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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

• The four Pass classification grades represent a level of credit quality, which ranges from no well-defined deficiency or weakness to some noted weakness, yet risk of default is expected to be remote.

 

• A Special Mention asset does not currently expose us to a sufficient degree of risk to warrant an adverse classification, but does possess a correctable deficiency or potential weakness deserving management's close attention.

 

• Substandard assets have a well-defined weakness or weaknesses. They are characterized by the distinct possibility that some loss will be sustained if the deficiencies are not corrected.

 

• An asset classified Doubtful has all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Doubtful is considered to be a temporary classification until resolution of pending weakness issues enables the potential for loss to be more clearly evaluated.

 

• That portion of an asset classified Loss is considered uncollectible and of so little value that its continuance as an asset is not warranted. A Loss classification does not mean that an asset has absolutely no recovery or salvage value, but rather it is not reasonable to defer charging off all or that portion of the asset deemed uncollectible even though partial recovery may be effected in the future.

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

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

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

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

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

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

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

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Management reviews and classifies our assets monthly and reports the results of its review to the Board of Directors. We classify assets in accordance with the management guidelines described above. Foreclosed assets are classified as Substandard. We utilize an internal appraisal staff and Board approved independent appraisers to conduct appraisals at the time of foreclosure and subsequent appraisals on assets on a periodic basis. Qualified personnel are also utilized for annual property inspections on all income producing real properties securing a loan balance over $2.0 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, 2004 and 2003 we had gross balances of $9.3 million and $33.9 million, respectively, of assets criticized as Special Mention, on which there were no SVAs. The main components of assets criticized as Special Mention at March 31, 2004 were: eight commercial business loans with existing commitments totaling $5.3 million; and one construction loan totaling $3.8 million.

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

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

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

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

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

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

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

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

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

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

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