<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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, 1997
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
incorporation or organization) Identification No.)
350 SOUTH GAREY AVENUE, POMONA, CALIFORNIA 91766
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(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. [X] Yes [_] No
The registrant had 17,903,344 shares of common stock, par value $.01 per
share, outstanding as of November 12, 1997.
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I FINANCIAL INFORMATION (UNAUDITED)
Item 1 Financial Statements
Consolidated Balance Sheets as of
September 30, 1997 and March 31, 1997 1
Consolidated Statements of Operations for the Three and
Six Months Ended September 30, 1997 and 1996 2
Consolidated Statements of Changes in Stockholders'
Equity for the Six Months Ended September 30, 1997 3
Consolidated Statements of Cash
Flows for the Six Months Ended September 30, 1997 and 1996 4
Notes to Unaudited Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II OTHER INFORMATION
Item 1 Legal Proceedings 24
Item 2 Changes in Securities 24
Item 3 Defaults Upon Senior Securities 24
Item 4 Submission of Matters to a Vote of Security Holders 24
Item 5 Other Information 24
Item 6 Reports on Form 8-K 24
SIGNATURES
</TABLE>
<PAGE>
PART I--FINANCIAL INFORMATION (UNAUDITED)
ITEM 1. FINANCIAL STATEMENTS.
PFF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1997 1997
---------------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents....................................................... $ 45,795 $ 31,632
Loans held for sale at lower of cost or fair value (net of valuation
allowance)................................................................... 163,000 736
Investment securities held-to-maturity (estimated fair value of $832 at
September 30, 1997 and $16,213 at March 31, 1997).............................. 822 16,190
Investment securities available-for-sale, at fair value......................... 129,563 87,647
Mortgage-backed securities held-to-maturity (estimated fair value of
$4,790 at September 30, 1997 and $5,509 at March 31, 1997)................... 4,761 5,490
Mortgage-backed securities available-for-sale, at fair value.................... 476,893 486,009
Loans receivable, net........................................................... 1,701,057 1,819,209
Federal Home Loan Bank (FHLB) stock, at cost.................................... 28,295 27,270
Accrued interest receivable..................................................... 15,751 15,879
Real estate, net................................................................ 9,690 8,858
Property and equipment, net..................................................... 27,047 26,521
Prepaid expenses and other assets............................................... 12,792 10,326
---------- ----------
Total assets.......................................................... $2,615,466 $2,535,767
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits..................................................................... $1,713,881 $1,711,049
FHLB advances and other borrowings........................................... 600,886 530,000
Accrued expenses and other liabilities....................................... 37,712 29,192
---------- ----------
Total liabilities..................................................... 2,352,479 2,270,241
---------- ----------
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 19,837,500; outstanding 17,903,344 at September 30,
1997 and 18,845,625 at March 31, 1997................................. 198 198
Additional paid-in capital................................................... 173,672 182,519
Retained earnings, substantially restricted.................................. 106,448 108,021
Unearned stock-based compensation............................................ (23,077) (24,711)
Treasury stock............................................................... (19) (10)
Unrealized gains (losses) on securities available-for-sale, net.............. 5,765 (491)
---------- ----------
Total stockholders' equity............................................... 262,987 265,526
---------- ----------
Total liabilities and stockholders' equity............................ $2,615,466 $2,535,767
========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-1-
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- --------------------------
1997 1996 1997 1996
------------ ----------- ---------- ----------
<S> <C> <C> <C> <C>
Interest income:
Mortgage loans.............................................. $ 35,202 $ 32,451 $ 69,832 $ 63,310
Non-mortgage loans.......................................... 996 552 1,831 1,097
Mortgage-backed securities.................................. 8,096 6,066 16,817 9,951
Investment securities and deposits.......................... 3,134 1,433 5,805 3,363
----------- ----------- ---------- ----------
Total interest income...................................... 47,428 40,502 94,285 77,721
----------- ----------- ---------- ----------
Interest expense:
Interest on deposits...................................... 20,435 19,784 40,662 39,382
Interest on borrowings.................................... 9,064 3,939 17,379 4,691
----------- ----------- ---------- ----------
Total interest expense.................................. 29,499 23,723 58,041 44,073
----------- ----------- ---------- ----------
Net interest income..................................... 17,929 16,779 36,244 33,648
Provision for loan losses.................................... 2,249 3,071 4,499 7,766
----------- ----------- ---------- ----------
Net interest income after provision for loan losses..... 15,680 13,708 31,745 25,882
----------- ----------- ---------- ----------
Non-interest income:
Other fees and charges...................................... 2,813 2,279 5,769 4,608
Mortgage loan servicing fees................................ 224 209 443 422
Gain (loss) on sale of loans, net........................... 3 27 17 (149)
Other non-interest income................................... 186 48 204 237
----------- ----------- ---------- ----------
Total non-interest income.................................. 3,226 2,563 6,433 5,118
----------- ----------- ---------- ----------
Non-interest expense:
General and administrative:
Compensation and benefits............................ 6,996 5,410 13,182 10,695
Occupancy and equipment.............................. 2,948 2,825 5,691 5,232
Marketing and professional services.................. 657 666 1,441 1,568
Other non-interest expense........................... 2,539 3,087 5,040 6,105
----------- ----------- ---------- ----------
Total general and administrative..................... 13,140 11,988 25,354 23,600
SAIF recapitalization assessment............................. - 10,900 - 10,900
Real estate operations, net.................................. (58) 139 533 (1,064)
----------- ----------- ---------- ----------
Total non-interest expense................................. 13,082 23,027 25,887 33,436
----------- ----------- ---------- ----------
Earnings (loss) before income taxes................. 5,824 (6,756) 12,291 (2,436)
Income taxes (benefit)....................................... 2,538 (2,339) 5,322 (444)
----------- ----------- ---------- ----------
Net earnings (loss)................................. $ 3,286 $ (4,417) $ 6,969 $ (1,992)
=========== =========== ========== ==========
Earnings (loss) per share........................... $ 0.19 $ (0.24) $ 0.40 $ (0.11)
=========== =========== ========== ==========
Weighted average shares outstanding for
earnings (loss) per share calculation............. 17,278,254 18,316,625 17,220,367 18,296,788
=========== =========== ========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-2-
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
UNREALIZED
GAINS
(LOSSES)
ON
RETAINED SECURITIES
ADDITIONAL EARNINGS UNEARNED AVAILABLE-
NUMBER OF COMMON PAID-IN SUBSTANTIALLY STOCK-BASED TREASURY FOR-
SHARES STOCK CAPITAL RESTRICTED COMPENSATION STOCK SALE,NET TOTAL
----------- ------ ------- -------------- ------------ -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SIX MONTHS ENDED SEPTEMBER 30, 1997
- -----------------------------------
Balance at March 31, 1997.......... 18,845,625 $198 182,519 108,021 (24,711) (10) (491) $265,526
Net earnings....................... - - 6,969 - - - - 6,969
Purchase of treasury stock......... (942,281) - (9,414) (8,542) - (9) - (17,965)
Amortization of shares under
stock-based
compensation plan................. - - 567 - 1,634 - - 2,201
Changes in unrealized gains(losses)
on securities available-for-sale,
net.............................. - - - - - - 6,256 6,256
---------- ---- ------- ------- ------- --- ----- --------
Balance at September 30, 1997...... 17,903,344 $198 173,672 106,448 (23,077) (19) 5,765 $262,987
========== ==== ======= ======= ======= === ===== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
-3-
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOW
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
--------------------------------------
1997 1996
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss)......................................... $ 6,969 $ (1,992)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Amortization of premiums (discounts) on loans,
