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. Yes X No .

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

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

Portions of the Registrant's Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Annual Meeting of Stockholders to be held September 16, 2003 and any adjournment thereof and which is expected to be filed with the Securities and Exchange Commission on or about July 29, 2003, are incorporated by reference in Part III hereof.

2

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

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

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

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Under the securities Exchange Act of 1934 Sections 13 and 15(d), periodic and current reports must be filed with the Securities and Exchange Commission ("SEC"). The Company electronically files the following reports with the SEC: Form 10-K (Annual Report), 10-Q (Quarterly Report), DEF 14A (Proxy Statement), and Form S-3 and 8-A (Registration Statements). The Company may also file additional forms. The SEC maintains an internet site, www.sec.gov, in which all forms filed electronically may be accessed. Additionally, all forms filed with the SEC and additional shareholder information is available free of charge on the Company's website: www.pffbank.com.

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

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

In January 1995, the Company acquired the trust operations of another bank for $3.5 million. As a result of the acquisition, the Company now has additional fiduciary responsibilities acting as trustee, executor, administrator, guardian, custodian, record keeper, agent, registrar, advisor and manager. The trust assets are not the assets of the Company and are not included in the balance sheet of the Company. Trust fee income for the years ended March 31, 2003 and 2002 was $2.1 million. See "Notes to Consolidated Financial Statements - Note 20: Trust Operations." Pursuant to federal securities laws applicable to its trust activities, the Bank operates with a Registered Investment Advisor ("RIA") designation. During April 2002, as a part of its strategy to increase fee income associated with its wealth management and advisory services, the Company formed a second RIA, Glencrest Investment Advisors, Inc. ("Glencrest") as a wholly-owned subsidiary of the Bancorp. In addition to providing investment advice to independent third parties, Glencrest provides investment advisory services to the Bank for which it is paid a fee. The Bank provides fee based custody services for Glencrest. The positioning of Glencrest, as an entity with an identity separate and distinct from the Bank, enables Glencrest to more effectively market its advisory services to higher net worth individuals and institutions.

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

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

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

6

Origination, Sale, Servicing and Purchase of Loans. The Bank's lending activities are conducted primarily by loan representatives through its 26 banking branches, its loan origination center in Rancho Cucamonga, California, a satellite loan office in Redding, California, a regional lending office in Sacramento, California and wholesale brokers approved by the Bank. The Bank originates one-to-four family first trust deed residential mortgages through brokers and internal sources while maintaining a greater focus on the origination of Four-C loans. The Bank also originates equity-based consumer loans through wholesale brokers. All loans originated by the Bank, either through internal sources or through wholesale brokers, are underwritten by the Bank pursuant to the Bank's policies and procedures. The Bank originates both adjustable-rate and fixed-rate loans. The Bank's ability to originate loans is influenced by general economic conditions affecting housing, business and consumer activities as well as the relative customer demand for fixed-rate or adjustable-rate loans, which is affected by the current and expected future levels of interest rates.

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

It is the general policy of the Bank to sell substantially all of the 15 and 30-year fixed-rate mortgage loans that it originates and retain substantially all of the adjustable-rate mortgage loans that it originates. The Bank generally retains servicing of the loans sold. At March 31, 2003, the Bank was servicing $141.9 million of loans for others. See "Loan Servicing." When loans are sold on a servicing retained basis, the Company records gains or losses from the sale based on the difference between the net sales proceeds and the allocated basis of the loans sold. The Company capitalizes mortgage servicing rights ("MSR") when loans are sold with servicing rights retained. The total cost of the mortgage loans designated for sale is allocated to the MSR and the mortgage loans without the MSR based on their relative fair values. MSR are included in the financial statements in the category "Prepaid expenses and other assets." The Bank had $357,000 of MSR as of March 31, 2003, compared to $518,000 at March 31, 2002. Impairment losses, if any, are recognized through a valuation allowance, with any associated provision recorded as a component of loan servicing fees. At March 31, 2003, there were $3.3 million of mortgage loans categorized as held for sale consisting of fixed-rate one-to-four family residential mortgage loans.

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

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

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

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

Non-owner-occupied properties, particularly those classified as investment properties, are generally considered to involve a higher degree of credit risk than loans secured by owner-occupied properties because repayment is generally dependent upon the property producing sufficient cash flow to cover debt service and other operating expenses. Negative amortization involves a greater risk to the Bank because during a period of higher interest rates the loan principal may increase above the amount originally advanced, which may increase the risk of default. However, the Bank believes that the risk of default is reduced by negative amortization caps, underwriting criteria and the stability provided by payment schedules. Prior to March 2000, adjustable rate loans were offered with maturities up to 40 years. Effective during March 2000, in response to interest rate risk considerations, the Bank discontinued offering 40-year maturities.

