<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
Annual report pursuant to Section 13 of the
Securities Exchange Act of 1934, as amended
For the fiscal year ended March 31, 1997
Commission File No.: 0-27404
PFF BANCORP, INC.
(exact name of registrant as specified in its charter)
DELAWARE 95-4561623
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
350 SOUTH GAREY AVENUE, POMONA, CALIFORNIA 91766
(Address of principal executive offices)
Registrant's telephone number, including area code: (909) 623-2323
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of class)
NASDAQ NATIONAL MARKET
(Name of exchange on which registered)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--------- -------.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, i.e., persons other than the directors and executive officers of
the registrant, was $310,335,297, based upon the last sales price as quoted on
The Nasdaq National Market for June 20, 1997.
The number of shares of Common Stock outstanding as of June 20, 1997:
18,715,625
<PAGE>
INDEX
PART I
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
Item 1. Description of Business............................ 1
Item 2. Properties......................................... 41
Item 3. Legal Proceedings.................................. 44
Item 4. Submission of Matters to a Vote of Security Holders 44
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters .............................. 44
Item 6. Selected Financial Data............................ 45
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............... 48
Item 8. Financial Statements and Supplementary Data........ 63
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............ 97
PART III
Item 10. Directors and Executive Officers of the Registrant. 97
Item 11. Executive Compensation............................. 97
Item 12. Security Ownership of Certain Beneficial Owners
and Management.................................... 97
Item 13. Certain Relationships and Related Transactions..... 98
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K. . . . . . . . . . . . . . . . . . . . 99
</TABLE>
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
- --------------------------------
GENERAL
PFF Bancorp, Inc. (the "Bancorp") completed its initial public offering of
19,837,500 shares of common stock on March 28, 1996, in connection with the
conversion of Pomona First Federal Savings and Loan Association from the mutual
to stock form of ownership and the change of the Association's name to PFF Bank
& Trust (the "Bank"). The Bancorp received $198.4 million from this initial
public offering before offering expenses of $4.5 million. The Bancorp utilized
$105.0 million of the net proceeds of the initial public offering to acquire all
of the issued and outstanding stock of the Bank. The Bancorp is headquartered
in Pomona, California and its principal business currently consists of the
operations of its wholly-owned subsidiary, the Bank. The Bancorp had no
operations prior to March 28, 1996, and accordingly, the results of operations
prior to this date reflect only those of the Bank and its subsidiaries. At March
31, 1997, on a consolidated basis, the Bancorp and the Bank, (collectively
referred to as the "Company") had total assets of $2.54 billion, total deposits
of $1.71 billion and total stockholders' equity of $265.5 million. The Bancorp,
as a unitary savings and loan holding company, and the Bank are subject to
regulation by the Office of Thrift Supervision (the "OTS"), the Federal Deposit
Insurance Corporation (the "FDIC") and the Securities and Exchange Commission
(the "SEC").
The Bank's historical focus has been attracting retail deposits from the
general public in the areas surrounding its branch offices and investing on
those deposits, together with funds generated from operations and borrowings,
primarily in one- to four-family residential mortgage loans. To a lesser
extent, the Bank has engaged in secondary market activities and has invested on
a limited basis in multi-family mortgage, commercial real estate, construction
and land, and consumer loans. The Bank has begun increasing its emphasis on
attracting business deposit accounts and originating commercial business, tract
construction and consumer loans. Loan sales come from loans held in the Bank's
portfolio designated as being held for sale or originated during the period and
being so designated. The Bank generally retains all the servicing rights of
loans sold. The Bank's revenues are derived principally from interest on its
mortgage loans, and to a lesser extent, interest and dividends on its
investments and mortgage-backed securities and to a significantly lesser extent
income from loan servicing and other fees. The Bank's primary sources of funds
are deposits, principal and interest payments on loans and mortgage-backed
securities and FHLB advances and other borrowings. The Bank also engages in
trust activities through its trust department and offers certain annuity and
mutual fund non-deposit investment products through a subsidiary. The Bank is
strongly committed to utilizing emerging technologies for effective delivery of
its products and services and since August 1995, has maintained an Internet site
on the World Wide Web. In April 1997, the Bank opened a telebanking center as
a means of expanding the delivery channels for its products and services. In
addition, the Bank is using a recently developed system for retail origination
of real property loans utilizing laptop computers and automated uploads of
application packages to its loan origination system. This new system is
expected to increase efficiency and reduce processing time for loan
originations. In October 1996, the Bank converted its core electronic data
processing (EDP) systems from one third party service provider to a combination
of new third party providers. This EDP conversion was necessary to enable the
Bank to support the expanded array of consumer and business products and
services that the Bank has begun offering. The costs charged to operations for
the year ended March 31, 1997 associated with this EDP conversion totaled
approximately $2.1 million, excluding ongoing monthly contractual charges.
Capital outlays for software and hardware costs during fiscal 1997 in connection
with this EDP conversion totaled approximately $1.8 million.
MARKET AREA AND COMPETITION
The Bank is a community-oriented savings institution whose lending and
deposit gathering activities are concentrated in eastern Los Angeles county, San
Bernardino and Riverside counties and northern and central Orange county. The
Bank also originates loans on a wholesale basis throughout Southern California
1
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and has expanded its lending markets outside of Southern California on a limited
basis. The Bank's deposit gathering is concentrated in the communities
surrounding its offices.
The Bank's primary market area is highly competitive for financial services
and the Bank faces significant competition both in making loans and in
attracting deposits. The Bank faces direct competition from a significant
number of financial institutions operating in its market area, many with a
state-wide or regional presence and in some cases a national presence. Many of
these financial institutions are significantly larger and have greater financial
resources than the Bank. The Bank's competition for loans comes principally
from savings and loan associations, mortgage banking companies, commercial
banks, credit unions and insurance companies. Its most direct competition for
deposits has historically come from savings and loan associations and commercial
banks. In addition, the Bank faces increasing competition for deposits and
other financial products from non-bank institutions such as brokerage firms and
insurance companies in such areas as short-term money market funds, mutual funds
and annuities. Competition may also increase as a result of the lifting of
restrictions on the interstate operations of financial institutions.
TRUST ACTIVITIES
In January 1995, the Bank acquired the trust operations of another bank for
$3.5 million. As a result of the acquisition, the Bank now has additional
fiduciary responsibilities acting as trustee, executor, administrator, guardian,
custodian, record keeper, agent, registrar, advisor and manager. The trust
assets are not the assets of the Bank and are not included in the balance sheet
of the Bank. Trust fee income for the year ended March 31, 1997 was $1.4
million. See Note 18 to the Consolidated Financial Statements.
LENDING ACTIVITIES
Loan Portfolio Composition. The Bank's loan portfolio consists primarily
of conventional first mortgage loans secured by one- to four-family residences.
At March 31, 1997, the Bank had total gross loans outstanding of $1.89 billion,
of which $1.50 billion were one- to four-family residential mortgage loans, or
79.4% of the Bank's total gross loans. The remainder of the portfolio consisted
of $108.9 million of multi-family mortgage loans, or 5.8% of total gross loans;
$137.2 million of commercial real estate loans, or 7.2 % of total gross loans;
$113.2 million of construction and land loans, or 6.0 % of total gross loans;
consumer loans of $26.9 million or 1.4% of total gross loans and commercial
business loans of $3.1 million or 0.2% of total gross loans. At March 31, 1997,
98.2% of the Bank's mortgage loans had adjustable interest rates. Of the Bank's
adjustable-rate mortgage loans, 74.1% are indexed to the 11th Federal Home Loan
Bank (FHLB) District Cost of Funds Index (COFI).
The types of loans that the Bank may originate are subject to federal and
state laws and regulations. Interest rates charged by the Bank on loans are
affected by the demand for such loans, the supply of money available for lending
purposes and the rates offered by competitors. These factors are, in turn,
affected by, among other things, economic conditions, monetary policies of the
federal government, including the Federal Reserve Board, and legislative tax
policies.
2
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The following table sets forth the composition of the Bank's loan portfolio
in dollar amounts and as a percentage of the portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT MARCH 31,
--------------------------------------------------------------------------------------------------------
1997 1996 1995 1994(1) 1993
----------------- ----------------- ----------------- ----------------- ------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate:
Residential:
One-to four-family...... $1,499,858 79.4% $1,269,099 77.9% $1,291,300 78.0% $1,069,175 73.7% $1,068,971 72.3%
Multi-family............ 108,896 5.8 114,477 7.0 119,802 7.2 123,674 8.5 136,695 9.3
Commercial real estate.... 137,169 7.2 148,300 9.1 146,746 8.9 155,976 10.8 161,223 10.9
Construction and land..... 113,188 6.0 76,529 4.7 76,007 4.6 79,732 5.5 89,606 6.1
Commercial................ 3,100 0.2 - - - - - - - -
Consumer.................. 26,931 1.4 21,853 1.3 22,606 1.3 21,425 1.5 21,243 1.4
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total loans, gross..... 1,889,142 100.0% 1,630,258 100.0% 1,656,461 100.0% 1,449,982 100.0% 1,477,738 100.0%
===== ===== ===== ===== =====
Undisbursed loan funds..... (38,485) (25,030) (25,934) (32,625) (26,278)
Unamortized discounts, net. (1,629) (803) (1,158) (897) (1,341)
Deferred loan origination
fees, net................. (1,362) (3,384) (4,400) (4,464) (4,600)
Allowance for loan losses.. (27,721) (19,741) (19,294) (11,723) (6,391)
---------- ---------- ---------- ---------- ----------
Total loans, net....... 1,819,945 1,581,300 1,605,675 1,400,273 1,439,128
Less:
Loans held for sale(2).... (736) (6,365) - (4,775) (1,494)
---------- ---------- ---------- ---------- ----------
Loans receivable, net.. $1,819,209 $1,574,935 $1,605,675 $1,395,498 $1,437,634
========== ========== ========== ========== ==========
</TABLE>
__________________
(1) Loans held for accelerated disposition at March 31, 1994 are not included
in March 31, 1994 amounts.
(2) All loans held for sale were one- to-four family residential mortgage
loans. Loans held for sale are stated at cost before valuation adjustments
of $350 and $54 at March 31, 1996, and 1994 respectively, to reflect
carrying value at lower of cost or market. Loans classified as held for
sale at March 31, 1994 were transferred to loans receivable held for
investment in August, 1994.
3
<PAGE>
Loan Maturity. The following table shows the contractual maturity of the
Bank's gross loans at March 31, 1997. The table does not include principal
prepayments.
<TABLE>
<CAPTION>
AT MARCH 31, 1997
---------------------------------------------------------------------------------------
ONE- TO TOTAL
FOUR- MULTI- COMMERCIAL CONSTRUCTION LOANS
FAMILY FAMILY REAL ESTATE AND LAND COMMERCIAL CONSUMER RECEIVABLE
---------- ------- ------------ ------------ ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Amounts due:
One year or less..................... $ 6,011 613 11,764 111,747 2,789 15,964 148,888
After one year:
More than one year to three years... 3,691 601 12,476 819 311 161 18,059
More than three years to five years. 6,744 7,957 6,203 49 - 141 21,094
More than five years to 10 years.... 22,091 9,502 28,159 321 - 367 60,440
More than 10 years to 20 years...... 140,045 33,289 68,290 139 - 10,298 252,061
More than 20 years.................. 1,321,276 56,934 10,277 113 - - 1,388,600
---------- ------- ------- ------- ----- ------ ---------
Total due after March 31, 1998.... 1,493,847 108,283 125,405 1,441 311 10,967 1,740,254
---------- ------- ------- ------- ----- ------ ---------
Total amount due................. 1,499,858 108,896 137,169 113,188 3,100 26,931 1,889,142
Less:
Undisbursed loan funds.............. - - - (38,485) - - (38,485)
Unamortized discounts, net.......... (1,183) 5 (50) (401) - - (1,629)
Deferred loan origination fees, net. 824 (277) (457) (1,599) - 147 (1,362)
Allowance for loan losses........... (13,841) (3,410) (4,648) (4,103) (56) (1,663) (27,721)
---------- ------- ------- ------- ----- ------ ---------
Total loans, net.............. 1,485,658 105,214 132,014 68,600 3,044 25,415 1,819,945
Loans held for sale................. (736) - - - - - (736)
---------- ------- ------- ------- ----- ------ ---------
Loans receivable, net............... $1,484,922 105,214 132,014 68,600 3,044 25,415 1,819,209
========== ======= ======= ======= ===== ====== =========
</TABLE>
4
<PAGE>
The following table sets forth at March 31, 1997, the dollar amount of
total gross loans receivable contractually due after March 31, 1998, and whether
such loans have fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER MARCH 31, 1998
-------------------------------
FIXED ADJUSTABLE TOTAL
------- ------------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Real estate loans:
Residential:
One- to four-family............. $31,506 1,462,341 1,493,847
Multi-family.................... 362 107,921 108,283
Commercial real estate........... - 125,405 125,405
Construction and land............ - 1,441 1,441
Commercial....................... - 311 311
Consumer......................... - 10,967 10,967
------- --------- ---------
Total gross loans receivable... $31,868 1,708,386 1,740,254
======= ========= =========
</TABLE>
Origination, Sale, Servicing and Purchase of Loans. The Bank's
mortgage lending activities are conducted primarily by loan representatives
through its 23 banking branches, its loan origination center and wholesale
brokers approved by the Bank and, beginning in April 1997, through telebanking
center. All loans originated by the Bank, either through internal sources or
through wholesale brokers are underwritten by the Bank pursuant to the Bank's
policies and procedures. The Bank originates both adjustable-rate and fixed-
rate mortgage loans. The Bank's ability to originate loans is dependent upon
the relative customer demand for fixed-rate or adjustable-rate mortgage loans,
which is affected by the current and expected future levels of interest rates.
