UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------- ------------
Commission File Number 0-27404
PFF BANCORP, INC.
-----------------
(exact name of registrant as specified in its charter)
DELAWARE 95-4561623
-------- ----------
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
350 South Garey Avenue, Pomona, California 91766
-------------------------------------------------
(Address of principal executive offices)
(909) 623-2323
--------------
(Registrant's telephone number, including area code)
Not Applicable
--------------
(Former name, former address and former fiscal year, if changed since last
report
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 [_].
The registrant had 13,997,305 shares of common stock, par value $.01 per
share, outstanding as of November 12, 1999.
PFF BANCORP, INC. AND SUBSIDIARIES
Form 10-Q
Index
PAGE
----
PART I FINANCIAL INFORMATION (Unaudited)
Item 1 Financial statements
Consolidated Balance Sheets as of
September 30, 1999 and March 31, 1999 1
Consolidated Statements of Earnings for the three and six months
ended September 30, 1999 and 1998 2
Consolidated Statements of Comprehensive Earnings
for the three and six months ended September 30, 1999 and 1998 3
Consolidated Statement of Stockholders' Equity
for the six months Ended September 30, 1999 4
Consolidated Statements of Cash Flows for the
six months ended September 30, 1999 and 1998 5
Notes to Unaudited Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3 Qualitative and Quantitative disclosures about
Market Risk 25
PART II OTHER INFORMATION
Item 1 Legal Proceedings 26
Item 2 Changes in Securities 26
Item 3 Defaults Upon Senior Securities 26
Item 4 Submission of Matters to a Vote of Security Holders 26
Item 5 Other Information 26
Item 6 Exhibits and Reports on Form 8-K 27
SIGNATURES
PART 1 - FINANCIAL INFORMATION (Unaudited)
Item 1. Financial Statements.
PFF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
(Unaudited)
September 30, March 31,
1999 1999
- ------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 34,897 $ 63,790
Loans held for sale at lower of cost or fair value 5,072 3,531
Investment securities held-to-maturity (estimated fair value
of $706 at September 30, 1999 and $716 at March 31, 1999) 707 709
Investment securities available-for-sale, at fair value 182,439 185,087
Mortgage-backed securities held-to-maturity (estimated fair
value of $216 at September 30, 1999 and $560 at March 31, 1999) 217 556
Mortgage-backed securities available-for-sale, at fair value 429,606 525,560
Trading securities, at fair value 4,231 4,271
Investments in real estate 6,263 6,371
Loans receivable, net 2,178,665 2,026,081
Federal Home Loan Bank (FHLB) stock, at cost 41,397 50,323
Accrued interest receivable 17,459 17,118
Real estate acquired through foreclosure, net 2,631 5,318
Property and equipment, net 22,734 23,925
Prepaid expenses and other assets 25,391 23,340
- ------------------------------------------------------------------------------------------------------------
Total assets $2,951,709 $2,935,980
============================================================================================================
Liabilities and Stockholders' Equity
Liabilities:
Deposits $1,856,589 $1,843,538
FHLB advances and other borrowings 834,000 814,000
Accrued expenses and other liabilities 38,601 35,777
- ------------------------------------------------------------------------------------------------------------
Total liabilities 2,729,190 2,693,315
Commitments and contingencies - -
Stockholders' equity:
Preferred stock, $.01 par value. Authorized 2,000,000 - -
shares; none issued
Common stock, $.01 par value. Authorized 59,000,000
shares; issued 19,981,899, outstanding 13,983,432 at
September 30, 1999, and 15,445,481 March 31, 1999 200 199
Additional paid-in capital 136,640 150,612
Retained earnings, substantially restricted 108,338 110,163
Unearned stock-based compensation (15,379) (17,169)
Treasury stock (5,998,467 at September 30, 1999 and 4,498,467
at March 31, 1999) (60) (45)
Accumulated other comprehensive loss (7,220) (1,095)
-----------------------------------------------------------------------------------------------------------
Total stockholders' equity 222,519 242,665
- ------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $2,951,709 $2,935,980
============================================================================================================
See accompanying notes to the unaudited consolidated financial statements.
1
PFF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands, except per share data)
(Unaudited)
For the Three Months Ended For the Six Months Ended
September 30, September 30,
- -----------------------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
Interest income:
Mortgage loans $ 37,457 $ 33,986 $ 73,452 $ 67,642
Non-mortgage loans 4,136 2,064 7,770 3,701
Mortgage-backed securities 7,086 10,286 14,834 19,352
Investment securities and deposits 3,852 5,677 7,816 11,448
- -----------------------------------------------------------------------------------------------------------------------------
Total interest income 52,531 52,013 103,872 102,143
- -----------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 19,394 20,062 38,689 39,754
Interest on borrowings 10,890 13,653 21,709 26,132
- -----------------------------------------------------------------------------------------------------------------------------
Total interest expense 30,284 33,715 60,398 65,886
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income 22,247 18,298 43,474 36,257
Provision for loan losses 1,000 1,000 2,000 2,020
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 21,247 17,298 41,474 34,237
- -----------------------------------------------------------------------------------------------------------------------------
Non-interest income:
Deposit and related fees 2,308 2,160 4,720 4,327
Loan and servicing fees 685 616 1,463 1,350
Trust fees 517 452 1,037 928
Gain on sales of assets, net 45 161 98 299
Gain(loss) on trading securities, net (142) (642) 128 (359)
Profit on real estate investments - 101 - 101
Other non-interest income 139 203 357 296
- -----------------------------------------------------------------------------------------------------------------------------
Total non-interest income 3,552 3,051 7,803 6,942
- -----------------------------------------------------------------------------------------------------------------------------
Non-interest expense:
General and administrative:
Compensation and benefits 7,424 6,831 14,384 13,800
Occupancy and equipment 2,949 2,962 5,757 5,896
Marketing and professional services 1,257 1,177 2,405 2,052
Other non-interest expense 2,199 2,714 4,467 5,144
- -----------------------------------------------------------------------------------------------------------------------------
Total general and administrative 13,829 13,684 27,013 26,892
Foreclosed real estate operations, net (186) (111) (156) (36)
- -----------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 13,643 13,573 26,857 26,856
- -----------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 11,156 6,776 22,420 14,323
Income taxes 4,840 2,932 9,700 6,151
- -----------------------------------------------------------------------------------------------------------------------------
Net earnings $ 6,316 $ 3,844 $ 12,720 $ 8,172
=============================================================================================================================
Basic earnings per share $ 0.52 $ 0.27 $ 1.03 $ 0.57
=============================================================================================================================
Diluted earnings per share $ 0.47 $ 0.26 $ 0.95 $ 0.54
=============================================================================================================================
Cash dividends paid $ 0.06 - $ 0.06 -
=============================================================================================================================
Weighted average shares outstanding for
basic earnings per share calculation 12,129,514 14,065,791 12,337,345 14,406,806
=============================================================================================================================
Weighted average shares outstanding for
diluted earnings per share calculation 13,299,542 14,736,249 13,422,902 15,194,120
=============================================================================================================================
See accompanying notes to the unaudited consolidated financial statements.
2
PFF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(Dollars in thousands)
(Unaudited)
For the Three Months Ended For the Six Months Ended
September 30, September 30,
- --------------------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
Net earnings $ 6,316 $ 3,844 $12,720 $ 8,172
- --------------------------------------------------------------------------------------------------------------------------
Other comprehensive earnings (loss), net of
income taxes
Unrealized gains (losses) on securities
available-for-sale:
Investment securities available-for-sale (1,971) (2,566) (2,040) (2,649)
Reclassification of realized (gains)losses included
in earnings 2 9 62 (63)
Mortgage-backed securities available-for-sale (1,569) 830 (4,147) 785
- --------------------------------------------------------------------------------------------------------------------------
Other comprehensive (loss) (3,538) (1,727) (6,125) (1,927)
- --------------------------------------------------------------------------------------------------------------------------
Comprehensive earnings $ 2,778 $ 2,117 $ 6,595 $ 6,245
==========================================================================================================================
See accompanying notes to the unaudited consolidated financial statements.