When evaluating a multi-family loan, the Bank also considers the financial resources and income level of the borrower, the borrower's experience in owning or managing similar properties, and the Bank's lending experience with the borrower. The Bank's underwriting policies require that the borrower be able to demonstrate strong management skills and the ability to maintain the property from current rental income. The borrower is required to present evidence of the ability to repay the mortgage and a history of making mortgage payments on a timely basis. In making its assessment of the creditworthiness of the borrower, the Bank generally reviews the financial statements, employment and credit history of the borrower, as well as other related documentation.

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

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

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

At March 31, 2003, the Bank's commercial real estate loan portfolio was $396.8 million, or 13% of total gross loans. At March 31, 2003, 74% of these loans were indexed to the one-year CMT, 13% were indexed to COFI, 9% were indexed to the Monthly Average U.S. Treasury, 3% were indexed to Prime and 1% were fixed rate. The largest commercial real estate loan in the Bank's portfolio at March 31, 2003 was $9.7 million and is secured by a three building, multi-tenant industrial/office project containing approximately 165,685 square feet.

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

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

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

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

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

The Bank's policy is to originate equity loans and lines of credit up to 100% of the appraised value of the property securing the loan. Loans secured by a second lien on property and with higher loan to value are generally considered to involve a higher degree of credit risk than loans secured by a first lien position or with a lower loan to value. These loans are priced to compensate for these higher risks. The Bank also originates a limited number of equity loans with loan to values up to 125%. These loans are originated for the secondary market and substantially all of the originations are sold upon funding to an investor. These loans also have a higher degree of risk and are made with strict credit guidelines.

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

As of March 31, 2003, the Bank's total commercial loan commitments were $304.3 million, of which $149.2 million or 5% of total gross loans was outstanding. At March 31, 2003, 48% of the commercial loans outstanding were indexed to the PFF Bank and Trust Base Rate (which approximates Prime), 4% were indexed to Prime and the remaining 48% were fixed rate. At March 31, 2003, the largest amount of commercial loans outstanding to one borrower was $12.5 million to a manufacturer and lessor of vehicles used in food service and package delivery. The loans to this borrower are secured by the assignment of leases and underlying equipment. The second largest extension of commercial credit to one borrower was $11.4 million to an equipment leasing company. This loan is also secured by the assignment of leases and underlying equipment as well as inventory and accounts receivable. Repayment of both loans is expected to come from lessee payments or, alternatively, from liquidation of equipment and assets of the borrowers or guarantors.

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

The following table presents a by-industry breakdown of the Bank's commercial lending portfolio.

Loan Approval Procedures and Authority. The Board of Directors establishes the lending policies of the Bank and delegates lending authority and responsibility to the Loan Origination and Asset Review Committee ("LOARC"), the Management Loan Committee and specified officers of the Bank. The LOARC includes four of the six outside Directors of the Bank as well as selected senior management staff. All loans must be approved by a majority of a quorum of the designated committee, group of officers or by the designated individual. The following committees, groups of officers and individual officers are granted the authority to approve and commit the Bank to the funding of the following categories of loans: mortgage loans and consumer loans in amounts up to $299,999 may be approved by the Bank's staff underwriters; mortgage loans and consumer loans in excess of $299,999 and up to $599,999 may be approved by certain department managers; commercial business loans up to $499,999 may be approved by the Commercial Credit Administrator or Chief Lending Officer; mortgage loans and consumer loans in excess of $599,999 and up to $999,999 may be approved by the Major Loan Manager, the Senior Executive Vice President or Chief Lending Officer; mortgage loans in excess of $999,999 and up to $9,999,999, and commercial business loans in excess of $499,999 and up to $4,999,999 must be approved by the Management Loan Committee; and mortgage loans of $10.0 million or more, consumer loans in excess of $999,999 and commercial business loans of $5.0 million or more require the approval of the LOARC. The LOARC presently reviews commercial business loans in excess of $4,999,999, post funding, for consistency with the Bank's goals and objectives. Since March 31, 1998 the Bank has also contracted with an independent credit review firm for the post funding review of all commercial business loans in excess of $500,000 and selected smaller loans. This credit review firm is comprised of experienced former federal bank examiners. During fiscal 2003, the Bank hired a former federal bank examiner to strengthen its internal credit review capabilities. As a result, the Bank has begun phasing out the use of the external credit review firm.

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

Loan Servicing. The Bank services mortgage loans for others. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, making inspections of mortgaged premises as required, contacting delinquent mortgagors, supervising foreclosures and property dispositions in the event of unremedied defaults, making certain borrower insurance and tax payments are made and generally administering the loans. All of the loans currently being serviced for others are loans that have been sold by the Bank. At March 31, 2003, the Bank was servicing $141.9 million of loans for others. The Bank does not purchase servicing rights related to mortgage loans originated by other institutions.