investments............................................. 704 1,051
and mortgage-backed securities
Amortization of deferred loan origination fees............ (495) (532)
Loan fees collected....................................... (94) (534)
Dividends on FHLB stock................................... (820) (452)
Provisions for losses on:
Loans................................................. 4,499 7,766
Real estate........................................... 416 (1,221)
Net (gain) on sales of loans, mortgage-backed
securities
available-for-sale, real estate and property and
equipment................................................ (412) (316)
Depreciation and amortization of property and equipment... 1,794 1,524
Loans originated for sale................................. (3,192) (6,409)
Proceeds from sale of loans held for sale................. 7,030 9,691
Amortization of unearned stock-based compensation......... 2,201 919
(Increase)/decrease in:
Accrued expenses and other liabilities................ 13,512 11,583
Accrued interest receivable........................... (128) (4,057)
Prepaid expenses and other assets..................... 2,466 6,839
--------- ---------
Net cash provided by operating activities......... 34,450 23,860
--------- ---------
Cash flows from investing activities:
Loans originated for investment.......................... (242,019) (317,099)
Increase/(decrease) in construction loans in process..... (10,979) 15,083
Purchases of loans held for investment................... - (28,292)
Principal payments on loans.............................. 182,050 112,275
Principal payments on mortgage-backed securities
held-to-maturity........................................ 729 1,078
Principal payments on mortgage-backed securities
available-for-sale..................................... 55,036 23,496
Purchases of investment securities available-for-sale.... (59,911) (30,914)
Purchases of FHLB stock.................................. (205) (8,406)
Purchases of mortgage-backed securities
available-for-sale...................................... (42,863) (426,800)
Proceeds from maturity of certificates of deposit........ - 190
Proceeds from maturities of investment securities........ 15,368 20,870
Proceeds from maturities of investment
securities available-for-sale........................... 10,898 1,305
</TABLE>
(Continued)
-4-
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOW
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX-MONTHS ENDED
SEPTEMBER 30,
-------------------------------------
1997 1996
--------- ---------
<S> <C> <C>
Proceeds from the sale of investment securities
available-for-sale......................................... 7,899 -
Proceeds from the sale of mortgage-backed securities
available-for-sale......................................... 6,293 -
Investment in real estate................................... (88) (695)
Proceeds from sale of real estate........................... 4,072 5,607
Purchases of property and equipment......................... (2,387) (1,572)
Proceeds from sale of property and equipment................ 67 4
--------- ---------
Net cash used in investing activities................. (76,040) (633,870)
Cash flows from financing activities:
Proceeds from FHLB advances and other borrowings............ 426,886 631,200
Repayment of FHLB advances and other borrowings............. (356,000) (155,922)
Net change in deposits...................................... 2,832 (6,413)
Purchase of treasury stock.................................. (17,965) -
--------- ---------
Net cash provided by financing activities............. 55,753 468,865
Net (decrease) increase in cash and cash
equivalents.......................................... 14,163 (141,145)
Cash and cash equivalents, beginning of period.................. 31,632 175,904
------ ---------
Cash and cash equivalents, end of period........................ $ 45,795 $ 34,759
========= =========
Supplemental information:
Interest paid, including interest credited...................... $ 55,774 $ 41,843
Income taxes paid............................................... 4,575 1,838
Non-cash investing and financing activities:
Change in unrealized gain (loss) on securities
available-for-sale......................................... 6,256 1,962
Net transfers from loans receivable to real estate.......... 1,563 4,468
Loans originated for the sale of real estate acquired
in settlement of loans..................................... 1,449 736
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-5-
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Consolidation
Effective March 28, 1996, pursuant to a plan of conversion, Pomona First Federal
Savings and Loan Association (the Association) reorganized from a federally
chartered mutual savings and loan association to PFF Bank & Trust (the Bank), a
federally chartered stock savings bank. PFF Bancorp, Inc. (the Bancorp) was
incorporated under Delaware law in October 1995 for the purpose of acquiring and
holding all of the outstanding capital stock of the Bank as a part of the Bank's
conversion. Any references to financial information for periods before March
28, 1996, refer to the Association prior to conversion.
The accompanying consolidated financial statements include the accounts of PFF
Bancorp, Inc. and its subsidiary (the Company) PFF Bank & Trust. The Company's
business is conducted primarily through PFF Bank & Trust and subsidiary, Pomona
Financial Services, Inc. Pomona Financial Services, Inc. includes the accounts
of Diversified Services, Inc. and PFF Insurance Service. All material
intercompany balances and transactions have been eliminated in consolidation.
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.
The results of operations for the three and six months ended September 30, 1997
are not necessarily indicative of results that may be expected for the entire
fiscal year ending March 31, 1998.
(2) Recent Accounting Pronouncements
In February 1997, the FASB issued Statement of Financial Accounting Standards
No. 128, "Earnings per Share" (SFAS 128). SFAS 128 supersedes APB Opinion No.
15, "Earnings per Share" (APB 15) and specified the computation, presentation,
and disclosure requirements for earnings per share (EPS) for entities with
publicly held common stock or potential common stock. SFAS 128 replaces the
presentation of primary EPS with a presentation of basic EPS, and fully diluted
EPS with diluted EPS. SFAS 128 will also require dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator of the diluted EPS
computation. This statement shall be effective for financial statements for
both interim and annual periods ending after December 15, 1997. Earlier
application is not permitted. The Company has determined that this statement
will have no significant impact on the financial condition, results of
operations, or earnings per share.
In February 1997, the FASB issued Statement of Financial Accounting Standards
No. 129, "Disclosure of Information about Capital Structure" (SFAS 129). This
statement shall be effective for the financial statements for both interim and
annual periods ending after December 15, 1997. It is not expected that the
issuance of SFAS No. 129 will require significant revision of prior disclosures
since the Statement lists required disclosures that had been included in a
number of previously existing separate statements and opinions.
-6-
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenue, expenses, gains, and losses) in full set of
general purpose financial statements. SFAS No. 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS No. 130 requires that
an enterprise (a) classify items of other comprehensive income by their nature
in a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. SFAS No.
130 is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. Management is in the process of determining
the impact, if any, this statement will have on the Company.
In June 1997, the FASB also issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
(SFAS no. 131). SFAS No. 131 establishes standards for the way that public
enterprises report information about operating segments in annual financial
statements and requires that selected information about those operating segments
be reported in interim financial statements. This Statement supersedes
Statement of Financial Accounting Standards No. 14, "Financial Reporting for
Segments of a Business Enterprise". SFAS No. 131 requires that all public
enterprises report financial and descriptive information about their reportable
operating segments. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. This Statement is effective
for fiscal years beginning after December 15, 1997. In the initial year of
application, comparative information for earlier years should be restated. This
Statement need not be applied to interim financial statements in the year of
application, but comparative information for earlier years should be restated.
This Statement need not be applied to interim financial statements in the year
of application, but comparative information for interim periods in the initial
year of application shall be reported in financial statements for interim
periods in the second year of application. Early application is encouraged.