3
PFF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
Retained Accumulated
Additional Earnings, Unearned Other
Number of Common Paid-in Substantially Stock-based Treasury Comprehensive
Shares Stock Capital Restricted Compensation Stock Earnings(Loss) Total
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1999 15,445,481 $199 $150,612 $110,163 $(17,169) $(45) $(1,095) $242,665
Net earnings - - - 12,720 - - - 12,720
Purchase of treasury stock (1,500,000) - (14,985) (13,773) - (15) - (28,773)
Amortization of shares under
stock-based compensation plans - - 701 - 1,790 - - 2,491
Stock options exercised 37,951 1 312 - - - - 313
Cash dividends - - - (772) - - - (772)
Change in unrealized (loss)
on securities available for
sale, net - - - - - - (6,125) (6,125)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1999 13,983,432 $200 $136,640 $108,338 $(15,379) $(60) $(7,220) $222,519
===================================================================================================================================
See accompanying notes to the unaudited consolidated financial statements.
4
PFF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Six Months Ended
September 30,
- ---------------------------------------------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings $ 12,720 $ 8,172
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Amortization of premiums on loans and securities 1,336 2,073
Amortization of deferred loan origination fees 217 (717)
Loan fees collected (1,545) (1,491)
Dividends on FHLB stock (1,262) (1,188)
Redemption of FHLB stock 10,188 -
Provisions for losses on loans 2,000 2,020
Gains on sales of loans, mortgage-backed securities
available-for-sale, real estate and property and equipment (491) (611)
Proceeds from sale of trading securities 200 1,500
(Gains) losses on trading securities (128) 359
Depreciation and amortization of property and equipment 1,876 1,944
Proceeds from sale of loans held-for-sale 20,537 23,773
Amortization of unearned stock-based compensation 2,491 2,393
Increase (decrease) in accrued expenses and other 2,824 4,878
liabilities
(Increase) decrease in:
Accrued interest receivable (341) 1,069
Prepaid expenses and other assets (2,051) 24,389
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 48,571 68,563
- ---------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Loans originated for investment (604,460) (420,709)
Increase in construction loans in process 34,931 30,496
Purchases of loans held for investment (50) (139,086)
Principal payments on loans 392,771 406,248
Principal payments on mortgage-backed securities
held-to-maturity 336 489
Principal payments on mortgage-backed securities
available-for-sale 91,339 127,169
Purchases of investment securities available-for-sale (28,066) (88,869)
Purchases of FHLB stock - (8,232)
Purchases of mortgage-backed securities available-
for-sale - (301,469)
(Continued)
5
PFF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Six Months Ended
September 30,
- ---------------------------------------------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------------
Proceeds from maturities of investment securities
available-for-sale $ 21,057 $ 67,931
Investment in real estate acquired through foreclosure - 21
Proceeds from sale of investment securities available-for-sale 6,126 36,231
Proceeds from sale of real estate acquired through foreclosure 5,314 7,055
Investment in real estate held for investment 108 (5,833)
Purchases of property and equipment (689) (1,613)
Proceeds from sale of property and equipment - 4
- ---------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (81,283) (290,167)
- ---------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from FHLB advances and other borrowings 235,000 791,876
Repayment of FHLB advances and other borrowings (215,000) (578,762)
Net change in deposits 13,051 38,723
Proceeds from exercise of stock options 313 492
Purchase of treasury stock (28,773) (32,098)
Cash dividend (772) -
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 3,819 220,231
- ---------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (28,893) (1,373)
Cash and cash equivalents, beginning of period 63,790 46,021
- ---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 34,897 $ 44,648
===============================================================================================================
Supplemental information:
Interest paid, including interest credited $ 61,453 $ 70,607
Income taxes paid 8,100 6,700
Non-cash investing and financing activities:
Change in unrealized (loss) on securities
available-for-sale (10,561) (3,396)
Net transfers from loans receivable to real estate acquired
through foreclosure 2,696 5,970
Net transfer from loans receivable to loans held for sale 25,569 24,480
Net transfers from available-for-sale securities to
trading securities - 5,419
===============================================================================================================
See accompanying notes to the unaudited consolidated financial statements.
6
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
(1) Basis of Consolidation
The accompanying consolidated financial statements include the accounts of PFF
Bancorp, Inc. (the "Bancorp") and its subsidiary PFF Bank & Trust (collectively,
"the Company"). The Company's business is conducted primarily through PFF Bank
& Trust and its subsidiary, Pomona Financial Services, Inc (collectively, "the
Bank"). Pomona Financial Services, Inc. includes the accounts of Diversified
Services, Inc. and PFF Financial Services, Inc. All material intercompany
balances and transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
principally of normal recurring accruals) necessary for a fair presentation have
been included. Certain reclassifications have been made to the consolidated
financial statements for 1998 to conform to the 1999 presentation.
The results of operations for the six months ended September 30, 1999 are not
necessarily indicative of results that may be expected for the entire fiscal
year ending March 31, 2000.
(2) New Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at fair
value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a foreign-
currency-denominated forecasted transaction.
Under SFAS No. 133, an entity that elects to apply hedge accounting is required
to establish at the inception of the hedge the method it will use for assessing
the effectiveness of the hedging derivative and the measurement approach of
determining the ineffective aspect of the hedge. Those methods must be
consistent with the entity's approach to managing risk.
This statement was to be effective for all quarters of fiscal years beginning
after June 15, 1999 however, the FASB issued SFAS No. 137 which has delayed the
required implementation date by one year. Management is in the process of
determining the impact of SFAS No. 133 on the Company's financial position and
results of operations.
7
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements - Continued
(3) Earnings per share
Basic EPS excludes dilution and is computed by dividing earnings available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted from issuance of common stock that then shared in
earnings.
The following table is a reconciliation of the numerators and denominators of
the basic and diluted EPS computations for net earnings for PFF Bancorp, Inc.
For the Three Months Ended September 30,
---------------------------------------------------------------------------------------
1999(1) 1998(2)
------------------------------------------ ---------------------------------------
Earnings Shares Per-Share Earnings Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
---------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Net Earnings $6,316 $3,844
Basic EPS
Earnings available to common stockholders 6,316 12,129,514 $0.52 3,844 14,065,791 $0.27
===== =====
Effect of Dilutive Securities
Options and Stock Awards - 1,170,028 - 670,458
--------------------------- ----------------------
Diluted EPS
Earnings available to common stockholders
and assumed conversions $6,316 13,299,542 $0.47 $3,844 14,736,249 $0.26
======================================== ===================================
1. Options to purchase 7,482 shares of common stock at a weighted average price
of $20.60 per share were outstanding during the three month period ending
September 30, 1999 but were not included in the computation of diluted EPS
because the options' exercise prices were greater than the average market
price of the common shares. The options, which expire between October 22,
2002 and April 22, 2003, were still outstanding at September 30, 1999.
2. Options to purchase 10,108 shares of common stock at a weighted average
price of $20.12 per share were outstanding during the three month period
ending September 30, 1998 but were not included in the computation of
diluted EPS because the options' exercise prices were greater than the
average market price of the common shares. The options, which expire between
October 22, 2002 and April 22, 2003 were still outstanding at September 30,
1998.
