------------------------------------------------  
        Total interest-earning assets             22,394     459    22,853   32,218      124    32,342
                                                 -----------------------------------------------------
INTEREST-BEARING LIABILITIES:
    Passbook accounts                               (851)   (469)   (1,320)   1,757    1,111     2,868
    Money market savings accounts                  2,864   1,182     4,046   (1,196)   1,119       (77)
    NOW and other demand deposit accounts            210     (92)      118      119     (775)     (656)
    Certificate accounts                          (1,980)     45    (1,935)    (468)  (4,672)   (5,140)
    FHLB advances and other borrowings            17,692     560    18,252   15,401     (340)   15,061
    Other                                             (8)     58        50     (297)      (9)     (306)
                                                 -----------------------------------------------------
        Total interest-bearing liabilities        17,927   1,284    19,211   15,316   (3,566)   11,750
                                                 -----------------------------------------------------
        Change in net interest income            $ 4,467    (825)    3,642   16,902    3,690    20,592
                                                 =====================================================
</TABLE>
-------------------------
(1) Includes assets available-for-sale.
(2) Included in the increases (decreases) in interest income on investment
    securities, net for the year ended March 31, 1998 compared to 1997, for the
    year ended March 31, 1997 compared to 1996 and for the year ended March 31,
    1996 compared to 1995 are increases/(decreases) in interest income on
    investment securities available-for-sale attributable to volume and rate of
    $8.8 million and $(800,000); $2.7 million and $571,000; $(303,000) and
    $40,000, respectively.
(3) Included in the increases or (decreases) in interest income on loans
    receivable, net for the year ended March 31, 1998 compared to 1997, the year
    ended March 31, 1997 compared to 1996 and the year ended March 31, 1996
    compared to 1995, are increases/(decreases) in interest income on loans held
    for sale attributable to volume and rate of $3.2 million and $82,000;
    $208,000 and $(2,000); and $(54,000), and $(1,000), respectively.
(4) Included in the increase or (decrease) in interest income on mortgage-backed
    securities, net for the year ended March 31, 1998 compared to 1997 and for
    the year ended March 31, 1997 compared to March 31, 1996 and the year ended
    March 31, 1996 compared to 1995, are increases/(decreases) in interest
    income on mortgage-backed securities available-for-sale attributable to
    volume and rate of $5.9 million and $300,000; $25.1 million and ($1.1
    million); and $3.3 million and zero, respectively.

                                       47
<PAGE>
 
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED MARCH 31, 1998 AND MARCH 31,
1997

GENERAL
-------

  The Company reported net earnings of $16.0 million for fiscal 1998 compared to
net earnings of $2.7 million for fiscal 1997.  The improvement in operating
results between fiscal 1998 and fiscal 1997 was attributable to four factors:
(i) an increase in net interest income before provision for loan losses from
$69.2 million for fiscal 1997 to $72.9 million for fiscal 1998 attributable to
growth in average interest-earning assets (ii) a decrease in the provision for
loan losses from $13.7 million for fiscal 1997 to $7.1 million for fiscal 1998
arising from an improvement in asset quality (iii) an increase in non-interest
income from $10.2 million for fiscal 1997 to $14.3 million for fiscal 1998
driven principally by increase's in deposit and trust fees from $9.0 million for
fiscal 1997 to $11.7 million for fiscal 1998 and (iv) the impact on fiscal 1997
of the Bank's $10.9 million share of the SAIF recapitalization assessment.

INTEREST INCOME
---------------

  Interest income for fiscal 1998 was $191.4 million compared to $168.5 million
for fiscal 1997, an increase of $22.9 million or 13.6%.  The increase in
interest income between fiscal 1997 and fiscal 1998 was attributable to a $314.3
million increase in average interest-earning assets from $2.27 billion for
fiscal 1997 to $2.58 billion for fiscal 1998.  The yield on average interest-
earning assets was 7.41% for fiscal 1998 compared to 7.42% for fiscal 1997.  The
increase in average interest-earning assets between fiscal 1997 and fiscal 1998
was comprised principally of a $117.2 million increase in the average balance of
investment securities from $62.7 million for fiscal 1997 to $179.9 million for
fiscal 1998, a $110.2 million increase in the average balance of loans
receivable, net from $1.74 billion for fiscal 1997 to $1.85 billion for fiscal
1998 and $82.9 million increase in the average balance of mortgage-backed
securities (MBS) from $406.7 million for fiscal 1997 to $489.6 million for
fiscal 1998.  The average yield on loans receivable, net increased 6 basis
points from 7.64% for fiscal 1997 to 7.70% for fiscal 1998 reflecting the Bank's
increased emphasis on the origination of mortgages which provide higher yields
than those earned on single-family residential Federal Home Loan Bank (FHLB)
Eleventh District Cost of Funds Index (COFI) based loan products.  The disbursed
balance of the Bank's portfolio of construction loans totaled $90.3 million at
an average yield of 10.02% during fiscal 1998 compared to $74.7 million at an
average yield of 11.49% during fiscal 1997.  The Bank has also increased the
proportion of its loan portfolio comprised of (36/6) single-family residential
mortgage loans which provide for a fixed-rate of interest for 36 months before
transitioning to a six month adjustable-rate loan tied to the one-year constant
maturity treasury (CMT) index.  During fiscal 1998, the Bank's portfolio of 36/6
loans averaged $318.9 million at an average yield of 7.22% compared  to $193.9
million at an average yield of 7.12% during fiscal 1997.  Unlike the typical
COFI based adjustable-rate loans originated by the Bank, these 36/6 loans are
not originated with lower introductory rates.  The increase in yield on loans
receivable, net attributable to the change in the composition of the loan
portfolio was partially offset by an increase in the level of prepayments of
higher yielding residential mortgage loans.  These prepayments also resulted in
an increase in the amortization of premiums paid on loans purchased.  This
premium amortization amounted to $784,000 for fiscal 1998 compared to $38,000
for fiscal 1997.  At March 31, 1998, the Bank's weighted average carrying value
of loans purchased from others as a percentage of outstanding principal balance
was 101.8%.

     The yield on investment securities decreased from 6.85% for fiscal 1997 to
6.63% for fiscal 1998 as lower-yielding adjustable rate collateralized mortgage
obligations (CMOs) indexed primarily to the one-month London Interbank Offered
Rate (LIBOR) were added to the portfolio in connection with the Bank's strategy
of supplementing growth in loans and deposits with MBS and other securities
funded primarily with FHLB advances and other borrowings. The yield on MBS
decreased from 6.82% for fiscal 1997 to 6.77% for fiscal 1998. This decrease in
the yield on MBS was attributable to a decrease in the general level of interest
rates during fiscal 1998, particularly the one year CMT index to which 26.02% of
the Company's MBS portfolio is tied. The CMT index decreased from 6.02% at March
31, 1997 to 5.08% on January 9, 1998 before increasing slightly to 5.41% at
March 31, 1998. The decrease in the general level of interest rates also
resulted in an acceleration in the level of prepayments of the higher yielding
fixed and adjustable rate MBS in the Company's portfolio with a resulting
increase in premium amortization. This premium

                                       48
<PAGE>
 
amortization was $2.0 million for fiscal 1998 compared to $1.1 million for
fiscal 1997. The weighted average cost basis of the MBS and other investment
securities held by the Company at March 31, 1998 was 100.8 percent of par value.

INTEREST EXPENSE
----------------

  Interest expense for fiscal 1998 was $118.5 million compared to $99.3 million
for fiscal 1997, an increase of $19.2 million or 19.3%.  The increase in
interest expense between fiscal 1997 and fiscal 1998, was due to a $345.3
million increase in average interest-bearing liabilities from $2.03 billion for
fiscal 1997 to $2.37 billion for fiscal 1998 coupled with an increase in the
average cost of interest-bearing liabilities from 4.90% for fiscal 1997 to 5.00%
for fiscal 1998.  The increase in the average balance of interest-bearing
liabilities was attributable to a $305.8 million increase in the average balance
of FHLB advances and other borrowings from $345.3 million for fiscal 1997 to
$651.1 million for fiscal 1998. The average balance of deposits increased $39.8
million from $1.68 billion for fiscal 1997 to $1.72 billion for fiscal 1998.
During fiscal 1998, the Bank utilized FHLB advances and other borrowings as its
primary funding source for its additional investments in MBS and other
investment securities and as a means of managing the difference in cash flows
between retail loan and deposit activity in a manner complementary to the
overall interest rate risk and profitability objectives of the Bank.   The
average cost of deposits decreased from 4.72% for fiscal 1997 to 4.67% for
fiscal 1998.  Contributing to the decrease in the average cost of deposits was a
$77.4 million increase in the average balance of money market savings, passbook
NOW and other demand deposit accounts  (Core Deposits) from $438.0 million for
fiscal 1997 to $515.3 million for fiscal 1998.  The average cost of FHLB
advances and other borrowings increased from 5.79% for fiscal 1997 to 5.87% for
fiscal 1998.  This increase reflects the Bank's lengthening of the term to
repricing of its FHLB advances in order to achieve greater correlation between
the repricing of its interest-earning assets and interest-bearing liabilities.
At March 31, 1998, the weighted average maturity for the Bank's FHLB advances
and other borrowings was 15 months compared to 9 months at March 31, 1997.  In
calculating these weighted average terms to repricing, putable borrowings have
been assumed to reprice at their first put date.

PROVISION FOR LOAN LOSSES
--------------------------

  Provision for loan losses was $7.1 million for fiscal 1998 compared to $13.7
million for fiscal 1997. The provision for loan losses for fiscal 1997 includes
$2.5 million applicable to the establishment of specific allowances on several
loans based upon updated reviews in June 1996.  Non-accrual loans were $17.2
million or 0.88%, of gross loans receivable at March 31, 1998 compared to $23.4
million or 1.24% of gross loans receivable at March 31, 1997.  The allowance for
loan losses was $26.0 million or 1.33% of gross loans receivable at March 31,
1998 compared to $27.7 million or 1.47% of gross loans receivable at March 31,
1997.

NON-INTEREST INCOME
-------------------

  Non-interest income was $14.3 million for fiscal 1998 compared to $10.2
million for fiscal 1997, an increase of $4.1 million or 39.6%.  The increase
between fiscal 1997 and fiscal 1998 was attributable principally to an increase
in deposit fees and charges from $4.8 million for fiscal 1997 to $6.6 million
for fiscal 1998 due to a combination of higher volumes of Core Deposit activity
and an increased emphasis on the assessment and collection of fees. The income
from the sale of non-deposit investments increased from $1.4 million for fiscal
1997 to $1.6 million for fiscal 1998 as the Bank continued to expand its
offerings of non-proprietary annuity and mutual fund products.  Trust fee income
increased from $1.4 million for fiscal 1997 to $1.9 million for fiscal 1998
reflecting, in part, growth in assets under custody from $211.0 million at March
31, 1997 to $238.6 million at March 31, 1998.  Gain on sales of loans and
securities were $1.6 million for fiscal 1998 compared to $150,000 for fiscal
1997.  The $1.6 million for fiscal 1998 is comprised of gains on sales of loans
of $992,000 and gain on sales of securities of $624,000.  The gains on sale of
loans include $701,000 applicable to the sale of $149.6 million of single family
loans indexed to COFI.  These loans were sold and a similar amount of loans
indexed to the one year CMT were purchased during the year in connection with
the Bank's efforts to diversify the repricing characteristics of its loan
portfolio.

                                       49
<PAGE>
 
NON-INTEREST EXPENSE
--------------------

  Non-interest expense was $52.0 million for fiscal 1998 compared to $60.0
million for fiscal 1997, a decrease of $7.9 million or 13.2%.  Non-interest
expense for fiscal 1997 includes a pre-tax charge of $10.9 million representing
the Bank's share of an industry-wide special assessment levied against the March
31, 1995 deposit bases of all savings institutions in the country with deposits
insured by the SAIF.  Excluding the impact of the SAIF assessment, non-interest
expense increased $3.0 million or 6.1% between fiscal 1997 and fiscal 1998.

  General and administrative expense was $51.6 million or 1.93% of average
assets for fiscal 1998 compared to $49.4 million or 2.11%  of average assets for
fiscal 1997, an increase of $2.2 million or 4.4%. Compensation and benefits
expense increased $3.8 million from $23.0 million for fiscal 1997 to $26.8
million for fiscal 1998. The increase between fiscal 1997 and fiscal 1998 was
attributable principally to a $875,000 increase in ESOP expense arising from an
increase in the market value of the Company's common stock and $1.1 million of
expense associated with the Company's 1996 Incentive Plan which became effective
in October 1996.  Other non-interest expense decreased $2.9 million from $12.8
million for fiscal 1997 to $9.9 million for fiscal 1998.  The decrease was due
principally to the inclusion in fiscal 1997 of approximately $2.1 million of
expenses associated with the Bank's transition of its EDP systems to a new
third-party service provider in October 1996.  Other non-interest expense for
fiscal 1997 also includes a $350,000 legal judgment and a $420,000 accrual for
the interest portion of a possible adverse California franchise tax settlement.
Occupancy and equipment expense was $11.6 million for fiscal 1998 compared to
$10.3 million for fiscal 1997.  The $1.3 million increase in occupancy and
equipment expense between fiscal 1997 and fiscal 1998 is attributable
principally to depreciation on computer equipment related to upgrades to  the
Bank's wide area  networked personal computers and service bureau charges.  Real
estate operations, net reflects expense of $473,000 for fiscal 1998 compared to
income of $325,000 for fiscal 1997.  The results for fiscal 1997 reflect a $1.4
million reduction in the allowance for real estate losses based upon updated
property valuations.

INCOME TAXES
------------

  Income taxes were $12.0 million for fiscal 1998 compared to $3.1 million for
fiscal 1997.  Income taxes for fiscal 1997 includes a $470,000 accrual for the
tax portion of a possible adverse California franchise tax settlement.  The
effective income tax rate for fiscal 1998 was 42.9% compared to an effective
rate of 43.2% for fiscal 1997, excluding the $470,000 item noted above.

COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1998 AND MARCH 31, 1997
----------------------------------------------------------------------

  Total assets at March 31, 1998 were $2.81 billion compared to $2.54 billion at
March 31, 1997 an increase of $276.6 million or 10.9%.  Loans receivable, net
increased $8.4 million from $1.82 billion at March 31, 1997 to $1.83 billion at
March 31, 1998.  Loan originations were $557.4 million for fiscal 1998 compared
to $499.7 million for fiscal 1997.  Investment securities available -for- sale
increased $228.8 million from $87.6 million at March 31, 1997 to $316.4 million
at March 31, 1998.  MBS available - for - sale were $481.6 million at March 31,
1998 compared to $486.0 million at March 31, 1997.  During fiscal 1998 in
response to an acceleration in the general level of prepayments and increases in
the pricing of MBS, the Bank placed less emphasis on purchasing MBS and instead
shifted its emphasis to other investment securities, principally floating rate
CMO's.  The increase in FHLB stock from $27.3 million at March 31, 1997 to $39.5
million at March 31, 1998 reflects the additional stock the Bank is required to
hold based upon its level of outstanding FHLB advances.  Prepaid expenses and
other assets were $47.2 million at March 31, 1998 compared to $10.3 million at
March 31, 1997.  Included in prepaid expenses and other assets at March 31, 1998
is $29.2 million (including a gain on sale of $193,000) reflecting MBS sold but
not yet settled as of March 31, 1998.