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

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

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

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

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

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

 

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

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

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

For the fiscal years ended March 31, 2002 and 2003, the provisions for loan losses approximated the levels of net charge-offs. During these periods, the proportion of the loan portfolio comprised by the Four-Cs increased from 44% at March 31, 2001, to 47% at March 31, 2002, and 53% at March 31, 2003. The probable loss exposure on the Four-Cs generally exceeds that of the residential mortgage portfolio. As a result, if the level of probable losses were to remain constant between periods for all segments of the portfolio, an increase in the Four-Cs would be expected to result in an increase in the allowance for loan losses. However, based upon a reduction in historical loss experience and a reduction in the Company's estimate of incurred losses inherent in the loan portfolio after giving consideration to current economic conditions, the Company has reduced the probable loss rates used in determining the GVA. In determining the amount of the GVA, the Company stratifies its loan portfolio into approximately 105 segments based upon loan type, internal classification, etc. Each of these strata is assigned a separate probable loss factor.

16

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

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

Management reviews and classifies the Company's assets monthly and reports the results of its review to the Board of Directors. The Company classifies assets in accordance with the management guidelines described above. REO is classified as Substandard. The Company utilizes an internal appraisal staff and Board approved independent appraisers to conduct appraisals at the time of foreclosure and subsequent appraisals on REO on a periodic basis. Qualified personnel are also utilized for annual property inspections on all income producing real properties securing a loan balance over $1.0 million and other specified properties. Property inspections are intended to provide updated information concerning occupancy, maintenance, current rent levels, and changes in market conditions.

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The Company's present policy is generally to continue to classify a troubled-debt restructured ("TDR") loan as Substandard until the asset has performed at normal contract terms for a period of six to twelve months. Where there has been a forgiveness of principal or interest, a sub-market interest rate granted, or a substantial lengthening of the loan term due to credit or collateral weaknesses, the loan is generally considered a TDR. Although the regional economy, in general, was strong during fiscal 2003, the Company continued to utilize early intervention and flexibility in restructuring some troubled loans with borrowers rather than foreclosing on the underlying properties. See "Non-Accrual and Past-Due Loans."

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

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

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

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

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

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

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21

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

22

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

23

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

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

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

The investment policy of the Bank, as established by the Board of Directors, attempts to provide and maintain liquidity, generate a favorable return on investments without incurring undue interest rate or credit risk, and complement the Bank's lending activities. Specifically, the Bank's policies generally limit investments to government and federal agency-backed securities and other non-government guaranteed securities, including corporate debt obligations, that are investment grade. On November 4, 1998 the OTS issued Thrift Bulletin 73 ("TB73") "Trust Preferred Securities" which, among other things, limits the aggregate investment in investment grade trust preferred securities for OTS supervised institutions to 15 percent of total capital. At the time TB73 was issued, the Bank's aggregate investment in such securities of $52.4 million exceeded the OTS limitation by $23.0 million. The Bank applied for and was granted a waiver by the OTS permitting the Bank to continue to hold its trust preferred securities. At March 31, 2003, the Bank's aggregate investment in trust preferred securities is $43.4 million which represents 17% of the Bank's total capital.

The investment powers of the Bancorp are substantially broader than those permitted for the Bank. The investment policy of the Bancorp, as established by its Board of Directors, while generally consistent with that of the Bank, permits the investment by the Bancorp in equity securities and non-rated corporate debt obligations. At March 31, 2003, the Bancorp had direct equity investments of $5.0 million, investments in equity mutual funds of $4.2 million and investments in corporate debt obligations (trust preferred debt securities) of $6.0 million. Given the non-rated nature of the Bancorp's investments in trust preferred debt securities along with the longer-term (typically 30 years) structure of the obligations, the Bancorp undertakes a review of the historical and current financial condition and operating results of the issuer prior to making an investment. These reviews are updated periodically during the holding periods for the investments.

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

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

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

Investments in MBS involve a risk that actual prepayments will vary from the estimated prepayments over the life of the security. This may require adjustments to the amortization of premium or accretion of discount relating to such instruments, thereby changing the net yield on such securities. There is also reinvestment risk associated with the cash flows from such securities. In addition, the market value of such securities may be adversely affected by changes in interest rates.

The Company's $15.2 million CMO portfolio consists principally of adjustable rate securities tied to the one month LIBOR ($3.2 million) or the Prime rate ($12.0 million). The adjustment intervals for these securities are generally monthly. All of the Company's CMO are backed by mortgages insured by FNMA or FHLMC. As with MBS, CMO involve a risk that actual levels of prepayments will require an adjustment to the amortization of premium or accretion of discounts on the security with an impact on the yield on the security. Additionally, the structure of many CMO is such that their cash flows exhibit greater sensitivity to changes in prepayments than do traditional MBS.

The Company evaluates all of its securities on an individual basis no less frequently than quarterly for "other-than-temporary" impairment. In conducting this evaluation, the Company determines if it is probable that it will be unable to collect all amounts due according to the contractual terms of the securities. Among the factors considered are the credit ratings of the issuers, any call features inherent in the securities and the Company's intent and ability to hold the securities to maturity. At March 31, 2003, the Company determined that there was no other-than-temporary impairment of its securities.

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

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

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