8
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements - Continued
For the Six Months Ended September 30,
---------------------------------------------------------------------------------------
1999(1) 1998(2)
------------------------------------------- ---------------------------------------
Earnings Shares Per-Share Earnings Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
---------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Net Earnings $12,720 $8,172
Basic EPS
Earnings available to common stockholders 12,720 12,337,345 $1.03 8,172 14,406,806 $0.57
===== =====
Effect of Dilutive Securities
Options and Stock Awards - 1,085,557 - 787,314
------------------------ ------------------------
Diluted EPS
Earnings available to common stockholders
and assumed conversions $12,720 13,422,902 $0.95 $8,172 15,194,120 $0.54
==================================== ======================== =====
1. Options to purchase 7,482 shares of common stock at a weighted average price
of $20.60 per share were outstanding during the six month period ending
September 30, 1999 but were not included in the computation of diluted EPS
because the options' exercise prices were greater than the average market
price of the common shares. The options, which expire between October 22,
2002 and April 22, 2003, were still outstanding at September 30, 1999.
2. Options to purchase 10,108 shares of common stock at a weighted average
price of $20.12 per share were outstanding during the six month period
ending September 30, 1998 but were not included in the computation of
diluted EPS because the options' exercise prices were greater than the
average market price of the common shares. The options, which expire between
October 22, 2002 and April 22, 2003, were still outstanding at September 30,
1998.
9
PFF BANCORP, INC. AND SUBSIDIARY
Item 2: Management's Discussion and Analysis of Financial
Condition and Operation
Average Balance Sheets
The following table sets forth certain information relating to the Company for
the three months ended September 30, 1999 and 1998. The yields and costs are
derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods shown. Average balances are derived
from average daily balances. The yields and costs include fees that are
considered adjustments to yields.
Three Months Ended September 30,
-----------------------------------------------------------------------
1999 1998
-----------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
-----------------------------------------------------------------------
(Dollars in thousands)
Assets:
Interest-earning assets:
Interest-earning deposits and short-term
investments $ 24,340 $ 301 4.91% $ 31,891 $ 441 5.49%
Investment securities, net 187,856 2,941 6.26 291,338 4,469 6.09
Loans receivable, net 2,105,193 41,593 7.90 1,864,115 36,050 7.74
Mortgage-backed securities, net 447,074 7,086 6.34 654,720 10,286 6.28
FHLB stock 42,309 610 5.72 48,734 767 6.24
---------------------- ---------------------
Total interest-earning assets 2,806,772 52,531 7.49 2,890,798 52,013 7.20
Non-interest-earning assets 103,871 119,388
---------- ----------
Total assets $2,910,643 $3,010,186
========== ==========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Savings accounts $ 144,640 815 2.24 $ 149,584 871 2.31
Money market accounts 422,885 4,569 4.29 248,515 2,700 4.31
NOW and other demand deposit accounts 211,213 342 0.64 184,278 322 0.69
Certificate accounts 1,077,519 13,668 5.03 1,177,306 16,169 5.45
---------------------- ----------------------
Total 1,856,257 19,394 4.15 1,759,683 20,062 4.52
FHLB advances and other borrowings 788,496 10,882 5.48 957,083 13,637 5.65
Other 2,944 8 1.08 3,060 16 2.07
---------------------- ----------------------
Total interest-bearing liabilities 2,647,697 30,284 4.54 2,719,826 33,715 4.92
------ ------
Non-interest-bearing liabilities 43,162 54,237
---------- ----------
Total liabilities 2,690,859 2,774,063
Stockholders' equity 219,784 236,123
---------- ----------
Total liabilities and stockholders' equity $2,910,643 $3,010,186
========== ==========
Net interest income before provision for loan losses $22,247 $18,298
======= =======
Net interest spread 2.95 2.28
Effective interest spread 3.17 2.53
Ratio of interest-earning assets to interest-bearing
liabilities 106.01% 106.29%
10
PFF BANCORP, INC. AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition and Operation
(Continued)
Average Balance Sheets
The following table sets forth certain information relating to the Company for
the six months ended September 30, 1999 and 1998. The yields and costs are
derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods shown. Average balances are derived
from average daily balances. The yields and costs include fees that are
considered adjustments to yields.
Six Months Ended September 30,
-----------------------------------------------------------------------
1999 1998
-----------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
-----------------------------------------------------------------------
(Dollars in thousands)
Assets:
Interest-earning assets:
Interest-earning deposits and short-term $ 45,696 $ 1,042 4.55% $ 33,862 $ 864 5.09%
investments
Investment securities, net 183,183 5,596 6.11 293,238 9,247 6.29
Loans receivable, net 2,065,048 81,222 7.87 1,854,418 71,343 7.69
Mortgage-backed securities, net 468,789 14,834 6.33 613,418 19,352 6.31
FHLB stock 44,372 1,178 5.30 45,769 1,337 5.83
---------------------- ----------------------
Total interest-earning assets 2,807,088 103,872 7.40 2,840,705 102,143 7.19
Non-interest-earning assets 110,837 117,435
---------- ---------
Total assets $2,917,925 $2,958,140
========== ==========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Savings accounts $ 144,797 1,631 2.25 $ 150,867 1,762 2.33
Money market accounts 413,630 9,020 4.35 242,289 5,194 4.28
NOW and other demand deposit accounts 208,984 681 0.65 182,130 642 0.70
Certificate accounts 1,084,827 27,357 5.03 1,174,506 32,156 5.46
---------------------- ----------------------
Total 1,852,238 38,689 4.17 1,749,792 39,754 4.53
FHLB advances and other borrowings 791,048 21,689 5.47 916,017 26,101 5.68
Other 2,341 20 1.70 2,759 31 2.24
---------------------- ----------------------
Total interest-bearing liabilities 2,645,627 60,398 4.55 2,668,568 65,886 4.92
------ ------
Non-interest-bearing liabilities 48,039 47,615
---------- ----------
Total liabilities 2,693,666 2,716,183
Stockholders' equity 224,259 241,957
---------- ---------
Total liabilities and stockholders' equity $2,917,925 $2,958,140
========== ==========
Net interest income before provision for loan losses $ 43,474 $ 36,257
======== ========
Net interest spread 2.85 2.27
Effective interest spread 3.10 2.55
Ratio of interest-earning assets to interest-bearing 106.10% 106.45%
liabilities
11
Rate/Volume Analysis
The following table presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to: (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume); (iii) changes attributable to changes in
rate/volume (change in rate multiplied by change in volume); and (iv) the net
change.
Three Months Ended September 30, 1999 Six Months Ended September 30, 1999
Compared to Compared to
Three Months Ended September 30, 1998 Six Months Ended September 30, 1998
-------------------------------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
-------------------------------------------------------------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
-------------------------------------------------------------------------------------
(Dollars in thousands)
Interest-earning assets:
Interest-earning deposits and
short-term $ (104) (47) 11 (140) $ 302 (92) (32) 178
investments
Investment securities, net (1,574) 129 (83) (1,528) (3,461) (264) 74 (3,651)
Loans receivable, net 4,662 780 101 5,543 8,103 1,595 181 9,879
Mortgage-backed securities, (3,262) 91 (29) (3,200) (4,563) 59 (14) (4,518)
net
FHLB stock (101) (64) 8 (157) (41) (122) 4 (159)
---------------------------------------------------------------------------------
Total interest-earning (379) 889 8 518 340 1,176 213 1,729
assets ---------------------------------------------------------------------------------
Interest-bearing liabilities:
Savings accounts (29) (28) 1 (56) (71) (63) 3 (131)
Money market accounts 1,894 (15) (10) 1,869 3,673 90 63 3,826
NOW and other demand deposit
accounts 47 (24) (3) 20 95 (49) (7) 39
Certificate accounts (1,370) (1,235) 104 (2,501) (2,455) (2,537) 193 (4,799)
FHLB advances and other (2,402) (428) 75 (2,755) (3,561) (986) 135 (4,412)
borrowings
Other (1) (8) 1 (8) (5) (7) 1 (11)
---------------------------------------------------------------------------------
Total interest-bearing (1,861) (1,738) 168 (3,431) (2,324) (3,552) 388 (5,488)
liabilities (1) ---------------------------------------------------------------------------------
Change in net interest $ 1,482 2,627 (160) 3,949 $ 2,664 4,728 (175) 7,217
income =================================================================================
_________________________
(1) The increase in net interest income arising from the change in volume of
interest-bearing liabilities was significantly influenced by the shift
in average balances from relatively higher cost FHLB advances and other
borrowings and certificate accounts to relatively lower cost money
market and NOW accounts.