  Total liabilities at March 31, 1998 were $2.56 billion compared to $2.27
billion at March 31, 1997, an increase of $287.9 million or 12.7%.  Total
deposits of the Bank were $1.74 billion at March 31, 1998 compared to $1.71
billion at March 31, 1997.  FHLB advances and other borrowings were $785.9
million

                                       50
<PAGE>
 
at March 31, 1998 compared to $530.0 million at March 31, 1997. The increase in
FHLB advances and other borrowings between March 31, 1997 and 1998 was
attributable to the Bank's use of FHLB advances and other borrowings to fund the
growth in loans receivable and the increase in investment securities during
fiscal 1998.

  Total stockholders' equity decreased $11.2 million from $265.5 million at
March 31, 1997 to $254.3 million at March 31, 1998.  The $11.2 million decrease
is comprised principally of a $16.6 million decrease in additional paid-in-
capital partially offset by a $3.8 million decrease in unearned stock-based
compensation and a $3.0 million increase in unrealized gains (losses) on
securities available for sale.  The $16.6 million decrease in additional paid-
in-capital was attributable principally to the Company's repurchase during
fiscal 1998 of 1,842,448 shares of its outstanding common stock, at a weighted
average price of $19.44 per share.  The $1.4 million decrease in retained
earnings from $108.0 million at March 31, 1997 to $106.6 million at March 31,
1998 reflects $17.4 million attributable to the amount paid by the Company to
repurchase its common stock in excess of the issuance price of the stock,
partially offset by the Company's net earnings of $16.0 million for fiscal 1998.
The $3.8 million decrease in unearned stock-based compensation was attributable
to the amortization of shares under the Company's ESOP and 1996 incentive plan.

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED MARCH 31, 1997 AND MARCH 31,
1996

General
-------

     The Company reported net earnings of $2.7 million for fiscal 1997 compared
to net earnings of $2.1 million for fiscal 1996.  The slight improvement in
operating results between fiscal 1997 and fiscal 1996 was attributable to the
increase in net interest income before provision for loan losses arising from
higher balances of average interest-earning assets and interest-bearing
liabilities coupled with an increase in the ratio of average interest-earning
assets to average interest-bearing liabilities reflecting the investment of the
net proceeds from the Company's March 28, 1996 initial public offering of common
stock.  Net interest income before provision for loan losses was $69.2 million
for fiscal 1997, compared to $48.6 million for fiscal 1996.  Provision for loan
losses increased from $10.9 million for fiscal 1996 to $13.7 million for fiscal
1997.  Total non-interest income increased from $8.1 million for fiscal 1996 to
$10.2 million for fiscal 1997 due principally to an increase in savings fees
and charges from $3.7 million for fiscal 1996 to $4.8 million for fiscal 1997.

INTEREST INCOME
---------------

     Interest income for fiscal 1997 was $168.5 million compared to $136.2
million for fiscal 1996, an increase of $32.3 million or 23.8%.  The increase in
interest income between fiscal 1996 and fiscal 1997 was attributable to a $443.0
million  increase  in average  interest-earning assets from $1.83 billion for
fiscal 1996 to $2.27 billion for fiscal 1997.   The yield on average interest-
earning assets was 7.42% for fiscal 1997 compared to 7.45% for fiscal 1996.
The increase in average interest-earning assets between fiscal 1996 and fiscal
1997 was comprised of a $255.7 million increase in the average balance of
mortgage-backed securities from $151.0 million for fiscal 1996 to $406.7 million
for fiscal 1997 and a $169.0 million increase in the average balance of loans
receivable, net from $1.57 billion for fiscal 1996 to $1.74 billion for fiscal
1997.  The average yield on loans receivable, net increased 3 basis points from
7.61% for fiscal 1996 to 7.64% for fiscal 1997 reflecting the Bank's increased
emphasis on the origination of mortgages which provide higher yields than those
earned on single-family residential COFI based loan products.   The disbursed
balance of the Bank's portfolio of construction loans averaged $74.7 million at
an average yield of 11.49% during fiscal 1997 compared to $51.5 million at an
average  yield of 9.12% during fiscal 1996.  The Bank has also increased the
proportion of its loan portfolio comprised by 36/6 single-family residential
mortgage loans.  During fiscal 1997, the Bank's portfolio of these types of
loans averaged $193.9 million at an average yield of 7.12% compared to $37.5
million at an average yield of 7.12% during fiscal 1996.  The increase in yield
on loans receivable, net attributable to the change in the composition of the
loan portfolio was partially offset by a decrease in COFI to which 65.4 percent
of the Bank's portfolio of adjustable-rate mortgage loans are tied.  For the
year ended March 31, 1997, COFI averaged 4.83% compared to 5.08% for fiscal
1996.  The yield on MBS decreased from 7.19% for fiscal 1996 to 6.82% for fiscal
1997 as lower-yielding adjustable-

                                       51
<PAGE>
 
rate MBS indexed primarily to the one-year CMT were purchased and added to the
portfolio in connection with the Bank's strategy of supplementing growth in
loans and deposits with MBS and other investment securities funded utilizing
primarily FHLB advances and other borrowings.

INTEREST EXPENSE
----------------

     Interest expense for fiscal 1997 was $99.3 million compared to $87.6
million for fiscal 1996, an increase of $11.8 million or 13.4%. The increase in
interest expense between fiscal 1996 and fiscal 1997, was due  to an increase in
average interest-bearing liabilities from $1.77 billion for fiscal 1996 to $2.03
billion for fiscal 1997.  The increase in interest expense attributable to the
increase in average interest-bearing liabilities was partially offset by a
slight decrease in the average cost of interest-bearing liabilities from 4.94%
for fiscal 1996 to 4.90% for fiscal 1997.  The increase in the average balance
of interest-bearing liabilities was attributable to a $261.7 million increase in
the average balance of FHLB advances and other borrowings from $83.6 million for
fiscal 1996 to $345.3 million for fiscal 1997. The average balance of deposits
increased $4.3 million from $1.67 billion for fiscal 1996 to $1.68 billion for
fiscal 1997. During fiscal 1997, the Bank utilized FHLB advances and other
borrowings as primary funding sources for its additional investments in MBS and
other investment securities and as a means of managing the difference in cash
flows between retail loan and deposit activity in a manner complementary to the
overall interest rate risk and profitability objectives of the Bank. The average
cost of deposits decreased from 4.92% for fiscal 1996 to 4.72% for fiscal 1997.
Contributing to the decrease in the average cost of deposits was a $37.7 million
increase in the average balance of Core Deposits from $400.3 million for fiscal
1996 to $438.0 million for fiscal 1997.

PROVISION FOR LOAN LOSSES
--------------------------

     Provision for loan losses was $13.7 million for fiscal 1997 compared to
$10.9 million for fiscal 1996. The provision for loan losses for fiscal 1997
includes $2.5 million applicable to the establishment of specific allowances on
several loans based upon updated reviews in June 1996.  Non-accrual  loans were
$23.4 million or 1.24%, of gross loans receivable at March 31, 1997 compared to
$23.0 million or 1.41% of gross loans receivable at March 31, 1996.  The
allowance for loan losses was $27.7 million or 1.47% of gross loans receivable
at March 31, 1997 compared to $19.7 million or 1.21% of gross loans receivable
at March 31, 1996.

NON-INTEREST INCOME
-------------------

     Non-interest income was $10.2 million for fiscal 1997 compared to $8.1
million for fiscal 1996, an increase of $2.1 million or 25.7%.  The increase
between fiscal 1996 and fiscal 1997 was attributable principally to an increase
in deposit fees and charges from $3.7 million for fiscal 1996 to $4.8 million
for fiscal 1997 due to a combination of higher volumes of Core Deposit activity
and an increased emphasis on the assessment and collection of fees. The income
from the sale of non-deposit investments increased from $986,000 for fiscal 1996
to $1.4 million for fiscal 1997 as the Bank continued to expand its offerings of
non-proprietary annuity and mutual fund products.  Trust fee income was $1.4
million for both fiscal 1997 and fiscal 1996.

NON-INTEREST EXPENSE
--------------------

     Non-interest expense was $60.0 million for fiscal 1997 compared to $42.1
million for fiscal 1996, an increase of $17.8 million or 42.3%. Non-interest
expense for fiscal 1997 includes a pre-tax charge of $10.9 million representing
the Bank=s share of an industry-wide special assessment levied against the March
31, 1995 deposit bases of all savings institutions in the country with deposits
insured by the SAIF.

     General and administrative expense was $49.4 million or 2.10% of average
assets for fiscal 1997 compared to $40.5 million or 2.14%  of average assets for
fiscal 1996, an increase of $8.9 million or 22.0%. Compensation and benefits
expense increased $3.9 million from $19.1 million  for fiscal 1996 to $23.0
million for fiscal 1997. The increase between fiscal 1996 and fiscal 1997 was
attributable principally to the

                                       52
<PAGE>
 
addition of $2.0 million of expense associated with the amortization of shares
under the Company's ESOP and $830,000 of expense associated with the Company's
1996 Incentive Plan. Other non-interest expense increased $3.1 million from $9.7
million for fiscal 1996 to $12.8 million for fiscal 1997. The increase was due
principally to approximately $2.1 million of expenses associated with the Bank's
transition of its EDP systems to a new third-party service provider in October
1996. Other non-interest expense for fiscal 1997 also includes a $350,000 legal
judgment and a $420,000 accrual for the interest portion of a possible adverse
California franchise tax settlement. Marketing and professional services expense
increased $1.5 million from $1.8 million for fiscal 1996 to $3.2 million for
fiscal 1997 due principally to an increase in marketing expense associated with
the Bank's name change and increased focus on business banking. Real estate
operations, net reflects income of $325,000 for fiscal 1997 compared to expense
of $1.7 million for fiscal 1996. The results for fiscal 1997 reflect a $1.4
million reduction in the allowance for real estate losses based upon updated
property valuations.

INCOME TAXES
------------

     Income taxes were $3.1 million for fiscal 1997 compared to $1.7 million for
fiscal 1996.  Income taxes for fiscal 1997 includes a $470,000 accrual for the
tax portion of a possible adverse California franchise tax settlement and
$150,000 of Delaware corporate tax applicable to the Company's incorporation in
that state in March 1996.  The effective income tax rate for fiscal 1997,
excluding the two items noted above was 45.0% compared to 44.4% for fiscal 1996.

COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1997 AND MARCH 31, 1996
----------------------------------------------------------------------

     Total assets at March 31, 1997 were $2.54 billion compared to $2.01 billion
at March 31, 1996 an increase of $527.6 million or 26.3%.  Loans receivable, net
increased by $244.3 million from $1.57 billion at March 31, 1996 to $1.82
billion at March 31, 1997 due principally to an increase in loan originations
from $265.2 million in fiscal 1996 to $499.7  million  in fiscal 1997.  MBS
available-for- sale increased $360.4 million from $125.6 million at March 31,
1996 to $486.0 million at March 31, 1997. Investment securities available-for-
sale increased $77.7 million from $9.9 million at March 31, 1996 to $87.6
million at March 31, 1997 while investment securities held-to-maturity decreased
$11.8 million from $28.0 million at March 31, 1996 to $16.2 million at March 31,
1997 reflecting the maturation or calling of investments by the issuers.  Cash
and cash equivalents decreased $144.3 million from $175.9 million at March 31,
1996 to $31.6 million at March 31, 1997 due principally to the redeployment of
the net proceeds from the March 28, 1996 closing of the Company's stock
offering.  The majority of the net proceeds from the March 28, 1996 stock
offering remained in short-term investments at March 31, 1996 awaiting
deployment into longer-term investments.  See "Liquidity and Capital Resources".

     Total liabilities at March 31, 1997 were $2.27 billion compared to $1.72
billion at March 31, 1996, an increase of $551.2 million. Total deposits of the
Bank were $1.71 billion at March 31, 1997 compared to $1.68 billion at March 31,
1996. FHLB advances and other borrowings were $530.0 million at March 31, 1997
compared to $19.7 million at March 31, 1996. The increase in FHLB advances and
other borrowings between March 31, 1996 and 1997 was attributable to the Bank's
use of FHLB advances and other borrowings to fund the growth in loans receivable
and the increase in MBS during fiscal 1997.

     Total stockholders' equity decreased $23.6 million from $289.1 million at
March 31, 1996 to $265.5 million at March 31, 1997.  The $23.6 million decrease
is comprised principally of a $11.2 million decrease in additional paid-in-
capital, a $8.8 million increase in unearned stock-based compensation and a $2.2
million decrease in retained earnings, substantially restricted.  The $11.2
million decrease in additional paid-in-capital was attributable principally to
the Company's repurchase of 991,875 shares of its outstanding common stock on
January 24, 1997.  All shares were repurchased at a price of $14.94 per share.
The $8.8 million increase in unearned stock-based compensation is comprised of a
$11.2 million increase attributable to the purchase of 793,000 shares of the
Company's common stock by the third party trustee administrator of the Company's
1996 Incentive Plan partially offset by a $2.4 million decrease attributable to
the amortization of shares under the Company's ESOP and stock award plan.  The
$2.2 million decrease in

                                       53
<PAGE>
 
retained earnings, substantially restricted is comprised of $2.7 million of net
earnings offset by $4.9 million which represents the amount paid for the
repurchase of treasury stock in excess of the issuance price of the stock.

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

     The Bank's primary sources of funds are deposits, principal and interest
payments on loans and securities, FHLB advances and other borrowings, proceeds
from the maturation of securities and, to a lesser extent, proceeds from the
sale of loans.  While maturities and scheduled amortization of loans and
securities are predictable sources of funds, deposit flows and mortgage and
security prepayments are greatly influenced by general interest rates, economic
conditions and competition.  The Bank has maintained the required minimum levels
of liquid assets as defined by OTS regulations.  This requirement, which may be
varied at the direction of the OTS depending upon economic conditions and
deposit flows, is based upon a percentage of deposits and short-term borrowings.
Effective with the quarter ended December 31, 1997 the required ratio is 4%.
Prior to that the requirement was 5%.  The Bank's average liquidity ratios were
4.90%, 5.30%, and 6.04% for the years ended March 31, 1998, 1997 and 1996,
respectively.   Management attempts to maintain a liquidity ratio no higher than
1% above the regulatory requirement.  This reflects management's strategy to
invest excess liquidity in higher yielding interest-earning assets, such as
loans or other investments, depending on market conditions.  The Bank has
invested in corporate securities when the yields thereon have been more
attractive than U.S. government and federal agency securities of similar
maturity.  While corporate securities are not backed by any government agency,
the maturity structure and credit quality of all corporate securities meet the
minimum standards set forth by the OTS for regulatory liquidity-qualifying
investments.  The Company invests in callable debt issued by Federal agencies of
the U.S. government when the yields thereon to call date(s) and maturity exceed
the yields on comparable term and credit quality non-callable investments by
amounts which management deems sufficient to compensate the Company for the call
options inherent in the securities.