Management is in the process of determining the impact, if any, this statement
will have on the Company.
The Securities and Exchange Commission has approved rule amendments to clarify
and expand existing disclosure requirements for derivative financial
instruments. The amendments require enhanced disclosure of accounting policies
for derivative financial instruments in the footnotes to the financial
statements. In addition, the amendments expand existing disclosure requirements
to include quantitative and qualitative information about market risk inherent
in market risk sensitive instruments. The required quantitative and qualitative
information should be disclosed outside the financial statements and related
notes thereto. The enhanced accounting policy disclosure requirements are
effective for the quarterly period ended June 30, 1997. As the Company believes
that the derivative financial instrument disclosures contained with the notes to
the financial statements of its 1997 Form 10-K substantially conform with the
accounting policy requirements of these amendments, no further interim period
disclosure has been provided. The rule amendments that required expanded
disclosure of quantitative and qualitative information about market risk are
effective with the 1998 Form 10-K.
-7-
<PAGE>
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 and six months ended September 30, 1997 and 1996. The yields and
costs are derived by dividing income or expense by the average balance of assets
or liabilities, respectively, for the periods shown. Average balances are
derived from average daily balances. The yields and costs include fees which are
considered adjustments to yields.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------------------------
1997 1996
--------------------------------------- ------------------------------------
AVERAGE AVG. YIELD/ AVERAGE AVG. YIELD/
ASSETS: BALANCE INTEREST COST BALANCE INTEREST COST
------- -------- ----------- ------- -------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Interest-earning deposits and short-
term investments.................... $ 35,732 $ 484 5.37% $ 26,469 $341 5.11%
Investment securities, net (1)(2).... 129,776 2,208 6.75 48,941 820 6.65
Loans receivable, net (3)(4)......... 1,871,157 36,198 7.74 1,746,198 33,003 7.56
Mortgage-backed securities(1)(5)..... 479,739 8,096 6.91 347,338 6,066 6.99
Federal Home Loan Bank Stock, at
cost................................ 28,085 442 6.24 16,724 272 6.51
---------- ------- ---------- ------
Total interest-earning assets..... 2,544,489 47,428 7.49 2,185,670 40,502 7.41
------- ------
Non-interest-earning assets.......... 78,835 76,396
---------- ----------
Total assets...................... $2,623,324 $2,262,066
========== ==========
LIABILITIES AND EQUITY:
Interest-bearing liabilities
Money market savings accounts........ 186,505 1,940 4.13 $ 139,082 1,050 2.99
Passbook accounts.................... 165,826 1,120 2.68 158,104 1,245 3.12
NOW and other demand deposit
accounts............................ 154,051 303 0.78 134,057 283 0.84
Certificate accounts................. 1,213,866 17,072 5.58 1,234,598 17,206 5.53
---------- ------- ---------- ------
Total............................. 1,720,248 20,435 4.71 1,665,841 19,784 4.71
FHLB advances and other borrowings... 604,313 9,027 5.93 275,273 3,920 5.65
Other................................ 3,020 37 4.86 3,181 19 2.37
---------- ------- ---------- ------
Borrowed funds..................... 607,333 9,064 5.92 278,454 3,939 5.61
---------- ------- ---------- ------
Total interest-bearing
liabilities...................... 2,327,581 29,499 5.03 1,944,295 23,723 4.84
------- ------
Non-interest-bearing liabilities..... 31,059 27,512
---------- ----------
Total liabilities................. 2,358,640 1,971,807
Stockholders' equity................. 264,684 290,259
---------- ----------
Total liabilities and
stockholders' equity............. $2,623,324 $2,262,066
========== ==========
Net interest income before provision
for loan losses..................... $17,929 $16,779
======= =======
Net interest rate spread (6)......... 2.46% 2.57%
Net interest margin (7).............. 2.82% 3.07%
Ratio of interest earning assets to
interest-bearing liabilities........ 109.32% 112.41%
</TABLE>
-8-
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
_______________________________
(1) Includes assets available for sale and held-to-maturity and unamortized
discounts and premiums.
(2) Included in the average balance of investment securities for the three
months ended September 30, 1997 and 1996 are average investment securities
held-to-maturity of $2.6 million and $12.4 million, respectively. Interest
income recognized on investment securities held-to-maturity during these
periods was $49,000 and $184,000, respectively, resulting in average yields
of 7.36% and 5.93%, respectively. Yields on average investment securities
have been calculated based upon the historical cost bases of the underlying
securities.
(3) Amount is net of deferred loan origination fees, undisbursed loan funds,
unamortized discounts and allowance for loan losses and includes loans held
for sale and non-performing loans.
(4) Included in the average balance of loans receivable, net for three months
ended September 30, 1997 and 1996, are average loans held for sale of $41.7
million and $3.3 million respectively. Interest income recognized on loans
held for sale during these periods was $751,000 and $58,500, respectively,
resulting in average yields of 7.20% and 7.15%, respectively.
(5) Included in the average balance of mortgage-backed securities, net for the
three months ended September 30, 1997 and 1996 are average mortgage-backed
securities held-to-maturity of $4.9 million and $6.2 million. Interest
income recognized on mortgage backed securities held-to-maturity during
these periods was $88,000 and $113,000, respectively, resulting in an
average yields of 7.23% and 7.24%, respectively.
(6) Net interest rate spread represents the difference between the yield on
interest-earnings assets and the cost of interest-bearing liabilities.
(7) Net interest margin represents net interest income divided by average
interest-earning assets.
-9-
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
AVERAGE BALANCE SHEET
<TABLE>
<CAPTION>
SIX MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------------------------------
1997 1996
--------------------------------------- ------------------------------------------
AVERAGE AVG. YIELD/ AVERAGE AVG. YIELD/
ASSETS: BALANCE INTEREST COST BALANCE INTEREST COST
------- -------- ----------- ------- ------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Interest-earning deposits and
short-term investments............... $ 30,062 $ 836 5.55% $ 41,927 $ 1,188 5.67%
Investment securities, net (1)(2)..... 122,314 4,150 6.77 46,579 1,674 7.19
Loans receivable, net (3)(4).......... 1,861,143 71,663 7.70 1,682,489 64,407 7.66
Mortgage-backed securities(1)(5)...... 489,427 16,817 6.91 283,993 9,951 7.01
Federal Home Loan Bank Stock, at cost. 27,831 819 5.87 16,379 501 6.12
---------- ------- ---------- -------
Total interest-earning assets..... 2,530,777 94,285 7.45 2,071,367 77,721 7.50
------- -------
Non-interest-earning assets........... 74,415 79,073
---------- ----------
Total assets...................... $2,605,192 $2,150,440
========== ==========
LIABILITIES AND EQUITY:
Interest bearing liabilities
Money market savings accounts......... $ 175,892 3,627 4.11 $ 140,397 1,922 2.73
Passbook accounts..................... 169,545 2,301 2.71 152,680 2,360 3.08
NOW and other demand deposit accounts 151,153 601 0.79 133,039 560 0.84
Certificate accounts.................. 1,222,822 34,133 5.57 1,238,556 34,540 5.56
---------- ------- ---------- -------
Total............................. 1,719,412 40,662 4.72 1,664,672 39,382 4.72
FHLB advances and other borrowings.... 585,484 17,325 5.90 162,384 4,665 5.73
Other................................. 2,477 54 4.35 2,576 26 2.01
---------- ------- ---------- -------
Borrowed funds..................... 587,961 17,379 5.90 164,960 4,691 5.67
---------- ------- ---------- -------
Total interest-bearing liabilities. 2,307,373 58,041 5.02 1,829,632 44,073 4.80
------- -------
Non-interest-bearing liabilities...... 30,561 30,634
---------- ----------
Total liabilities................. 2,337,934 1,860,266
Stockholders' equity.................. 267,258 290,174
---------- ----------
Total liabilities and stockholders'
equity............................. $2,605,192 $2,150,440
========== ==========
Net interest income before provision
for loan losses...................... $36,244 $33,648
======= =======
Net interest rate spread (6).......... 2.43% 2.70%
Net interest margin (7)............... 2.86% 3.25%
Ratio of interest-earning assets to
interest-bearing liabilities...... 109.68% 113.21%
</TABLE>
-10-
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
_______________________________
(1) Includes assets available for sale and held-to-maturity and unamortized
discounts and premiums.