12
PFF BANCORP, INC. AND SUBSIDIARY
Management's Discussion and Analysis
(Continued)
Forward-Looking Statements
Except for historical information contained herein, the matters discussed in
this report contain forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended (the "Securities Act"), and Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
that involve substantial risks and uncertainties. When used in this report, or
in the documents incorporated by reference herein, the words "anticipate,"
"believe," "estimate," "may," "intend," "expect" and similar expressions
identify certain of such forward-looking statements. Actual results could
differ materially from such forward-looking statements contained herein.
Factors that could cause future results to vary from current expectations
include, but are not limited to, the following: changes in economic conditions
(both generally and more specifically in the markets in which the Company
operates); changes in interest rates, deposit flows, loan demand, real estate
values and competition; changes in accounting principles, policies or guidelines
and in government legislation and regulation (which change from time to time and
over which the Company has no control); other factors affecting the Company's
operations, markets, products and services, including but not limited to, year
2000 compliance issues; and other risks detailed in this Form 10-Q 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.
Comparison of Operating Results for the Three Months Ended September 30, 1999
- -----------------------------------------------------------------------------
and 1998
- --------
General
- -------
The Company recorded net earnings of $6.3 million or $0.47 per diluted share for
the three months ended September 30, 1999 compared to net earnings of $3.8
million or $0.26 per diluted share for the comparable period of 1998.
Net interest income was $22.2 million for the three months ended September 30,
1999 compared to $18.3 million for the comparable period of 1998. The increase
in net interest income was attributable to a 67 basis point increase in net
interest spread from 2.28% for the three months ended September 30, 1998 to
2.95% for the comparable period of 1999.
Provision for loan losses was $1.0 million for the three months ended September
30, 1999 and 1998.
Total non-interest income was $3.6 million for the three months ended September
30, 1999 compared to $3.1 million for the comparable period of 1998. Total non-
interest expense was $13.6 million for the three months ended September 30, 1999
and September 30, 1998.
Interest Income
- ---------------
Interest income was $52.5 million for the three months ended September 30, 1999
compared to $52.0 million for the comparable period of 1998. The $518,000
increase in interest income was attributable to a 29 basis point increase in
average yield on interest-earning assets, partially offset by a $84.0 million
decrease in average interest-earning assets. The average aggregate balance of
mortgage-backed securities (MBS) and investment securities decreased $311.1
million from $946.1 million for the three months ended September 30, 1998 to
$634.9 million for the comparable period of 1999 reflecting the Company's
strategy of utilizing paydowns and payoffs from MBS and investment securities to
repay FHLB advances and fund growth in loans receivable. Reflecting this
strategy, the impact on average interest earning assets from the decrease in MBS
and investment securities was partially
13
PFF BANCORP, INC. AND SUBSIDIARY
Management's Discussion and Analysis
(Continued)
offset by a $241.1 million increase in average loans receivable, net from $1.86
billion for the three months ended September 30, 1998 to $2.11 billion for the
comparable period of 1999.
The average yield on loans receivable, net increased 16 basis points from 7.74%
for the three months ended September 30, 1998 to 7.90% for the comparable period
of 1999. The increase in the average yield on loans receivable, net was
attributable principally to a $233.2 million increase in the aggregate disbursed
balance of construction, commercial business, commercial real estate and
consumer loans (the Four-C's) from $368.3 million or 19 percent of loans
receivable, net at September 30, 1998 to $601.5 million or 28 percent of loans
receivable, net at September 30, 1999. Originations of the Four-C's continues to
be an area of focus for the Bank with such loans accounting for 61% and 62% of
total loan originations for the three months ended September 30, 1999 and 1998,
respectively.
The Bank has also increased the proportion of its total loan portfolio comprised
by hybrid adjustable rate mortgages (ARM's) from 19% at September 30, 1998 to
26% at September 30, 1999. Hybrid ARM's provide for fixed rates of interest for
an initial term (typically 3 to 5 years) after which the rates on the loans
become adjustable based upon a specified index (typically the one year Constant
Maturity Treasury(CMT) index). The initial rates on hybrid ARM's are generally
above the initial "teaser" rates at which non-hybrid ARM's are originated.
The average yield on investment securities was 6.26% for the three months ended
September 30, 1999 compared to 6.09% for the comparable period of 1998. The
increase in the average yield on investment securities reflects a reduction in
premium amortization, net of discount accretion, partially offset by the impact
of a generally lower interest rate environment. Premium amortization, net of
discount accretion on investment securities was $12,000 (3 basis points) for the
three months ended September 30, 1999 compared to $193,000 (26 basis points) for
the comparable period of 1998. The one month London Inter-Bank Offered Rate
(LIBOR) to which a portion of the investment securities portfolio is indexed
averaged approximately 5.30% for the three months ended September 30, 1999
compared to approximately 5.58% for the comparable period of 1998.
The average yield on MBS was 6.34% for three months ended September 30, 1999
compared to 6.28% for the comparable period of 1998. Premium amortization, net
of discount accretion on MBS was $371,000 (33 basis points) for the three months
ended September 30, 1999 compared to $843,000 (52 basis points) for the
comparable period of 1998. The impact on average yield on MBS of this reduction
in premium amortization, net of discount accretion was partially offset by the
lagging impact of changes in the one year CMT on the 44% of the MBS portfolio
that is tied to that index. The adjustment frequency of the one year CMT MBS
held by the Company is generally on an annual basis. Accordingly, for any given
period, the yield on the one year CMT portion of the MBS portfolio is reflective
of a combination of the index in effect one year earlier as well as the current
level for the index. The one-year CMT averaged approximately 5.54% for the
three months ended September 30, 1997 compared to approximately 5.10% and 5.16%
for the comparable periods of 1998 and 1999, respectively.
Interest Expense
- ----------------
Interest expense was $30.3 million for the three months ended September 30, 1999
compared to $33.7 million for the comparable period of 1998. The $3.4 million
decrease in interest expense was attributable to a 38 basis point decrease in
the average cost of interest-bearing liabilities coupled with a $72.1 million
decrease in the balance of average interest-bearing liabilities from $2.72
billion for the three months ended September 30, 1998 to $2.65 billion for the
comparable period of 1999. The 38 basis point decrease in the average cost of
interest-bearing liabilities reflects a 37 basis point reduction in the average
cost of deposits, a 17 basis point reduction in the cost of FHLB advances and
other borrowings and an increase in the proportion of total interest-bearing
liabilities comprised by
14
PFF BANCORP, INC. AND SUBSIDIARY
Management's Discussion and Analysis
(Continued)
deposits from 65% for the three months ended September 30, 1998 to 70% for the
comparable period of 1999 as FHLB advances were repaid using a portion of the
cash flow arising from payoffs and paydowns on MBS and investment securities.
The decrease in the average cost of deposits from 4.52% for the three months
ended September 30, 1998 to 4.15% for the comparable period of 1999 reflects an
increase in the proportion of the total deposit base comprised by money market,
savings and NOW accounts (collectively, "core deposits") from 33% for the three
months ended September 30, 1998 to 42% for the comparable period of 1999. The
average balance of total deposits increased $96.6 million from $1.76 billion for
the three months ended September 30, 1998 to $1.86 billion for the comparable
period of 1999. The average balance of core deposits increased $196.4 million or
34% between the three months ended September 30, 1998 and 1999. The increase in
the proportion of the deposit portfolio comprised by core deposits reflects the
Bank's emphasis on this segment of the deposit portfolio. The average cost of
core deposits was 2.92% for the three months ended September 30, 1999 compared
to 5.03% for certificate accounts.