     The Bank'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 $152.1 million, $40.5 million,
and $5.9 million, for the years ended March 31, 1998, 1997 and 1996,
respectively.  Net cash provided by (used in) investing activities consisted
primarily of disbursements for loan originations and purchases of mortgage-
backed and other investment securities, offset by principal collections on loans
and proceeds from maturation of investments and paydowns on mortgage-backed
securities.  Principal payments on loans were $471.5 million, $226.0 million,
and $192.2 million for the years ended March 31, 1998, 1997 and 1996,
respectively.  Disbursements on loans originated and purchased, excluding loans
originated for sale, were $659.6million, $492.8 million, and $260.1 million for
the years ended March 31, 1998, 1997 and 1996, respectively.  Disbursements for
purchases of mortgage-backed and other investment securities were $480.8
million, $563.1 million, and $191.6 million for the years ended March 31, 1998,
1997 and 1996, respectively.  Proceeds from the maturation of investment
securities and paydowns of mortgage-backed securities were $207.4 million,
$101.8 million and $198.9 million for the years ended March 31, 1998, 1997 and
1996, respectively.  Net cash provided by (used in) financing activities
consisted primarily of net activity in deposit accounts and FHLB advances and
other borrowings. The net increases in deposits were $29.8 million, $29.0
million, and $12.7 million for the years ended March 31, 1998, 1997 and 1996,
respectively. The net changes in FHLB advances and other borrowings were an
$255.9 million and $510.3 million increase for 1998 and 1997, and a $29.4
million decrease for 1996.

     On March 28, 1996, the Company completed its initial public offering of
common stock to the public.  The net proceeds from this offering were $193.9
million, after deducting offering expenses. $15.9 million of the net proceeds
were utilized to fund a loan to the ESOP for the purchase of 1,587,000 (8% of
the original issued shares) of the Company's common stock.  Concurrent with the
closing of the Company's offering of common stock, the Company acquired 100% of
the outstanding capital stock of the Bank for $105.0 million.  The Bancorp
provided to the Bank a $73.0 million interest-bearing loan, due on demand. This
loan was repaid in full on September 26, 1996.

                                       54
<PAGE>
 
     At March 31, 1998, the Bank exceeded all of its regulatory capital
requirements with a tangible capital level of $195.3 million, or 7.10% of
adjusted total assets, which is above the required level of $41.3 million, or
1.5%; core capital of $195.3 million, or 7.10 % of adjusted total assets, which
is above the required level of $82.6 million, or 3.0%, and total risk-based
capital of $213.6 million, or 14.17% of risk-weighted assets, which is above the
required level of $120.5 million, or 8%. See "Item 1 - Description of Business -
Regulation and Supervision - Federal Savings Institution Regulation".

     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, 1998
cash and short-term investments totaled $46.0 million.  The Company has other
sources of liquidity if a need for additional funds arises, including the
utilization of reverse repurchase agreements and FHLB advances.  At March 31,
1998, the Bank has $735.9 million of FHLB advances and $50.0 million of reverse
repurchase agreements outstanding.  Other sources of liquidity include
investment securities maturing within one year.

     The Company currently has no material contractual obligations or
commitments for capital expenditures.  See "Item 1  Description of Business -
General".  At March 31, 1998, the Bank had outstanding commitments to originate
and purchase mortgage loans of $9.9 million and zero, respectively, compared to
$10.8 million and zero, respectively, at March 31, 1997.  At March 31, 1998, the
Company had no outstanding commitments to purchase mortgage-backed securities
and other investment securities, compared to $21.0 million and $5.0 million,
respectively at March 31, 1997.  The Company anticipates that it will have
sufficient funds available to meet these commitments.  See "Item 1 - Description
of Business - General".  Certificate accounts that are scheduled to mature in
less than one year from March 31, 1998 totaled $987.1 million.  The Bank expects
that a substantial portion of the maturing certificate accounts will be retained
by the Bank at maturity.

IMPACT OF INFLATION

     The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with 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.

YEAR 2000

     Like most financial organizations, the Company utilizes many computer
systems that identify dates using only the last two digits of the year.  These
systems must be prepared to distinguish dates such as 1900 from 2000.  Computer
system failures due to processing errors potentially arising from calculations
using Year 2000 dates are a known risk.

     The Company has established processes to identify, prioritize, renovate or
replace systems that may be affected by year 2000 dates.  To date, the Company
has completed an inventory of all systems, determined which processes are most
critical to its operations and developed a plan to implement Year 2000
compliance.  System renovation and replacement activities have been started and
mission critical systems are targeted for completion by the end of calendar year
1998.  Compliance testing and installation processes have begun and are intended
to be completed during calendar 1999.

     The Company believes that this process will be successful.  However, there
can be no assurance that it will be successful.  To the extent that the
Company's systems are not fully year 2000 compliant, there can be no assurance
that partial system interruptions or the cost necessary to update software would
not have a

                                       55
<PAGE>
 
material adverse effect on the Company's business, financial condition, results
of operations and business prospects. Additionally, third party vendor
dependency, including government entities, may impact the Company's efforts to
successfully complete Year 2000 compliance for all systems in a timely fashion.
The Company is requesting that third party vendors represent their products to
be Year 2000 compliant and has a program to test for compliance. Contingency
plans are being developed in the event that a vendor is not able to provide a
Year 2000 compliant solution.

     Year 2000 issues may also impact commercial loan borrowers of the Bank.
The Company has embarked on an awareness program to bring this issue to its
borrower's attention and to determine the extent of their preparations for year
2000.  In addition, lending guidelines will take into consideration how Year
2000 issues will impact borrowers' businesses and possibly their ability to
repay loan obligations to the Bank.

     The Company currently estimates that the year 2000 project may cost
approximately $2.4 million.  This cost is in addition to existing personnel who
may participate in the project.  Included in the estimate are costs for
renovation or replacement of software and hardware, as well as existing staff
who will be specifically devoted to the project.  Approximately 35% of the cost
represent expenditures to replace certain older hardware and software, which the
Company might otherwise have replaced during the period notwithstanding the Year
2000 issue.  Of the estimated $2.4 million total cost, approximately $350,000
was incurred in fiscal 1998, approximately $1.9 million is expected to be
incurred in fiscal 1999 and approximately $125,000 is expected to be incurred in
fiscal 2000.  As the Company progresses in addressing the Year 2000 issue,
estimates of costs could change if third party vendors fail to provide Year 2000
compliant solutions and in a timely fashion or due to other circumstances
outside the Company's control.

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 at Item 7 of this Form 10-K.

                                       56
<PAGE>
 
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-----------------------------------------------------

                         Index to Financial Statements
<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
<S>                                                                         <C>
Consolidated Balance Sheets - March 31, 1998 and 1997......................  58

Consolidated Statements of Earnings - Years ended
 March 31, 1998, 1997 and 1996.............................................  59

Consolidated Statements of Stockholders' Equity - Years
 ended March 31, 1998, 1997 and 1996.......................................  60

Consolidated Statements of Cash Flows - Years ended
 March 31, 1998, 1997 and 1996.............................................  61

Notes to Consolidated Financial Statements.................................  63

Independent Auditors' Report...............................................  95
</TABLE>

                                       57
<PAGE>
 
                        PFF BANCORP, INC. AND SUBSIDIARY
                          Consolidated Balance Sheets
                 (Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
                                                                             MARCH 31,
                                                                 ---------------------------------
                                                                    1998                    1997
                                                                 ---------------------------------
<S>                                                              <C>                     <C>
                             ASSETS
Cash and equivalents                                             $   46,021                 31,632
Loans held for sale (note 19)                                           701                    736
Investment securities held-to-maturity (estimated fair value
  of $725 and $16,213 at March 31, 1998 and 1997)
  (notes 2, 9 and 11)                                                   714                 16,190
Investment securities available-for-sale, at fair value
  (notes 2, 9 and 11)                                               316,410                 87,647
Mortgage-backed securities held-to-maturity (estimated fair
  value of $1,375 and $5,509 at March 31, 1998 and 1997)
  (notes 3, 9,10 and 11)                                              1,373                  5,490
Mortgage-backed securities available-for-sale, at fair value
  (notes 3, 9,10 and 11)                                            481,620                486,009
Loans receivable, net (notes 4, 6, 9 and 11)                      1,827,614              1,819,209
Federal Home Loan Bank (FHLB) stock, at cost (note 11)               39,504                 27,270
Accrued interest receivable (note 7)                                 17,320                 15,879
Real estate, net (notes 5 and 6)                                      8,326                  8,858
Property and equipment, net (note 8)                                 25,567                 26,521
Prepaid expenses and other assets (notes 12 and 18)                  47,214                 10,326
                                                                 ---------------------------------
          Total assets                                           $2,812,384              2,535,767
                                                                 =================================
              LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
  Deposits (note 9)                                              $1,740,824              1,711,049
  FHLB advances and other borrowings (notes 10 and 11)              785,886                530,000
  Deferred income taxes payable (note 13)                             3,396                  6,894
  Accrued expenses and other liabilities (note 9)                    28,000                 22,298
                                                                 ---------------------------------
          Total liabilities                                       2,558,106              2,270,241
Commitments and contingencies (notes 12, 16, 17 and 18)                   -                      -
Stockholders' equity (notes 12, 13, 14, 21 and 22):
 Preferred stock, $.01 par value.  Authorized 2,000,000                                           
  shares; none issued                                                     -                      -
  Common stock, $. 01 par value.  Authorized 59,000,000
  shares; issued 19,901,422; outstanding 17,067,099 and
  18,845,625 at March 31, 1998 and 1997, respectively                   199                    198
  Additional paid-in capital                                        165,912                182,519
  Retained earnings, substantially restricted                       106,617                108,021
  Unearned stock-based compensation                                 (20,895)               (24,711)
  Treasury stock (2,834,323 and 991,875 in 1998 and 1997
  respectively)                                                         (28)                   (10)
  Unrealized gains (losses) on securities available-for-sale, net     2,473                   (491)
                                                                 ---------------------------------
          Total stockholders' equity                                254,278                265,526
                                                                 ---------------------------------
          Total liabilities and stockholders' equity             $2,812,384              2,535,767
                                                                 =================================
</TABLE>
See accompanying notes to consolidated financial statements.

                                       58
<PAGE>
 
                        PFF BANCORP, INC. AND SUBSIDIARY
                      Consolidated Statements of Earnings
                 (Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
                                                                 YEAR ENDED MARCH 31,
                                                 ----------------------------------------------------
                                                      1998               1997               1996
                                                 ----------------------------------------------------
<S>                                              <C>                 <C>                 <C>
Interest income:
  Mortgage loans                                 $   138,480              130,788             117,534
  Non-mortgage loans                                   4,335                2,328               2,242
  Mortgage-backed securities                          33,167               27,723              10,853
  Investment securities and deposits                  15,386                7,676               5,544
                                                 ----------------------------------------------------
      Total interest income                          191,368              168,515             136,173
                                                 ----------------------------------------------------
Interest on deposits (note 9)                         80,155               79,246              82,251
Interest on borrowings (note 10)                      38,362               20,060               5,305
                                                 ----------------------------------------------------
      Total interest expense                         118,517               99,306              87,556
                                                 ----------------------------------------------------
Interest income before provision for loan losses      72,851               69,209              48,617
Provision for loan losses (note 6)                     7,099               13,661              10,895
                                                 ----------------------------------------------------
Interest income after provision for loan losses       65,752               55,548              37,722
                                                 ----------------------------------------------------
Non-interest income:
  Deposit and other fees                               9,869                7,659               6,020
  Trust fees                                           1,852                1,390               1,430
  Mortgage loan servicing fees (note 19)                 845                  903                 907
  Gain on sale of loans and securities, net            1,615                  150                 102
  Other non-interest income                               99                  125                (320)
                                                 ----------------------------------------------------
      Total non-interest income                       14,280               10,227               8,139
                                                 ----------------------------------------------------
Non-interest expense:
  General and administrative:
    Compensation and benefits (note 12)               26,803               23,003              19,062
    Occupancy and equipment                           11,579               10,305               9,951
    Marketing and professional services                3,248                3,238               1,755
    Other non-interest expense (note 15)               9,930               12,835               9,707
                                                 ----------------------------------------------------
      Total general and administrative                51,560               49,381              40,475
  SAIF recapitalization assessment                         -               10,900                   -
  Real estate operations, net (note 5)                   473                 (325)               1,670
                                                 -----------------------------------------------------
      Total non-interest expense                      52,033               59,956               42,145
                                                 -----------------------------------------------------
Earnings before income taxes                          27,999                5,819                3,716
  Income taxes (note 13)                              12,019                3,087                1,651
                                                 -----------------------------------------------------
Net earnings                                     $    15,980                2,732                2,065
                                                 =====================================================
Basic earnings per share                         $      1.00                 0.15                  N/A
                                                 =====================================================
Weighted average shares outstanding for basic
  earnings per share                              16,055,127           17,819,870                  N/A
                                                 =====================================================
Diluted earnings per share                       $      0.95                 0.15                  N/A
                                                 =====================================================
Weighted average shares outstanding for diluted
  earnings per share                              16,795,096           17,959,561                  N/A
                                                 =====================================================
</TABLE>
See accompanying notes to consolidated financial statements.

                                       59
<PAGE>
 
                        PFF BANCORP, INC. AND SUBSIDIARY
                Consolidated Statements of Stockholders' Equity
                 (Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                                 RETAINED
                                                                             ADDITIONAL          EARNINGS,
                                              NUMBER OF        COMMON         PAID-IN          SUBSTANTIALLY
                                               SHARES          STOCK          CAPITAL           RESTRICTED
                                             ---------------------------------------------------------------
<S>                                          <C>               <C>           <C>               <C>
Balance at March 31, 1995                             -         $  -          $      -           $108,122

Net earnings                                          -            -                 -              2,065
Proceeds from issuance of common stock,
  net of issuance costs of $4,500            19,837,500          198           193,677                  -
Purchase of shares for employee stock
  ownership plan (ESOP)                               -            -                 -                  -
Changes in unrealized gains on securities
  available-for-sale, net                             -            -                 -                  -
                                             ------------------------------------------------------------
Balance at March 31, 1996                    19,837,500          198           193,677            110,187

Net earnings                                          -            -                 -              2,732
Purchase of treasury stock                     (991,875)           -            (9,909)            (4,898)
Purchase of 793,500 shares for the
  Company's 1996 incentive plan                       -            -                 -                  -
Amortization of shares under stock-based
  compensation plans                                  -            -            (1,249)                 -
Changes in unrealized losses on
  securities available for sale, net                  -            -                 -                  -
                                             ------------------------------------------------------------
Balance at March 31, 1997                    18,845,625          198           182,519            108,021

Net earnings                                          -            -                 -             15,980
Purchase of treasury stock                   (1,842,448)           -           (18,406)           (17,384)
Amortization of shares under stock-based
  compensation plans                                  -            -             1,118                  -
Stock options exercised                          63,922            1               681                  -
Changes in unrealized gains on
  securities available for sale, net                  -            -                 -                  -
                                             ------------------------------------------------------------
Balance at March 31, 1998                    17,067,099         $199          $165,912           $106,617
                                             ============================================================
</TABLE>

<TABLE>
<CAPTION>
                                                                                  UNREALIZED
                                                                                 GAINS(LOSSES)
                                                  UNEARNED                       ON SECURITIES
                                                STOCK-BASED       TREASURY      AVAILABLE-FOR-
                                                COMPENSATION       STOCK           SALE, NET          TOTAL
                                                -------------------------------------------------------------
<S>                                             <C>               <C>           <C>                  <C>
Balance at March 31, 1995                        $      -          $  -             $   (69)         $108,053

Net earnings                                            -             -                   -             2,065
Proceeds from issuance of common stock,
  net of issuance costs of $4,500                       -             -                   -           193,875
Purchase of shares for employee stock
  ownership plan (ESOP)                           (15,870)            -                   -           (15,870)
Changes in unrealized gains on securities
  available-for-sale, net                               -             -                 948               948
                                                 ------------------------------------------------------------
Balance at March 31, 1996                         (15,870)            -                 879           289,071

Net earnings                                            -             -                   -             2,732
Purchase of treasury stock                              -           (10)                  -           (14,817)
Purchase of 793,500 shares for the
  Company's 1996 incentive plan                   (11,262)            -                   -           (11,262)
Amortization of shares under stock-based
  compensation plans                                2,421             -                   -             1,172
Changes in unrealized losses on
  securities available for sale, net                    -             -              (1,370)           (1,370)
                                                 ------------------------------------------------------------
Balance at March 31, 1997                         (24,711)          (10)               (491)          265,526

Net earnings                                            -             -                   -            15,980
Purchase of treasury stock                              -           (18)                  -           (35,808)
Amortization of shares under stock-based
  compensation plans                                3,816             -                   -             4,934
Stock options exercised                                 -             -                   -               682
Changes in unrealized gains on
  securities available for sale, net                    -             -               2,964             2,964
                                                 ------------------------------------------------------------
Balance at March 31, 1998                        $(20,895)         $(28)            $ 2,473          $254,278
                                                 ============================================================
</TABLE>

See accompanying notes to consolidated financial statements.