Loan originations have increased from $265.2 million for fiscal 1996 to $499.7
million for fiscal 1997. The increase in loan originations was a result of an
improving Southern California economy and the resulting increase in sales
activity of new and existing homes. The increase is also attributable in part
to the rising cost of fixed-rate loans which increased demand for the Bank's
adjustable-rate loan products. During the quarter ended September 30, 1996, the
Bank began reducing its emphasis on the origination of one- to-four family
residential mortgage loans with a corresponding increased emphasis on the
origination of tract construction and commercial business loans as a means of
enhancing the Bank's yield on interest-earning assets. It is the general policy
of the Bank to sell all of the 15 and 30 year fixed-rate mortgage loans that it
originates and retain substantially all of the adjustable-rate mortgage loans
that it originates. The Bank generally utilizes 10 day Federal National
Mortgage Association (FNMA) forward commitments in connection with the
origination and funding of fixed-rate loans for sale. The Bank generally
retains servicing of the loans sold. At March 31, 1997, the Bank was servicing
$252.1 million of loans for others. See "Loan Servicing". The Bank recognizes,
at the time of sale, the gain or loss on the sale of the loans based on the
difference between the weighted average contractual yield of the loans sold,
adjusted for normal servicing fee rates, and the yield guaranteed to the
purchaser over the estimated life of the loans. At March 31, 1997, there were
$736,000 of mortgage loans categorized as held for sale consisting of fixed-rate
one- to four-family residential mortgage loans. To supplement loan production
the Bank engages in secondary marketing activities, including the purchase of
whole or participating interests in one- to four-family mortgage loans
originated by other institutions based upon the Bank's investment needs and
market opportunities. The Bank intends to continue to purchase various types of
loans originated by other institutions both in its primary market area and to a
limited extent other geographic areas throughout the country depending on market
opportunities. The Bank generally purchases loans on a servicing retained by
seller basis. - See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Comparison of Financial Condition at March
31, 1997 and March 31, 1996".
5
<PAGE>
The following tables set forth the Bank's loan originations, purchases, sale
and principal repayments for the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
MARCH 31
------------------------------------
1997 1996 1995
---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance(1)............. $1,580,950 1,605,675 1,400,273
Loans originated:
One- to four-family(2).......... 354,391 179,765 325,912
Multi-family.................... 4,844 1,755 3,545
Commercial real estate.......... 2,656 6,578 9,124
Construction and land........... 109,747 59,431 50,336
Commercial...................... 3,719 - -
Consumer........................ 24,310 17,681 14,156
---------- ---------- ---------
Total loans originated........ 499,667 265,210 403,073
Loans purchased.................. 28,417 9,303 21,678
---------- ---------- ---------
Total.......................... 2,109,034 1,880,188 1,825,024
Less:
Principal payments............... (225,996) (192,237) (199,362)
Sales of loans................... (27,019) (9,279) (1,315)
Securitization of loans.......... - (73,407) -
Accelerated disposition of loans. - (6,080) (1,900)
Transfers to REO................. (9,977) (8,961) (9,570)
Change in undisbursed loan funds (13,695) 904 6,691
Provision for loan losses........ (13,662) (10,895) (13,901)
Other (3)........................ 1,260 717 8
---------- --------- ---------
Total loans...................... 1,819,945 1,580,950 1,605,675
Loans held for sale, net......... (736) (6,015) -
---------- --------- ---------
Ending balance loans receivable,
net............................. $1,819,209 1,574,935 1,605,675
========== ========= =========
</TABLE>
- ------------------------
(1) Includes loans held for sale.
(2) Loans classified as held for sale at March 31, 1994 were transferred to
loans held for investment in August 1994.
(3) Includes net capitalization of fees, amortization of premium or discount
on loans and gain or loss on sale of loans.
6
<PAGE>
One- to-Four Family Residential Mortgage Lending. The Bank offers both
fixed-rate and adjustable-rate mortgage loans secured by one- to four-family
residences located in the Bank's primary market area, with maturities up to 40
years. Substantially all such loans are secured by properties located in the
Bank's primary market area. Loan originations are obtained from the Bank's loan
representatives and their contacts with the local real estate industry, existing
or past customers, members of the local communities and wholesale brokers who
are compensated on a fee basis.
At March 31, 1997, the Bank's total gross loans outstanding were $1.89
billion, of which $1.50 billion or 79.4% were one- to four-family residential
mortgage loans. 32.6% of such loans were classified as loans secured by non-
owner-occupied properties, which are generally considered to involve a higher
degree of credit risk than loans secured by owner-occupied properties because
repayment is generally dependent upon the property producing sufficient income
to cover debt service and any operating expenses. Of the one- to four-family
residential mortgage loans outstanding at that date, 97.8% were adjustable-rate
loans. The Bank's one- to four-family residential adjustable-rate mortgage
loans have historically been primarily indexed to COFI; however, the Bank has
been increasing the origination of adjustable-rate mortgage loans indexed to
other indices, including the one year Constant Maturity Treasury index (CMT) and
six month London Interbank Offered Rate index (LIBOR). The Bank currently
offers a number of adjustable-rate mortgage loan programs with interest rates
which adjust monthly, semi-annually or annually. A portion of the Bank's
adjustable-rate mortgage loans have introductory terms below the fully-indexed
rate. In underwriting such loans, the Bank qualifies the borrowers based upon
the fully-indexed rate. At the end of the introductory period, such loans will
adjust either monthly, semi-annually or annually according to their terms. The
Bank's adjustable-rate mortgage loans generally provide for periodic and overall
caps on the increase or decrease in interest rate at any adjustment date and
over the life of the loan. The Bank currently has a number of mortgage loan
programs that may be subject to negative amortization. At March 31, 1997, the
outstanding principal balances of these loans totaled $593.6 million (including
$46.3 million of loans serviced by others in which the Bank has purchased a
participating interest), or 39.6% of total one- to four-family residential
mortgage loans. At March 31, 1997, the total outstanding negative amortization
on these loans (excluding the $46.3 million of loans serviced by others) was
$2.6 million. The negative amortization is generally capped at up to 110% of
the original loan amount. Negative amortization involves a greater risk to the
Bank because during a period of higher interest rates the loan principal may
increase above the amount originally advanced. However, the Bank believes that
the risk of default is reduced by negative amortization caps, underwriting
criteria and the stability provided by payment schedules.
The Bank's policy is to originate one- to four-family residential
mortgage loans in amounts up to 85% of the lower of the appraised value or the
selling price of the property securing the loan and up to 95% of the appraised
value or selling price if private mortgage insurance is obtained. Mortgage
loans originated by the Bank generally include due-on-sale clauses which provide
the Bank with the contractual right to deem the loan immediately due and payable
in the event the borrower transfers ownership of the property without the Bank's
consent. Due-on-sale clauses are an important means of adjusting the rates on
the Bank's fixed-rate mortgage loan portfolio and the Bank has generally
exercised its rights under these clauses.
Multi-Family Lending. The Bank originates multi-family mortgage loans
generally secured by properties located in Southern California. As a result of
declining economic conditions in its primary market area during the period of
1990 to 1995, the Bank de-emphasized the origination of multi-family loans
through fiscal 1996. However with an improving Southern California economy
during fiscal 1997, the Bank has selectively increased loan originations in this
type of product. In reaching its decision on whether to make a multi-family
loan, the Bank considers a number of factors including: the net operating
income of the mortgaged premises before debt service and depreciation; the debt
service ratio (the ratio of net operating income to debt service); and the ratio
of loan amount to appraised value. Pursuant to the
7
<PAGE>
Bank's current underwriting policies, a multi-family mortgage loan may only be
made in an amount up to 80% of the appraised value of the underlying property.
In addition, the Bank generally requires a debt service ratio of 120-125%.
Properties securing a loan are appraised and title insurance is required on all
loans. Declines in the real estate values in the Bank's primary market area as a
result of previously mentioned economic conditions, have resulted in an increase
in the loan-to-value ratios on some mortgage loans subsequent to origination.
When evaluating a multi-family loan, the Bank also considers the financial
resources and income level of the borrower, the borrower's experience in owning
or managing similar properties, and the Bank's lending experience with the
borrower. The Bank's underwriting policies require that the borrower be able to
demonstrate strong management skills and the ability to maintain the property
from current rental income. The borrower is required to present evidence of the
ability to repay the mortgage and a history of making mortgage payments on a
timely basis. In making its assessment of the creditworthiness of the borrower,
the Bank generally reviews the financial statements, employment and credit
history of the borrower, as well as other related documentation.
Loans secured by multi-family residential properties generally involve a
greater degree of risk than one- to four-family residential mortgage loans.
Because payments on loans secured by multi-family properties are often dependent
on successful operation or management of the properties, repayment of such loans
may be subject to a greater extent to adverse conditions in the real estate
market or the economy. The Bank seeks to minimize these risks through its
underwriting policies, which require such loans to be qualified at origination
on the basis of the property's income and debt service ratio.
The Bank's multi-family loan portfolio at March 31, 1997 totaled $108.9
million or 5.8% of total gross loans. At March 31, 1997, substantially all of
the Bank's multi-family loans were adjustable-rate indexed to COFI. The Bank's
largest multi-family loan at March 31, 1997, had an outstanding balance of $5.0
million and is secured by a 129 unit apartment complex.
Commercial Real Estate Lending. The Bank originates commercial real estate
loans that are generally secured by properties such as small office buildings or
retail facilities located in Southern California. Due to uncertain market
conditions in its primary market area in recent years, the Bank has limited the
origination of commercial real estate loans. The Bank's underwriting policies
provide that commercial real estate loans may be made in amounts up to 75% of
the appraised value of the property. These loans may be made with terms up to
thirty years and have generally been indexed to COFI. However, the Bank has
begun to originate loans of this type which are indexed to either the CMT or
LIBOR in an effort to diversify away from COFI indexed loan products. The Bank's
underwriting standards and procedures are similar to those applicable to its
multi-family loans, whereby the Bank considers the net operating income of the
property and the borrower's expertise, credit history and profitability. The
Bank has generally required that the properties securing commercial real estate
loans have debt service ratios of at least 120%. The largest commercial real
estate loan in the Bank's portfolio at March 31, 1997 was $3.1 million and is
secured by a mobile home park. At March 31, 1997, the Bank's commercial real
estate loan portfolio was $137.2 million, or 7.2% of total gross loans.
Loans secured by commercial real estate properties, like multi-family
loans, are generally larger and involve a greater degree of risk than one- to
four-family residential mortgage loans. Because payments on loans secured by
commercial real estate properties are often dependent on successful operation or
management of the properties, repayment of such loans may be influenced to a
great extent by adverse conditions in the real estate market or the economy. The
Bank seeks to minimize these risks through its underwriting standards, which
require such loans to be qualified on the basis of the property's income and
debt service ratio.
8
<PAGE>
Construction and Land Lending. The Bank generally originates construction
and land development loans to real estate developers and individuals in Southern
California. The Bank has expanded, on a selective basis, construction and land
lending to western states other than California. Such expansion has been
undertaken with developers with whom the Bank has had long-term lending
relationships. As of March 31, 1997, the Bank has construction and land loans
outstanding for development of residential properties located in Colorado and
Nevada totaling $7.4 million, $4.4 million of which was disbursed. As of March
31, 1997, the remainder of the Bank's construction and land loans are for
development of real estate located in California. The Bank's construction loans
primarily are made to finance tract construction and the construction of one- to
four-family residential properties. These loans are all adjustable-rate loans
with maturities of one year or less and generally include extension options of
six to eighteen months upon payment of an additional fee. The Bank's policies
provide that construction loans may be made in amounts up to 75% of the
appraised value of the property for construction of commercial properties, up to
80% for multi-family properties and up to 85% for one- to four family
residences. The Bank requires an independent appraisal of the property and
generally requires personal guarantees. Loan proceeds are disbursed in
increments as construction progresses and as inspections warrant. The Bank's
inspectors generally visit projects on a weekly basis to monitor the progress of
construction. Land loans are underwritten on an individual basis, but generally
they do not exceed 65% of the actual cost or current appraised value of the
property, whichever is less. The largest construction loan in the Bank's
portfolio at March 31, 1997 had a balance of $8.3 million and is secured by 137
finished lots. The loan amount at origination was $13.5 million and was granted
for the acquisition and development of 182 home sites. The loan has been paid
down in increments by $5.2 million provided by another lender who is originating
construction financing for the phased construction of homes on the completed
lots. The second largest loan in the construction portfolio as of March 31, 1997
was in the amount of $8.1 million and was for the re-subdivision of 40 finished
residential lots into 91 finished lots to facilitate the sale of a Bank owned
foreclosed real estate (REO) project. The next largest construction loan in the
portfolio as of March 31, 1997 was for $4.8 million for the construction of 19
homes. At March 31, 1997, the Bank has $113.2 million (not including undisbursed
loan funds of $38.5 million) of construction and land loans which amounted to
6.0% of the Bank's total gross loans.
Construction and land financing is generally considered to involve a
higher degree of credit risk than long-term financing on improved, owner-
occupied real estate. Risk of loss on a construction loan is dependent largely
upon the accuracy of the initial estimate of the property's value at completion
of construction or development compared to the estimated cost (including
interest) of construction. If the estimate of value proves to be inaccurate,
the Bank may be confronted with a project, when completed, having a value which
is insufficient to assure full repayment of the Bank's loan.
Consumer and Other Lending. The Bank's originated consumer loans generally
consist of home equity lines of credit, overdraft lines of credit, mobile home
loans, automobile loans, recreational vehicle loans and secured personal loans.
At March 31, 1997, the Bank's consumer loan portfolio was $26.9 million or 1.4%
of total gross loans.
Commercial Business Lending. The Bank has expanded its operations to
include commercial business lending. The year ending March 31, 1997 was the
first full year of originating commercial business loans. Total term and
revolving line of credit loans in the portfolio as of March 31, 1997 were $6.3
million, $3.1 million of which was outstanding. The largest loan in the
commercial portfolio is a $2.0 million line of credit to an established
residential retirement facility. The purpose of the revolving line is to
facilitate ongoing upgrades to the facility. As of March 31, 1997, this loan had
an outstanding balance of $484,000.
Commercial business lending is generally considered to involve a higher
degree of credit risk than the forms of secured real estate lending that the
Bank has traditionally engaged in. Commercial business loans may be originated
on an unsecured basis or may be secured by collateral which is not readily
9
<PAGE>
marketable. The Bank generally requires personal guarantees on its
commercial business loans. The risk of default by a commercial business
borrower may be influenced by numerous factors which may include the strength of
the worldwide, regional or local economies or sectors thereof, changes in
technology or demand for particular goods and services and the ongoing ability
of the commercial business borrower to successfully manage the business.
Because of these risks, the Bank monitors the performance of its commercial
business loans and the underlying businesses and individuals with a different
focus than is typical of traditional one- to four-family residential mortgage
lending. The monitoring of commercial business loans typically involves the
periodic review of the financial statements and on-site visits to the businesses
to which credit has been extended.