The average cost of FHLB advances and other borrowings was 5.48% for the three
months ended September 30, 1999 compared to 5.65% for the comparable period of
1998.
Provision for Loan Losses
- -------------------------
Provision for loan losses was $1.0 million for the three months ended September
30, 1999 and 1998. See "Comparison of Financial Condition at September 30, 1999
and March 31, 1999".
Non-Interest Income
- -------------------
Non-interest income was $3.6 million or, on an annualized basis, .49% of average
assets for the quarter ended September 30, 1999 compared to $3.1 million or, on
an annualized basis, .41% of average assets for the comparable period of 1998.
Excluding trading securities activity and profit on real estate investments,
core non-interest income was $3.7 million for the three months ended September
30, 1999, compared to $3.6 million for the comparable period of 1998. Deposit
and related fees increased $148,000 from $2.2 million for the three months ended
September 30, 1998 to $2.3 million for the comparable period of 1999. The
increase in deposit and related fees reflects the increase in fee income
opportunities created by the growth in core deposits coupled with the Bank's
increased emphasis on collecting rather than waiving fees. The increase in
trust fees from $452,000 for the three months ended September 30, 1998 to
$517,000 for the comparable period of 1999 reflects the updating of fee
schedules coupled with growth in assets under custody or management from $220.9
million at September 30, 1998 to $249.8 million at September 30, 1999.
Non-Interest Expense
- --------------------
Non-interest expense was $13.6 million for the three months ended September 30,
1999 and 1998. General and administrative expense was $13.8 million or, on an
annualized basis, 1.90% of average assets for the three months ended September
30, 1999 compared to $13.7 or, on an annualized basis, 1.82% for the comparable
period in 1998. Compensation and benefits expense was $7.4 million for the
three months ended September 30, 1999 compared to $6.8 million for the
comparable period in 1998.
Included in compensation and benefits expense are non-cash charges associated
with the amortization of shares under the Company's Employee Stock Ownership
Plan (ESOP) and 1996 Incentive Plan of $1.4 million for the three months ended
September 30, 1999 compared to $1.1 million for the comparable period of 1998.
15
PFF BANCORP, INC. AND SUBSIDIARY
Management's Discussion an Analysis
(Continued)
The $80,000 increase in marketing and professional services expense from $1.2
million for the three months ended September 30, 1998 to $1.3 million for the
comparable period of 1999 reflects the Bank's expenditures to capitalize on its
presence as the largest locally based financial institution in the Inland Empire
of Southern California by establishing the brand theme of "as big as you need as
small as you like."
The decrease in other non-interest expense from $2.7 million for the three
months ended September 30, 1998 to $2.2 million for the comparable period of
1999 was due primarily to a reduction in office supplies and expenses of
$178,000 resulting from renegotiation and consolidation of telecommunications
services.
Income Taxes
- ------------
Income taxes were $4.8 million for the three months ended September 30, 1999
compared to $2.9 million for the comparable period of 1998. The effective tax
rate was 46.5% for the three months ended September 30, 1999 and 1998.
Comparison of Operating Results for the Six Months Ended September 30, 1999 and
- -------------------------------------------------------------------------------
1998
- ----
General
- -------
The Company recorded net earnings of $12.7 million or $0.95 per diluted share
for the six months ended September 30, 1999 compared to net earnings of $8.2
million or $0.54 per diluted share for the comparable period of 1998.
Net interest income was $43.5 million for the six months ended September 30,
1999 compared to $36.3 million for the comparable period of 1998. The increase
in net interest income was attributable to a 58 basis point increase in net
interest spread from 2.27% for the six months ended September 30, 1998 to 2.85%
for the comparable period of 1999.
Provision for loan losses was $2.0 million for the six months ended September
30, 1999 and 1998.
Total non-interest income was $7.8 million for the six months ended September
30, 1999 compared to $6.9 million for the comparable period of 1998. Total non-
interest expense was $26.9 million for the six months ended September 30, 1999
and 1998.
Interest Income
- ---------------
Interest income was $103.9 million for the six months ended September 30, 1999
compared to $102.1 million for the comparable period of 1998. The $1.7 million
increase in interest income was attributable to a 21 basis point increase in
average yield on interest-earning assets, partially offset by a $33.6 million
decrease in average interest-earning assets. The average aggregate balance of
MBS and investment securities decreased $254.7 million from $906.7 million for
the six months ended September 30, 1998 to $652.0 million for the comparable
period of 1999 reflecting the Company's strategy of utilizing paydowns and
payoffs from MBS and investment securities to repay FHLB advances and fund
growth in loans receivable. Reflecting this strategy, the impact on average
interest earning assets from the decrease in average MBS and investment
securities was partially offset by an increase in average loans receivable, net
of $210.6 million from $1.85 billion for the six months ended September 30, 1998
to $2.07 billion for the comparable period of 1999.
16
PFF BANCORP, INC. AND SUBSIDIARY
Management's Discussion an Analysis
(Continued)
The average yield on loans receivable increased 18 basis points from 7.69% for
the six months ended September 30, 1998 to 7.87% for the comparable period of
1999. The increase in the average yield on loans receivable was attributable
principally to a $233.2 million increase in the aggregate disbursed balance of
construction, commercial business, commercial real estate and consumer loans
(the Four-C's) from $368.3 million or 19 percent of loans receivable, net at
September 30, 1998 to $601.5 million or 28 percent of loans receivable, net at
September 30, 1999. Originations of the Four-C's continues to be an area of
focus for the Bank with such loans accounting for 57% and 59% of total loan
originations for the six months ended September 30, 1999 and 1998, respectively.
The Bank has also increased the proportion of its total loan portfolio comprised
by hybrid ARM's from 19% at September 30, 1998 to 26% at September 30, 1999.
The average yield on investment securities was 6.11% for the six months ended
September 30, 1999 compared to 6.29% for the comparable period of 1998. The
decrease in the average yield on investment securities reflects the impact of
the decrease in the general level of interest rates partially offset by a
decrease in premium amortization, net of discount accretion. Premium
amortization, net of discount accretion on investment securities was $57,000 (6
basis points) for the six months ended September 30, 1999 compared to $335,000
(23 basis points) for the comparable period of 1998. The one year CMT and one
month LIBOR averaged approximately 4.99% and 5.09%, respectively for the six
months ended September 30, 1999 compared to approximately 5.27% and 5.61%,
respectively for the comparable period of 1998.
The average yield on MBS was 6.33% for six months ended September 30, 1999
compared to 6.31% for the comparable period of 1998. Premium amortization, net
of discount accretion, on MBS was $827,000 (35 basis points), for the six months
ended September 30, 1999 compared to $1.7 million (57 basis points), for the
comparable period of 1998. As discussed in the comparison of interest income
for the three months ended September 30, 1999 and 1998, the yield on the MBS
portfolio is influenced in a lagging fashion by changes in the one year CMT
index. The decrease in the average yield on MBS between 1998 and 1999, after
excluding the impact of premium amortization, net of discount accretion reflects
the fact that the one year CMT averaged approximately 5.69% for the six months
ended September 30, 1997 compared to approximately 5.27% and 4.99% for the
comparable periods of 1998 and 1999, respectively.
Interest Expense
- ----------------
Interest expense was $60.4 million for the six months ended September 30, 1999
compared to $65.9 million for the comparable period of 1998. The $5.5 million
decrease in interest expense was attributable to a 37 basis point decrease in
the average cost of interest-bearing liabilities coupled with a $22.9 million
decrease in the balance of average interest-bearing liabilities from $2.67
billion for the six months ended September 30, 1998 to $2.65 billion for the
comparable period of 1999. The 37 basis point decrease in the average cost of
interest-bearing liabilities reflects a 36 basis point reduction in the average
cost of deposits, a 21 basis point reduction in the cost of FHLB advances and
other borrowings and an increase in the proportion of total interest-bearing
liabilities comprised by deposits from 66% for the six months ended September
30, 1998 to 70% for the comparable period of 1999 as FHLB advances were repaid
using a portion of the cash flow arising from payoffs and paydowns on MBS and
investment securities.