(2) Included in the average balance of investment securities for the six months
ended September 30, 1997 and 1996 are average investment securities held-
to-maturity of $6.0 million and $15.1 million, respectively. Interest
income recognized on investment securities held-to-maturity during these
periods was $177,000 and $438,000 respectively, resulting in average yields
of 5.93% and 5.80%, respectively. Yields on average investment securities
have been calculated based upon the historical cost bases of the underlying
securities.
(3) Amount is net of deferred loan origination fees, undisbursed loan funds,
unamortized discounts and allowance for loan losses and includes loans held
for sale and non-performing loans.
(4) Included in the average balance of loans receivable, net for six months
ended September 30, 1997 and 1996, are average loans held for sale of $24.3
million and $5.6 million, respectively. Interest income recognized on
loans held for sale during these periods were $876,000 and $200,000,
respectively, resulting in average yields of 7.21% and 7.19%, respectively.
(5) Included in the average balance of mortgage-backed securities, net for the
six months ended September 30, 1997 and 1996 are average mortgage-backed
securities held-to-maturity of $5.1 million and $6.5 million. Interest
income recognized on mortgage backed securities held-to-maturity during
these periods were $184,000 and $113,000, respectively, resulting in an
average yields of 5.87% and 7.24%, respectively.
(6) Net interest rate spread represents the difference between the yield on
interest-earnings assets and the cost of interest-bearing liabilities.
(7) Net interest margin represents net interest income divided by average
interest-earning assets.
-11-
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
RATE/VOLUME ANALYSIS
The following table presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to: (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume); and (iii) the net change. The changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
COMPARED TO SEPTEMBER 30, 1996 COMPARED TO SEPTEMBER 30, 1996
INCREASE (DECREASE) INCREASE(DECREASE)
----------------------------- -------------------------------
VOLUME RATE NET VOLUME RATE NET
-------- ------ ------ ------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-earning deposits and short-term
investments....................................... $ 119 $ 24 $ 143 $ (334) $ (18) $ (352)
Investment securities, net(1)(2)................... 1,354 34 1,388 2,734 (258) 2,476
Loans receivable, net(3)........................... 2,362 833 3,195 6,839 417 7,256
Mortgage-backed securities(1)(4)................... 2,122 (92) 2,030 7,198 (332) 6,866
Federal Home Loan Bank Stock, at cost.............. 189 (19) 170 353 (35) 318
------ ----- ------ ------- ------- -------
Total interest-earning assets................. 6,146 780 6,926 16,790 (226) 16,564
------ ----- ------ ------- ------- -------
Interest-bearing liabilities:
Money market savings accounts...................... 357 533 890 486 1,219 1,705
Passbook accounts.................................. 61 (186) (125) 261 (320) (59)
NOW and other demand deposit accounts ............. 42 (22) 20 76 (35) 41
Certificate accounts............................... (289) 155 (134) (440) 33 (407)
FHLB advances and other borrowings................. 4,686 421 5,107 12,155 505 12,660
Other.............................................. (1) 19 18 (2) 30 28
------ ----- ------ ------- ------- -------
Total interest-bearing liabilities.............. 4,856 920 5,776 12,536 1,432 13,968
------ ----- ------ ------- ------- -------
Change in net interest income........................... $1,290 $(140) $1,150 $ 4,254 $(1,658) $ 2,596
====== ===== ====== ======= ======= =======
</TABLE>
__________________________
(1) Includes assets held-to-maturity.
(2) Included in the increase/(decrease) in interest income on investment
securities, net for the three and six months ended September 30, 1997
compared to 1996 are increases/(decreases) in interest income on investment
securities held-to-maturity attributable to volume and rate of $(144,000)
and $(9,000), and $(266,000) and $4,000, respectively.
(3) Included in the increase in interest income on loans receivable, net for
the three and six months ended September 30, 1997 compared to 1996 are
increases/(decreases) in interest income on loans held for sale
attributable to volume and rate of $681,000 and $(5,000) and $674,000 and
$2,000, respectively.
(4) Included in the increase in interest income on mortgage-backed securities,
net for the three and six months ended September 30, 1997 compared to 1996
are increases/(decreases) in interest income on mortgage-backed securities
held-to-maturity attributable to volume and rate of $(24,000) and zero and
$(52,000) and $1,000, respectively.
-12-
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997
- -----------------------------------------------------------------------------
AND 1996
- --------
GENERAL
- -------
The Company recorded net earnings of $3.3 million or $0.19 per share for the
three months ended September 30, 1997 compared to a net loss of $4.4 million or
$0.24 per share for the comparable period of 1996. The net loss for the quarter
ended September 30, 1996 included an after tax charge of $6.3 million
representing the impact of the Bank's $10.9 million share of an industry wide
special assessment levied against the Bank's insured deposits in September 1996
in order to recapitalize the Savings Association Insurance Fund (SAIF) of the
Federal Deposit Insurance Corporation (FDIC).
Net interest income was $17.9 million for the three months ended September 30,
1997 compared to $16.8 million for the comparable period of 1996. The increase
resulted principally from growth in average interest-earning assets. The
Company's ratio of average interest-earning assets to average interest-bearing
liabilities was 109.32% for the three months ended September 30, 1997 compared
to 112.41% for the comparable period of 1996 reflecting the Company's efforts to
leverage its capital base. Average interest spread was 2.46% for the three
months ended September 30, 1997 compared to 2.57% for the comparable period of
1996. Net interest margin was 2.82% for the three months ended September 30,
1997 compared to 3.07% for the comparable period of 1996.
Provision for loan losses was $2.2 million for the three months ended September
30, 1997 compared to $3.1 million for the comparable period of 1996.
Total non-interest income was $3.2 million for the three months ended September
30, 1997 compared to $2.6 million for the comparable period of 1996. Total non-
interest expense decreased from $23.0 million for the three months ended
September 30, 1996 to $13.1 million for the comparable period of 1997 due
principally to the $10.9 million special assessment to recapitalize the SAIF
recorded in September 1996.