Loan Approval Procedures and Authority. The Board of Directors establishes
the lending policies of the Bank and delegates lending authority and
responsibility to the Loan Origination and Asset Review Committee (LOARC), the
Management Loan Committee and specified officers of the Bank. The LOARC includes
five of the seven outside Directors of the Bank as well as selected senior
management staff. All loans must be approved by a majority of a quorum of the
designated committee, group of officers or the designated individual. The
following committees, groups of officers and individual officers are granted the
authority to approve and commit the Bank to the funding of the following
categories of loans: mortgage loans in amounts up to $299,999 and consumer loans
in amounts up to $199,999 may be approved by the Bank's staff underwriters;
mortgage loans in excess of $299,999 and up to $499,999 and consumer loans in
excess of $199,999 and up to $299,999 may be approved by certain department
managers; commercial business loans up to $499,999 may be approved by the
Commercial Credit Administrator or Chief Lending Officer; mortgage loans in
excess of $499,999 and up to $999,999 may be approved by the Major Loan Manager,
the Senior Executive Vice President or Chief Lending Officer; mortgage loans in
excess of $999,999 and up to $2,999,999, consumer loans in excess of $299,999
and up to $449,999 and commercial business loans in excess of $499,999 and up to
$1,999,999 must be approved by the Management Loan Committee; and mortgage loans
of $3.0 million or more, consumer loans in excess of $450,000 and commercial
business loans of $2.0 million or more require the approval of the LOARC. The
LOARC presently reviews all commercial business loans, post funding, for
consistency with the Bank's goals and objectives. The Bank will not make loans
to one borrower that are in excess of regulatory limits. Pursuant to OTS
regulations, loans-to-one borrower cannot exceed 15% of the Bank's unimpaired
capital and surplus.
Loan Servicing. The Bank also services mortgage loans for others. Loan
servicing includes collecting and remitting loan payments, accounting for
principal and interest, making inspections of mortgaged premises as required,
contacting delinquent mortgagors, supervising foreclosures and property
dispositions in the event of unremedied defaults, making certain insurance and
tax payments on behalf of the borrowers and generally administering the loans.
In the past, the Bank has recognized gains or losses from excess servicing,
which is the present value of any difference between the weighted average
contractual yield of the loans sold, adjusted for normal servicing fee rates,
and the yield guaranteed to the purchaser over the estimated life of the loans.
Gains or losses from excess servicing are recognizable as an adjustment to the
gain or loss on sale of loans and are dependent on prepayment estimates and
discount rate assumptions. All of the loans currently being serviced for others
are loans which have been sold by the Bank. At March 31, 1997, the Bank was
servicing $252.1 million of loans for others. The Bank currently does not
purchase servicing rights related to mortgage loans originated by other
institutions.
Delinquencies and Classified Assets. The Board of Directors generally
performs a monthly review of all delinquent loans ninety days or more past due.
In addition, management reviews on an ongoing basis all loans 15 or more days
delinquent. The procedures taken by the Bank with respect to delinquencies vary
depending on the nature of the loan and period of delinquency. When a borrower
fails to make a required payment on a loan, the Bank takes a number of steps to
have the borrower cure the delinquency and restore the loan to current status.
The Bank generally sends the borrower a written notice of non-payment 15 days
after the loan is first past due. In the event payment is not then received,
additional letters and phone calls
10
<PAGE>
generally are made. If the loan is still not brought current and it becomes
necessary for the Bank to take legal action, which typically occurs after a loan
is delinquent at least 30 days or more, the Bank will commence foreclosure
proceedings against the real property that secures the loan. If a foreclosure
action is instituted and the loan is not brought current, paid in full, or
refinanced before the foreclosure sale, the real property securing the loan
generally is sold at foreclosure.
Federal regulations and the Bank's Classification of Assets Policy require
that the Bank utilize an internal asset classification system as a means of
reporting problem and potential problem assets. The Bank has incorporated the
OTS internal asset classifications as a part of its credit monitoring system.
The Bank currently classifies problem and potential problem assets as
"Substandard," "Doubtful," or "Loss" assets. An asset is considered Substandard
if it is inadequately protected by the current net worth and paying capacity of
the obligor or of the collateral pledged, if any. Substandard assets include
those characterized by the "distinct possibility" that the insured institution
will sustain "some loss" if the deficiencies are not corrected. Assets
classified as Doubtful have all of the weaknesses inherent in those classified
Substandard with the added characteristic that the weaknesses present make
"collection or liquidation in full," on the basis of currently existing facts,
conditions, and values, "highly questionable and improbable." Assets classified
as Loss are those considered "uncollectible" and of such little value that their
continuance as assets without the establishment of a specific loss allowance is
not warranted. Assets which do not currently expose the Bank to sufficient risk
to warrant classification in one of the aforementioned categories but possess
weaknesses are required to be designated "Special Mention."
When the Bank classifies one or more assets, or portions thereof, as
Substandard or Doubtful, under current OTS policy, the Bank is required to
consider establishing a general valuation allowance in an amount deemed prudent
by management. The general valuation allowance, which is a regulatory term,
represents a loss allowance which has been established to recognize the inherent
credit risk associated with lending and investing activities. When the Bank
classifies one or more assets, or portions thereof, as "Loss," it is required
either to establish a specific allowance for losses equal to 100% of the amount
of the asset so classified or to charge off such amount. The Bank has adopted a
policy of charging off all amounts classified as "Loss".
The Bank's determination as to the classification of its assets and the
amount of its valuation allowances is subject to review by the OTS which can
order the establishment of additional general or specific loss allowances. The
OTS, in conjunction with the other federal banking agencies, has adopted an
interagency policy statement on the allowance for loan and lease losses. The
policy statement provides guidance for financial institutions on both the
responsibilities of management for the assessment and establishment of adequate
allowances and guidance for banking agency examiners to use in determining the
adequacy of general valuation allowances. Generally, the policy statement
recommends that institutions have effective systems and controls to identify,
monitor and address asset quality problems; that management has analyzed all
significant factors that affect the collectibility of the portfolio in a
reasonable manner; and that management has established acceptable allowance
evaluation processes that meet the objectives set forth in the policy statement.
As a result of the declines in local and regional real estate market values and
the significant losses experienced by many financial institutions, there has
been a greater level of scrutiny by regulatory authorities of the loan
portfolios of financial institutions undertaken as part of the examination of
institutions by the OTS and the FDIC. While the Bank believes that it has
established an adequate allowance for loan losses, there can be no assurance
that regulators, in reviewing the Bank's loan portfolio, will not request the
Bank to materially increase at that time its allowance for loan losses, thereby
negatively affecting the Bank's financial condition and earnings. Although
management believes that an adequate allowance for loan losses has been
established, actual losses are dependent upon future events and, as such,
further additions to the level of allowances for loan losses may become
necessary.
11
<PAGE>
The LOARC reviews and classifies the Bank's assets monthly and reports the
results of its review to the Board of Directors. The Bank classifies assets in
accordance with the management guidelines described above. REO is classified as
Substandard. The Bank utilizes an internal appraisal staff and Board approved
independent appraisers to conduct appraisals at the time of foreclosure and
subsequent appraisals on REO on a periodic basis. Qualified staff appraisers are
also utilized for annual property inspections on all properties with a loan
balance over $1.0 million and other specified properties. Property inspections
are intended to provide updated information concerning occupancy, maintenance,
current rent levels, and changes in market conditions.
At March 31, 1997, the Bank had $6.7 million of assets classified as
Special Mention, net of allowances of $93,000 compared to $7.2 million
classified as Special Mention, net of allowances of $23,000 at March 31, 1996.
At March 31, 1997, assets classified as Special Mention include 32 loans
totaling $3.7 million secured by one- to-four family residences. The largest
loan classified as Special Mention at March 31, 1997 had a loan balance of $2.4
million and is secured by a commercial building. At March 31, 1997, the Bank had
$47.6 million of assets classified as Substandard, net of allowances of $8.5
million, compared to $45.2 million classified as Substandard, net of allowances
of $8.5 million at March 31, 1996. The $2.4 million increase in assets
classified as Substandard, net between March 31, 1996 and 1997 was attributable
to an increase in loans classified as Substandard, from 217 loans totaling $42.2
million, before allowances at March 31, 1996, to 251 loans totaling $48.0
million, before allowances at March 31, 1997. One- to-four family residential
loans classified as Substandard, increased from 186 loans totaling $22.8
million, before allowances at March 31, 1996, to 224 loans totaling $29.9
million, before allowances at March 31, 1997. Commercial real estate loans
classified as Substandard, increased from 5 loans totaling $5.0 million, before
allowances at March 31, 1996 to 8 loans totaling $7.0 million, before allowances
at March 31, 1997. Multi-family loans classified as Substandard, decreased from
22 loans totaling $10.4 million, before allowances at March 31, 1996 to 17 loans
totaling $8.8 million, before allowances at March 31, 1997.
During fiscal 1997, the Bank revised its policy relating to the
classification of assets as substandard. This revision in policy primarily
resulted in the classification of loans that had been modified as a temporary
accommodation or troubled-debt restructure (TDR). A modified loan does not
involve the forgiveness of principal or interest and usually involves only a
temporary accommodation such as the advance of several installments of
delinquent loan payments or real property taxes. A troubled-debt restructure
usually involves either the forgiveness of some principal or interest or a
modification that extends beyond six months. The March 31, 1996 figures
presented in the table below have been reclassified to reflect the application
of the foregoing policy changes. The reclassification of March 31, 1996 figures
resulted in the addition of 11 one-to-four family loans to the Substandard
classification in the aggregate amount of $874,000 (gross and net balances), the
addition of six multi-family loans with aggregate gross and net balances of $3.6
million and $3.2 million, respectively and the addition of two commercial loans
with aggregate gross and net balances of $2.3 million and $2.1 million
respectively. After reclassification of the March 31, 1996 figures, the increase
in one- to-four family residential mortgage loans classified as Substandard, was
largely due to the addition of 29 modified one- to-four family residential
mortgage loans totaling $3.5 million and an increase in one- to-four family
troubled-debt restructures from 16 loans totaling $2.1 million at March 31, 1996
to 24 loans totaling $3.2 million at March 31, 1997. The increase in commercial
real estate loans classified as Substandard was primarily due to the addition of
three loans totaling $2.6 million. The Bank's present policy is generally to
continue to classify a troubled-debt restructured loan as Substandard until the
asset has performed at normal contact terms for a period of six to twelve
months. Where there has been a forgiveness of principal or interest or a
submarket interest rate granted, the loan is generally considered a troubled-
debt restructure. During fiscal 1997, the Bank continued to place increased
emphasis on early intervention and flexibility in restructuring troubled-loans
with borrowers rather than foreclosing on the underlying properties. See "Non-
Accrual and Past-Due Loans". At March 31, 1997 and 1996, there were no assets
classified as Doubtful or Loss. The composition of assets classified Substandard
as of March 31, 1997 and 1996 is set forth below.
12
<PAGE>
<TABLE>
<CAPTION>
AT MARCH 31, 1997
-----------------------------------------------------------------------------------------------------
LOANS REO TOTAL SUBSTANDARD ASSETS
----------------------------------- -------------------------------- -------------------------------
GROSS NET NUMBER OF GROSS NET NUMBER OF GROSS NET NUMBER OF
BALANCE BALANCE(1) LOANS BALANCE BALANCE(1) PROPERTIES BALANCE BALANCE(1) ASSETS
--------- ------------ ----------- -------- ----------- ----------- --------- ----------- ---------
Residential: (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family . $29,853 $25,137 224 $ 4,085 $ 4,052 50 $33,938 $29,189 274
Multi-family ........ 8,807 6,717 17 -- -- -- 8,807 6,717 17
Commercial .......... 6,993 6,123 8 342 342 1 7,335 6,465 9
Construction and land 2,395 1,910 2 3,647 3,351 6 6,042 5,261 8
------- ------- ------- ------- ------- ------- ------- ------- -------
Total ......... $48,048 $39,887 251 $ 8,074 $ 7,745 57 $56,122 $47,632 308
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 1996
------------------------------------------------------------------------------------------------------
LOANS REO TOTAL SUBSTANDARD ASSETS
----------------------------------- -------------------------------- --------------------------------
GROSS NET NUMBER OF GROSS NET NUMBER OF GROSS NET NUMBER OF
BALANCE BALANCE(1) LOANS BALANCE BALANCE(1) PROPERTIES BALANCE BALANCE(1) ASSETS
--------- ------------ ----------- -------- ------------ ---------- --------- ------------ --------
Residential: (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family . $22,813 $20,559 186 $ 3,956 $ 3,694 47 $26,769 $24,253 233
Multi-family ........ 10,416 9,528 22 382 382 1 10,798 9,910 23
Commercial .......... 5,014 4,559 5 446 446 1 5,460 5,005 6
Construction and land 3,964 3,815 4 6,711 2,211 4 10,675 6,026 8
------- ------- ------- ------- ------- ------- ------- ------- -------
Total .......... $42,207 $38,461 217 $11,495 $ 6,733 53 $53,702 $45,194 270
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
- -------------------------
(1) Net balances are reduced for loss allowances established against Substandard
loans and REO.
13
<PAGE>
Non-Accrual and Past-Due Loans. The following table sets forth information
regarding non-accrual loans, troubled-debt restructurings and REO. There were
38 troubled-debt restructured loans and 57 REO properties at March 31, 1997. It
is the policy of the Bank to cease accruing and establish an allowance for all
previously accrued but unpaid interest on loans 90 days or more past due. For
the years ended March 31, 1997, 1996, 1995, 1994, and 1993, the amount of
interest income that would have been recognized on non-accrual loans if such
loans had continued to perform in accordance with their contractual terms was
$2.2 million, $858,000, $987,000, $2.7 million, and $2.0 million, respectively,
none of which was recognized. For the same period, the amount of interest income
that would have been recognized on troubled-debt restructured loans if such
loans had continued to perform in accordance with their contractual terms was
$1.3 million, $1.2 million, $506,000, $513,000, and $566,000, respectively;
$942,000, $891,000, $326,000, $391,000, and $476,000 of which was recognized.
The increase in troubled-debt restructured loans from $13.8 million at March 31,
1996 to $14.6 million at March 31, 1997 reflects an increase in the number of
troubled-debt restructured loans from 29 at March 31, 1996 to 38 at March 31,
1997. The $749,000 increase in troubled-debt restructured loans between March
31, 1996 and March 31, 1997 represents $3.9 million in additions comprised of
four loans secured by multi-family properties totaling $2.9 million and six
loans totaling $1.0 million secured by one-to-four family properties. This
increase was offset by one $3.1 million loan secured by a commercial property
that was removed from the troubled-debt restructured category.