The decrease in the average cost of deposits from 4.53% for the six months ended
September 30, 1998 to 4.17% for the comparable period of 1999 reflects an
increase in the proportion of the total deposit base comprised by money market,
savings and NOW accounts (collectively, "core deposits") from 33% for the six
months ended September 30, 1998 to 41% for the comparable period of 1999. The
average balance of total deposits increased
17
PFF BANCORP, INC. AND SUBSIDIARY
Management's Discussion an Analysis
(Continued)
$102.4 million from $1.75 billion for the six months ended September 30, 1998 to
$1.85 billion for the comparable period of 1999. The average balance of core
deposits increased $192.1 million or 33% between the six months ended September
30, 1998 and 1999. The increase in the proportion of the deposit portfolio
comprised by core deposits reflects the Bank's emphasis on this segment of the
deposit portfolio. The average cost of core deposits was 2.95% for the six
months ended September 30, 1999 compared to 5.03% for certificate accounts.
The average cost of FHLB advances and other borrowings decreased from 5.68% for
the six months ended September 30, 1998 to 5.47% for the comparable period of
1999 reflecting the Bank's increased utilization of putable fixed rate FHLB
advances.
Provision for Loan Losses
- -------------------------
Provision for loan losses was $2.0 million for the six months ended September
30, 1999 and 1998. See "Comparison of Financial Condition at September 30, 1999
and March 31, 1999."
Non-Interest Income
- -------------------
Non-interest income was $7.8 million or, on an annualized basis, .53% of average
assets for the six months ended September 30, 1999 compared to $6.9 million or ,
on an annualized basis, .47% of average assets for the comparable period of
1998. Core non-interest income was $7.7 million for the six months ended
September 30, 1999, compared to $7.2 million for the comparable period of 1998.
Deposit and related fees increased $393,000 from $4.3 million for the six months
ended September 30, 1998 to $4.7 million for the comparable period of 1999. The
increase in deposit and related fees reflects the increase in fee income
opportunities created by the growth in core deposits coupled with the Bank's
increased emphasis on collecting rather than waiving fees. The increase in
trust fees from $928,000 for the six months ended September 30, 1998 to $1.0
million for the comparable period of 1999 reflects the updating of fee schedules
coupled with growth in assets under custody or management.
Non-Interest Expense
- --------------------
Non-interest expense was $27.0 million for the six months ended September 30,
1999 and 1998. General and administrative expense was $27.0 million or, on an
annualized basis, 1.85% of average assets for the six months ended September 30,
1999 compared to $26.9 million or, on an annualized basis, 1.82% for the
comparable period in 1998. Compensation and benefits expense was $14.4 million
for the six months ended September 30, 1999 compared to $13.8 million for the
comparable period in 1998.
Included in compensation and benefits expense are non-cash charges associated
with the amortization of shares under the Company's Employee Stock Ownership
Plan (ESOP) and 1996 Incentive Plan of $2.5 million and $2.4 million for the six
months ended September 30, 1999 and September 30, 1998, respectively.
The $353,000 increase in marketing and professional services expense from $2.1
million for the six months ended September 30, 1998 to $2.4 million for the
comparable period of 1999 reflects the Bank's expenditures to capitalize on its
presence as the largest locally based financial institution in the Inland Empire
of Southern California by establishing the brand theme of "as big as you need as
small as you like."
The decrease in other non-interest expense from $5.1 million for the six months
ended September 30, 1998 to $4.5 million for the comparable period of 1999 was
primarily attributable to a reduction in office supplies and expenses of
$347,000 resulting from renegotiation and consolidation of telecommunications
services.
18
PFF BANCORP, INC. AND SUBSIDIARY
Management's Discussion and Analysis
(Continued)
Income Taxes
- ------------
Income taxes were $9.7 million for the six months ended September 30, 1999
compared to $6.2 million for the comparable period of 1998. The effective tax
rate was 46.5% for the six months ended September 30, 1999 and 1998.
Comparison of Financial Condition at September 30, 1999 and March 31, 1999
- --------------------------------------------------------------------------
Total assets increased $15.7 million from $2.94 billion at March 31, 1999 to
$2.95 billion at September 30, 1999. Loans receivable, net increased $152.6
million from $2.03 billion at March 31, 1999 to $2.18 billion at September 30,
1999. MBS decreased $96.3 million from $526.1 million at March 31, 1999 to
$429.8 million at September 30, 1999 and investment securities decreased $2.7
million from $185.8 million at March 31, 1999 to $183.1 million at September 30,
1998 reflecting the strategy discussed above of utilizing paydowns on securities
to fund loans and repay FHLB advances.
Loan originations for the six months ended September 30, 1999 were $604.5
million, compared to $420.7 million for the comparable period of 1998. Loan
principal payoffs and paydowns were $392.8 million for the six months ended
September 30, 1999 compared to $406.2 million for the comparable period of 1998.
Reflecting very favorable economic conditions in the Bank's market area, non-
accrual loans declined from $11.0 million or 0.50% of gross loans at March 31,
1999 to $7.5 million or 0.31% of gross loans at September 30, 1999. Non-
performing assets, which includes non-accrual loans, and foreclosed real estate,
net of specific allowances, declined from $16.3 million or 0.56% of total assets
at March 31, 1999 to $10.1 million or 0.34% of total assets at September 30,
1999.
The allowance for loan losses is maintained at an amount management considers
adequate to cover future losses on loans receivable which are deemed probable
and estimable. The allowance is based upon a number of factors, including
current economic conditions, actual loss experience, industry trends and the
composition of the loan portfolio by type. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowance for loan losses. Such agencies may require the Bank to
make additional provisions for loan losses based upon information available at
the time of the review. At September 30, 1999, the Bank's allowance for loan
losses was $26.5 million or 1.10% of gross loans and 355.55% of non-accrual
loans compared to $26.2 million or 1.18% of gross loans and 237.56% of non-
accrual loans at March 31, 1999. The Bank will continue to monitor and modify
its allowance for loan losses as economic conditions, loss experience, changes
in portfolio composition and other factors dictate. The following table sets
forth activity in the Bank's allowance for loan losses for the three and six
months ended September 30, 1999.
Three Months Six Months
Ended Ended
---------------------------------
Beginning balance $26,113 26,160
Provision for loan losses 1,000 2,000
Charge-offs (582) (1,680)
Recoveries 4 55
--------------------------------------------------------------------
Ending balance $26,535 $26,535
====================================================================
Included in charge-offs for the six months ended September 30, 1999 is $416,000
applicable to the sale of 12 loans aggregating $2.3 million, which were
restructured in previous fiscal years. While these loans were all on full
accrual status in accordance with their workout agreements, the sale was
consummated to strengthen the Bank's overall asset quality position in the
current as well as future credit cycles.
19
PFF BANCORP, INC. AND SUBSIDIARY
Management's Discussion and Analysis
(Continued)
Total liabilities increased $35.9 million or 1.3% to $2.73 billion at September
30, 1999 from $2.69 billion at March 31, 1999. Deposits increased $13.1 million
from $1.84 billion at March 31, 1999 to $1.86 billion at September 30, 1999.
Core deposits increased $16.5 million from $745.4 million at March 31, 1999 to
$761.9 million at September 30, 1999. In response to the additional need for
funding arising from the strong level of loan originations, FHLB advances and
other borrowings increased $20.0 million from $814.0 million at March 31, 1999
to $834.0 million at September 30, 1999. At September 30, 1999 and March 31,
1999 the Bank had putable borrowings totaling $515.0 million. Under putable
borrowings programs, in exchange for a favorable interest rate on the borrowing,
the Bank grants to the creditor an option to "put" the borrowing back to the
Bank at specified "put" dates prior to maturity but after the conclusion of a
specified lock out period. Under the putable borrowings programs the Bank
obtains funds below the cost of non-putable borrowings of comparable final
maturity. In exchange for this favorable funding rate, the Bank is exposed to
the risk that the borrowing is put back to the Bank following an increase in the
general level of interest rates causing the Bank to initiate a borrowing at a
less advantageous cost.