INTEREST INCOME
- ---------------
Interest income was $47.4 million for the three months ended September 30, 1997
compared to $40.5 million for the comparable period of 1996. The increase in
interest income was attributable principally to a $358.8 million increase in
average interest-earning assets from $2.19 billion for the three months ended
September 30, 1996 to $2.54 billion for the comparable period of 1997. The yield
on earning assets increased to 7.49% for the three months ended September 30,
1997 from 7.41% for the comparable period of 1996. The increase in average
interest-earning assets was due principally to three factors: a $132.4 million
increase in the average balance of mortgage-backed securities (MBS) from $347.3
million for the three months ended September 30, 1996 to $479.7 million for the
comparable period of 1997; an increase of $125.0 million in the average balance
of loans receivable, net from $1.75 billion for the three months ended September
30, 1996 to $1.87 billion for the comparable period of 1997; and an increase of
$80.8 million in the average balance of
-13-
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
investment securities from $48.9 million for the three months ended September
30, 1996 to $129.8 million for the comparable period of 1997.
The yield on loans receivable increased to 7.74% for the three months ended
September 30, 1997 from 7.56% for the comparable period of 1996. The Bank has
placed emphasis on originating construction, consumer, commercial business and
commercial real estate loans, the majority of which provide higher yields than
those earned on single-family residential COFI-based loan products. The
disbursed balance of the Bank's portfolio of construction loans totaled $80.0
million at a yield of 9.84% at September 30, 1997 compared to $57.7 million at a
yield of 9.71% at September 30, 1996. The Bank also increased the proportion of
its loan portfolio comprised by ("36/6") single-family residential mortgage
loans which provide for a fixed rate of interest for 36 months before
transitioning to a six-month adjustable-rate loan tied to the one-year constant
maturity treasury (CMT) index. At September 30, 1997, the Bank's portfolio of
these loans totaled $283.7 million at an average yield of 7.24% compared to
$190.8 million at an average yield of 7.16% at September 30, 1996. The increase
in the yield on loans receivable, net attributable to the change in the
composition of the loan portfolio was additionally impacted by an increase in
the Federal Home Loan Bank (FHLB) Eleventh District cost of funds Index (COFI)
to which a large portion of the Bank's portfolio of adjustable-rate loans are
tied. COFI in effect for the three months ended September 30, 1997 averaged
4.88% compared to 4.83% for the comparable period of 1996.
The average balance of MBS increased $132.4 million from $347.3 million for the
three months ended September 30, 1996 to $479.7 million for the comparable
period of 1997. The weighted average yield on MBS was 6.91% for the three months
ended September 30, 1997 compared to 6.99% for the comparable period of 1996.
The decrease in the yield on MBS was due primarily to a shift in the MBS
portfolio to a higher percentage of variable-rate securities tied to one-year
CMT and six-month LIBOR.
The average balance of investment securities increased from $48.9 million for
the three months ended September 30, 1996 to $129.8 million for the comparable
period of 1997 creating a positive volume variance of $1.4 million. The
weighted average yield on investment securities increased from 6.65% for the
three months ended September 30, 1996 to 6.75% for the comparable period of
1997. The increase in the weighted average yield on investment securities
reflects the higher yield earned on callable notes and collateralized mortgage
obligations (CMO) purchased during 1997.
INTEREST EXPENSE
- ----------------
Interest expense was $29.5 million for the three months ended September 30, 1997
compared to $23.7 million for the comparable period of 1996. The increase was
attributable to a $383.3 million increase in the average balance of interest-
bearing liabilities from $1.94 billion for the three months ended September 30,
1996 to $2.33 billion for the comparable period of 1997 coupled with an increase
in the cost of average interest-bearing liabilities from 4.84% for the three
months ended September 30, 1996 to 5.03% for the comparable period of 1997. The
increase in interest-bearing liabilities was due principally to a $329.0 million
increase in the average balance of FHLB advances and other borrowings from
$275.3 million for the three months ended September 30, 1996 to $604.3 million
for the comparable period of 1997. The increase
-14-
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
in FHLB advances and other borrowings was due to the Company's strategy of
utilizing both wholesale and retail sources of funding to achieve its strategic
growth objectives. The weighted average cost of FHLB advances and other
borrowings increased from 5.65% for the three months ended September 30, 1996 to
5.93% for the comparable period of 1997 reflecting an increase in the weighted
average maturity and the general level of interest rates. The average balance of
deposits was $1.72 billion for the three months ended September 30, 1997
compared to $1.67 billion for the comparable period of 1996, an increase of
$54.4 million. The average balance of money market, passbook and demand accounts
increased $75.1 million from $431.2 million for the three months ended September
30, 1996 to $506.4 million for the comparable period of 1997 while the average
balance of certificate accounts decreased $20.7 million from $1.23 billion for
the three months ended September 30, 1996 to $1.21 billion for the comparable
period of 1997. The Bank is making a conscious effort through its marketing,
pricing and business development efforts to increase the proportion of its
deposit base comprised by money market, passbook and demand accounts. The
weighted average cost of deposits was 4.71% for both the three months ended
September 30, 1997 and 1996.
PROVISION FOR LOAN LOSSES
- -------------------------
The provision for loan losses was $2.2 million for the three months ended
September 30, 1997 compared to $3.1 million for the comparable period of 1996.
See "Comparison of Financial Condition at September 30, 1997 and March 31,
1997."
NON-INTEREST INCOME
- -------------------
Non-interest income was $3.2 million or .49% of average assets for the quarter
ended September 30, 1997 compared to $2.6 million or .45% of average assets for
the comparable period of 1996. Savings fees and charges were $1.8 million for
the quarter ended September 30, 1997 compared to $1.4 million for the comparable
period of 1996. Trust fee income was $415,000 for the quarter ended September
30, 1997 compared to $330,000 for the comparable period of 1996. Sales of non-
deposit investment products generated fee income of $263,000 for the six months
ended September 30, 1997 compared to $289,000 for the comparable period of 1996.
NON-INTEREST EXPENSE
- --------------------
Non-interest expense was $13.1 million for the three months ended September 30,
1997 compared to $23.0 million for the comparable period of 1996. General and
administrative expenses were $13.1 million or 2.00% of average assets for the
three months ended September 30, 1997 compared to $12.0 million or 2.12% of
average assets for the comparable period of 1996. Compensation and benefits
expense increased from $5.4 million for the quarter ended September 30, 1996 to
$7.0 million for the comparable period of 1997, due principally to increased
staffing associated with the Bank's offering of additional products and services
to both consumers and businesses, including a Telebanking Center which opened in
May 1997, and also the expense associated with the Company's 1996 Incentive Plan
under which stock has been granted to key
-15-
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
officers and directors subject to the Company's achieving certain performance
levels. Other non-interest expense decreased $548,000 from $3.1 million for the
quarter ending September 30, 1996 to $2.5 million for the comparable period of
1997. The decrease was due principally to the reduction in the SAIF insurance
rate from 23 cents to 6.5 cents per $1,000 of average deposits. For the three
months ended September 30, 1996, there was approximately $273,000 of expenses
associated with the Bank's transition of its EDP systems to a new third party
service provider in October 1996 and approximately $300,000 of forms, supplies
and other expenses associated with the Bank's name change. For the three months
ended September 30, 1997, there was approximately $150,000 of costs associated
with the Bank's preparation and modification of its electronic data processing
(EDP) and other systems for full functionality in the year 2000 (Y2K) and
thereafter. The Bank is highly dependent on both internal and external EDP
systems for the conduct of its business and expects to incur between $1.5 and
$2.0 million of expense over the next two fiscal years in connection with its
Y2K efforts. As a part of its evaluation and response to Y2K, the Bank will
also be evaluating and reacting to the potential impact, if any, of Y2K on its
major borrowers and suppliers.