<TABLE>
<CAPTION>
AT MARCH 31,
---------------------------------------------------------
1997 1996 1995 1994(1) 1993
---------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Residential real estate:
One- to four-family...................... $19,258 $17,794 $14,418 $22,556 $16,152
Multi-family............................. 790 1,558 4,331 1,068 2,395
Commercial real estate..................... 1,331 - - 6,349 4,409
Construction and land...................... 1,447 3,254 4,521 1,475 9,122
Consumer................................... 524 345 443 477 450
------- ------- ------- ------- -------
Total................................... 23,350 22,951 23,713 31,925 32,528
REO, net(2)................................ 7,745 6,733 8,007 14,350 7,226
Restructured loans......................... 14,559 13,810 4,896 5,122 5,151
------- ------- ------- ------- -------
Non-performing assets...................... $45,654 $43,494 $36,616 $51,397 $44,905
======= ======= ======= ======= =======
Classified assets, gross................... $56,462 $53,702 $41,329 $63,521 $59,317
Allowance for loan losses as a
percent of gross loans receivable(3)...... 1.47% 1.21% 1.16% 0.81% 0.43%
Allowance for loan losses as a
percent of total non-performing
loans(4).................................. 118.72 86.01 81.36 36.72 19.65
Non-performing loans
as a percent of gross loans
receivable(3)(4)......................... 1.24 1.41 1.43 2.20 2.20
Non-performing assets as a percent
of total assets(4)....................... 1.80 2.17 1.99 3.11 2.76
</TABLE>
- ------------------------
(1) Loans held for accelerated disposition at March 31, 1994 are included in
non-accrual loans.
(2) REO balances are shown net of related loss allowances.
(3) Gross loans includes loans receivable held for investment and loans
receivable held for sale and excludes loans held for accelerated
disposition.
(4) Non-performing assets consist of non-performing loans, restructured loans
and REO. Non-performing loans consist of all loans 90 days or more past due
and all other non-accrual loans.
14
<PAGE>
The following table sets forth delinquencies in the Bank's loan portfolio as of
the dates indicated:
<TABLE>
<CAPTION>
AT MARCH 31, 1997 AT MARCH 31, 1996
---------------------------------------- -----------------------------------------
60-89 DAYS 90 DAYS OR MORE(1) 60-89 DAYS 90 DAYS OR MORE(1)
------------------ ------------------- --------------------- ------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL
OF BALANCE OF BALANCE OF BALANCE OF BALANCE
LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS
------ --------- ------ --------- ------ --------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family.............. 46 $2,629 56 $19,258 27 $2,966 140 $17,794
Multi-family..................... 1 118 2 790 - - 5 1,558
Commercial....................... 2 675 2 1,331 - - - -
Construction and land............ - - 1 1,447 - - 3 3,254
Consumer loans................... 188 283 215 524 26 29 76 345
--- ------ --- ------- ------ --------- ------ ---------
Total 237 $3,705 276 $23,350 53 $2,995 224 $22,951
=== ====== === ======= ====== ========= ====== =========
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 1995
--------------------------------------------
60-89 DAYS 90 DAYS OR MORE(1)
------------------ --------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF BALANCE OF BALANCE
LOANS OF LOANS LOANS OF LOANS
------ --------- ------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
One- to four-family............ 24 $1,734 125 $14,418
Multi-family................... 1 187 9 4,331
Commercial..................... 1 891 - -
Construction and land.......... - - 5 2,345
Consumer loans................. 21 128 54 443
--- ------ --- -------
Total.......................... 47 $2,940 193 $21,537
=== ====== === =======
</TABLE>
- --------------------
(1) Loans 90 days or more past due are included in non-accrual loans. See "Non-
Accrual and Past Due Loans."
15
<PAGE>
Allowance for Loan Losses. The allowance for loan losses is
established through a provision for loan losses based on management's evaluation
of the risks inherent in the Bank's loan portfolio and the general economy.
The allowance for loan losses is maintained at an amount management considers
adequate to cover losses on loans receivable which are deemed probable and
estimable. The allowance is based upon a number of factors, including current
economic conditions, actual loss experience and industry trends. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to make additional provisions for loan losses based upon
information available at the time of the review. At March 31, 1997, the Bank's
allowance for loan losses was $27.7 million or 1.47% of gross loans as compared
to $19.7 million or 1.21% of gross loans at March 31, 1996. At March 31, 1997,
the Bank had non-accrual loans of $23.4 million or 1.24% of gross loans compared
to $23.0 million or 1.41% of gross loans at March 31, 1996. The Bank will
continue to monitor and modify its allowances for loan losses as conditions
dictate.
During the year ended March 31, 1994, in connection with a program for
the rapid reduction of problem loans, the Bank identified loans for accelerated
disposition with an aggregate principal balance of $33.3 million, which resulted
in a $10.7 million provision for loan losses and a charge-off of the same amount
for the year ended March 31, 1994. During the year ended March 31, 1995, and
prior to the consummation of the sale of the $33.3 million of loans, additional
loans with aggregate principal balances of $4.0 million were added to the
accelerated disposition program. The inclusion of this additional $4.0 million
in the accelerated disposition coupled with receipt of final pricing on the
entire $37.3 million of loans held for accelerated disposition resulted in a
$2.1 million charge to the provision for loan losses during the fiscal year
ended March 31, 1995. The closing of the sale of the $37.3 million of loans
held for accelerated disposition occurred in September, 1994. During the year
ended March 31, 1996, the Bank identified loans for accelerated disposition with
an aggregate principal balance of $8.8 million, which resulted in a $2.7 million
provision for loan losses and a charge-off of the same amount for the year ended
March 31, 1996. The closing of the sale of the $8.8 million of loans held for
accelerated disposition occurred in December 1995.
16
<PAGE>
<TABLE>
<CAPTION>
The following table sets forth activity in the Bank's allowance for loan
losses for the periods set forth in the table.
FOR THE YEAR ENDED MARCH 31
-------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Beginning balance......................................................... $19,741 19,294 11,723 6,391 3,874
Provision for loan losses................................................. 13,661 10,895 13,901 20,796 3,198
Charge-offs:
Real Estate:
One- to four-family..................................................... (4,190) (5,089) (3,493) (2,849) (406)
Multi-family............................................................ (134) (1,635) (98) (97) -
Commercial real estate.................................................. (842) - (420) (603) (35)
Construction and land................................................... (313) (589) (113) (1,125) -
Accelerated disposition of loans........................................ - (2,716) (2,090) (10,700) -
Consumer................................................................. (303) (422) (121) (112) (240)
------- ------- ------ ------- -----
Total................................................................. (5,782) (10,451) (6,335) (15,486) (681)
Recoveries................................................................ 101 3 5 22 -
------- ------- ------ ------- -----
Ending balance............................................................ $27,721 19,741 19,294 11,723 6,391
======= ======= ====== ======= =====
Net charge-offs to average gross
loans outstanding....................................................... 0.31% 0.64% 0.38% 1.07% 0.05%
</TABLE>
17
<PAGE>
The following tables set forth the amount of the Bank's allowance for loan
losses, the percent of allowance for loan losses to total allowance and the
percent of gross loans to total gross loans in each of the categories listed at
the dates indicated.
<TABLE>
<CAPTION>
At March 31,
------------------------------------------------------------
1997 1996
----------------------------- ------------------------------
Percent of Percent of
Gross Gross
Loans in Loans in
Each Each
Percent of Category Percent of Category
Allowance to Total Allowance to Total
to Total Gross to Total Gross
Amount Allowance Loans Amount Allowance Loans
------ --------- ------- ------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
One- to four-
family .................... $13,841 49.93% 79.39% $ 9,687 49.07% 77.85%
Multi-family................. 3,410 12.30 5.77 3,468 17.57 7.02
Commercial
real estate................ 4,648 16.77 7.26 3,116 15.78 9.10
Construction
and land................... 4,103 14.80 5.99 2,413 12.22 4.69
Commercial................... 56 0.20 0.16 - - -
Consumer ................... 1,586 5.72 1.43 730 3.70 1.34
Unallocated.................. 77 0.28 - 327 1.66 -
------- ----- ----- ------- ----- -----
Total allowance for
loan losses.............. $27,721 100.00% 100.00% $19,741 100.00% 100.00%
======= ====== ====== ======= ====== ======
<CAPTION>
At March 31,
--------------------------------------------------------------------------------------------
1995 1994 1993
------------------------------ -------------------------------- ----------------------------
Percent of Percent of Percent of
Gross Gross Gross
Loans in Loans in Loans in
Each Each Each
Percent of Category Percent of Category Percent of Category
Allowance to Total Allowance to Total Allowance to Total
to Total Gross to Total Gross to Total Gross
Amount Allowance Loans Amount Allowance Loans Amount Allowance Loans
------ --------- ------ ------ -------- ------ ------ ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-
family ............... $ 9,710 50.33% 77.96% $ 5,117 43.65% 73.73% $2,228 34.86% 72.34%
Multi-family............ 2,485 12.88 7.23 1,278 10.90 8.53 486 7.60 9.25
Commercial
real estate........... 2,160 11.20 8.86 2,436 20.78 10.76 1,923 30.09 10.91
Construction
and land.............. 3,826 19.83 4.59 2,109 17.99 5.50 1,090 17.06 6.06
Commercial.............. - - - - - - - - -
Consumer................ 653 3.38 1.36 660 5.63 1.48 430 6.73 1.44
Unallocated............. 460 2.38 - 123 1.05 - 234 3.66 -
------- ------ ------ ------- ------ ------ ------ ------ ------
Total allowance for
loan losses......... $19,294 100.00% 100.00% $11,723 100.00% 100.00% $6,391 100.00% 100.00%
======= ====== ====== ======= ====== ====== ====== ====== ======
</TABLE>
18
<PAGE>
REAL ESTATE
At March 31, 1997, the Bank had $7.7 million of REO, net of
allowances. If the Bank acquires any REO, it is initially recorded at fair
value less estimated costs to sell. Thereafter, REO is valued at the lower of
the recorded investment or the fair value of the property less estimated costs
to sell. If there is a further deterioration in value, the Bank provides for a
specific valuation allowance and charges operations for the diminution in value.
It is the policy of the Bank to obtain an appraisal on all REO at the time of
possession. Real estate acquired for development (REI) consists of a former
branch facility, land acquired for a new branch site which the Bank subsequently
decided to not pursue and three parcels of land as well as security interest in
56 lots held for development through the Bank's service corporation. The former
branch facility was disposed of during the year ended March 31, 1996 and one of
the parcels of land held for development (REI) with a carrying value of $418,000
was sold in April 1996 at a gain of $68,000. The Bank is currently exploring
opportunities for sale of the land originally acquired for the new branch site.
The following table sets forth certain information with regard to the Bank's REO
and REI.
<TABLE>
<CAPTION>
AT MARCH 31,
-----------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
REO........................... $8,074 11,495 13,028 17,708 7,395
Allowance for REO
losses..................... (329) (4,762) (5,021) (3,358) (169)
------ ------- ------- ------ -----
REO, net.................. 7,745 6,733 8,007 14,350 7,226
------ ------- ------- ------ -----
REI........................... 1,113 911 1,449 1,556 1,175
Allowance for REI
losses.................... - - (419) (396) (289)
------ ------- ------- ------ -----
REI, net.................. 1,113 911 1,030 1,160 886
------ ------- ------- ------ -----
Total real estate, net....... $8,858 7,644 9,037 15,510 8,112
====== ======= ======= ====== =====
</TABLE>
INVESTMENT ACTIVITIES
Federally chartered savings institutions have the authority to invest
in various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certificates of deposit of insured banks
and savings institutions, bankers' acceptances, repurchase agreements and
federal funds. Subject to various restrictions, federally chartered savings
institutions may also invest their assets in commercial paper, investment-grade
corporate debt securities and mutual funds whose assets conform to the
investments that a federally chartered savings institution is otherwise
authorized to make directly. Additionally, the Bank must maintain minimum levels
of investments that qualify as liquid assets under OTS regulations. See
"Regulation and Supervision - Federal Savings Institution Regulation -
Liquidity." Historically, the Bank has maintained liquid assets above the
minimum OTS requirements and at a level considered to be adequate to meet its
normal daily activities.
The investment policy of the Bank as established by the Board of
Directors attempts to provide and maintain liquidity, generate a favorable
return on investments without incurring undue interest rate and credit risk, and
complement the Bank's lending activities. Specifically, the Bank's policies
generally limit
19
<PAGE>
investments to government and federal agency-backed securities and other non-
government guaranteed securities, including corporate debt obligations, that are
investment grade. The Bank's policies also provide the authority to invest in
marketable equity securities permissable by the OTS for investment and meeting
the Bank's guidelines and in mortgage-backed securities guaranteed by the U.S.
government and agencies thereof and other financial institutions.
Although the investment powers of the Bancorp are substantially
broader than those permitted of the Bank, the investment policy of the Bancorp
as established by its Board of Directors is generally consistent with that of
the Bank with the exception that the Bancorp is not subject to OTS qualifying
liquidity requirements and the Bancorp by its internal investment policy is
permitted to invest to a limited extent in a broader ranger of marketable equity
securities than those permitted by the OTS (although it has not yet done so).
At March 31, 1997, the Company had $103.8 million in investment
securities consisting primarily of investment grade corporate and U.S. agency
securities including $58.0 million of U.S. agency securities which are callable
at par by the issuers at specified dates prior to maturity. The Company invests
in such callable securities when the yields to each call and to final maturity
exceed those available from comparable term and credit quality non-callable
securities by amounts which management deems sufficient to compensate the
Company for the call options inherent in the securities. The Company's
mortgage-backed securities portfolio consists of adjustable-rate mortgage-backed
securities tied to the CMT (47.3% of the portfolio), or LIBOR (2.2 % of the
portfolio) and seasoned fixed-rate mortgage-backed and balloon mortgage-backed
securities (50.5 % of the portfolio). At March 31, 1997, the carrying value of
the Company's mortgage-backed securities portfolio totaled $491.5 million, $
486.0 million, 98.9 % of which was classified as available-for-sale. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Comparison of Financial Condition at March 31, 1997 and March 31,
1996." All of the Company's mortgage-backed securities were insured or
guaranteed by either the Government National Mortgage Association (GNMA), FNMA
or the Federal Home Loan Mortgage Corporation (FHLMC). Investments in mortgage-
backed securities involve a risk that actual prepayments will vary from the
estimated prepayments over the life of the security. This may require
adjustments to the amortization of any premium or accretion of any discount
relating to such instruments, thereby reducing the net yield on such securities.