                                       60
<PAGE>
 
                        PFF BANCORP, INC. AND SUBSIDIARY
                     Consolidated Statements of Cash Flows
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                             YEAR ENDED MARCH 31,
                                                                -----------------------------------------------
                                                                   1998               1997               1996
                                                                -----------------------------------------------
<S>                                                             <C>                <C>                <C>
Cash flows from operating activities 
  Net earnings                                                  $  15,980              2,732              2,065
  Adjustments to reconcile net earnings to net cash
    provided by operating activities:
      Amortization of premiums (discounts) on loans,
        investments and mortgage-backed securities                  1,415                331             (1,740)
      Amortization of deferred loan origination fees                 (261)            (1,666)            (1,716)
      Loan fees collected                                          (3,487)              (212)             1,059
      Dividends on FHLB stock                                      (1,716)            (1,150)              (701)
      Provisions for losses on:
        Loans                                                       7,099             13,661             10,895
        Real estate                                                  (416)              (970)               868
      Gains on sales of loans, mortgage-backed
        securities available-for-sale, real estate and 
        property and equipment                                     (1,792)              (764)              (475)
      Depreciation and amortization of property and
        equipment                                                   5,051              3,134              3,233
      Loans originated for sale                                    (3,893)           (21,590)           (15,294)
      Proceeds from sale of loans held-for-sale                   166,989             26,869              9,381
      Proceeds from sale of loans held for accelerated
        disposition                                                     -                  -              6,080
      Amortization of unearned stock-based
        compensation                                                4,934              1,172                  -
      Increase (decrease) in:
        Deferred income taxes                                      (5,141)            (2,415)             1,309
        Accrued expenses and other liabilities                      5,702             15,395             (1,035)
      (Increase) decrease in:
        Accrued interest receivable                                (1,441)            (5,060)            (1,643)
        Prepaid expenses and other assests                        (36,919)            11,061             (6,374)
                                                                -----------------------------------------------
          Net cash provided by operating activities               152,104             40,528              5,912
                                                                -----------------------------------------------
Cash flows from investing activities:
  Net maturities of long-term certificates of deposit                   -                190              5,000
  Loans originated for investment                                (553,535)          (478,077)          (249,916)
  Increase (decrease) in construction loans in process             56,972             13,695               (904)
  Purchases of loans held for investment                         (163,045)           (28,417)            (9,303)
  Principal payments on loans                                     471,544            225,996            192,237
  Principal payments on mortgage-backed securities
    held-to-maturity                                                3,325              1,644             20,531
  Principal payments on mortgage-backed securities
    available-for-sale                                            144,920             70,040              9,293
  Purchases of investment securities held-to-maturity                   -            (15,000)          (148,674)
  Purchases of investment securities available-for-sale          (279,762)           (86,515)           (10,068)
  Purchases of FHLB stock                                         (10,518)           (10,228)              (955)
  Purchases of mortgage-backed securities held-to-
    maturity                                                            -                  -            (31,952)
</TABLE>

                                       61
<PAGE>
 
                        PFF BANCORP, INC. AND SUBSIDIARY
                Consolidated Statements of Cash Flows, continued
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                             YEAR ENDED MARCH 31,
                                                              -------------------------------------------------
                                                                   1998               1997              1996
                                                              -------------------------------------------------
<S>                                                           <C>                   <C>                <C>
  Purchases of mortgage-backed securities available-
    for-sale                                                  $  (190,539)          (451,322)                -
  Proceeds from maturities of investment securities
    held-to-maturity                                               15,475             26,899           162,095
  Proceeds from maturities of investment securities
    available-for-sale                                             43,687              3,197             7,000
  Proceeds from maturities of mortgage-backed
    securities available-for-sale                                     793                  -                 -
  Investment in real estate                                         1,006             (1,027)           (2,118)
  Proceeds from sale of investment securities
    available-for-sale                                              8,934              5,000                 -
  Proceeds from sale of mortgage-backed securities
    available-for-sale                                             52,789             19,542            25,561
  Proceeds from sale of real estate                                13,807             11,325            11,967
  Purchases of property and equipment                              (4,172)            (5,045)           (1,210)
  Proceeds from sale of property and equipment                         69                129                21
                                                              ------------------------------------------------
          Net cash used in investing activities                  (388,250)          (697,974)          (21,395)
                                                              ------------------------------------------------
Cash flows from financing activities:
  Proceeds from FHLB advances and other borrowings              1,342,886          1,215,600           340,658
  Repayment of FHLB advances and other borrowings              (1,087,000)          (705,323)         (370,031)
  Net change in deposits                                           29,775             28,976            12,657
  Proceeds from exercise of stock options                             682                  -                 -
  Proceeds from issuance of capital stock                               -                  -           193,875
  Purchase of stock for unearned stock-based
    compensation plans                                                  -            (11,262)          (15,870)
  Purchase of treasury stock                                      (35,808)           (14,817)                -
                                                              ------------------------------------------------
          Net cash provided by financing activities               250,535            513,174           161,289
                                                              ------------------------------------------------
          Net increase in cash and cash equivalents                14,389           (144,272)          145,806
Cash and cash equivalents, beginning of year                       31,632            175,904            30,098
                                                              ------------------------------------------------
Cash and cash equivalents, end of year                        $    46,021             31,632           175,904
                                                              ================================================
Supplemental information:
  Interest paid, including interest credited                      116,991             90,298            87,570
  Income taxes paid                                                16,608              1,838             2,230
Non-cash investing and financing activities:
  Transfer of mortgage-backed securities from held-
    to-maturity to available-for-sale                                   -                  -           158,800
  Securitization of mortgage loans transferred to
    mortgage-backed securities held-to-maturity                         -                  -            73,407
Change in unrealized gain (loss) on securities
    available-for-sale                                              5,145             (2,431)            1,667
  Net transfers from loans receivable to real estate               12,563              9,979             8,961
  Net transfers from loans receivable to loans held
    for accelerated disposition                                         -                  -             6,080
  Loans originated for the sale of real estate
    acquired in settlement of loans                                   617              1,187             2,263
  Transfer of loans from held for investment to loans
    held for sale                                                 163,000                  -                 -
                                                              ================================================
</TABLE>

See accompanying notes to consolidated financial statements.

                                       62
<PAGE>
 
                        PFF BANCORP, INC. AND SUBSIDIARY
                   Notes to Consolidated Financial Statements
                 (Dollars in thousands, except per share data)

(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 21 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 subsidiary, PFF Bank & Trust (the Company). The Company's
business is conducted primarily through PFF Bank & Trust and its subsidiary,
Pomona Financial Services, Inc. Pomona Financial Services, Inc. includes the
accounts of Diversified Services, Inc. and PFF Insurance Service. 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
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and 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 $33,560 and
$26,123 and short-term deposits in banks of $12,461 and $5,509 at March 31, 1998
and 1997, respectively. The Company considers all highly liquid debt instruments
with maturities at date of acquisition of three months or less to be cash
equivalents.

INVESTMENT AND MORTGAGE-BACKED SECURITIES

At the time of purchase of an investment security or a mortgage-backed security,
the Company designates the security as either held-to-maturity, available-for-
sale or held for 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.

                                       63
<PAGE>
 
                       PFF BANCORP, INC. AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued
                 (Dollars in thousands, except per share data)

Held-to-Maturity

Securities held-to-maturity are carried at cost, adjusted for amortization of
premiums and accretion of discounts which are recognized in interest income
using the interest method. Mortgage-backed securities represent participating
interests in pools of long-term first mortgage loans originated and serviced by
the issuers of the securities. Mortgage-backed securities held-to-maturity are
carried at unpaid principal balances, adjusted for unamortized premiums and
unearned discounts. Premiums and discounts on mortgage-backed securities are
amortized or accreted using the interest method over the remaining period to
contractual maturity, adjusted for anticipated prepayments. 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

Securities available-for-sale are carried at fair value. Unrealized holding
gains and losses, or valuation allowances established for net unrealized losses,
are excluded from earnings and reported as a separate component of stockholders=
equity, net of income taxes, unless the security is deemed to be other than
temporarily impaired. 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

The Company had no trading securities at March 31, 1998 and 1997.

LOANS HELD FOR SALE

Loans originated and held for sale in the secondary market are carried at the
lower of cost or market value in the aggregate, as determined by outstanding
commitments from investors or current investor requirements. 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.

GAINS OR LOSSES ON SALES OF LOANS AND MORTGAGE SERVICING ASSETS

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
("MSRs") acquired through either the purchase or origination of mortgage loans
for sale or securitization with servicing rights retained. At the time of sale
the total cost of the mortgage loans is allocated to the MSRs and the mortgage
loans without the MSRs based upon their relative fair values. The MSRs are
included in other assets and as a component of the gain on the sale of loans.
The MSRs are amortized in proportion to and over the estimated period of the net
servicing income. This amortization is reflected as a component of loan
servicing fees.

The MSRs are periodically reviewed for impairment based upon their fair value.
The fair value of the MSRs, for the purposes of impairment, is measured using a
discounted cash flow analysis using market prepayment 

                                       64
<PAGE>
 
                       PFF BANCORP, INC. AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued
                 (Dollars in thousands, except per share data)

rates, the Company's cost of servicing and market-adjusted discount rates.
Impairment losses are recognized through a valuation allowance, with any
associated provision recorded as a component of loan servicing fees.

LOANS RECEIVABLE

Loans receivable are stated at unpaid principal balances less the undisbursed
portion of construction loans, unearned discounts, net deferred loan origination
fees and allowances for losses. Premiums/discounts are amortized/accreted using
the interest method over the remaining term to maturity.

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 nonaccrual
receivables 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

Loan fees and certain direct loan origination costs are deferred, with the net
fee or cost being accreted or amortized to interest income over the remaining
term to 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 current. When a loan is
paid in full, any unamortized net loan origination fee or cost is recognized in
interest income. When a 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 prospective 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.

Management considers loans with a principal balance of $500 or more, including
loans to one borrower that exceed $500, as non-homogeneous for purposes of 
evaluation for impairment. A loan is considered impaired if it is probable that

                                       65
<PAGE>
 
                       PFF BANCORP, INC. AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued
                 (Dollars in thousands, except per share data)

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 are either
placed on nonaccrual status or are designated as restructured loans. Only
nonaccrual loans and restructured loans not performing in accordance with their
restructured terms are included in nonperforming loans. Loans are generally
placed on nonaccrual 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 nonaccrual
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

Real estate properties acquired through loan foreclosure are initially recorded
at fair value at the date of foreclosure. 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. Real estate properties held for sale or
development are carried at the lower of cost, including cost of improvements and
amenities incurred subsequent to acquisition, or net realizable 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.

The Company capitalizes interest on all construction in progress based on the
cost of funds in effect during the construction period.

                                       66
<PAGE>
 
                       PFF BANCORP, INC. AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued
                 (Dollars in thousands, except per share data)

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 is being
amortized on a straight-line basis over the estimated average life of the trust
relationships acquired of 11 years.

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 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.

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. Income taxes or benefits are allocated to the subsidiaries based on
earnings or losses before income taxes as if each subsidiary prepared its own
tax return on a stand alone basis.

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.

PER SHARE INFORMATION

The Company adopted, effective December 31, 1997, Statement of Accounting
Standards No. 128, "Earnings Per Share" (SFAS 128). SFAS 128 simplifies the
standards for computing and presenting earnings per share (EPS) as previously
prescribed by Accounting Principles Board Opinion 15., "Earnings per Share."
SFAS 128 replaces primary EPS with basic EPS and fully diluted EPS with diluted
EPS. Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted from issuance of common stock that then shared in
earnings.

                                       67
<PAGE>
 
                       PFF BANCORP, INC. AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued
                 (Dollars in thousands, except per share data)

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. When
the issuance occurs, 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 No. 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 No. 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 No. 123 had been applied. As such, compensation expense
would be recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. The Company has elected to apply
the provisions of APB 25 and provide the pro forma disclosure provisions of SFAS
No. 123.

NEW ACCOUNTING PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards Nos. 130 and 131, "Reporting Comprehensive
Income" ("SFAS No. 130") and "Disclosures about Segments of an Enterprise and
Related Information " ("SFAS No. 131"), respectively (collectively, the
"Statements"). The Statements are effective for fiscal years beginning after
December 15, 1997. SFAS No. 130 established standards for reporting of
comprehensive income and its components in annual financial statements. SFAS No.
131 establishes standards for reporting financial and descriptive information
about an enterprise's operating segments in its annual financial statements and
selected segment information in interim financial reports. Reclassification or
restatement of comparative financial statements or financial information for
earlier periods is required upon adoption of SFAS No. 130 and SFAS No. 131,
respectively. Application of the Statements' requirements is not expected to
have a material impact on the Company's disclosures.

In February 1998, the FASB issued Statement of financial Accounting Standards
No. 132 (SFAS No. 132), "Employers' Disclosures about Pension and Other
Postretirement Benefits." SFAS No. 132 amends the disclosure requirements of
SFAS No. 87, "Employers' Accounting for Pensions, SFAS No. 88, "Employer's
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
for termination Benefits," and SFAS No. 106, "Employer's Accounting for
Retirement Benefits Other than Pensions." SFAS No. 132 standardizes the
disclosure requirements of SFAS Nos. 87 and 106 to the extent practicable and
recommends a parallel format for presenting information about pensions and other
retirement benefits. SFAS No. 132 is effective for fiscal years beginning after
December 15, 1997. SFAS No. 132 will result in disclosure changes only.