Real estate operations, net reflects income of $58,000 for the quarter ended
September 30, 1997 compared to expense of $139,000 for the comparable period of
1996.
INCOME TAXES
- ------------
Income tax expense was $2.5 million for the quarter ended September 30, 1997
compared to a tax benefit of $2.3 million for the comparable period of 1996.
The increase in income tax expense was primarily the result of an increase in
earnings before income taxes from a loss of $6.8 million for the quarter ended
September 30, 1996 to earnings of $5.8 million for the comparable period of
1997.
-16-
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997 AND
- -------------------------------------------------------------------------------
1996
- ----
GENERAL
- --------
The Company recorded net earnings of $7.0 million or $0.40 per share for the six
months ended September 30, 1997 compared to a net loss of $2.0 million or $0.11
per share for the comparable period of 1996. The net loss for the six months
ended September 30, 1996 was attributable to the Bank's share of the industry
wide SAIF assessment.
Net interest income was $36.2 million for the six months ended September 30,
1997 compared to $33.6 million for the comparable period of 1996. The increase
resulted from a $459.4 million increase in average interest-earning assets from
$2.07 billion for the six months ended September 30, 1996 to $2.53 billion for
the comparable period of 1997. The Company's ratio of average interest-earning
assets to average interest-bearing liabilities was 109.68% for the six months
ended September 30, 1997 compared to 113.21% for the comparable period of 1996.
Average interest spread was 2.43% for the six months ended September 30, 1997
compared to 2.70% for the comparable period of 1996. Net interest margin was
2.86% for the six months ended September 30, 1997 compared to 3.25% for the
comparable period of 1996.
Provision for loan losses was $4.5 million for the six months ended September
30, 1997 compared to $7.8 million for the comparable period of 1996.
Total non-interest income was $6.4 million for the six months ended September
30, 1997 compared to $5.1 million for the comparable period of 1996. Total non-
interest expense decreased from $33.4 million for the six months ended September
30, 1996 to $25.9 million for the comparable period of 1997 due principally to
the $10.9 million SAIF assessment recorded in September 1996.
INTEREST INCOME
- ---------------
Interest income was $94.3 million for the six months ended September 30, 1997
compared to $77.7 million for the comparable period of 1996. The increase was
attributable to a $459.4 million increase in average interest-earning assets
from $2.07 billion for the six months ended September 30, 1996 to $2.53 billion
for the comparable period of 1997. The increase in interest income arising from
higher balances was offset by a decline in the yield on average interest-earning
assets from 7.50% for the six months ended September 30, 1996 to 7.45% for the
comparable period of 1997. The average balance of MBS increased $205.4 million
from $284.0 million for the six months ended September 30, 1996 to $489.4
million for the comparable period of 1997. The average balance of loans
receivable, net increased $178.7 million from $1.68 billion for the six months
ended September 30, 1996 to $1.86 billion for the comparable period of 1997 and
the average balance of investment securities increased $75.7 million from $46.6
million for the six months ended September 30, 1996 to $122.3 million for the
comparable period of 1997.
The weighted average yield on loans receivable, net was 7.70% for the six months
ended September 30, 1997 compared to 7.66% for the comparable period of 1996.
The increase in the yield on loans
-17-
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
receivable was a result of the Bank's increased emphasis on originating higher
yielding mortgage loans coupled with an increase in the six-month average COFI.
COFI in effect for the six months ended September 30, 1997 averaged 4.85%
compared to 4.83% for the comparable period of 1996. The weighted average yield
on MBS was 6.91% for the six months ended September 30, 1997 compared to 7.01%
for the comparable period of 1996. The decrease in the yield on MBS was due
primarily to a shift in the MBS portfolio to a higher percentage of variable-
rate securities tied to one-year CMT and six-month LIBOR. The weighted average
yield on investment securities was 6.77% for the six months ended September 30,
1997 compared to 7.19% for the comparable period of 1996. The six months ended
September 30, 1996 reflects an adjustment of $158,000. Without this adjustment,
the yield for the six months would have been 6.51%. The adjusted increase in the
yield on investment securities of 26 basis points reflects the higher yields
earned on callable agency securities and CMOs purchased during 1997.
INTEREST EXPENSE
- ----------------
Interest expense was $58.0 million for the six months ended September 30, 1997
compared to $44.1 million for the comparable period of 1996. The average
balance of interest-bearing liabilities increased $477.7 million from $1.83
billion for the six months ended September 30, 1996 to $2.31 billion for the
comparable period of 1997. The weighted average cost of interest-bearing
liabilities increased from 4.80% for the six months ended September 30, 1996 to
5.02% for the comparable period of 1997.
The increase in the average interest-bearing liabilities was due to a $423.1
million increase in the average balance of FHLB advances and other borrowings
from $162.4 million for the six months ended September 30, 1996 to $585.5
million for the comparable period of 1997 in connection with the Company's
strategy of utilizing both wholesale and retail sources of funding to achieve
its strategic growth objectives. The average balance of deposits was $1.72
billion for the six months ended September 30, 1997, an increase of $54.7
million from the comparable period of 1996. For the six months ended September
30, 1997 and 1996, the average cost of deposits was 4.72%. For the six months
ended September 30, 1997, the average cost of FHLB advances and other borrowings
was 5.90% compared to 5.67% for the comparable period of 1996 reflecting the
increase in the weighted average maturity and the general level of interest
rates.
PROVISION FOR LOAN LOSSES
- -------------------------
The provision for loan losses was $4.5 million for the six months ended
September 30, 1997 compared to $7.8 million for the comparable period of 1996.
The provision for the six months ended September 30, 1996 included $2.5 million
applicable to the establishment of specific allowances on several loans based
upon updated reviews. See "Comparison of Financial Condition at September 30,
1997 and March 31, 1997."
NON-INTEREST INCOME
- -------------------
Non-interest income was $6.4 million or .49% of average assets for the six
months ended September 30, 1997 compared to $5.1 million or .48% of average
assets for the comparable period of 1996. Savings fees and charges were $3.3
million for the six months ended September 30, 1997 compared to $2.3 million for
the comparable period of 1996. Trust fee income was $842,000 for the six months
ended September 30,
-18-
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
1997 compared to $705,000 for the comparable period of 1996. Sales of non-
deposit investment products generated $872,000 of fee income for both six month
periods ending September 30, 1997 and 1996.
NON-INTEREST EXPENSE
- --------------------
Non-interest expense was $25.9 million for the six months ended September 30,
1997 compared to $33.4 million for the comparable period of 1996. General and
administrative expenses were $25.4 million or 1.95% of average assets for the
six months ended September 30, 1997 compared to $23.6 million or 2.16% of
average assets for the comparable period of 1996. Compensation and benefits
expense was $13.2 million for the six months ended September 30, 1997 compared
to $10.7 million for the comparable period of 1996, due principally to the
addition of staffing associated with the Bank's offering of additional products
and services, including a Telebanking Center which opened in May 1997, and the
expense associated with the Company's 1996 Incentive Plan under which stock has
been granted to key officers and directors subject to the Company's achieving
certain performance levels. The increase in occupancy and equipment expense
from $5.2 million for the six months ended September 30, 1996 to $5.7 million
for the comparable period of 1997 was due principally to computer and cabling
upgrades incurred in conjunction with the Bank's technology business plan.