There is also reinvestment risk associated with the cash flows from such
securities. In addition, the market value of such securities may be adversely
affected by changes in interest rates.
20
<PAGE>
The following table sets forth certain information regarding the
carrying and fair values of the Company's mortgage-backed securities at the
dates indicated.
<TABLE>
<CAPTION>
AT MARCH 31,
------------------------------------------------------------
1997 1996 1995
--------------------- ------------------ ------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE VALUE VALUE
----------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Held-to-Maturity:
GNMA.............................. $ - - - - 19,268 19,565
FNMA.............................. - - - - 27,895 28,064
FHLMC............................. 5,490 5,509 7,134 7,180 33,615 34,013
-------- ------ ------ ------- ------ ------
Total held-to-maturity........... 5,490 5,509 7,134 7,180 80,778 81,642
-------- ------- ------- ------- ------ ------
Available-for-sale:
GNMA............................... 56,682 56,682 17,165 17,165 - -
FNMA............................... 279,539 279,539 27,604 27,604 - -
FHLMC............................. 149,788 149,788 80,819 80,819 - -
-------- ------- ------- ------- ------ ------
Total available-for-sale........ 486,009 486,009 125,588 125,588 - -
-------- ------- ------- ------- ------ ------
Total mortgage-backed securities... $491,499 491,518 132,722 132,768 80,778 81,642
======== ======= ======= ======= ====== ======
</TABLE>
21
<PAGE>
The following table sets forth certain information regarding the carrying and
fair values of the Company's investment securities at the dates indicated:
<TABLE>
<CAPTION>
AT MARCH 31
----------------------------------------------------------
1997 1996 1995
------------- ----------------- -----------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE VALUE VALUE
-------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Held-to-maturity:
Domestic Corporate.............................. $ 15,000 15,000 24,936 24,975 29,836 29,864
Collateralized mortgage
obligations.................................... 472 474 2,374 2,395 4,504 4,661
U.S. government and
federal agency obligations..................... 718 739 716 739 5,719 5,606
-------- ------- ------ ------ ------ ------
Total held-to-maturity............................ 16,190 16,213 28,026 28,109 40,059 40,131
-------- ------- ------ ------ ------ ------
Available-for-sale:
Collateralized mortgage
obligations.................................... 24,437 24,437 4,950 4,950 - -
FHLMC non-cumulative
preferred stock................................ 5,600 5,600 - - - -
U.S. government and federal
agency obligations............................. 57,610 57,610 4,982 4,982 6,881 6,881
-------- ------- ------ ------ ------ ------
Total available-for-sale............................ 87,647 87,647 9,932 9,932 6,881 6,881
-------- ------- ------ ------ ------ ------
Total....... $103,837 103,860 37,958 38,041 46,940 47,012
======== ======= ====== ====== ====== ======
</TABLE>
22
<PAGE>
The table below sets forth certain information regarding the carrying
value, weighted average yields and maturities of the Company's investment
securities and mortgage-backed securities as of March 31, 1997.
<TABLE>
<CAPTION>
At March 31, 1997
------------------------------------------------------------------------------------
More than One More than Five
One Year or Less Year to Five Years Years to Ten Years
------------------- --------------------- ----------------------
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
---------- -------- ----------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Investment Securities:
Held-to-maturity:
Domestic Corporate.................... $15,000 5.62% $ - -% $ - -%
Collateralized mortgage obligations... 472 8.00 - - - -
U.S. Government and
federal agency obligations........... - - 718 7.07 - -
------- --------- -------
Total held-to-maturity............... 15,472 5.69 718 7.07 - -
------- --------- -------
Available-for-sale:
Collateralized mortgage obligations... - - - - - -
U.S. government and
federal agency obligations........... 14,838 6.21 32,860 6.68 9,912 7.01
FHLMC Non-cumulative preferred stock.... - - 5,600 6.13 - -
------ ------- -----
Total available-for-sale............ 14,838 6.21 38,460 6.60 9,912 7.01
------ -------
Total investment securities................ $30,310 5.95 $39,178 6.61 $9,912 7.01
======= ======= ======
Mortgage-backed securities:
Held-to-maturity:
FHLMC............................ $ 3,519 7.50 $ 1,971 7.13 $ - -
-------- ------- -------
Available for sale
GNMA............................. - - - - 144 9.00
FNMA............................. - - 18,192 6.56 57,984 7.11
FHLMC............................ - - 26,020 6.78 15,587 6.74
-------- ------- -------
Total available-for-sale........ - - 44,212 6.69 73,715 7.03
-------- ------- -------
Total mortgage-backed
securities.................... $ 3,519 7.50% $46,183 6.70% $73,715 7.03%
======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
At March 31, 1997
----------------------------------------------------
More than ten years Total
------------------- ---------------------
Weighted Weighted
Carrying Average Carrying Average
Value Yield Value Yield
---------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Investment securities:
Held-to-maturity:
Domestic Corporate.................... $ - -% $ 15,000 5.62%
Collateralized mortgage obligations - - 472 8,00
U.S. Government and
federal agency obligations........... - - 718 7.07
------- --------
Total held-to-maturity............... - - 16,190 5.76
------- --------
Available-for-sale:
Collateralized mortgage obligations... 24,437 7.17 24,437 7.17
U.S. government and
federal agency obligations........... - - 57,610 6.62
FHLMC Non-cumulative preferred stock.... - - 5,600 6.13
------- --------
Total available-for-sale............ 24,437 7.17 87,647 6.74
------- --------
Total investment securities................ $24,437 7.17 $103,837 6.59
======= ========
Mortgage-backed securities:
Held-to-maturity:
FHLMC............................. $ - - $ 5,490 7.37
Available for sale
GNMA............................. 56,538 7.53 56,682 7.54
FNMA............................. 203,363 7.13 279,539 7.08
FHLMC............................ 108,181 7.20 149,788 7.08
-------- --------
Total available-for-sale........ 368,082 7.21 486,009 7.14
-------- --------
Total mortgage-backed $368,082 7.21% $491,499 7.14%
securities ======== ========
</TABLE>
<PAGE>
SOURCES OF FUNDS
General. Deposits, loan repayments and prepayments, proceeds from
sales of loans, cash flows generated from operations and FHLB advances and other
borrowings are the primary sources of the Bank's funds for lending, investing
and other general purposes.
Deposits. The Bank offers a variety of deposit accounts with a range
of interest rates and terms. The Bank's deposits consist of passbook accounts,
NOW and other demand accounts, money market savings accounts and certificate
accounts. The terms of the fixed-rate certificate accounts offered by the Bank
vary from 90 days to five years and the offering rates are established by the
Bank on a weekly basis. Once an account is established, no additional amounts
are permitted to be deposited in fixed-rate accounts. The Bank's 12-month and
18-month (which is no longer offered) Step-up certificates permit additions to
the account and the ability to increase the interest rate one time if the
offering rate increases during the term of the account. Variable-rate
certificates offer rates that change each month relative to COFI and additions
to the account are permitted. Specific terms of an individual account vary
according to the type of account, the minimum balance required, the time period
funds must remain on deposit and the interest rate, among other factors. The
flow of deposits is influenced significantly by general economic conditions,
changes in money market rates, prevailing interest rates and competition.
During the later stages of fiscal 1996, the Bank intentionally constrained its
growth in assets and deposits in order to maintain its regulatory capital ratios
at a level which would continue to qualify the Bank as a "well capitalized"
institution under the OTS prompt corrective action regulations. See "Regulation
and Supervision - Federal Savings Institution Regulation". At March 31, 1997,
the Bank had $1.10 billion of certificate accounts maturing in less than one
year. The Bank's deposits are obtained predominantly from the areas in which
its branch offices are located. The Bank relies primarily on customer service
and long-standing relationships with customers to attract and retain these
deposits; however, market interest rates and rates offered by competing
financial institutions significantly affect the Bank's ability to attract and
retain deposits.
The following table presents the deposit activity of the Bank for the
periods indicated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
---------------------------------
1997 1996 1995
--------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net deposits (withdrawals)............ $(42,601) (60,762) 83,615
Interest credited on deposit accounts. 71,577 73,419 62,154
-------- ------- -------
Total increase in deposit accounts.. $ 28,976 12,657 145,769
======== ======= =======
</TABLE>
24
<PAGE>
At March 31, 1997, the Bank had $293.3 million in certificate accounts in
amounts of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
WEIGHTED
MATURITY PERIOD AMOUNT AVERAGE RATE
- --------------------------------- -------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Three months or less............. $ 63,358 5.35%
Over three through six months.... 110,001 5.75
Over six through 12 months....... 90,666 5.71
Over 12 months................... 29,307 5.96
--------
Total.......................... $293,332 5.67
========
</TABLE>
25
<PAGE>
The following table sets forth the distribution of the Bank's average deposit
accounts for the periods indicated and the weighted average interest rates on
each category of deposits presented.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31
----------------------------------------------------------------------------------------------------
1997 1996 1995
--------------------------------- ------------------------------- -----------------------------
PERCENT PERCENT PERCENT
OF TOTAL WEIGHTED OF TOTAL WEIGHTED OF TOTAL WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE BALANCE DEPOSIT RATE
---------- -------- -------- ---------- -------- -------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook accounts.............. $ 192,520 11.48% 2.83% $ 115,878 6.93% 2.29% $ 121,609 7.81% 2.05%
Money market savings accounts.. 111,793 6.66 3.46 159,276 9.52 2.52 203,530 13.08 2.43
NOW accounts................... 106,355 6.34 0.91 119,849 7.16 0.95 118,126 7.59 0.96
Non-interest bearing accounts.. 27,292 1.63 - 5,287 0.31 - 1,985 0.13 -
---------- ------ ---------- ------ ---------- ------
Total......................... 437,960 26.11 400,290 23.92 445,250 28.61
---------- ------ ---------- ------ ---------- ------
Certificate accounts:
Variable-rate certificates of
deposit...................... 45,395 2.71 4.88 57,216 3.42 5.20 208,387 13.39 4.02
Step-up certificates of
deposit...................... 303,595 18.10 5.77 397,981 23.79 6.10 316,583 20.34 4.87
Less than six months.......... 171,594 10.23 4.94 100,582 6.01 5.24 27,597 1.77 3.16
Six through 11 months......... 184,274 10.98 5.09 237,340 14.19 5.42 195,079 12.53 4.46
12 through 23 months.......... 304,984 18.18 5.35 259,603 15.52 6.03 146,328 9.40 5.01
24 months through 47 months... 85,515 5.10 5.64 82,890 4.95 5.56 75,288 4.84 4.80
48 months or greater.......... 111,648 6.65 5.78 110,600 6.61 6.04 123,438 7.93 6.02
Jumbo......................... 31,021 1.85 5.39 23,434 1.40 5.74 9,917 0.64 4.75
Acquired certificates of
deposit(1)................... 1,484 0.09 4.28 3,236 0.19 5.03 8,617 0.55 4.33
---------- ------ ---------- ------ ---------- ------
Total certificate accounts.. 1,239,510 73.89 5.40 1,272,882 76.08 5.80 1,111,234 71.39 4.73
---------- ------ ---------- ------ ---------- ------
Total average deposits......... $1,677,470 100.00% $1,673,172 100.00% $1,556,484 100.00%
========== ====== ========== ====== ========== ======
</TABLE>
____________________
(1) These certificates of deposit were acquired in connection with various
acquisitions of branch offices from other institutions.
26
<PAGE>
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at March 31, 1997.
<TABLE>
<CAPTION>
PERIOD TO MATURITY FROM MARCH 31, 1997 AT MARCH 31,
--------------------------------------------------------------------------- -----------------------------------
LESS THAN ONE TO TWO TO THREE TO FOUR TO MORE THAN
ONE YEAR TWO YEARS THREE YEARS FOUR YEARS FIVE YEARS FIVE YEARS 1997 1996 1995
--------- --------- ----------- ---------- ---------- ---------- --------- --------- ----------
(DOLLARS IN THOUSANDS)
<S>............... <C> <C> <C> <C> <C> <C> <C> <C> <C>
0.00 to 4.00%..... $ 722 32 62 6 5 1 828 2,046 52,407
4.01 to 5.00%..... 110,414 5,859 210 88 113 - 116,684 143,539 220,001
5.01 to 6.00%..... 899,145 74,750 35,437 12,807 9,320 2,918 1,034,377 772,541 491,730
6.01 to 7.00%..... 56,921 10,563 9,885 9,099 518 96 87,082 330,461 466,925
7.01 to 8.00%..... 658 - 327 - 21 - 1,006 9,868 32,754
8.01 to 9.00%..... - - - - - - - 376 3,828
Over 9.01%........ 127 - 127 - - - 254 127 317
---------- ------ ------ ------ ----- ----- --------- --------- ---------
Total............ $1,067,987 91,204 46,048 22,000 9,977 3,015 1,240,231 1,258,958 1,267,962
========== ====== ====== ====== ===== ===== ========= ========= =========
</TABLE>
27
<PAGE>
FHLB Advances and Other Borrowings. The Bank utilizes FHLB advances and
reverse repurchase agreements as alternative sources of funds to retail
deposits. These borrowings are generally short-term and are collateralized by
mortgage-backed securities and, in the case of certain FHLB advances, certain of
the Bank's mortgage loans and secondarily by the Bank's investment in the
capital stock of the FHLB. See "Regulation and Supervision-Federal Home Loan
Bank System". The FHLB provides advances pursuant to several different credit
programs, each of which has its own interest rate, range of maturities and
collateralization requirements. The maximum amount that the FHLB will advance
to member institutions, including the Bank fluctuates from time to time in
accordance with the policies of the OTS and FHLB. At March 31, 1997, the Bank
had $480.0 million in outstanding advances from the FHLB and $50.0 million
outstanding under reverse repurchase agreements.