Total stockholders' equity was $222.5 million at September 30, 1999 compared to
$242.7 million at March 31, 1999. The $20.1 million decrease in total
stockholders' equity is comprised principally of a $14.0 million decrease in
additional paid-in-capital, a $1.8 million decrease in retained earnings,
substantially restricted, a $1.8 million decrease in unearned stock-based
compensation and a $6.1 million increase in accumulated other comprehensive
loss.
During the six months ended September 30, 1999, the Company repurchased
1,500,000 shares of its common stock at a weighted average price of $19.18 per
share. The $14.0 million decrease in additional paid-in-capital was
attributable principally to the removal from additional paid-in-capital of the
original amount of additional paid-in-capital recorded upon the March 1996
initial issuance of the 1,500,000 shares repurchased ($9.99 per share, net of
the $.01 per share credited to common stock). The $1.8 million decrease in
retained earnings, substantially restricted reflects the $13.8 million
difference between the $10.00 per share original issuance price of the 1,500,000
shares repurchased and the $19.18 per share price paid to repurchase the shares,
partially offset by the $12.7 million of net earnings for the six months ended
September 30, 1999. The decrease in retained earnings, substantially restricted
also reflects the Company's August 25, 1999 declaration of its first quarterly
cash dividend of $.06 per common share paid on September 30, 1999 to
stockholders of record September 15, 1999. The $1.8 million decrease in
unearned stock-based compensation reflects the amortization of shares under the
Company's ESOP ($856,000) and 1996 Incentive Plan ($934,000). The $6.1 million
increase in accumulated other comprehensive loss was attributable principally to
the change in the unrealized loss, net of tax on MBS and investment securities
available-for-sale.
Liquidity and Capital Resources
- -------------------------------
The Company's primary sources of funds are deposits, principal and interest
payments on loans and securities, FHLB advances and other borrowings, proceeds
from the maturation of securities and, to a lesser extent, proceeds from the
sale of loans and securities. While maturities and scheduled amortization of
loans and securities are predictable sources of funds, deposit flows and
mortgage and security prepayments are greatly influenced by the general level of
interest rates, economic conditions and competition. The Bank has maintained
the required minimum levels of liquid assets as defined by OTS regulations.
This requirement, which may be varied at the direction of the OTS depending upon
economic conditions and deposit flows, is based upon a percentage of deposits
and short-term borrowings. Effective with the quarter ended December 31, 1997
the required ratio is 4%. Prior to that the requirement was 5%. The Bank's
average liquidity ratio was 5.29% for the six months ended September 30, 1999.
Management attempts to maintain a liquidity ratio no higher than approximately
1% above the regulatory requirement. This reflects management's strategy of
investing excess liquidity in higher yielding interest-earning
20
PFF BANCORP, INC. AND SUBSIDIARY
Management's Discussion and Analysis
(Continued)
assets, such as loans or other investments, depending on market conditions. The
Bank invests in corporate securities when the yields thereon are more attractive
than U.S. government and federal agency securities of similar maturity. While
corporate securities are not backed by any government agency, the maturity
structure and credit quality of all corporate securities owned by the Bank meet
the minimum standards set forth by the OTS for regulatory liquidity-qualifying
investments. The Bank invests in callable debt issued by Federal agencies of the
U.S. government when the yields thereon to call date(s) and maturity exceed the
yields on comparable term and credit quality non-callable investments by amounts
which management deems sufficient to compensate the Bank for the call options
inherent in the securities. The Bancorp has invested and will from time to time
continue to invest in "non-rated" corporate debt and equity securities.
Investments held at the Bancorp are not subject to the OTS regulatory
restrictions applicable to the Bank.
The Company's cash flows are comprised of three primary classifications: cash
flows from operating activities, investing activities and financing activities.
Cash flows provided by operating activities were $48.6 million and $68.6 million
for the six months ended September 30, 1999 and 1998, respectively. Net cash
used in investing activities consisted primarily of disbursements for loan
originations and purchases of mortgage-backed and other investment securities,
offset by principal collections on loans and proceeds from maturation of
investments and paydowns on mortgage-backed securities. Principal payments on
loans were $392.8 million and $406.2 million for the six months ended September
30, 1999 and 1998, respectively. Loans originated and purchased were $604.5
million and $559.8 million for the six months ended September 30, 1999 and 1998,
respectively. Disbursements for purchases of mortgage-backed and other
investment securities were $28.1 million and $390.3 million for the six months
ended September 30, 1999 and 1998, respectively. Proceeds from the maturation
of investment securities and paydowns of mortgage-backed securities were $112.7
million and $195.6 million for the six months ended September 30, 1999 and 1998,
respectively. Net cash provided by financing activities consisted primarily of
net activity in deposit accounts and FHLB advances and other borrowings. The net
increases in deposits were $13.1 million and $38.7 million for the six months
ended September 30, 1999 and 1998, respectively. FHLB advances and other
borrowings increased $20.0 million and increased $213.1 million for the six
months ended September 30, 1999 and 1998, respectively.
At September 30, 1999, the Bank exceeded all of its regulatory capital
requirements with a tangible capital level of $195.2 million, or 6.66% of
adjusted total assets, which is above the required level of $44.0 million, or
1.5%; core capital of $195.2 million, or 6.66 % of adjusted total assets, which
is above the required level of $87.9 million, or 3.0%, and total risk-based
capital of $218.3 million, or 11.53% of risk-weighted assets, which is above the
required level of $151.5 million, or 8%.
The Company's most liquid assets are cash and short-term investments. The
levels of these assets are dependent on the Company's operating, financing,
lending and investing activities during any given period. At September 30, 1999
cash and short-term investments totaled $34.9 million. The Company has other
sources of liquidity if a need for additional funds arises, including the
utilization of reverse repurchase agreements and FHLB advances. At September
30, 1999, the Bank has $784.0 million of FHLB advances and $50.0 million of
reverse repurchase agreements outstanding. Other sources of liquidity include
investment securities maturing within one year.
The Company currently has no material contractual obligations or commitments for
capital expenditures. At September 30, 1999, the Bank had outstanding
commitments to originate and purchase loans of $387.1 million and zero,
respectively, compared to $249.6 million and zero, respectively, at September
30, 1999 and 1998. At September 30, 1999, and 1998 the Company had no
outstanding commitments to purchase mortgage-backed securities and other
investment securities. The Company anticipates that it will have sufficient
funds available to meet these commitments. Certificate accounts that are
scheduled to mature in less than one year from September
21
PFF BANCORP, INC. AND SUBSIDIARY
Management's Discussion and Analysis
(Continued)
30, 1999 totaled $930.0 million. The Bank expects that a substantial portion of
the maturing certificate accounts will be retained by the Bank at maturity.
Segment Reporting
The Company, through the branch network of the Bank, provides a broad range of
financial services to individuals and companies located primarily in Southern
California. These services include demand, time, and savings deposits; real
estate, business and consumer lending; ATM processing; cash management; and
trust services. While the Company's chief decision makers monitor the revenue
streams of the various Company products and services, operations are managed and
financial performance is evaluated on a Company-wide basis. Accordingly, all of
the Company's banking operations are considered by management to be aggregated
in one reportable operating segment.