Other non-interest expense decreased from $6.1 million for the six months ended
September 30, 1996 to $5.0 million for the comparable period of 1997 due
primarily to a reduction in the SAIF insurance rate charged on average deposits.
Other non-interest expense for the six months ended September 30, 1997 includes
approximately $350,000 associated with the preparation for the Y2K; whereas, the
six months ended September 30, 1996 includes expenses associated with the name
change and the Bank's transition of its EDP systems to a new third party
provider.
Real estate operations, net reflects income of $1.1 million for the six months
ended September 30, 1996 compared to a loss of $533,000 for the comparable
period of 1997. The results for the six months ended September 30, 1996 reflect
a $1.4 million reduction in the allowance for real estate losses based upon
updated property valuations. The results for the six months ended September 30,
1997 reflect a provision of $325,000 on a single-family residential development
project.
INCOME TAXES
- ------------
Income tax expense was $5.3 million for the six months ended September 30, 1997
compared to a benefit of $444,000 for the comparable period of 1996. The income
tax benefit for the six months ended September 30, 1996 is net of a $470,000
expense accrual for the tax portion of a possible adverse California franchise
tax settlement.
-19-
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1997 AND MARCH 31, 1997
- --------------------------------------------------------------------------
Total assets increased $79.7 million or 3.14% to $2.62 billion at September 30,
1997 from $2.54 billion at March 31, 1997 due to growth in loans receivable,
including loans held-for-sale, and investment securities. Loans receivable, net
decreased $118.2 million to $1.70 billion at September 30, 1997 from $1.82
billion at March 31, 1997 due principally to the reclassification of $163.0
million of mortgage loans to loans held for sale as of September 30, 1997. This
reclassification reflects the Bank's intention to alter the repricing profile of
its loan portfolio by selling a portion of the portfolio indexed to COFI during
the quarter ending December 31, 1997 while increasing the proportion of the
portfolio indexed to current indices such as prime and the one-year CMT. The
Company has entered into a commitment to purchase residential mortgage loans
indexed to the one-year CMT in an amount similar to the balance of the COFI
loans being sold during the quarter ending December 31, 1997.
Loan originations for the six months ended September 30, 1997 were $253.0
million compared to $330.3 million for the comparable period of 1996. Non-
performing loans declined from $23.4 million or 1.24% of gross loans at March
31, 1997 to $18.9 million or 0.97% of gross loans at September 30, 1997. Non-
performing assets, which includes foreclosed real estate, net of specific
allowances and restructured loans, decreased from $45.7 million or 1.80% of
total assets at March 31, 1997 to $41.8 million or 1.61% of total assets at
September 30, 1997. Troubled-debt restructured loans were $14.6 million at
March 31, 1997 compared to $14.8 million at September 30, 1997.
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 and industry trends. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowance for loan losses. Such
agencies may require the Bank to make additional provisions for loan losses
based upon information available at the time of the review. At September 30,
1997, the Bank's allowance for loan losses was $27.2 million or 1.40% of gross
loans compared to $27.7 million or 1.47% of gross loans at March 31, 1997. The
Bank will continue to monitor and modify its allowance for loan losses as
conditions dictate. The following table sets forth activity in the Bank's
allowance for loan losses for the six months ended September 30, 1997.
<TABLE>
<S> <C>
Balance at March 31, 1997 $27,721
Provision for loan losses 2,250
Charge-offs, net (2,324)
-------
Balance at June 30, 1997 27,647
Provision for loan losses 2,249
Charge-offs, net (2,675)
-------
Balance at September 30, 1997 $27,221
=======
</TABLE>
-20-
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
Investment securities and MBS increased $16.7 million to $612.0 million at
September 30, 1997 from $595.3 million at March 31, 1997. The growth in
investment securities and MBS was funded primarily through borrowings.
Total liabilities increased $82.2 million or 3.6% to $2.35 billion at September
30, 1997 from $2.27 billion at March 31, 1997. Deposits increased $2.8 million
from $1.71 billion at March 31, 1997 to $1.71 billion at September 30, 1997.
FHLB advances and other borrowings increased $70.9 million to $600.9 million at
September 30, 1997 from $530.0 million at March 31, 1997. FHLB advances were
utilized to fund the growth in loans receivable including loans held for sale
and the increase in investment securities.
Total stockholder's equity was $263.0 million at September 30, 1997 compared to
$265.5 million at March 31, 1997. The $2.5 million decrease in stockholder's
equity is comprised of a $7.0 million increase representing net earnings for the
six months ended September 30, 1997, a $6.3 million increase representing the
change in unrealized gains on securities available-for-sale, a $2.2 million
increase representing the amortization of shares under stock-based compensation
plans, and a $18.0 million decrease representing Treasury Stock. On April 24,
1997, the Office of Thrift Supervision approved the Company's application to
repurchase 5% (942,241 shares) of its outstanding common stock. All shares were
repurchased during the six months ended September 30, 1997 at an average price
of $19.07 per share.
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. While maturities and scheduled amortization of loans and
securities are predictable sources of funds, deposit flows and mortgage
prepayments are greatly influenced by general interest rates, economic
conditions and competition. The Bank is subject to minimum regulatory liquidity
requirements. The Bank has maintained the required minimum levels of liquid
assets as defined by OTS regulations. These requirements, which may be varied
at the direction of the OTS depending upon economic conditions and deposit
flows, are based upon a percentage of deposits and short-term borrowings. The
required ratios are currently 5% for the total qualifying liquidity and 1% for
the short-term qualifying liquidity (generally those investments having
maturities of one year or less). The Bank's average total and short-term
liquidity ratios were 5.48% and 2.27%, respectively for the six months ended
September 30, 1997.
The Company's cash flows are comprised of three primary classifications: cash
flows from operations, investing activities and financing activities. Cash
flows provided by operating activities were $34.5 million and $23.9 million for
the six months ended September 30, 1997 and 1996, respectively.
Net cash provided by (used in) investing activities consisted primarily of
disbursements for loan originations and purchase of mortgage-backed and other
investment securities, offset by principal collections on loans and proceeds
from maturation of investments and pay downs on mortgage-backed securities.
Principal payments on loans were $182.1 million and $112.3 million for the six
months ended September 30, 1997 and 1996, respectively. Disbursements on loans
originated and purchased excluding loans originated for sale, were $242.0
million and $345.4 million for the six months ended September 30, 1997 and 1996,
-21-
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
respectively. Disbursements for purchases of mortgage-backed and other
investment securities were $102.8 million and $457.7 million for the six months
ended September 30, 1997 and 1996, respectively. Proceeds from the maturation
of investment securities and paydowns of mortgage-backed securities were $82.0
million and $46.7 million for the six months ended September 30, 1997 and 1996,
respectively. Proceeds from the sale of investment securities and mortgage-
backed securities available-for-sale were $14.2 million for the six months ended
September 30, 1997. No securities were sold during the six month period ended
September 30, 1996.
Net cash provided by (used in) financing activities consisted primarily of net
activity in deposit accounts, FHLB advances and other borrowings and treasury
stock. The net increases/(decreases) in deposits were $2.8 million and $(6.4
million) for the six months ended September 30, 1997 and 1996, respectively.