At March 31, 1997, the Bank had outstanding FHLB advances and other
borrowings of $530.0 million at a weighted average cost of 5.78% secured by
GNMA, FNMA and FHLMC mortgage-backed securities. The original terms of the FHLB
advances and other borrowings outstanding at March 31, 1997, range from 1 day to
5 years. The Bank expects to continue to utilize FHLB advances and other
borrowings including reverse repurchase agreements as secondary sources of funds
to deposit liabilities. FHLB advances and other borrowings are utilized to
balance the differential net cash flows arising from loan and deposit activities
and as a primary funding vehicle for the Bank's investment in mortgage-backed
and other investment securities. Reverse repurchase agreements take the form of
sales of securities under agreements to repurchase the identical securities at a
later date. These transactions are accounted for as financing arrangements with
the obligations to repurchase securities sold reflected as a liability while the
securities underlying the agreements remain in the respective asset account.
The utilization of reverse repurchase agreements involves the risk that
between the dates of sale and subsequent repurchase, a decline in the market
value of the underlying security may require the "sale" of additional securities
to the counterparty to the reverse repurchase agreement. Any such "sale" is
accounted for in the same fashion as the original transaction as described
above. See "Sources of Funds - FHLB Advances and Other Borrowings".
28
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
The following table sets forth certain information regarding the Bank's
borrowed funds at or for the periods ended on the dates indicated:
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED MARCH 31,
----------------------------------
1997 1996 1995
---------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FHLB advances:
Average balance outstanding.............. $335,188 $19,768 $ 2,993
Maximum amount outstanding at any
month-end during the year.............. 545,000 68,985 75,000
Balance outstanding at end of year....... 480,000 19,722 -
Weighted average interest rate during
the year............................... 5.78% 5.66% 6.46%
Weighted average interest rate end
of year................................ 5.78% 5.52% -
Reverse repurchase agreements:
Average balance outstanding.............. $ 10,129 $63,839 $ 8,655
Maximum amount outstanding at
any month-end during the year.......... 50,000 96,681 49,095
Balance outstanding at end of year....... 50,000 - 49,095
Weighted average interest rate during
the year............................... 5.96% 5.97% 6.15%
Weighted average interest rate
end of year............................ 5.87% - 6.19%
</TABLE>
29
<PAGE>
SUBSIDIARY ACTIVITIES
Pomona Financial Services, Inc.(PFS), is a wholly-owned subsidiary of the
Bank. PFS acts as a holding company for the service corporations described below
and acts as trustee under deeds of trusts. For the year ended March 31, 1997,
PFS had net earnings of $108,000.
PFF Insurance Service ("PFFIS") is a wholly-owned subsidiary of PFS. Until
recently, PFFIS operated as an agency selling various personal and business
insurance policies strictly as an adjunct to the Bank's traditional thrift
business. As part of the Bank's strategy to diversify the products and services
it offers and restructure its balance sheet, a decision was made to expand the
role of PFFIS. In July 1994, PFFIS was authorized to sell fixed annuities to the
Bank's customers through the Bank's branches. In August 1995, PFFIS was further
authorized to offer variable annuities and mutual funds through a relationship
with a third party marketer of annuity and mutual fund non-deposit investment
products. In addition, PFFIS is working with vendors of other insurance
products, such as auto, home and life insurance, to further expand the products
and services offered to the Bank's customers and members of the local community.
For the year ended March 31, 1997, PFFIS had net earnings of $416,000.
Diversified Services, Inc. ("DSI") is a wholly-owned subsidiary of PFS. DSI
participates as an investor in residential real estate projects. For the year
ended March 31, 1997, DSI had net earnings of $44,000. DSI has not participated
to any material extent in real estate activities over the past several years due
to local real estate market conditions. DSI may consider additional real estate
activities as market conditions warrant.
PERSONNEL
As of March 31, 1997, the Bank had 406 full-time employees and 122 part-
time employees. The employees are not represented by a collective bargaining
unit and the Bank considers its relationship with its employees to be good. See
Item 11 "Executive Compensation" for a description of certain compensation and
benefit programs offered to the Bank's employees.
REGULATION AND SUPERVISION
GENERAL
The Bancorp, as a savings and loan holding company, is required to file
certain reports with, and otherwise comply with the rules and regulations of the
OTS under the Home Owners' Loan Act, as amended (the "HOLA"). In addition, the
activities of savings institutions, such as the Bank, are governed by the HOLA
and the Federal Deposit Insurance Act ("FDI Act").
The Bank is subject to extensive regulation, examination and supervision by
the OTS, as its primary federal regulator, and the FDIC, as the deposit insurer.
The Bank is a member of the FHLB System and its deposit accounts are insured up
to applicable limits by the Savings Association Insurance Fund ("SAIF") managed
by the FDIC. The Bank must file reports with the OTS and the FDIC concerning
its activities and financial condition in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with, or
acquisitions of, other savings institutions. The OTS and/or the FDIC conduct
periodic examinations to test the Bank's safety and soundness and compliance
with various regulatory requirements. This regulation and supervision
establishes a comprehensive framework of activities in which
30
<PAGE>
an institution can engage and is intended primarily for the protection of the
insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss allowances for regulatory purposes. Any change in such regulatory
requirements and policies, whether by the OTS, the FDIC or the Congress could
have a material adverse impact on the Bancorp, the Bank and their operations.
Certain of the regulatory requirements applicable to the Bank and to the Bancorp
are referred to below or elsewhere herein. The description of statutory
provisions and regulations applicable to savings institutions and their holding
companies set forth herein does not purport to be a complete description of such
statutes and regulations and their effects on the Bank and the Bancorp.
HOLDING COMPANY REGULATION
The Bancorp is a nondiversified unitary savings and loan holding company
within the meaning of the HOLA. As a unitary savings and loan holding company,
the Bancorp generally will not be restricted under existing laws as to the types
of business activities in which it may engage, provided that the Bank continues
to be a qualified thrift lender ("QTL"). Upon any non-supervisory acquisition
by the Bancorp of another savings institution or savings bank that meets the QTL
test and is deemed to be a savings institution by the OTS, the Bancorp would
become a multiple savings and loan holding company (if the acquired institution
is held as a separate subsidiary) and would be subject to extensive limitations
on the types of business activities in which it could engage. The HOLA limits
the activities of a multiple savings and loan holding company and its non-
insured institution subsidiaries primarily to activities permissible for bank
holding companies under Section 4(c)(8) of the Bank Holding Company Act ("BHC
Act"), subject to the prior approval of the OTS, and certain activities
authorized by OTS regulation and no multiple savings and loan holding company
may acquire more than 5% of the voting stock of a company engaged in
impermissable activities.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution or holding company thereof,
without prior written approval of the OTS; or acquiring or retaining control of
a depository institution that is not insured by the FDIC. In evaluating
applications by holding companies to acquire savings institutions, the OTS must
consider the financial and managerial resources and future prospects of the
Bancorp and institution involved, the effect of the acquisition on the risk to
the insurance funds, the convenience and needs of the community and competitive
factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies and (ii) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions. The
states vary in the extent to which they permit interstate savings and loan
holding company acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, HOLA does prescribe such restrictions on subsidiary
savings institutions, as described below. The Bank must notify the OTS 30 days
before declaring any dividend to the Bancorp. In addition, the financial impact
of a holding company on its subsidiary institution is a matter that is evaluated
by the OTS and the agency has authority to order cessation of activities or
divestiture of subsidiaries deemed to pose a threat to the safety and soundness
of the institution.
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FEDERAL SAVINGS INSTITUTION REGULATION
Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 3% leverage (core) capital ratio and an 8% risk-based capital ratio.
In addition, the prompt corrective action standards discussed below also
establish, in effect, a minimum 2% tangible capital standard, a 4% leverage
(core) capital ratio (3% for institutions receiving the highest rating on the
CAMEL financial institution rating system), and, together with the risk-based
capital standard itself, a 4% Tier I risk-based capital standard. Core capital
is defined as common stockholders' equity (including retained earnings),
certain noncummulative perpetual preferred stock and related surplus, and
minority interests in equity accounts of consolidated subsidiaries less
intangibles other than certain mortgage servicing rights and credit card
relationships. The OTS regulations also require that, in meeting the tangible,
leverage (core) and risk-based capital standards, institutions must generally
deduct investments in and loans to subsidiaries engaged in activities as
principal that are not permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier I (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, as assigned by the OTS capital regulation based on the
risks OTS believes are inherent in the type of asset. The components of Tier I
(core) capital are equivalent to those discussed earlier. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock and the allowance for loan and lease losses
limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of
supplementary capital included as part of total capital cannot exceed 100% of
core capital.
The OTS regulatory capital requirements also incorporate an interest rate
risk component. Savings institutions with "above normal" interest rate risk
exposure are subject to a deduction from total capital for purposes of
calculating their risk-based capital requirements. A savings institution's
interest rate risk is measured by the decline in the net portfolio value of its
assets (i.e., the difference between incoming and outgoing discounted cash flows
from assets, liabilities and off-balance sheet contracts) that would result from
a hypothetical 200 basis point increase or decrease in market interest rates
divided by the estimated economic value of the institution's assets. In
calculating its total capital under the risk-based capital rule, a savings
institution whose measured interest rate risk exposure exceeds 2% must deduct an
amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
institution's assets. The Director of the OTS may waive or defer a savings
institution's interest rate risk component on a case-by-case basis. A savings
institution with assets of less than $300 million and risk-based capital ratios
in excess of 12% is not subject to the interest rate risk component, unless the
OTS determines otherwise. For the present time, the OTS has deferred
implementation of the interest rate risk component. At March 31, 1997, the Bank
met each of its capital requirements and it is anticipated that the Bank will
not be subject to the interest rate risk component.
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The following table presents the Bank's capital position at March 31, 1997.
<TABLE>
<CAPTION>
CAPITAL
--------------------------------------------------
ACTUAL REQUIRED EXCESS ACTUAL REQUIRED
-------- -------- ------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Tangible......... $209,688 37,194 172,494 8.46% 1.50%
Core (Leverage)... 209,688 74,388 135,300 8.46 3.00
Risk-based....... 226,251 109,448 116,803 16.54 8.00
</TABLE>
Prompt Corrective Regulatory Action. Under the OTS prompt corrective
action regulations, the OTS is required to take certain supervisory actions
against undercapitalized institutions, the severity of which depends upon the
institution's degree of undercapitalization. Generally, a savings institution
is considered "well capitalized" if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of Tier I (core) capital to risk-weighted
assets is at least 6%, its ratio of core capital to total assets is at least 5%,
and it is not subject to any order or directive by the OTS to meet a specific
capital level. A savings institution generally is considered "adequately
capitalized" if its ratio of total capital to risk-weighted assets is at least
8%, its ratio of Tier I (core) capital to risk-weighted assets is at least 4%,
and its ratio of core capital to total assets is at least 4% (3% if the
institution receives the highest CAMEL rating). A savings institution that has
a ratio of total capital to risk weighted assets of less than 8%, a ratio of
Tier I (core) capital to risk-weighted assets of less than 4% or a ratio of core
capital to total assets of less than 4% (3% or less for institutions with the
highest examination rating) is considered to be "undercapitalized." A savings
institution that has a total risk-based capital ratio less than 6%, a Tier I
capital ratio of less than 3% or a leverage ratio that is less than 3% is
considered to be "significantly undercapitalized" and a savings institution that
has a tangible capital to assets ratio equal to or less than 2% is deemed to be
"critically undercapitalized." Subject to a narrow exception, the banking
regulator is required to appoint a receiver or conservator for an institution
that is "critically undercapitalized." The regulation also provides that a
capital restoration plan must be filed with the OTS within 45 days of the date a
savings institution receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." Compliance
with the plan must be guaranteed by any parent holding company. In addition,
numberous mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The OTS could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
Insurance of Deposit Accounts. Deposits of the Bank are presently insured
by the SAIF. Both the SAIF and the Bank Insurance Fund ("BIF"), (the deposit
insurance fund that covers most commercial bank deposits), are statuatarily
required to be recapitalized to a 1.25% of insured reserve deposits ratio.
Until recently, members of the SAIF and BIF were paying average deposit
insurance premiums of between 24 and 25 basis points. The BIF met the required
reserve in 1995, whereas the SAIF was not expected to meet or exceed the
required level until 2002 at the earliest. This situation was primarily due to
the statutory requirement that SAIF members make payments on bonds issued in the
late 1980s by the Financing Corporation ("FICO") to recapitalize the predecessor
to the SAIF.
In view of the BIF's achieving the 1.25% ratio, the FDIC ultimately adopted
a new assessment rate schedule of from 0 to 27 points under which 92% of BIF
members paid an annual premium of only $2,000. With respect to SAIF member
institutions, the FDIC adopted a final rule retaining the previously existing
assessment rate schedule applicable to SAIF member institutions of 23 to 31
basis points. As long as the
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premium differential continued, it may have had adverse consequences for SAIF
members, including reduced earnings and an impaired ability to raise funds in
the capital markets. In addition, SAIF members, such as the Bank were placed at
a substantial competitive disadvantage to BIF members with respect to pricing of
loans and deposits and the ability to achieve lower operating costs.
On September 30, 1996, the President signed into law the Deposit Insurance
Funds Act of 1996 (the "Funds Act") which , among other things, imposed a
special one-time assessment on SAIF member institutions, including the Bank, to
recapitalize the SAIF. As required by the Funds Act, the FDIC imposed a special
assessment of 65.7 basis points on SAIF assessable deposits held as of March 31,
1995, payable November 27, 1996 (the "SAIF Special Assessment"). The SAIF
Special Assessment was recognized by the Bank as an expense in the quarter ended
September 30, 1996 and is generally tax deductible. The SAIF Special Assessment
recorded by the Bank amounted to $10.9 million on a pre-tax basis and $6.3
million on an after-tax basis.
The Funds Act also spreads the obligations for payment of the FICO bonds
across all SAIF and BIF members. Beginning on January 1, 1997, BIF deposits
will be assessed for a FICO payment of 1.3 basis points, while SAIF deposits
will pay 6.48 basis points. Full pro rata sharing of the FICO payments between
BIF and SAIF members will occur on the earlier of January 1, 2000 or the date
the BIF and SAIF are merged. The Funds Act specifies that the BIF and SAIF will
be merged on January 1, 1999, provided no savings associations remain as of that
time.
As a result of the Funds Act, the FDIC voted to effectively lower SAIF
assessments to 0 to 27 basis points as of January 1, 1997, a range comparable
to that of BIF members. SAIF members will also continue to make the FICO
payments described above. The FDIC also lowered the SAIF assessment schedule
for the third quarter of 1997 to 18 to 27 basis points. Management cannot
predict the level of FDIC insurance assessments on an on-going basis, whether
the savings association charter will be eliminated or whether the BIF and SAIF
will eventually be merged.