                                       68
<PAGE>
 
                       PFF BANCORP, INC. AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued
                 (Dollars in thousands, except per share data)

(2) INVESTMENT SECURITIES

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

<TABLE>
<CAPTION>
                                                                               MARCH 31, 1998
                                                        -------------------------------------------------------------
                                                                           GROSS            GROSS           ESTIMATED
                                                        AMORTIZED       UNREALIZED       UNREALIZED            FAIR
                                                          COST             GAINS           LOSSES             VALUE
                                                        -------------------------------------------------------------
<S>                                                     <C>             <C>              <C>                <C>
Held-to-maturity:
Bonds, notes and debentures at amortized cost:
    U.S. Government and federal agency obligations       $    714               11                -               725
                                                         ------------------------------------------------------------
          Total                                          $    714               11                -               725
                                                         ============================================================
Available-for-sale
    Collateralized mortgage obligations                  $223,514              839             (851)          223,502
    U.S. Government and federal agency obligations         56,007               50               (5)           56,052
    FHLMC non-cumulative preferred stock                    5,600              168                -             5,768
    Corporate debt-securities                              17,309              130              (80)           17,359
    Equity securities                                      13,112              617                -            13,729
                                                         ------------------------------------------------------------
          Total                                          $315,542            1,804             (936)          316,410
                                                         ============================================================
</TABLE>

     During the years ended March 31, 1998, 1997 and 1996, the Company realized
     gains on sales of securities available-for-sale of $144, $23 and zero,
     respectively.

<TABLE>
<CAPTION>
                                                                                MARCH 31, 1997
                                                        -------------------------------------------------------------
                                                                           GROSS            GROSS           ESTIMATED
                                                        AMORTIZED       UNREALIZED       UNREALIZED            FAIR
                                                          COST             GAINS           LOSSES             VALUE
                                                        -------------------------------------------------------------
<S>                                                     <C>             <C>              <C>                <C>
Held-to-maturity:
Bonds, notes and debentures at amortized cost:
  Domestic corporate                                      $15,000                -                -            15,000
  Collateralized mortgage obligations                         472                2                -               474
  U.S. Government and federal agency obligations              718               21                -               739
                                                          -----------------------------------------------------------
          Total                                           $16,190               23                -            16,213
                                                          ===========================================================
Available-for-sale
    Collateralized mortgage obligations                   $24,709                -             (272)           24,437
    U.S. Government and federal agency obligations         57,992               12             (394)           57,610
    FHLMC non-cumulative preferred stock                    5,600                -                -             5,600
                                                          -----------------------------------------------------------

          Total                                           $88,301               12             (666)           87,647
                                                          ===========================================================
</TABLE>

                                       69
<PAGE>
 
                       PFF BANCORP, INC. AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued
                 (Dollars in thousands, except per share data)

     Maturities of investment securities at March 31, 1998 are summarized as
     follows:

<TABLE>
<CAPTION>
                                                                               AVAILABLE-
                                                      HELD-TO-MATURITY          FOR-SALE
                                                  ---------------------------------------
                                                                 ESTIMATED      ESTIMATED
                                                  AMORTIZED         FAIR           FAIR
                   MATURITY                          COST          VALUE          VALUE
-----------------------------------------------------------------------------------------
<S>                                               <C>             <C>             <C>
Within one year                                   $       -              -          4,997
After one to five years                                 714            725         51,055
After five to ten years                                   -              -              -
After ten years                                           -              -        260,358
                                                  ---------------------------------------
                                                  $     714            725        316,410
                                                  =======================================
</TABLE>

(3) MORTGAGE-BACKED SECURITIES

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

<TABLE>
<CAPTION>
                                                              MARCH 31, 1998
                                       ------------------------------------------------------------
                                                          GROSS            GROSS          ESTIMATED
                                       AMORTIZED        UNREALIZED       UNREALIZED          FAIR
                                          COST            GAINS            LOSSES           VALUE
                                       ------------------------------------------------------------
<S>                                    <C>              <C>              <C>              <C>
Held-to-maturity
    FHLMC                               $  1,373                 2                -           1,375
                                        ===========================================================
Available-for-sale
    GNMA                                $ 34,399               695                -          35,094
    FHLMC                                137,504               561             (323)        137,706
    FNMA                                 306,287             2,856             (359)        308,820
                                        -----------------------------------------------------------
          Total                         $478,190             4,112             (682)        481,620
                                        ===========================================================
</TABLE>

<TABLE>
<CAPTION>
                                                              MARCH 31, 1997
                                       ------------------------------------------------------------
                                                          GROSS            GROSS          ESTIMATED
                                       AMORTIZED        UNREALIZED       UNREALIZED          FAIR
                                          COST            GAINS            LOSSES           VALUE
                                       ------------------------------------------------------------
<S>                                    <C>              <C>              <C>              <C>
Held-to-maturity
    FHLMC                               $  5,490                19                -           5,509
                                        ===========================================================
Available-for-sale
    GNMA                                $ 56,462               460             (240)         56,682
    FHLMC                                149,808               660             (680)        149,788
    FNMA                                 279,932             1,345           (1,738)        279,539
                                        -----------------------------------------------------------
          Total                         $486,202             2,465           (2,658)        486,009
                                        ===========================================================
</TABLE>

     The mortgage-backed securities have maturities of up to 30 years.

                                       70
<PAGE>
 
                       PFF BANCORP, INC. AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued
                 (Dollars in thousands, except per share data)

(4)  LOANS RECEIVABLE

     Loans receivable are summarized as follows:

<TABLE>
<CAPTION>
                                                            MARCH 31,
                                                  -----------------------------
                                                     1998               1997
                                                  -----------------------------
<S>                                               <C>                 <C>
Mortgage loans:
  Residential:
    One-to-four family                            $1,467,156          1,499,122
    Multi-family                                      97,350            108,896
  Commercial real estate                             144,035            137,169
  Construction and land                              185,225            113,188
                                                  -----------------------------
      Total mortgage loans                         1,893,766          1,858,375

Commercial                                            12,468              3,100
Consumer                                              42,826             26,931
                                                  -----------------------------
                                                   1,949,060          1,888,406
  Less:
  Undisbursed portion of construction loans          (95,457)           (38,485)
  Unearned discounts                                   1,114             (1,629)
  Net deferred loan origination fees                  (1,101)            (1,362)
  Allowance for loan losses (note 6)                 (26,002)           (27,721)
                                                  -----------------------------
                                                  $1,827,614          1,819,209
                                                  =============================
  Weighted average yield                                7.70%              7.64%
                                                  =============================
</TABLE>

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

<TABLE>
<CAPTION>
                                                            MARCH 31,
                                                    -------------------------
                                                     1998               1997
                                                    -------------------------
<S>                                                 <C>                 <C>
Beginning balance                                   $1,897              1,406
Additions                                              288                747
Repayments                                            (115)              (256)
                                                    -------------------------
Ending balance                                      $2,070              1,897
                                                    =========================
</TABLE>

       The following table provides information with respect to the Company's
       nonaccrual loans and troubled debt restructured (TDR) loans at the dates
       indicated:
                                        
<TABLE>
<CAPTION>
                                                                          MARCH 31,
                                                         -------------------------------------------
                                                           1998              1997              1996 
                                                         -------------------------------------------
<S>                                                      <C>               <C>               <C>
Nonaccrual loans                                         $17,189            23,350            22,951
TDR loans                                                 12,505            14,559            13,810
                                                         -------------------------------------------
      Total nonaccrual and TDR loans                     $29,694            37,909            36,761
                                                         ===========================================
</TABLE>

                                       71
<PAGE>
 
                       PFF BANCORP, INC. AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued
                 (Dollars in thousands, except per share data)

     The following table identifies the Company's total recorded investment in
     impaired loans by type at the dates indicated:

<TABLE>
<CAPTION>
                                                                MARCH 31,
                                     ----------------------------------------------------------------
                                                 1998                                1997
                                     ----------------------------------------------------------------
                                      RECORDED          SPECIFIC          RECORDED          SPECIFIC
                                     INVESTMENT        ALLOWANCES        INVESTMENT        ALLOWANCES
                                     ----------------------------------------------------------------
<S>                                  <C>               <C>               <C>               <C>
Non accrual loans:
  Residential:
    One-to-four family                  $   504               202             1,545               329
    Multi-family                          2,214               436             1,650               386
  Commercial real estate                  4,872                 -             1,775                 -
  Construction and land                     865                 -             1,447               485
TDR loans                                12,505             1,922            14,559             2,972
                                        -------------------------------------------------------------
      Total                             $20,960             2,560            20,976             4,172
                                        =============================================================
</TABLE>

     During the year ended March 31, 1998 and 1997, the Company's average
     investment in impaired loans was $20,988 and $24,940, respectively and
     interest income recorded during these periods was $776 and $764,
     respectively of which $845 and $784, respectively was recorded utilizing
     the cash basis method of accounting.

     The effect of nonaccrual and TDR loans on interest income is presented
     below:

<TABLE>
<CAPTION>
                                                           YEAR ENDED MARCH 31,
                                            ------------------------------------------------
                                              1998                1997                 1996
                                            ------------------------------------------------
<S>                                         <C>                   <C>                  <C>
Contractual interest due:
  Nonaccrual loans                          $1,749                2,226                  858
  TDR loans                                  1,186                1,312                1,172
                                            ------------------------------------------------
                                             2,935                3,538                2,030
  Interest income recognized on
    TDR loans on a cash basis                  779                  942                  891
                                            ------------------------------------------------
  Interest income not recognized            $2,156                2,596                1,139
                                            ================================================
</TABLE>

(5) REAL ESTATE

     Real estate is summarized as follows:

<TABLE>
<CAPTION>
                                                                  MARCH 31,
                                                          ------------------------
                                                           1998              1997
                                                          ------------------------
<S>                                                       <C>                <C>
Properties:
  Acquired in settlement of loans                         $8,198             8,074
  Held for sale or development                               731             1,113
                                                          ------------------------
                                                           8,929             9,187
  Allowance for losses (note 6)                             (603)             (329)
                                                          ------------------------
      Total                                               $8,326             8,858
                                                          ========================
</TABLE>

                                       72
<PAGE>
 
                       PFF BANCORP, INC. AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued
                 (Dollars in thousands, except per share data)

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

<TABLE>
<CAPTION>
                                                                    YEAR ENDED MARCH 31,
                                                           -------------------------------------
                                                             1998           1997           1996
                                                           -------------------------------------
<S>                                                        <C>             <C>             <C>
Gain on sale of real estate, net                           $(1,692)         (519)           (363)
Real estate expense                                          1,749         1,164           1,165
Provision for (recoveries of) losses on real estate            416          (970)            868
                                                           -------------------------------------
                                                           $   473          (325)          1,670
                                                           =====================================
</TABLE>

(6) ALLOWANCES FOR LOSSES ON LOANS RECEIVABLE AND REAL ESTATE

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

<TABLE>
<CAPTION>
                                                              YEAR ENDED MARCH 31,
                                                  -------------------------------------------
                                                    1998             1997               1996
                                                  -------------------------------------------
<S>                                               <C>               <C>               <C>
Loans receivable:
  Beginning balance                               $27,721           19,741             19,294
    Provision                                       7,099           13,661             10,895
    Charge-offs                                    (9,110)          (5,782)           (10,451)
    Recoveries                                        292              101                  3
                                                  -------------------------------------------
  Ending balance                                   26,002           27,721             19,741
                                                  -------------------------------------------
Real Estate:
  Beginning balance                                   329            4,762              5,440
    Provision                                         416             (970)               868
    Charge-offs                                      (142)          (3,463)            (1,546)
                                                  -------------------------------------------
  Ending balance                                      603              329              4,762
                                                  -------------------------------------------
Total loans receivable and real estate:
  Beginning balance                                28,050           24,503             24,734
    Provision                                       7,515           12,691             11,763
    Charge-offs                                    (9,252)          (9,245)           (11,997)
    Recoveries                                        292              101                  3
                                                  -------------------------------------------
  Ending balance                                  $26,605           28,050             24,503
                                                  ===========================================
</TABLE>

(7) ACCRUED INTEREST RECEIVABLE

     Accrued interest receivable is summarized as follows:

<TABLE>
<CAPTION>
                                                                   MARCH 31,
                                                          -------------------------
                                                            1998              1997
                                                          -------------------------
<S>                                                       <C>                <C>
Investment securities                                     $ 2,963             1,397
Mortgage-backed securities                                  3,596             3,863
Loans receivable                                           10,761            10,619
                                                          -------------------------
                                                          $17,320            15,879
                                                          =========================
</TABLE>

                                       73
<PAGE>
 
                       PFF BANCORP, INC. AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued
                 (Dollars in thousands, except per share data)

(8)  PROPERTY AND EQUIPMENT, NET

     Property and equipment, net is summarized as follows:

<TABLE>
<CAPTION>
                                                        MARCH 31,
                                                ------------------------
                                                  1998             1997        ESTIMATED LIFE
                                                ---------------------------------------------
<S>                                             <C>               <C>          <C>
Land                                            $  5,254           5,254              -
Buildings and improvements                        21,299          20,781       10 to 50 years
Leasehold improvements                             1,939           1,824        Life of lease
Furniture, fixtures and equipment                 23,017          20,161        1 to 10 years
Automobiles                                          159             198           3 years
Construction in progress                              92           1,074              -
                                                ------------------------
                                                  51,760          49,292
Accumulated depreciation and
  amortization                                   (26,193)        (22,771)
                                                ------------------------
                                                $ 25,567          26,521
                                                ========================
</TABLE>

(9)  DEPOSITS

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

<TABLE>
<CAPTION>
                                                       MARCH 31,
                               ---------------------------------------------------------
                                          1998                          1997
                               ---------------------------------------------------------
                               WEIGHTED                      WEIGHTED
                               AVERAGE                       AVERAGE
                                RATE             AMOUNT       RATE              AMOUNT
                               ---------------------------------------------------------
<S>                                <C>         <C>               <C>          <C>
Regular passbook                   2.55%       $  152,649        2.76%        $  176,867
NOW and other demand
    deposit accounts               0.76           176,060        0.81            141,231
Fixed and variable-rate
    certificate accounts           5.40         1,178,515        5.54          1,240,231
Money market checking
    and savings                    4.05           233,600        4.05            152,720
                                               ----------                     ----------
                                   4.56%       $1,740,824        4.73%        $1,711,049
                                               ==========                     ==========
</TABLE>

                                       74
<PAGE>
 
                       PFF BANCORP, INC. AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued
                 (Dollars in thousands, except per share data)

     Certificate accounts maturing subsequent to March 31, 1998 are summarized
     as follows:

<TABLE>
<CAPTION>
                     YEAR ENDING MARCH 31,         AMOUNT
                     --------------------------------------
                     <S>                         <C>
                     1999                        $  987,083
                     2000                           131,964
                     2001                            30,706
                     2002                            12,811
                     2003                            13,239
                     thereafter                       2,712
                                                 ----------
                                                 $1,178,515
                                                 ==========
</TABLE>

     Interest expense on deposits is summarized as follows:

<TABLE>
<CAPTION>
                                                             YEAR ENDED MARCH 31,
                                                ---------------------------------------------
                                                  1998               1997               1996
                                                ---------------------------------------------
<S>                                             <C>                 <C>                <C>
Regular passbook                                $ 4,205              5,525              2,657
NOW and other demand deposit accounts             1,214              1,096              1,752
Money market checking and savings                 7,981              3,935              4,012
Certificates of deposit                          66,755             68,690             73,830
                                                ---------------------------------------------
          Total                                 $80,155             79,246             82,251
                                                =============================================
</TABLE>

     At March 31, 1998 and 1997, the Company had accrued interest payable on
     deposits of $811 and $476, respectively, which is included in other
     liabilities in the accompanying consolidated balance sheets.

     At March 31, 1998 and 1997, $7,637 and $5,737 of public funds on deposit
     were secured by loans receivable, mortgage-backed securities and investment
     securities with aggregate carrying values of $23,575 and $11,945,
     respectively.