The net increases in FHLB advances and other borrowings were $70.9 million and
$475.3 million for the six months ended September 30, 1997 and 1996,
respectively. The net increase in treasury stock was $18.0 million for the six
months ended September 30, 1997.
At September 30, 1997, on a consolidated basis, the Company had total capital of
$263.0 million or 10.06% of total assets. At September 30, 1997, the Bank
exceeded all of its regulatory capital requirements with a tangible capital
level of $218.5 million, or 8.51% of adjusted total assets, which is above the
required level of $38.5 million, or 1.5%; core capital of $218.5 million, or
8.51% of adjusted total assets, which is above the required level of $77.0
million, or 3%, and risk-based capital of $235.8 million or 16.47% of risk-
weighted assets, which is above the required level of $114.6 million, or 8%.
The Company's most liquid assets are cash and short-term investments. The level
of these assets are dependent on the Company's operating financial lending and
investing activities during any given period. At September 30, 1997, cash and
cash equivalents totaled $45.8 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 and collateralized borrowings.
At September 30, 1997, the Company had $550.9 million in FHLB advances and $50.0
million in reverse repurchase agreements outstanding. Other sources of
liquidity include MBS and other investment securities available-for-sale or
maturing within one year.
At September 30, 1997, the Bank had outstanding commitments to originate
mortgage loans of $15.8 million and no outstanding commitments to purchase MBS
or other investment securities. The Bank anticipates that it will have
sufficient funds available to meet these commitments. Certificate accounts which
are scheduled to mature in less than one year from September 30, 1997 totaled
$1.1 billion. The Bank expects that a substantial portion of the maturing
certificate accounts will be retained by the Bank at maturity.
-22-
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
LEGISLATIVE MATTERS
- -------------------
Thrift Rechartering Legislation. The Deposit Insurance Funds Act of 1996
provides that the BIF and SAIF will merge on January 1, 1999 if there are no
more savings associations as of that date. Various proposals to eliminate the
federal thrift charter, create a uniform financial institutions charter and
abolish the OTS have been introduced in Congress. The House Banking Committee
recently reported a bill that would require federal savings institutions to
convert to a national or state bank charter within two years of enactment. The
bill would allow banks resulting from the conversion of a savings association to
continue to engage in activities (and hold assets) in which they were lawfully
engaged on the day before enactment. State chartered thrifts would become
subject to the same federal regulation as applies to state commercial banks.
Holding companies for savings institutions would become subject to the same
regulation as holding companies that control commercial banks, with a limited
grandfather provision for unitary savings and loan holding company activities.
The grandfather treatment could be less under certain circumstances, such as a
change in control of the holding company. The OTS would be merged with the
Office of the Comptroller of the Currency, the agency that regulates national
banks. The Bank is unable to predict whether such legislation would be enacted,
the extent to which the legislation would restrict or disrupt its operations or
whether the BIF and SAIF funds will eventually merge. No assurance can be given
as to whether this legislation will be enacted or, if enacted, what the terms of
such legislation would be.
Legislation regarding bad debt recapture has been passed. The legislation
requires recapture of reserves accumulated after 1987. The recapture tax on
post 1987 reserves must be paid over a six year period starting in 1996. The
payment of the tax can be deferred in each of 1996 and 1997 if an institution
originates at least the same average annual principal amount of mortgage loans
that it originated in the six years prior to 1996. In the opinion of management,
this legislation will not have a material impact on the financial condition or
operations of the Company.
-23-
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
PART II -- OTHER INFORMATION
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 MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
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 11 - Statement Re: Computation of Earnings Per Share.
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.
-24-
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
SIGNATURES
Pursuant to the requirements 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.
November 12, 1997 /s/ LARRY M. RINEHART
- ------------------------------- -----------------------------------------
Date Larry M. Rinehart
President, Chief Executive Officer
and Director
November 12, 1997 /s/ GREGORY C. TALBOTT
- -------------------------------- -----------------------------------------
Date Gregory C. Talbott
Executive Vice President, Chief Financial
Officer and Treasurer
-25-
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
EXHIBIT 11. STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------------- ---------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
-------------- -------------- -------------- -------------
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
PRIMARY NET EARNINGS PER SHARE:
Net Earnings/(Loss).............................. $ 3,286 $ (4,417) $ 6,969 $ (1,992)
=========== =========== =========== ===========
Weighted average number of common
shares and equivalents outstanding:
Issued and outstanding........................... 19,837,500 19,837,500 19,837,500 19,837,500
Less:
Unearned ESOP shares and shares held by
benefit plans................................... (3,121,118) (1,520,875) (3,186,974) (1,540,712)
Add:
Common stock equivalents due to dilutive
effect of stock options (1)..................... 561,872 - 569,841 -
----------- ----------- ----------- -----------
Weighted average number of common
shares and equivalents outstanding.............. 17,278,254 18,316,625 17,220,367 18,296,788
=========== =========== =========== ===========
Earnings/(Loss) per share........................ $ 0.19 $ (0.24) $ 0.40 $ (0.11)
=========== =========== =========== ===========
FULLY DILUTED NET EARNINGS PER SHARE:
Net Earnings/(Loss).............................. $ 3,286 $ (4,417) $ 6,969 $ (1,992)
=========== =========== =========== ===========
Weighted average number of common
shares and equivalents outstanding:
Issued and outstanding........................... 19,837,500 19,837,500 19,837,500 19,837,500
Less:
Unearned ESOP shares held and shares held
by benefit plans................................ (3,121,118) (1,520,875) (3,186,974) (1,540,712)
Add:
Common stock equivalents due to dilutive
effect of stock options (1)..................... 419,595 - 573,305 -
----------- ----------- ----------- -----------
Weighted average number of common
shares and equivalents outstanding.............. 17,135,977 18,316,625 17,223,831 18,296,788
=========== =========== =========== ===========
Earnings/(Loss) per share........................ $ 0.19 $ (0.24) $ 0.40 $ (0.11)
=========== =========== =========== ===========
</TABLE>
(1) The PFF Bancorp, inc. 1996 Incentive Plan was adopted and approved by the
stockholders on October 23, 1996.
-26-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEPTEMBER
30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 45,795
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 606,456
<INVESTMENTS-CARRYING> 5,583
<INVESTMENTS-MARKET> 5,622
<LOANS> 1,864,057
<ALLOWANCE> 27,221
<TOTAL-ASSETS> 2,615,466
<DEPOSITS> 1,713,881
<SHORT-TERM> 0
<LIABILITIES-OTHER> 638,598
<LONG-TERM> 0
0
0
<COMMON> 198
<OTHER-SE> 262,789
<TOTAL-LIABILITIES-AND-EQUITY> 2,615,466
<INTEREST-LOAN> 71,663
<INTEREST-INVEST> 22,622
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 94,285
<INTEREST-DEPOSIT> 40,662
<INTEREST-EXPENSE> 17,379
<INTEREST-INCOME-NET> 36,244
<LOAN-LOSSES> 4,499
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 25,887
<INCOME-PRETAX> 12,291
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,969
<EPS-PRIMARY> 0.40
<EPS-DILUTED> 0.40
<YIELD-ACTUAL> 7.45
<LOANS-NON> 18,920
<LOANS-PAST> 0
<LOANS-TROUBLED> 14,798
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 27,721
<CHARGE-OFFS> 4,999
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 27,221
<ALLOWANCE-DOMESTIC> 27,221
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