The Bank's assessment rate for fiscal 1997 ranged from 6 to 24 basis points
and the premium paid for this period was $3.3 million (excluding $10.9 million
applicable to the SAIF recapitalization). A significant increase in SAIF
insurance premiums would likely have an adverse effect on the operating expenses
and results of operations of the Bank.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is
in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
Thrift Rechartering Legislation. The Funds Act provides that the BIF and
SAIF will merge on January 1, 1999 if there are no more savings associations as
of that date. That legislation also required that the Department of Treasury
submit a report to Congress that makes recommendations regarding a common
financial instutions charter, including whether the separate charters for
thrifts and banks should be abolished. Various proposals to eliminate the
federal thrift charter, create a uniform financial institutions charter and
abolish the OTS have been introduced in Congress. The bills would require
federal savings institutions to convert to a national bank or some type of
state charter by a specified date under some bills, or they would automatically
become national banks. Converted federal thrifts would generally be required to
conform their activities to those permitted for the charter selected and
divestiture of nonconforming assets would be
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<PAGE>
required over a two year period, subject to two possible one year extensions.
State chartered thrifts would become subject to the same federal regulation as
applies to state commercial banks. A more recent bill considered by the House
Banking Committee would allow savings institutions to continue to exercise their
current powers after converting to a bank charter. 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 savings
and loan holding company activities. The Bank is unable to predict whether such
legislation would be enacted or the extent to which the legislation would
restrict or disrupt its operations.
Loans to One Borrower. Under the HOLA, savings institutions are generally
subject to the limits on loans to one borrower applicable to national banks.
Generally, savings institutions may not make a loan or extend credit to a single
or related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if such loan is secured by readily-marketable collateral, which is
defined to include certain financial instruments and bullion. At March 31,
1997, the Bank's limit on loans to one borrower was $33.9 million. At March 31,
1997, the Bank's largest aggregate outstanding balance of loans to one borrower
totalled $16.5 million. See "Lending Activities - Construction and Land
Lending".
QTL Test. The HOLA requires savings institutions to meet a QTL test.
Under the QTL test, a savings and loan association is required to maintain at
least 65% of its "portfolio assets" (total assets less (i) specified liquid
assets up to 20% of total assets; (ii) intangibles, including goodwill; and
(iii) the value of property used to conduct business) in certain "qualified
thrift investments" (primarily residential mortgages and related investments,
including certain mortgage-backed securities) in at least 9 months out of each
12 month period.
A savings institution that fails the QTL test is subject to certain
operating restrictions and may be required to convert to a bank charter. As of
March 31, 1997, the Bank maintained 92.15 % of its portfolio assets in qualified
thrift investments and, therefore, met the QTL test. Recent legislation has
expanded the extent to which education loans, credit card loans and small
business loans may be considered "qualified thrift investments".
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution that exceeds
all fully phased-in capital requirements before and after a proposed capital
distribution ("Tier 1 Bank") and has not been advised by the OTS that it is in
need of more than normal supervision, could, after prior notice but without
obtaining approval of the OTS, make capital distributions during a calendar year
equal to the greater of (i) 100% of its net earnings to date during the calendar
year plus the amount that would reduce by one-half its "surplus capital ratio"
(the excess capital over its fully phased-in capital requirements) at the
beginning of the calendar year or (ii) 75% of its net income for the previous
four quarters. Any additional capital distributions would require prior
regulatory approval. In the event the Bank's capital fell below its regulatory
requirements or the OTS notified it that it was in need of more than normal
supervision, the Bank's ability to make capital distributions could be
restricted. In addition, the OTS could prohibit a proposed capital distribution
by any institution, which would otherwise be permitted by the regulation, if the
OTS determines that such distribution would constitute an unsafe or unsound
practice. In December 1994, the OTS proposed amendments to its capital
distribution regulation that would generally authorize the payment of capital
distributions without OTS
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<PAGE>
approval provided the payment does not make the institution undercapitalized
within the meaning of the prompt corrective action regulation. However,
institutions in a holding company structure would still have a prior notice
requirement. At March 31, 1997, the Bank was a Tier 1 bank.
Liquidity. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage of its net withdrawable deposit accounts plus short-term borrowings.
This liquidity requirement is currently 5% but may be changed from time to time
by the OTS to any amount within the range of 4% to 10% depending upon economic
conditions and the savings flows of member institutions. OTS regulations also
require each member savings institution to maintain an average daily balance of
short-term liquid assets at a specified percentage (currently 1%) of the total
of its net withdrawable deposit accounts and borrowings payable in one year or
less. Monetary penalties may be imposed for failure to meet these liquidity
requirements. The Bank's liquidity and short-term liquidity ratios for March
31, 1997 were 5.30% and 2.29%, respectively, which exceeded the applicable
requirements. The Bank has never been subject to monetary penalties for failure
to meet its liquidity requirements.
Assessments. Savings institutions are required to pay assessments to the
OTS to fund the agency's operations. The general assessment, paid on a semi-
annual basis, is computed upon the savings institution's total assets, including
consolidated subsidiaries, as reported in the institution's latest quarterly
thrift financial report. The assessments paid by the Bank for the fiscal year
ended March 31, 1997 totaled $343,000.
Branching. OTS regulations permit nationwide branching by federally
chartered savings institutions to the extent allowed by federal statute. This
permits federal savings institutions to establish interstate networks and to
geographically diversify their loan portfolios and lines of business. The OTS
authority preempts any state law purporting to regulate branching by federal
savings institutions.
Transactions with Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates" (e.g., any company that
controls or is under common control with an institution, including the Bancorp
and its non-savings institution subsidiaries) is limited by Sections 23A and 23B
of the Federal Reserve Act ("FRA"). Section 23A limits the aggregate amount of
covered transactions with any individual affiliate to 10% of the capital and
surplus of the savings institution. The aggregate amount of covered
transactions with all affiliates is limited to 20% of the savings institution's
capital and surplus. Certain transactions with affiliates are required to be
secured by collateral in an amount and of a type described in Section 23A and
the purchase of low quality assets from affiliates is generally prohibited.
Section 23B generally provides that certain transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the institution as those prevailing at the time for comparable
transactions with non-affiliated companies. In addition, savings institutions
are prohibited from lending to any affiliate that is engaged in activities that
are not permissible for bank holding companies and no savings institution may
purchase the securities of any affiliate other than a subsidiary.
The Bank's authority to extend credit to executive officers, directors and
10% stockholders, as well as entities such persons control, is governed by
Sections 22(g) and 22(h) of the FRA and Regulation O thereunder. Among other
things, such loans are required to be made on terms substantially the same as
those offered to unaffiliated individuals and to not involve more than the
normal risk of repayment. Recent legislation created an exception for loans made
pursuant to a benefit or compensation program that is widely available to all
employees of the institution and does not give preferences to such persons over
other
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<PAGE>
employees. Regulation O also places individual and aggregate limits on the
amount of loans the Bank may make to such persons based, in part, on the Bank's
capital position and requires certain Board approval procedures to be followed.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring actions
against the institution and all "institution-affiliated parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors to institution of receivership, conservatorship or termination of
deposit insurance. Civil penalties cover a wide range of violations and can
amount to $25,000 per day, or even $1 million per day in especially egregious
cases. Under the FDI Act, the FDIC has the authority to recommend to the
Director of the OTS enforcement action to be taken with respect to a particular
savings institution. If action is not taken by the Director, the FDIC has
authority to take such action under certain circumstances. Federal law also
establishes criminal penalties for certain violations.
Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") and a final rule to implement safety and soundness standards
required under the FDI Act. The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes impaired. The
standards set forth in the Guidelines address internal controls and information
systems; internal audit system; credit underwriting; loan documentation;
interest rate risk exposure; asset growth; asset quality; earnings; and
compensation, fees and benefits. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
Guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard, as required by the FDI
Act. The final rule establishes deadlines for the submission and review of such
safety and soundness compliance plans when such plans are required.
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB-San Francisco, is required to
acquire and hold shares of capital stock in that FHLB in an amount at least
equal to 1% of the aggregate principal amount of its unpaid residential mortgage
loans and similar obligations at the beginning of each year, or 5% of its
advances (borrowings) from the FHLB-San Francisco, whichever is greater. The
Bank was in compliance with this requirement, with an investment in FHLB-San
Francisco stock at March 31, 1997, of $27.3 million. FHLB advances must be
secured by specified types of collateral and may be obtained primarily for the
purpose of providing funds for residential housing finance.
The FHLBs are required to provide funds to cover certain obligations on
bonds issued to fund the resolution of insolvent thrifts and to contribute funds
for affordable housing programs. These requirements could reduce the amount of
dividends that the FHLBs pay to their members and could also result in the FHLBs
imposing a higher rate of interest on advances to their members. For the years
ended March 31, 1997, 1996, and 1995, dividends from the FHLB-San Francisco to
the Bank amounted to $1.4 million, $745,000 and $685,000, respectively.
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FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for accounts aggregating $49.3 million or less
(subject to adjustment by the Federal Reserve Board) the reserve requirement is
3%; and for accounts greater than $49.3 million, the reserve requirement is
$1.48 million plus 10% (subject to adjustment by the Federal Reserve Board
between 8% and 14%) against that portion of total transaction accounts in excess
of $49.3 million. The first $4.4 million of otherwise reserveable balances
(subject to adjustments by the Federal Reserve Board) are exempted from the
reserve requirements. The Bank is in compliance with the foregoing
requirements. The balances maintained to meet the reserve requirements imposed
by the Federal Reserve Board may be used to satisfy liquidity requirements
imposed by the OTS.
FEDERAL SECURITIES LAWS
The Bancorp's common stock is registered with the SEC under Section 12(g)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Bancorp is subject to the periodic reporting requirements, proxy solicitation
rules, insider trading restrictions, tender offer rules and other requirements
under the Exchange Act.
The registration under the Securities Act of 1933 (the "Securities Act") of
shares of the common stock that were issued in the Bank's conversion from mutual
to stock form does not cover the resale of such shares. Shares of the Common
Stock purchased by persons who are not affiliates of the Bancorp may be resold
without registration. Shares purchased by an affiliate of the Bancorp will be
subject to the resale restrictions of Rule 144 under the Securities Act. If the
Bancorp meets the current public information requirements of Rule 144 under the
Securities Act, each affiliate of the Bancorp who complies with the other
conditions of Rule 144 (including those that require the affiliate's sale to be
aggregated with those of certain other persons) would be able to sell in the
public market, without registration, a number of shares not to exceed, in any
three-month period, the greater of (i) 1% of the outstanding shares of the
Bancorp or (ii) the average weekly volume of trading in such shares during the
preceding four calendar weeks.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
General. The Company reports its income on a calendar year basis using the
accrual method of accounting and are subject to federal income taxation in
the same manner as other corporations with some exceptions, including
particularly the Bank's reserve for bad debts discussed below. The Company and
its subsidiary file federal income tax returns on a consolidated basis. The
Bank has been audited by the IRS through the 1990 tax year and the California
Franchise Tax Board through the 1985 tax year and for the 1993 tax year. The
statute of limitations has closed for all tax years for both IRS and California
Franchise Tax Board purposes through the 1992 tax year. The following
discussion of tax matters is intended only as a summary and does not purport to
be a comprehensive description of the tax rules applicable to the Bank or the
Company.
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Tax Bad Debt Reserve. Formerly, savings institutions such as the Bank
which met certain definitional tests primarily relating to their assets and the
nature of their business ("qualifying thrifts") were permitted to establish a
reserve for bad debts and to make annual additions , which additions could,
within specified formula limits, be deducted in arriving at taxable income. The
Bank's deduction with respect to "qualifying loans," (generally loans secured
by certain interests in real property), could be computed using a percentage
based on the Bank's actual loss experience, (the "experience method"), or a
percentage equal to eight percent of the Bank's taxable income before such
deduction (the "percentage of taxable income method"). Each year the Bank
selected the more favorable way to calculate the deduction attributable to an
addition to the bad debt reserve.
Pursuant to the Small Business Job Protection Act of 1996 (the "Act"),
Congress repealed the reserve method of accounting for bad debts for savings
institutions, effective for taxable years beginning after 1995. The Bank changed
its method of accounting for bad debts from the reserve method formerly
permitted under section 593 of the Internal Revenue Code of 1986, as amended
(the "Code") to the "specific charge-off" method. Under the specific charge-off
method, which is governed by section 166 of the Code and the regulations
thereunder, tax deductions may be taken for bad debts only if loans become
wholly or partially worthless. Although the Act requires that qualifying
thrifts recapture (i.e., include in taxable income) over a six-year period a
portion of their existing bad debt reserves equal to their "applicable excess
reserves," the Bank does not have applicable excess reserves subject to
recapture. However, the Bank's tax bad debt reserve balance of approximately
$25.3 million (as of March 31, 1996) will, in future years, be subject to
recapture in whole or in part upon the occurrence of certain events, such as a
distribution to shareholders in excess of the Bank's current and accumulated
earnings and profits, a redemption of shares, or upon a partial or complete
liquidation of the Bank. The Bank does not intend to make distributions to
shareholders that would result in recapture of any portion of its bad debt
reserves. These reserves would also be subject to recapture if the bank fails
to qualify as a "bank" for federal income tax purposes.
Corporate Alternative Minimum Tax. The Internal Revenue Code of 1986, as
amended (the "Code") imposes a tax on alternative minimum taxable income
("AMTI") at a rate of 20%. The excess of the bad debt reserve deduction using
the percentage of taxable income method over the deduction that would have been
allowable under the experience method is treated as a preference item for
purposes of computing the AMTI. Only 90% of AMTI can be offset by net operating
loss carryovers of which the Bank currently has none. AMTI is increased by an
amount equal to 75% of the amount by which the Bank's adjusted current earnings
exceeds its AMTI (determined without regard to this preference and prior to
reduction for net operating losses). In addition, for taxable years beginning
after December 31, 1996 and before January 1, 1996, an environmental tax of .12%
of the excess of AMTI (with certain modifications) over $2.0 million is imposed
on corporations, including the Bank, whether or not an Alternative Minimum Tax
("AMT") is paid. The Bank does not expect to be subject to the AMT, abut may be
subject to the environmental tax liability.