     Accounts which are greater than $100 at March 31, 1998 and 1997 total
     $306,187 and $293,332, respectively. Deposit accounts greater than $100 are
     not federally insured.

(10) FHLB ADVANCES AND OTHER BORROWINGS

     The Company utilizes FHLB advances and reverse repurchase agreements as
     sources of funds. The advances are collateralized by mortgage-backed
     securities and/or loans. Reverse repurchase agreements are collateralized
     by mortgage-backed securities. 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 at
     March 31, 1998 and 1997 were $735,886 and $480,000 and $50,000 and $50,000,
     respectively. See Note 11.

                                       75
<PAGE>
 
                       PFF BANCORP, INC. AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued
                 (Dollars in thousands, except per share data)

     The original terms to maturity for reverse repurchase agreements
     outstanding at March 31, 1998 were 5 years. Under these agreements, the
     debt may be put back to the Company by the creditor beginning February 1999
     and quarterly thereafter, continuing to final maturity in 2002. These
     agreements are collateralized by FHLMC and FNMA mortgage-backed and other
     investment securities with a historical cost basis and fair value of
     $55,780 and $56,033 and $51,967 and $51,946 at March 31, 1998 and March 31,
     1997, respectively. The underlying collateral for reverse repurchase
     agreements is held by and under the control of Morgan Stanley Group Inc..

<TABLE>
<CAPTION>
                                                                               MARCH 31,
                                                           ------------------------------------------------
                                                             1998                 1997                1996
                                                           ------------------------------------------------
<S>                                                        <C>                  <C>                  <C>
FHLB advances:
  Average amount outstanding during the year               $601,078             335,188              19,768
  Maximum amount outstanding at any month end               790,086             545,400              68,985
  Amount outstanding at year end (1)                        735,886             480,000              19,722
  Average interest rate:
    For the year                                               5.87%               5.78%               5.66%
    At year end                                                5.70%               5.78%               5.52%
Reverse repurchase agreements:
  Average amount outstanding during the year                 50,000              10,129              63,839
  Maximum amount outstanding at any month end                50,000              50,000              96,681
  Amount outstanding at year end (1)                         50,000              50,000                   -
  Average interest rate:
    For the year                                               5.87%               5.96%               5.97%
    At year end                                                5.87%               5.87%                  -
</TABLE>
---------------------
Included in the balance of FHLB advances and reverse repurchase agreements
outstanding at March 31, 1998 are putable borrowings of  $250.0 million and
$50.0 million, respectively with original terms to maturity of 24 to 120 months,
and 36 to 60 months, respectively final maturity dates ranging from December
1999 to February 2008 and February 2000 to December 2000, respectively, and
initial put dates ranging from June 1998 to February 2003 and February 1999 to
December 1999, respectively.

     FHLB advances have the following final maturities at March 31, 1998.

<TABLE>
<CAPTION>
 
                                              Amount
                                             --------
                          <S>                <C>
                          1999               $396,886
                          2000                 15,000
                          2001                 79,000
                          2002                 40,000
                          2003                190,000
                          thereafter           15,000
                                             --------
                                Total        $735,886
                                             ========
</TABLE>

                                       76
<PAGE>
 
                       PFF BANCORP, INC. AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued
                 (Dollars in thousands, except per share data)

     Interest expense on borrowings is summarized as follows:

<TABLE>
<CAPTION>
                                                        YEAR ENDED MARCH 31,
                                          -----------------------------------------------
                                            1998                1997                1996
                                          -----------------------------------------------
<S>                                       <C>                  <C>                  <C>
FHLB advances                             $35,273              19,378                 983
Reverse repurchase agreements               2,959                 604               3,937
Other interest expense                        130                  78                 385
                                          -----------------------------------------------
          Total                           $38,362              20,060               5,305
                                          ===============================================
</TABLE>

(11) LINES OF CREDIT

     At March 31, 1998 and 1997, the Company had maximum borrowing capacity from
     the FHLB of San Francisco in the approximate amount of $690,108 and
     $620,861, respectively. Based upon pledged collateral in place, the Company
     had available borrowing capacity of $192,386 and $269,882 as of March 31,
     1998 and 1997, respectively. Pledged collateral consists of certain loans
     receivable, mortgage-backed securities and investment securities
     aggregating $1,045,522 and $857,087 and the Company's required investment
     in one hundred dollar par value capital stock of the FHLB of San Francisco.
     At March 31, 1998 and 1997, the cost of this FHLB capital stock was $39,504
     and $27,270, respectively.

(12) EMPLOYEE BENEFIT PLANS

     The Company maintains a defined benefit Pension Plan ("Pension Plan")
     covering substantially all 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 became
     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 and
     Directors' Retirement and Supplemental Plans. Accordingly, no new accruals
     for future years of service will occur after December 31, 1995. The
     following table sets forth the plans' funded status and amounts recognized
     by the Company at the plans' most recent measurement dates of December 31,
     1997 and 1996:

                                       77
<PAGE>
 
                       PFF BANCORP, INC. AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued
                 (Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                                         1997                                     1996
                                           ------------------------------------------------------------------------
                                                              DIRECTORS'                               DIRECTORS'
                                                            RETIREMENT AND                           RETIREMENT AND
                                            PENSION          SUPPLEMENTAL            PENSION          SUPPLEMENTAL
                                             PLAN               PLANS                 PLAN               PLANS
                                           ------------------------------------------------------------------------
<S>                                        <C>              <C>                      <C>             <C>
Actuarial present value of benefit
  obligation:
  Accumulated benefit obligation           $ 20,792                 2,536             18,038                 2,561
                                           =======================================================================
  Vested benefit obligation                $ 20,792                 2,536             18,038                 2,561
                                           =======================================================================
Projected benefit obligation for
  services rendered to date                $ 20,792                 2,536             18,038                 2,561
Plan assets at fair value                   (21,964)                    -            (20,090)                    -
Projected benefit obligation less
  than (in excess of) plan assets            (1,172)                2,536             (2,052)                2,561
                                           -----------------------------------------------------------------------
Unrecognized net loss from past
  experience different from that
  assumed and effects of
  changes in assumptions                       (514)                 (535)               354                  (473)
Unrecognized net obligation at
  April 1, 1987 being recognized
  over twelve years                               -                  (132)               (73)                 (165)
Unrecognized prior service cost                (222)                   11               (292)                   22
Adjustment required to recognize
  minimum liability                               -                   535                  -                   616
                                           -----------------------------------------------------------------------
Accrued (prepaid) pension and
  retirement and supplemental costs        $ (1,908)                2,415             (2,063)                2,561
                                           =======================================================================
</TABLE>

The total pension expense for the Pension Plan was $155, $220, and $1,354, for
the years ended March 31, 1998, 1997 and 1996, respectively.  The total pension
expense for the Directors' Retirement and Supplemental Plans (including
amortization of prior service cost over 15 years) was $245, $1,773, and $343 for
the years ended March 31, 1998, 1997 and 1996, respectively.   The $1,527
difference between total pension expense and net periodic pension cost for the
Directors' Retirement and Supplemental Plans for the year ended

March 31, 1997, results from the curtailment of these plans.

Net periodic pension costs for 1997, 1996 and 1995 included the following
components:

<TABLE>
<CAPTION>
                                                                       DECEMBER 31,
                                     ---------------------------------------------------------------------------------
                                               1997                         1996                         1995
                                     ---------------------------------------------------------------------------------
                                                  DIRECTORS                     DIRECTORS                    DIRECTORS
                                                 RETIREMENT                    RETIREMENT                   RETIREMENT
                                                 AND SUPPLE-                   AND SUPPLE-                  AND SUPPLE-
                                     PENSION       MENTAL          PENSION       MENTAL         PENSION       MENTAL
                                      PLAN          PLANS           PLAN          PLANS          PLAN          PLANS
                                     ---------------------------------------------------------------------------------
<S>                                  <C>         <C>               <C>         <C>              <C>         <C>
Service cost-benefits earned
  During the period                  $     -              -              -              -           627             95      
Interest cost on projected
  Benefit obligation                   1,360            187          1,357            188         1,661            200
Return on plan assets                 (3,061)             -         (1,917)             -        (2,604)             -
Net amortization and deferral          1,856             58            780             58         1,670             48
                                     ---------------------------------------------------------------------------------
Net periodic pension cost            $   155            245            220            246         1,354            343
                                     =================================================================================
</TABLE>

                                       78
<PAGE>
 
                       PFF BANCORP, INC. AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued
                 (Dollars in thousands, except per share data)

The assumptions used in determining the actuarial present value of the
accumulated benefit obligation and the expected return on plan assets for 1997
and 1996 are as follows:

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                        -------------------------------------------------------------
                                                    1997                            1996
                                        -------------------------------------------------------------
                                                        DIRECTORS'                        DIRECTORS'
                                                        RETIREMENT                        RETIREMENT
                                        PENSION        AND SUPPLE-        PENSION        AND SUPPLE-
                                          PLAN         MENTAL PLANS         PLAN         MENTAL PLANS
                                        -------------------------------------------------------------
<S>                                     <C>            <C>                <C>            <C>
Actuarial present values:
  Weighted average discount rate        7.00%          7.00%              7.75%          7.75%
  Rate of increase in future
    compensation                           -              -                  -              -
Net periodic pension costs:
  Weighted average discount rate        7.75           7.75               7.50           7.50
  Rate of increase in future
    compensation                           -              -                  -              -
  Expected long-term return on
    plan assets                         7.25           7.25               8.50           8.50

</TABLE>

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 a percentage of employee contributions. In 1998, 1997 and 1996,
the total 401(k) Plan expense was $348, $290, and $226, respectively.

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 is
payable upon the occurrence of the first Board of Directors' meeting held in the
fiscal year following the participant attaining age 73. The benefit from the
Employees' Deferred Compensation Plan is payable at normal retirement (age 65)
or actual retirement but no later than age 70, 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, 1998, the
liability for these plans is included in accrued expenses and other liabilities.

The Company currently provides post retirement medical coverage to eligible
employees. At March 31, 1998 and 1997, the expected cost associated with this
coverage is included in accrued expenses and other liabilities.

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 $10 per share, or $15,870,
which was funded by a loan from the Company. The loan will be repaid from the
Company's or the Bank's discretionary contributions over a period of 10 years.
The loan is secured by the common stock

                                       79
<PAGE>
 
                       PFF BANCORP, INC. AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued
                 (Dollars in thousands, except per share data)

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. ESOP
shares are allocated to the eligible participants based on compensation as
described in the ESOP plan. In each of the fiscal years ending March 31, 1998
and 1997 158,700 shares were allocated to the eligible participants. At March
31, 1998 and 1997, 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, 1998, the
fair value of the unearned ESOP shares is $20,552. Compensation expense
associated with the ESOP was $2,921 and $2,050 for the years ended March 31,
1998 and 1997.

During October, 1996, the stockholders of the Company approved the PFF Bancorp,
Inc. 1996 Incentive Plan (the "1996 Plan"). The 1996 Plan authorizes the
granting of options to purchase the Company's common stock, option related
awards, and grants of common stock (collectively "Awards"). 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.

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 option-related awards and 793,500 shares reserved for grants of the
Company's common stock. The exercise price of all options and option-related
awards 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.

With respect to shares of the Company's common stock granted to employees, the
1996 Plan provides that each stock grant will be eligible to vest in five equal
annual installments, with 75% of the third, fourth and fifth annual installments
subject to the attainment of certain performance goals. Of the 793,500 shares
reserved for stock grants, 746,745 shares with a fair value of $11,263 were
granted during the year ended March 31, 1997. Compensation expense, associated
with the stock grants recognized based upon the market price of the common stock
at the time of grant, was $1,904 and $834 for the years ended March 31, 1998 and
1997. The unamortized balance of the grants is included in unearned stock-based
compensation in the accompanying consolidated financial statements. At March 31,
1998 and 1997 the unamortized balance of the stock awards was $8.9 million and
$10.4 million, respectively.

                                       80
<PAGE>
 
                       PFF BANCORP, INC. AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued
                 (Dollars in thousands, except per share data)

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

<TABLE> 
<CAPTION> 
OPTIONS GRANTED DURING THE YEAR ENDED MARCH 31, 1998           ASSUMPTIONS USED IN DETERMINING OPTIONS' VALUES
--------------------------------------------------------------------------------------------------------------
                                                                                                                  CALCULATED
                                                               EXPECTED                                            VALUE OF
                         NUMBER         EXERCISE               TERM IN           RISK-FREE         EXPECTED          EACH
GRANT DATE               GRANTED         PRICE                 YEARS(1)           RATE(2)         VOLATILITY        OPTION
----------------------------------------------------------------------------------------------------------------------------
<S>                      <C>            <C>                    <C>               <C>              <C>             <C>  
April 23, 1997           1,660          $14.250                 8.00              5.70%            30.00%         $ 6.93
May 7, 1997              1,229           14.500                 8.00              5.70%            30.00%           7.05
October 22, 1997         6,154           20.625                 8.00              5.70%            30.00%          10.03
February 25, 1998        2,626           18.750                 8.00              5.70%            30.00%           9.12
</TABLE> 

(1) Because of the lack of historical information relating to the expected term
    of the options, the expected term of a comparable and more seasoned company
    was used.

(2) The risk-free rate is the market rate for U.S. Government securities with
    the same maturities as the options, as of March 31, 1998.

The Company applies APB No. 25 in accounting for its Plan and, accordingly, 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 No.
123, the Company's operations would have been adjusted to the pro forma amounts
indicated below:
 
<TABLE> 
<CAPTION> 
                                 1998                   1997
                                -----------------------------
<S>                             <C>                    <C> 
Net earnings:             
    As reported                 $15,980                 2,732
    Pro forma                    14,463                 1,000
Earnings per share--Basic 
    As reported                    1.00                  0.15
    Pro forma                      0.90                  0.06
Earnings per share--Diluted
    As reported                    0.95                  0.15
    Pro forma                      0.86                  0.06
</TABLE> 

                                       81
<PAGE>
 
                       PFF BANCORP, INC. AND SUBSIDIARY
             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 Plan.

<TABLE> 
<CAPTION> 
                                              FOR THE YEAR        FOR THE YEAR 
                                                  ENDED               ENDED     
                                              MARCH 31, 1998      MARCH 31, 1997
                                              ----------------------------------
<S>                                           <C>                 <C> 
Balance at beginning of period                 1,960,069                   -
Granted                                           11,669           2,061,250
Canceled or expired                              (16,162)           (101,181)
Exercised                                        (79,105)                  -
                                              ----------------------------------
Balance at end of period                       1,876,471           1,960,069
                                              ==================================
Options exercisable                              381,083               2,452
Options available for grant                       26,813              23,681
                                                                
Weighted average option price per share:                        
  Under option                                    $13.05              $13.01
  Exercisable                                      13.06               12.75
  Exercised                                        19.26                   -
</TABLE> 

The following table summarizes information with respect to the Company's stock
options outstanding as of March 31, 1998.