Year 2000 Readiness Disclosure
Risks of the Year 2000 Issue
The Year 2000 issue is the result of computer programs being written using two
digits rather than four digits to represent the calendar year (e.g. "98" for
"1998"). Software so developed, and not corrected, could produce inaccurate or
unpredictable results or system failures commencing January 1, 2000, when dates
present a lower two digit year number than dates in the prior century. Such
occurrences may have a material adverse effect on the Company's financial
condition, results of operations, business or business prospects, as the
Company, like most financial organizations, is significantly subject to the
potential impact of the Year 2000 issue due to the nature of financial
information. Potential impacts to the Company may arise from software, computer
hardware, and other equipment both within the Company's direct control and
outside the Company's ownership, yet with which the Company electronically or
operationally interfaces. Financial institution regulators have intensively
focused upon Year 2000 exposures, issuing guidance concerning the
responsibilities of management and the board of directors. Year 2000 testing and
certification is being addressed as a key safety and soundness issue in
conjunction with regulatory exams and the Office of Thrift Supervision has
authority to bring enforcement actions against any institution under its
supervision which it believes is not properly addressing Year 2000 issues.
State of Readiness
The Company has established a five-phase process to address the Year 2000 issue
and pursuant to its plans, for both information technology and non-information
technology related systems, the majority of effort remaining is in the fifth and
final phase of the project. The Company's Board of Directors oversees the Year
2000 compliance project's progress through monthly status reports provided by
the Year 2000 Project Office, which indicate that the Company expects to be
ready for Year 2000. The Company was substantially ready by June 30, 1999.
Phase one of the project consisted of developing a Company-wide awareness of the
Year 2000 issue and included establishment of a Year 2000 Project Office for the
Company. As part of the second phase, the Company completed an inventory of all
data systems to determine which are most critical to support customer
transaction processing and provide customer services. This inventory not only
included in-house systems, but those provided by third party vendors as well.
Project plans were developed which place priority emphasis on those systems
requiring change and classified as mission critical. Third party vendors were
contacted during this phase to determine their processes and timelines for
correcting any Year 2000 compliance issues. The Company has in place a process
to monitor the progress of mission critical third party vendors toward making
required Year 2000 corrections. In addition,
22
PFF BANCORP, INC. AND SUBSIDIARY
Management's Discussion and Analysis
(Continued)
significant real estate and commercial loan borrowers of the Company were also
contacted to determine the extent of their preparations for Year 2000 and any
potential impact Year 2000 may have on their businesses and ability to repay
loan obligations to the Company.
Phase three of the process consists of making appropriate Year 2000 programming
changes to the Company's in-house and vendor-provided core processing systems,
as well as replacement of other vendor-provided PC-based systems. Phase four
consisted of acceptance testing and sign-off of both the Company's in-house and
vendor-provided systems. The fifth and final phase of the Year 2000 compliance
project included installation of the system modifications The company has
completed all five phases of the project, with the exception of a major
application (not related to core banking processing) that will be maintained on
its internal mid-range computer. The bank has decided to coordinate the
replacement of this major application with the end of calendar year 1999.
Therefore, it has ordered a minimal upgrade from the current out-source vendor
of the existing system in order to ensure that the existing system is Year 2000
ready. The Company's two core processing systems vendors have installed Year
2000 compliant code for all systems and remaining validation testing was
substantially completed by June 30, 1999. The Year 2000 project office has
closely monitored the renovation, testing and implementation phases of the two
processors' Year 2000 projects and is satisfied with the progress.
In addition to the computer systems utilized by the Company, the Company has
also inventoried other essential services that may be impacted by Year 2000
issues, such as telecommunications and utilities. The Company is monitoring such
essential service providers to determine their progress and how they are
addressing Year 2000 issues. To date, no information exists to suggest such
essential services will not be Year 2000 compliant.
Costs to Address the Year 2000 Issue
Currently the Company estimates that Year 2000 project costs will approximate
$3.1 million, although there can be no assurance that costs will not exceed that
amount. This cost is in addition to existing personnel who may participate in
the project. Included in the estimate are costs for hardware and software
renovation or replacement, as well as existing staff who are specifically
devoted to the project. The Company estimates that approximately 50% of the
cost represents expenditures to replace certain older hardware and software
which the Company might otherwise have replaced during the period,
notwithstanding the Year 2000 issue, the costs of which will be depreciated over
its anticipated useful life. Of the estimated total cost, approximately $2.75
million has been incurred on the project year-to-date. The table below
summarizes by year the estimated amount and anticipated timing of the planned
Year 2000 expenditures.
Fiscal Year
-------------------------------------------------------------
(In Millions) 1998 1999 2000 Total
-------------------------------------------------------------
Capital $ - 1.1 .4 1.5
Operating .3 .7 .6 1.6
-------------------------------------------------------------
Estimated Year 2000 expenditures $ .3 1.8 1.0 3.1
=============================================================
The total amount reflects the costs for inclusion of an internally maintained
mid-range computer system recently added to the Year 2000 compliance process. As
the Company progresses in addressing the Year 2000 compliance project and
additional information becomes available estimates of costs could change. At
this time, no significant data system projects have been delayed as a result of
the Company's Year 2000 compliance effort.
Contingency Plans
23
PFF BANCORP, INC. AND SUBSIDIARY
Management's Discussion and Analysis
(Continued)
The Company believes its Year 2000 compliance process should enable it to be
successful in modifying its computer systems to be Year 2000 compliant. In
addition to Year 2000 compliance system modification plans, the Company has
finalized and tested contingency plans, including manual procedures, for systems
classified as mission critical and high risk. These contingency plans provide
various alternatives based upon the different possible failures a system might
encounter in the Year 2000. However, there can be no assurance that either the
compliance process or contingency plans will avoid partial or total system
interruptions (particularly for disruptions caused by systems outside of the
Company's control), nor that the costs necessary to update hardware and software
would not have a material adverse effect upon the Company's financial condition,
results of operation, business or business prospects.
24
Item 3. Qualitative and Quantitative Disclosures about Market Risk
- ------------------------------------------------------------------
Readers should refer to the qualitative disclosures (consisting primarily of
interest rate risk) in the Company's March 31, 1999 Form 10-K, as there has been
no significant changes in these disclosures during the six months ended
September 30, 1999.
25
PART II - OTHER INFORMATION
PFF BANCORP, INC. AND SUBSIDIARY
Item 1. Legal Proceedings
The Company and subsidiary have been named as defendants in various
lawsuits arising in the normal course of business. The outcome of the lawsuits
cannot be predicted, but the Company intends to vigorously defend the actions
and is of the opinion that the lawsuits will not have a material adverse effect
on the Company.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matter to a Vote of Security Holders.
Election of Directors of the
Company for three year terms: Number of Votes Number of Votes
For Withheld
Robert W. Burwell 12,334,896 323,407
William T. Dingle 12,331,071 327,232
Curtis W. Morris 12,332,296 326,007
Number of Votes Number of Votes Number of Votes
For Against Abstaining
Approval of the PFF Bancorp,
Inc. 1999 Incentive Plan 11,540,520 923,227 194,556
Ratification of KPMG LLP as
the Company's independent
auditors 12,552,441 26,424 79,438
Item 5. Other Information.
None
26
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 3(I) - Certificate of Incorporation of PFF Bancorp, Inc. *
Exhibit 3(ii) - Bylaws of PFF Bancorp, Inc. *
Exhibit 27.0 - Financial Data Schedule (filed herewith)
(b) Reports on form 8-K
None
_________________________
*Incorporated herein by reference to Form S-1, Registration Statement, as
amended, filed on December 8, 1995, SEC Registration Number 33-94860.
27
PFF BANCORP, INC. AND SUBSIDIARY
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
PFF BANCORP, INC.
DATED: November 12, 1999 BY: /s/ LARRY M. RINEHART
-------------------------------
Larry M. Rinehart
President, Chief Executive Officer
and Director
DATED: November 12, 1999 BY: /s/ GREGORY C. TALBOTT
--------------------------------
Gregory C. Talbott
Executive Vice President, Chief
Financial Officer and Treasurer
28