<TABLE> 
<CAPTION> 
                                 OPTIONS OUTSTANDING                             OPTIONS EXERCISABLE
              -----------------------------------------------------------------------------------------------
                                   WEIGHTED-AVERAGE
 RANGE OF         NUMBER               REMAINING          WEIGHTED-           NUMBER             WEIGHTED-    
 EXERCISE       OUTSTANDING        CONTRACTUAL LIFE        AVERAGE          OUTSTANDING           AVERAGE     
  PRICES      AT MARCH 31, 1998         (YEARS)         EXERCISE PRICE    AT MARCH 31, 1998    EXERCISE PRICE 
-------------------------------------------------------------------------------------------------------------
<S>           <C>                  <C>                  <C>               <C>                  <C> 
$12 to 14         1,708,830             8.57                $12.75           342,865               $12.75
$14 to 16            65,051             9.00                 15.45            19,231                15.50
$16 to 18            94,940             8.92                 16.25            18,987                16.25
$18 to 20             2,626             9.91                 18.75                 -                    -
$20 to 22             5,024             9.57                 20.63                 -                    -
</TABLE> 

                                       82
<PAGE>
 
                       PFF BANCORP, INC. AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued
                 (Dollars in thousands, except per share data)

(13) INCOME TAXES

     Income taxes (benefit) is summarized as follows:

<TABLE> 
<CAPTION> 
                                          CURRENT      DEFERRED        TOTAL
                                       --------------------------------------
<S>                                       <C>          <C>           <C> 
Year Ended March 31, 1998                                                    
  Federal                                 $14,448      (4,399)       10,049
  State                                     2,508        (538)        1,970
                                       --------------------------------------
                                          $16,956      (4,937)       12,019
                                       ======================================
Year Ended March 31, 1997                                                    
  Federal                                 $ 3,289      (1,867)        1,422
  State                                     1,935        (270)        1,665
                                       --------------------------------------
                                          $ 5,224      (2,137)        3,087
                                       ======================================
Year Ended March 31, 1996                 $   342         854         1,196
  Federal                                       -         455           455
                                       --------------------------------------
  State                                   $   342       1,309         1,651
                                       ======================================
</TABLE> 

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

<TABLE> 
<CAPTION> 
                                                           YEAR ENDED MARCH 31,
                                    -----------------------------------------------------------------
                                            1998                   1997                   1996
                                    -----------------------------------------------------------------
                                     AMOUNT     PERCENT     AMOUNT     PERCENT     AMOUNT     PERCENT
                                    -----------------------------------------------------------------
<S>                                 <C>         <C>         <C>        <C>         <C>        <C> 
Computed "expected" taxes           $ 9,800         35%     $2,037         35%     $1,300         35%
Increase (reduction) in                                                 
  taxes resulting from:                                                 
  California franchise tax,                                             
    net of Federal tax benefit        1,281          7         433          7         296          7                  
  California franchise tax                                              
    examination, net of                                                 
    Federal tax benefit                   -          -         649         10           -          -
  Other items                           938          1         (32)         1          55          2
                                    -----------------------------------------------------------------
          Total                     $12,019         43%     $3,087         53%     $1,651         44%
                                    =================================================================
</TABLE> 
                                       83
<PAGE>
 
                       PFF BANCORP, INC. AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued
                 (Dollars in thousands, except per share data)

     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:

<TABLE> 
<CAPTION> 
                                         MARCH 31,         TAXES          MARCH 31,         TAXES        MARCH 31,
                                           1998          (BENEFIT)          1997          (BENEFIT)        1996
                                        ----------------------------------------------------------------------------------
<S>                                      <C>             <C>              <C>             <C>            <C> 
Deferred tax assets:
  Allowance for real estate
    loan losses                           $ (7,550)            453           (8,003)          1,389         (9,392)
  California franchise tax                  (1,698)           (672)          (1,026)            (42)          (984)
  Accrued expenses                          (2,255)           (679)          (1,576)           (910)          (666)
  Core deposit intangibles
    amortization                              (377)           (106)            (271)            (68)          (203)
  Nonaccrual interest                         (147)            886           (1,033)         (1,033)             -
  Unrealized gains (loss) on
    securities available-for-sale, net       1,794           1,439              356            (279)           635
  Other                                     (1,521)           (434)          (1,088)           (919)          (169)
                                          ------------------------------------------------------------------------
                                           (11,754)            887          (12,641)         (1,862)       (10,779)
                                          ------------------------------------------------------------------------
Deferred tax liabilities:
  Deferred loan origination fees             8,616          (4,758)          13,374          (1,400)        14,774
  Unredeemed FHLB stock
    dividends                                4,836             796            4,040             640          3,400
  Pension plan liability                       326              (4)             330            (320)           650
  Accumulated depreciation                     180            (294)             474            (147)           621
  Customer early withdrawl
    penalty depreciation                       174             (44)             218             (44)           262
  Accrued interest on pre-
    1985 loans                                 (35)            (58)              23            (179)           202
  Excess servicing rights
    amortization                                70             (25)              95              (3)            98
  Other                                        983               2              981             900             81
                                          ------------------------------------------------------------------------
                                            15,150          (4,385)          19,535            (553)        20,088
                                          ------------------------------------------------------------------------
Net deferred tax liability                $  3,396          (3,498)           6,894          (2,415)         9,309
                                          ========================================================================
</TABLE> 

     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.
     Deferred tax assets as of March 31, 1998 and 1997 have been recognized to
     the extent of the expected reversal of taxable temporary differences.

     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,
     1998. 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 repeals the reserve method of accounting
     for bad debts for savings institutions effective for taxable years
     beginning after 1995. The Company, therefore, will be 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

                                       84
<PAGE>
 
                       PFF BANCORP, INC. AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued
                 (Dollars in thousands, except per share data)

     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, 1998 and 1997 includes approximately $25,300
     for which no deferred income tax liability has been recognized.

(14) 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 of at least 5%, a Tier 1 risk-based capital ratio of at
     least 6%, and a total risk-based capital 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, 1998, 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, 1998:

<TABLE> 
<CAPTION> 
                                                                 PFF BANK & TRUST'S
                                                           REGULATORY CAPITAL REQUIREMENT
                                                 ---------------------------------------------------
                                                 TANGIBLE              CORE               RISK-BASED
                                                  CAPITAL             CAPITAL               CAPITAL
                                                 --------------------------------------------------- 
<S>                                              <C>                 <C>                  <C> 
Capital of the Bank presented on a GAAP
  Basis                                            $202,763           202,763              202,763
Adjustments to GAAP capital to arrive                            
  at Regulatory capital:                                           
  Unrealized gain on securities                                  
    available-for-sale, net                          (2,009)           (2,009)              (2,009)
  Investments in and advances to                                 
    non-includable consolidated subsidiaries         (1,450)           (1,450)              (1,450)
  Goodwill and other intangible assets               (4,006)           (4,006)              (4,006)
  General loan valuation allowance (1)                    -                 -               18,877
  Real estate held for sale                               -                 -                 (558)
                                                 --------------------------------------------------- 
Regulatory capital                                  195,298           195,298              213,617
Regulatory capital requirement                      110,275           110,275              121,017
                                                 --------------------------------------------------- 
  Amount by which regulatory capital                               
    Exceeds requirement                            $ 85,023            85,023               92,600
                                                 =================================================== 
</TABLE> 

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

    The following table summarizes the Bank's actual capital and required
    capital under prompt corrective action provisions of FDICIA as of March 31,
    1998 and 1997:

                                       85
<PAGE>
 
                       PFF BANCORP, INC. AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued
                 (Dollars in thousands, except per share data)

<TABLE> 
<CAPTION> 
                                                                                                             TO BE WELL
                                                                                                          CAPITALIZED UNDER
                                                                              FOR CAPITAL                 PROMPT CORRECTIVE
                                                    ACTUAL                 ADEQUACY PURPOSES              ACTION PROVISIONS
                                            ----------------------------------------------------------------------------------
          MARCH 31, 1998                     AMOUNT         RATIO        AMOUNT          RATIO           AMOUNT          RATIO
------------------------------------------------------------------------------------------------------------------------------
<S>                                         <C>             <C>         <C>              <C>            <C>             <C> 
Total capital (to risk-weighted assets)     $213,617        14.17%      $120,481         *8.00%         $150,782        *10.00%
Core (Tier 1) capital (to total assets)      195,298         7.10         82,559         *3.00           137,598         *5.00
Tier 1 capital (to risk-weighted assets)     195,298        12.95            -             -  (1)         90,469         *6.00
Tangible capital (to total assets)           195,298         7.10         41,280         *1.50               -             -  (1)
</TABLE> 

<TABLE> 
<CAPTION> 
                                                                                                             TO BE WELL
                                                                                                          CAPITALIZED UNDER
                                                                              FOR CAPITAL                 PROMPT CORRECTIVE
                                                    ACTUAL                 ADEQUACY PURPOSES              ACTION PROVISIONS
                                            ----------------------------------------------------------------------------------
          MARCH 31, 1998                     AMOUNT         RATIO        AMOUNT          RATIO           AMOUNT          RATIO
------------------------------------------------------------------------------------------------------------------------------
<S>                                         <C>             <C>         <C>              <C>            <C>             <C> 
Total capital (to risk-weighted assets)     $226,251        16.54%      $109,448         *8.00%         $136,810        *10.00%
Core (Tier 1) capital (to total assets)      209,688         8.46         74,357         *3.00           123,980         *5.00
Tier 1 capital (to risk-weighted assets)     209,688        15.33            -             -  (1)         82,086         *6.00
Tangible capital (to total assets)           209,688         8.46         37,179         *1.50               -             -  (1)
</TABLE> 

     (1)  Ratio is not specified under capital regulations.
     *    Greater than or equal to.

     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.

(15) OTHER NON-INTEREST EXPENSE

     Other non-interest expense amounts are summarized as follows:

<TABLE> 
<CAPTION> 
                                                             YEAR ENDED MARCH 31,
                                                  ----------------------------------------
                                                   1998             1997             1996
                                                  ----------------------------------------
<S>                                               <C>               <C>              <C> 
SAIF insurance premiums (1)                       $1,470            3,270            3,889
Office supplies and expense                        2,883            2,803            2,226
Savings and NOW account expenses                   1,382              947            1,000
Loan expenses                                        438              221              343
System conversion expenses                             -            2,117                -
Other                                              3,757            3,477            2,249
                                                  ----------------------------------------
                                                  $9,930           12,835            9,707
                                                  ========================================
</TABLE> 

     (1) The SAIF recapitalization assessment of $10,900 is recorded as a
     separate line item on the statements of operations.

                                       86
<PAGE>
 
                       PFF BANCORP, INC. AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued
                 (Dollars in thousands, except per share data)

(16) 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.

     The Company leases various office facilities under noncancellable operating
     leases that expire through the year 2044. Net rent expense under operating
     leases, included in occupancy and equipment expense for the years ended
     March 31, 1998, 1997 and 1996, was approximately $590, $512, and $502,
     respectively. A summary of future minimum lease payments under these
     agreements follows at March 31, 1998:
 
<TABLE> 
<CAPTION> 
                                                        Amount
                                                        ------
                <S>                                     <C> 
                Year Ending March 31,      
                1999                                    $  579
                2000                                       450
                2001                                       254
                2002                                       191
                2003                                       106 
                thereafter                                 239
                                                        ------
                     Total                              $1,819
                                                        ======
</TABLE> 

(17) OFF-BALANCE SHEET RISK

     CONCENTRATIONS OF OPERATIONS AND ASSETS

     The Company's operations are located entirely within Southern California.
     At both March 31, 1998 and 1997, approximately 96.8% 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.

     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:

                                       87
<PAGE>
 
                       PFF BANCORP, INC. AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued
                 (Dollars in thousands, except per share data)

<TABLE> 
<CAPTION> 
                                                                   MARCH 31,
                                                        -----------------------------
                                                             1998            1997
                                                        -----------------------------
<S>                                                      <C>              <C> 
Commitments to originate mortgage loans:             
    Variable-rate                                              $8,097            9,747
    Fixed-rate                                                  1,803            1,010
                                                        ------------------------------
          Total                                                $9,900           10,757
                                                                       
    Interest rate range for fixed-rate mortgage loans   6.075%-11.250%    8.250%-8.750% 
                                                                       
Commitments to purchase mortgage-backed securities                  -           20,998
                                                                       
Commitments to purchase investment securities                       -            4,995
</TABLE> 
                                                                               
     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 mortgage 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.

     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.

(18) TRUST OPERATIONS

     Included in prepaid expenses and other assets is the net unamortized trust
     acquisition cost of $2,599 and $2,884 at March 31, 1998 and 1997,
     respectively.

     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. The Trust department had $238.6 million
     and $211.0 million in assets under custody at March 31, 1998 and March 31,
     1997, respectively. These assets are not the assets of the Company and are
     not included in the consolidated balance sheets of the Company at March 31,
     1998 and 1997.

                                       88
<PAGE>
 
                       PFF BANCORP, INC. AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued
                 (Dollars in thousands, except per share data)

(19) LOAN SERVICING AND SALE ACTIVITIES

     Loan servicing and sale activities are summarized as follows:

<TABLE> 
<CAPTION> 
                                                      AS OF AND FOR THE YEAR ENDED MARCH 31,
                                                     ----------------------------------------
                                                       1998             1997           1996
                                                     ----------------------------------------
<S>                                                  <C>              <C>           
Balance sheet information:
  Loans held for sale                                $    701              736          6,015
                                                     ========================================
Statement of operations information:
  Loan servicing fees                                     887              945            943
  Amortization of excess servicing fees                   (42)             (42)           (36)
                                                     ----------------------------------------
  Loan servicing fees, net                           $    845              903            907
                                                     ========================================
  Gain (loss) on sale of loans                       $    992                9            102
                                                     ========================================
Statement of cash flows information:
  Loans originated for sale                          $  3,893           21,590         15,294
                                                     ========================================
  Proceeds from sale of loans                        $166,989           26,869          9,381
                                                     ========================================
</TABLE> 

     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, 1998, 1997 and 1996, the Company was servicing loans and
     participations in loans owned by others of $390,159, $252,057, and
     $261,288, respectively.

(20) 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.

                                       89
<PAGE>
 
                       PFF BANCORP, INC. AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued
                 (Dollars in thousands, except per share data)

     The estimated fair values of the Company's financial instruments are as
follows:
<TABLE> 
<CAPTION> 
                                                      MARCH 31, 1998                       MARCH 31, 1997
                                               ----------------------------------------------------------------
                                               CARRYING            FAIR             CARRYING             FAIR
                                                 VALUE             VALUE              VALUE              VALUE
                                               -----------------------------------------------------------------
<S>                                            <C>               <C>                <C>                <C> 
Financial assets:
  Cash and cash equivalents and
    certificates of deposit                       46,021            46,021             31,632             31,632
  Investment securities                          317,124           317,135            103,837            103,860
  Mortgage-backed securities                     482,993           482,995            491,499            491,518
  Loans held for sale                                701               703                736                736
  Loans receivable, net                        1,827,614         1,835,033          1,819,209          1,806,674
                                                        
Financial liabilities                                    
  Deposits                                     1,740,824         1,737,923          1,711,049          1,713,387
  FHLB advances and other borrowings             785,886           789,444            530,000            530,000
                                                        
Off-Balance Sheet Instruments:                           
  Commitments to originate loans                   9,900             9,900             10,757             10,757
  Commitments to purchase mortgage-                      
    backed securities                                  -                 -             20,998             20,998
  Commitments to purchase investment                     
    securities                                         -                 -              4,995              4,995
</TABLE> 

The following methods and assumptions were used in estimating the Company's fair
value disclosures for financial instruments.

Cash, Cash Equivalents and Certificates of Deposit: The fair values of cash and
cash equivalents, and certificates of deposit approximate the carrying values
reported in the consolidated balance sheet.

Investment Securities: The fair values of investment securities are based on
quoted market prices.

Mortgage-Backed Securities: The fair value of mortgage-backed securities is
based on quoted market prices or dealer quotations obtained from market sources.

Loans Receivable: For purposes of calculating the fair value of loans
receivable, loans were segregated by payment type, such as those with fixed
interest rates and those with adjustable interest rates as well as by prepayment
and repricing frequency.  For all mortgage loans, fair value is estimated using
discounted cash flow analysis.  Discount rates are based on current loan rates
for similar loan types adjusted for differences in credit and servicing
characteristics.  The fair values of significant nonperforming loans are based
on recent appraisals, or if not available, on estimated cashflows, discounted
using a rate commensurate with the risk associated with the specific properties.

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 at rates currently offered for deposits of similar maturities.

                                       90
<PAGE>
 
                       PFF BANCORP, INC. AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued
                 (Dollars in thousands, except per share data)

     FHLB advances and Other Borrowings: The fair value of FHLB advances and
     other borrowings is based on discounted cash flows using contractual rates
     currently offered for similar borrowings of similar final maturities.

     Off-Balance Sheet Financial Instruments: The fair value of commitments to
     purchase loans, mortgage-backed securities and investment securities is
     based upon bid quotations received from securities dealers. Commitments to
     fund loans outstanding at March 31, 1998 and 1997 would be offered at
     substantially the same rates and terms as commitments offered on March 31,
     1998 and 1997 to parties of similar credit worthiness. Therefore, the
     carrying value of the commitments approximates their estimated fair value.

(21) 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
     PFF Bank & Trust 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 $105.0 million of the net proceeds to purchase the capital
     stock of the Bank. The financial position of the Bancorp (parent company
     only) as of March 31, 1998 and the results of its operations for the year
     then ended are presented in Note 22. Earnings per share data are not
     presented in the consolidated statements of operations for the year end
     March 31, 1996, which would be based on the actual operating results of the
     Bancorp from March 28, 1996 (the date of the conversion) to March 31, 1996,
     as it would be insignificant. Prior to the completion of the conversion,
     the Bancorp had no assets or liabilities and did not conduct any business
     other than of an organizational nature.

     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, 1998 is $46,762.

     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.

                                       91
<PAGE>
 
                       PFF BANCORP, INC. AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued
                 (Dollars in thousands, except per share data)

(22) 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 financial
     statements for PFF Bancorp, Inc. (parent company only) as of March 31, 1998
     and 1997 and for the years then ended.

                           Condensed Balance Sheets
                           ------------------------
<TABLE>
<CAPTION>
                                                             1998                1997
                                                      ------------------------------------
<S>                                                       <C>                 <C>
                          ASSETS

Cash and cash equivalents                                 $  4,122                 4,849
Mortgage-backed securities available-for-sale,
  at fair value                                             11,286                42,610
Equity securities available-for-sale                        13,729                     -
Trust preferred securities available-for-sale               17,360                     -
Investment securities available-for-sale                         -                 4,850
Investment in Bank subsidiary                              202,763               213,711
Other assets                                                 5,724                   591
                                                      ------------------------------------
     Total assets                                         $254,984               266,611
                                                      ====================================

           LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities                                             $706                 1,085
Stockholders' equity                                       254,278               265,526
                                                      ------------------------------------
     Total liabilities and stockholders' equity           $254,984               266,611
                                                      ====================================
</TABLE>
                       Condensed Statements of Earnings
                       --------------------------------
<TABLE>
<CAPTION>

                                                                     1998                1997                1996
                                                               ------------------------------------------------------
<S>                                                                <C>                <C>                <C>
Interest and other income                                           $ 4,474               5,727                  31
General and administrative expense                                    2,653               1,548                   9
                                                               ------------------------------------------------------
     Earnings before equity in undistributed earnings
       of subsidiary                                                  1,821               4,179                  22
Equity in earnings of subsidiary                                     26,178                 365               2,053
                                                               ------------------------------------------------------
     Earnings before income taxes                                    27,999               4,544               2,075
Income taxes                                                         12,019               1,812                  10
                                                               ------------------------------------------------------
     Net earnings                                                   $15,980               2,732               2,065
                                                               ======================================================
</TABLE>

                                      92
<PAGE>
 
                       PFF BANCORP, INC. AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued
                 (Dollars in thousands, except per share data)

                       Condensed Statements of Cash Flows
                       ----------------------------------
<TABLE> 
<CAPTION> 
                                                                  1998                 1997                1996
                                                                ------------------------------------------------
<S>                                                             <C>                  <C>                <C> 
Cash flows from operating activities:
  Net earnings                                                  $ 15,980               2,732               2,065
Adjustments to reconcile net earnings to cash used by
  Operating activities:
  Amortization of premiums(discounts) on investments
     and mortgage-backed securities                                  262                   -                   -
  Amortization of unearned stock-based compensation                3,491               2,421                   -
  Gains on sale of mortgage-backed securities and
    investments available-for-sale                                  (438)                  -                   -
  Equity in undistributed earnings of subsidiary                 (15,032)               (365)             (2,053)
  Increase in other assets                                        (1,307)               (560)                  -
  Decrease in other liabilities                                     (696)              1,025                  19
                                                                ------------------------------------------------
     Net cash provided by(used in) operating activities            2,260               5,253                  31
                                                                ------------------------------------------------
Cash flow from investing activities:
  Increase in investment securities available-for-sale           (25,568)             (4,919)                  -
  Increase in mortgage-backed securities available-for-sale       27,707             (42,411)                  -
Purchase of outstanding stock of the Bank                              -                   -            (105,000)
  Note receivable from the Bank                                        -              73,005             (73,036)
                                                                ------------------------------------------------
     Net cash provided by (used by) investing activities           2,139              25,675            (178,036)
                                                                ------------------------------------------------
Cash flows from financing activities:
  Net proceeds from issuance of common stock                           -                   -             193,875
  Proceeds from exercise of stock options                            682                   -                   -
  Purchase of stock for unearned stock-based
    compensation plans                                                 -             (11,262)            (15,870)
  Purchase of treasury stock                                     (35,808)            (14,817)                  -
  Cash dividend from the Bank                                     30,000
                                                                ------------------------------------------------
     Net cash provided by (used by) financing activities          (5,126)            (26,079)            178,005
                                                                ------------------------------------------------
     Net (decrease)increase in cash during the year                 (727)              4,849                   -
Cash and cash equivalents, beginning of year                       4,849                   -                   -
                                                                ------------------------------------------------
Cash and cash equivalents, end of year                          $  4,122               4,849                   -
                                                                ================================================
</TABLE> 

                                       93
<PAGE>
 
                       PFF BANCORP, INC. AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued
                 (Dollars in thousands, except per share data)

(23) EARNINGS PER SHARE

A reconciliation of the components used to derive basic and diluted earnings per
share for March 31, 1998 and 1997 follows:
<TABLE> 
<CAPTION> 
                                                    Net          Weighted Average     Per Share
                                                  Earnings      Shares Outstanding      Amount
                                                  ---------------------------------------------
<S>                                               <C>           <C>                   <C> 
1998:                           
  Basic earnings per share                        $15,980           16,055,127           $1.00
  Effect of dilutive stock options and awards           -              739,969            0.05
                                                  --------------------------------------------
     Diluted earnings per share                   $15,980           16,795,096           $0.95
                                                  ============================================
1997:
  Basic earnings per share                        $ 2,732           17,819,870           $0.15
  Effect of dilutive stock options and awards           -              139,691               -
                                                  --------------------------------------------
     Diluted earnings per share                   $ 2,732           17,959,561           $0.15
                                                  ============================================
</TABLE> 
(24) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE> 
<CAPTION> 
                                                           THREE MONTHS ENDED
                                 --------------------------------------------------------------------
                                 JUNE 30,     SEPTEMBER 30,     DECEMBER 31,     MARCH 31,     TOTAL
                                  1997            1997             1997            1998        1998
                                 --------------------------------------------------------------------
<S>                              <C>          <C>               <C>              <C>          <C> 
Net interest income              $ 18,315      17,929              18,547         18,060       72,851
Provision for loan losses          (2,250)     (2,249)             (1,300)        (1,300)      (7,099)
Other income                        3,207       3,226               4,283          3,564       14,280
Other expenses                    (12,805)    (13,082)            (13,232)       (12,914)     (52,033)
                                 --------------------------------------------------------------------
  Earnings before income                               
   taxes                            6,467       5,824               8,298          7,410       27,999
Income taxes                        2,784       2,538               3,546          3,151       12,019
                                 --------------------------------------------------------------------
  Net earnings                   $  3,683       3,286               4,752          4,259       15,980
                                 ====================================================================
Basic earnings per share         $   0.22        0.20                0.30           0.28         1.00
                                 ====================================================================
Diluted earnings per share       $   0.22        0.19                0.28           0.26         0.95
                                 ====================================================================
 <CAPTION> 
                                                           THREE MONTHS ENDED
                                 --------------------------------------------------------------------
                                 JUNE 30,     SEPTEMBER 30,     DECEMBER 31,     MARCH 31,     TOTAL
                                  1996            1996             1996            1997        1997
                                 --------------------------------------------------------------------
<S>                              <C>          <C>               <C>              <C>          <C> 
Net interest income              $ 16,869      16,779            17,204           18,357       69,209
Provision for loan losses          (4,694)     (3,071)           (2,896)          (3,000)     (13,661)
Other income                        2,552       2,563             2,462            2,650       10,227
Other expenses                    (10,407)    (23,027)          (12,818)         (13,704)     (59,956)
                                 --------------------------------------------------------------------
  Earnings (loss) before                                  
   income taxes                     4,320      (6,756)            3,952            4,303        5,819
Income taxes (benefit)              1,895      (2,339)            1,736            1,795        3,087
                                 --------------------------------------------------------------------
  Net earnings (loss)            $  2,425      (4,417)            2,216            2,508        2,732
                                 ====================================================================
Basic earnings per share         $   0.13       (0.24)             0.12             0.14         0.15
                                 ====================================================================
Diluted earnings per share       $   0.13       (0.24)             0.12             0.14         0.15
                                 ====================================================================
</TABLE> 
                                       94
<PAGE>
 
                         INDEPENDENT AUDITORS' REPORT
                                        
The Board of Directors
PFF Bancorp, Inc.:

We have audited the accompanying consolidated balance sheets of PFF Bancorp,
Inc. and subsidiary (the Company) as of March 31, 1998 and 1997 and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the years in the three-year period ended March 31, 1998. 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 generally accepted auditing
standards. 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 subsidiary as of March 31, 1998 and 1997 and the results of their operations
and their cash flows for each of the years in the three-year period ended March
31, 1998 in conformity with generally accepted accounting principles.


                                        KPMG PEAT MARWICK LLP

April 22, 1998

                                       95
<PAGE>
 
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 pursuant to Regulation 14 A in
connection with PFF Bancorp Inc.'s Annual Meeting of Stockholders to be held on
September 16, 1998 (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 Proxy Statement 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.
------------------------------------------------------------------------ 

     The information relating to security ownership of certain beneficial owners
and management is incorporated herein by reference to the Proxy Statement.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
-------------------------------------------------------- 

     The information relating to certain relationships and related transactions
is incorporated herein by reference to the Proxy Statement.

                                       96
<PAGE>
 
                                    PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
------------------------------------------------------------------------- 

(a)(3)    Exhibits
 
<TABLE> 
<CAPTION> 
          <C>     <S> 
          (a)     The following exhibits are filed as part of this report:

          3.1     Certificate of Incorporation of PFF Bancorp, Inc. (1)

          3.2     Bylaws of PFF Bancorp, Inc. (1)

          4.0     Stock Certificate of PFF Bancorp, Inc. (1)

          10.1    Form of Employment Agreement between PFF Bank & Trust and PFF
                  Bancorp, Inc. and certain executive officers (1)

          10.2    Form of Change in Control Agreement between PFF Bank & Trust
                  and PFF Bancorp, Inc. and certain executive officers (1)

          10.3    Form of PFF Bank & Trust Employee Severance Compensation Plan
                  (1)

          10.4    Capital Accumulation Plan for Employees of Pomona First
                  Federal Savings and Loan Association (1)

          10.5    PFF Bancorp, Inc. 1996 Incentive Plan (2)

          10.6    Form of Non-Statutory Stock Option Agreement for officer and
                  employees of PFF Bancorp, Inc. (3)

          10.7    Form of Incentive Stock Option Agreement for officers and
                  employees of PFF Bancorp, Inc. (3)

          10.8    Form of Stock Award Agreement for officers and employees of
                  PFF Bancorp, Inc. (3)

          10.9    Form of Stock Award and Stock Option Agreement for Outside
                  Directors of PFF Bancorp, Inc. (3)

          10.10   The Pomona First Federal Bank & Trust Restated Supplemental
                  Executive Retirement Plan. (3)

          10.11   The Pomona First Federal Bank & Trust Directors' Deferred
                  Compensation Plan (3)

          21      Subsidiary information is incorporated herein by reference to
                  "Part I-Subsidiary Activities."

          23      Consent of KPMG Peat Marwick LLP

          27      Financial Data Schedule

          99.1    Annual Report on Form 11-K for Capital Accumulation Plan for
                  employees of PFF Bank & Trust

          (b)     Report on Form 8-K
                  None
</TABLE> 

     The Registrant did not file any reports on Form 8-K during the last quarter
     of the fiscal year ended March 31, 1998.

------------------------------------
(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.

                                       97
<PAGE>
 
                                  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. RINEHART
                                           -------------------------------
                                           Larry M. Rinehart
DATED: June 23, 1998                       President, Chief Executive Officer
                                           and 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.

<TABLE> 
<CAPTION> 
              NAME                                TITLE                         DATE
------------------------------------------------------------------------------------------
<S>                                   <C>                                    <C> 
/s/ LARRY M. RINEHART                                                                     
---------------------------------                                                         
Larry M. Rinehart                     President, Chief Executive             June 23, 1998
                                      Officer and Director                                
                                      (Principal Executive Officer)                       
                                                                                          
/s/ GREGORY C. TALBOTT                                                                    
---------------------------------                                                         
Gregory C. Talbott                    Executive Vice President, Chief        June 23, 1998
                                      Financial Officer and Treasurer                     
                                      (Principal Financial and                            
                                      Accounting Officer)                                 
                                                                                          
/s/ ROBERT W. BURWELL                                                                     
---------------------------------                                                         
Robert W. Burwell                     Director                               June 23, 1998
                                                                                          
                                                                                          
/s/ WILLIAM T. DINGLE                                                                     
---------------------------------                                                         
William T. Dingle                     Director                               June 23, 1998
                                                                                          
                                                                                          
/s/ CURTIS W. MORRIS                                                                      
---------------------------------                                                         
Curtis W. Morris                      Director                               June 23, 1998
                                                                                          
                                                                                          
/s/ ROBERT D. NICHOLS                                                                     
---------------------------------                                                         
Robert D. Nichols                     Director                               June 23, 1998
                                                                                          
                                                                                          
/s/ JIL H. STARK                                                                          
---------------------------------                                                         
Jil H. Stark                          Director                               June 23, 1998
</TABLE> 
                                                                             
                                       98