Dividends Received Deduction and Other Matters. The Bancorp may exclude
from its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Bancorp and the Bank will not file a consolidated tax return,
except that if the Bancorp or the Bank own more than 20% of the stock of a
corporation distributing a dividend then 80% of any dividends received may be
deducted.
39
<PAGE>
STATE AND LOCAL TAXATION
State of California. The California franchise tax rate applicable to the
Bank equals the franchise tax rate applicable to corporations generally, plus an
"in lieu" rate approximately equal to personal property taxes and business
license taxes paid by such corporations (but not generally paid by banks or
financial corporations such as the Bank); however, the total tax rate cannot
exceed 11.7%. Under California regulations, bad debt deductions are available
in computing California franchise taxes using a three or six year weighted
average loss experience method. The Bancorp and its California subsidiary file
California state franchise tax returns on a combined basis. Assuming that the
holding company form of organization is continued to be utilized, the Bancorp,
as a savings and loan holding company commercially domiciled in California, will
generally be treated as a financial corporation and subject to the general
corporate tax rate plus the "in lieu" rate as discussed previously for the Bank.
Delaware Taxation. As a Delaware holding company not earning income in
Delaware, the Bancorp is exempted from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
40
<PAGE>
ITEM 2. PROPERTIES.
- -------------------
The Bank's and the Bancorp's executive offices are located at 350 South
Garey Avenue, Pomona, California. The Bank conducts its business through
twenty-three banking branches, two trust offices, a regional loan center, and a
human resource center.
The following table sets forth the location of each of the Bank's offices,
the year the office was first leased or acquired, lease expiration, the net book
values and square footage (excluding basement, unless noted otherwise) of each
office. All of the Bank's offices are owned, with the exception of the
administrative offices, the Montclair Branch, the Rancho Cucamonga Branch, the
Tustin Branch, the Upland NW Branch, Ontario Mills Branch and the Trust Offices
in Hemet and Riverside.
<TABLE>
<CAPTION>
NET BOOK VALUE
ORIGINAL OF PROPERTY OR
YEAR DATE OF LEASEHOLD
LEASED LEASE IMPROVEMENTS
OR EXPIRATION AT SQUARE
LOCATION ACQUIRED (1) MARCH 31, 1997 FOOTAGE
- ----------------------------------- -------- ----------- -------------- -------
<S> <C> <C> <C> <C>
ADMINISTRATIVE OFFICES:
350 S. Garey Avenue 1984 2001 $ 258,433 20,020
Pomona, CA
HEAD OFFICE:
399 N. Garey Avenue 1951 - 839,561 44,939
Pomona, CA
BRANCH OFFICES:
Alta Loma 1977 - 625,316 4,270
9696 Baseline Road
Alta Loma, CA
Cathedral City 1982 - 761,192 3,700
35-950 Date Palm Drive
Cathedral City, CA
Chino 1962 - 369,267 5,917
12801 Central Avenue
Chino, CA
Claremont 1968 - 955,479 26,036
(Includes Trust Office)
393 W. Foothill Blvd.
Claremont, CA
</TABLE>
41
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Diamond Bar 1994 - $1,054,641 4,450
1175 W. Grand Avenue
Diamond Bar, CA
Glendora 1971 - 420,894 8,022
801 S. Grand Avenue
Glendora, CA
Indian Hill 1959 - 459,276 15,395
550 N. Indian Hill Blvd.
Pomona, CA
LaVerne 1981 - 676,222 3,717
1933 W. Foothill Blvd
La Verne, CA
Montclair 1983 2000 248,680 4,449
9090 Central Avenue
Montclair, CA
Ontario 1993 - 1,007,424 10,000
333 N. Euclid Avenue
Ontario, CA
Ontario Mills 1996 1999 213,229 1,498
Ontario Mills Circle #821
Ontario, CA
Palm Desert 1971 - 706,342 10,627
74-010 El Paseo Drive
Palm Desert, CA
Rancho Cucamonga 1979 2005 412,875 4,000
6644 Carnelian Street
Rancho Cucamonga, CA
Rowland Heights 1970 - 252,796 4,973
18220 Colima Road
Rowland Heights, CA
San Dimas 1963 - 299,790 4,714
165 E. Bonita Avenue
San Dimas, CA
Terra Vista 1992 - 1,958,253 5,995
11343 Baseline Road
Rancho Cucamonga, CA
</TABLE>
42
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Tustin 1980 2000 108,344 5,810
17851 17th Street
Tustin, CA
Twentynine Palms 1984 - 621,874 4,150
6325 Adobe Road
Twentynine Palms, CA
Upland 1972 - 717,755 5,314
20 E. Foothill Blvd
Upland, CA
Upland Northwest 1980 1999 1,069,936 7,593
1669 N. Mountain Avenue
Upland, CA
Yorba Linda 1975 - 304,231 3,600
19750 Yorba Linda Blvd.
Yorba Linda, CA
Yucca Valley 1968 - 419,192 6,444
57271 Twentynine Palms Hwy
Yucca Valley, CA
LOAN CENTER:
9467 Milliken Avenue 1993 - 2,626,021 34,340
Rancho Cucamonga, CA
RECORDS CENTER:
495 N. Garey Ave. 1986 - 709,081 14,412
Pomona, CA
TRUST OFFICE:
41555 E. Florida Avenue, Suite C 1995 1998 - 1,000
Hemet, CA
TRUST OFFICE:
3610 - 14th Street 1996 1998 - 1,200
Riverside, CA
HUMAN RESOURCES:
484 E. Foothill Blvd. 1959 477,565 6,772
Upland, CA
</TABLE>
___________________________
(1) The Bank owns the branch office facilities and leases the land on which
they are located.
43
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
- --------------------------
The Bancorp and subsidiaries have been named as defendants in various lawsuits
arising in the normal course of business. The outcome of these lawsuits cannot
be predicted, but the Bancorp intends to vigorously defend the actions and is of
the opinion that the lawsuits will not have a material effect on the Bancorp.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------------------------------------------------------------
On October 23, 1996, the annual meeting of stockholders (the Annual Meeting)
of the Company was held. At the Annual Meeting, the stockholders approved a
proposal to adopt the PFF Bancorp, Inc. 1996 Incentive Plan (the Incentive
Plan). There were 19,837,500 shares eligible to vote on the Incentive Plan of
which 11,809,957 shares were cast in favor of, 1,646,344 shares were cast
against and 187,578 shares abstained from voting. There were 2,920,676 broker
non-votes on the Incentive Plan.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
- -------------------------------------------------------------------------------
The Common Stock of PFF Bancorp, Inc. is traded over-the-counter on the Nasdaq
Stock Market under the symbol "PFFB." The stock began trading on March 29,
1996. The table below sets forth for the periods indicate the high, low and
closing sale prices of PFF Bancorp, Inc. common stock. To date, the Bancorp has
not paid a dividend to its stockholders. In the future, the Board of Directors
may consider a policy of paying cash dividends on the Common Stock. As of March
31, 1997, there were 5,700 holders of the Common Stock of the Company, which
includes the approximate number of shares held in street name.
<TABLE>
<CAPTION>
High Low Closing
------ ----- -------
<S> <C> <C> <C>
Year Ended March 31, 1997
First Quarter.............. $11.75 10.50 11.13
Second Quarter............. 12.75 10.25 12.38
Third Quarter.............. 14.88 12.13 14.88
Fourth Quarter............. 17.00 14.00 14.38
Year Ended March 31, 1996
First Quarter.............. N/A N/A N/A
Second Quarter............. N/A N/A N/A
Third Quarter.............. N/A N/A N/A
Fourth Quarter............. 11.63 11.25 11.38
</TABLE>
44
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
- ---------------------------------
The selected consolidated financial and other data of the Company set forth
below is derived in part from, and should be read in conjunction with the
consolidated financial statements of the Company and notes thereto - See Item 8
- - "Financial Statements and Supplementary Data".
<TABLE>
<CAPTION>
AT MARCH 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
SELECTED BALANCE SHEET DATA:
Total assets............................ $2,535,767 2,008,139 1,842,877 1,654,879 1,627,387
Investment securities held-to-
maturity(1)........................ 16,190 28,026 40,059 78,796 92,848
Investment securities available-for-
sale(1)............................ 87,647 9,932 6,881 - -
Mortgage-backed securities held-to-
maturity(1)........................ 5,490 7,134 80,778 4,026 6,313
Mortgage-backed securities
available-for-sale(1).............. 486,009 125,588 - - -
Loans held for sale..................... 736 6,015 - 4,721 1,494
Loans held for accelerated
disposition........................ - - - 22,593 -
Loans receivable, net(2)................ 1,819,209 1,574,935 1,605,675 1,395,498 1,437,634
Deposits................................ 1,711,049 1,682,073 1,669,416 1,523,647 1,489,270
FHLB advances and other borrowings...... 530,000 19,722 49,095 - -
Stockholders' equity, substantially
restricted......................... 265,526 289,071 108,053 112,281 115,189
</TABLE>
(continued on next page)
45
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
------------------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
SELECTED OPERATING DATA:
Interest income....................... $168,515 136,173 108,009 109,190 120,523
Interest expense...................... 99,306 87,556 62,066 54,939 63,873
-------- ------- ------- ------- -------
Net interest income before
provision for losses................ 69,209 48,617 45,943 54,251 56,650
Provision for loan losses............. 13,661 10,895 13,901 20,796 3,198
-------- ------- ------- ------- -------
Net interest income after
provision for loan losses.......... 55,548 37,722 32,042 33,455 53,452
Non-interest income................... 10,227 8,139 4,912 6,507 4,666
Non-interest expense:
General and administrative
expense...................... 49,381 40,475 39,534 39,229 37,455
SAIF recapitalization assessment... 10,900 - - - -
Real estate operations, net........ (325) 1,670 4,691 4,839 612
-------- ------- ------- ------- -------
Total non-interest expense............ 59,956 42,145 44,225 44,068 38,067
-------- ------- ------- ------- -------
Earnings (loss) before income
taxes............................. 5,819 3,716 (7,271) (4,106) 20,051
Income taxes (benefit)................ 3,087 1,651 (3,112) (1,198) 7,228
-------- ------- ------- ------- -------
Net earnings (loss)................... $ 2,732 2,065 (4,159) (2,908) 12,823
======== ======= ======= ======= =======
Earnings per share.................... $.15 N/A N/A N/A N/A
======== ======= ======= ======= =======
(continued on next page)
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED
MARCH 31,
-----------------------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------------------
SELECTED FINANCIAL RATIOS AND OTHER (DOLLARS IN THOUSANDS)
DATA(3):
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on average assets..................... 0.12% 0.11% (0.24)% (0.18)% 0.82%
Return on average equity..................... 0.96 1.86 (3.68) (2.47) 11.61
Average equity to average assets............. 12.10 5.88 6.60 7.14 7.04
Equity to total assets at end of period...... 10.47 14.39 5.86 6.78 7.08
Average interest rate spread(4).............. 2.52 2.51 2.63 3.23 3.52
Net interest margin(5)....................... 3.05 2.66 2.80 3.42 3.78
Average interest-earning assets to
average interest-bearing liabilities....... 112.04 103.17 104.52 105.66 105.55
Efficiency ratio(6)......................... 62.16 71.31 77.74 64.57 61.09
General and administrative
expense to average assets................. 2.10 2.14 2.31 2.38 2.39
REGULATORY CAPITAL RATIOS(3)(7):
Tangible capital............................. 8.46 10.53 5.67 6.77 7.01
Core capital................................. 8.46 10.53 5.67 6.77 7.01
Risk-based capital........................... 16.54 20.93 10.56 11.31 11.18
ASSET QUALITY RATIOS(3):
Non-performing loans as a percent of
gross loans receivable(8)(9)............... 1.24 1.41 1.43 2.20 2.20
Non-performing assets as a percent of
total assets(9)............................ 1.80 2.17 1.99 3.11 2.76
Allowance for loan losses
as a percent of gross loans
receivable(8).............................. 1.47 1.21 1.16 0.81 0.43
Allowance for loan losses
as a percent of non-performing loans(9).... 118.72 86.01 81.36 36.72 19.65
Allowance for loan losses as a
percent of total assets.................... 1.09 0.98 1.05 0.71 0.39
Number of full-service customer facilities.... 23 22 22 21 20
Loan originations............................. $499,667 $265,210 $403,073 $494,134 $368,961
- ----------------------------
</TABLE>
(1) The Bank adopted Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities,"
effective as of April 1, 1994. Prior to the adoption of SFAS No. 115,
investment securities and mortgage-backed securities held-for-sale were
carried at the lower of amortized cost or market value, as adjusted for
amortization of premiums and accretion of discounts over the remaining terms
of the securities from the dates of purchase.
(2) The allowance for loan losses at March 31, 1997, 1996, 1995, 1994, and 1993
was $27.7 million $19.7 million, $19.3 million, $19.3 million, $11.7
million, and $6.4 million, respectively.
(3) Asset Quality Ratios and Regulatory Capital Ratios are end of period ratios.
All ratios are based on average monthly balances during the indicated
periods.
(4) The average interest rate spread represents the difference between the
weighted average yield on interest-earning assets and the weighted average
cost of interest-bearing liabilities.
(5) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(6) The efficiency ratio represents general and administrative expense as a
percent of net interest income before provision for loan losses plus non-
interest income.
(7) For definitions and further information relating to the Bank's regulatory
capital requirements, see "Regulation - Federal Savings Institution
Regulation - Capital Requirements".
(8) Gross loans receivable includes loans receivable held for investment and
loans held for sale and excludes loans held for accelerated disposition.
(9) Non-performing assets consist of non-performing loans, restructured loans
and REO. Non-performing assets do not include loans which have been
restructured and are presently accruing interest in accordance with their
restructured terms. Non-performing loans consist of all loans 90 days or
more past due and all other non-accrual loans. It is the Bank's policy to
cease accruing interest on loans 90 days or more past due. See "Business of
the Bank - Non-Accrual and Past Due Loans" and "Real Estate".
47
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS.
- -------------
ASSET/LIABILITY MANAGEMENT
The Company's earnings depend primarily on its net interest income. Net
interest income is affected by (i) the amount of interest-earning assets and
interest-bearing liabilities, and (ii) the difference ("interest rate spread")
between yields on interest-earning assets and costs on interest-bearing
liabilities. Changes in interest rate spread and net interest income are
influenced to a significant extent by the repricing characteristics of interest-
earning assets and interest-bearing liabilities (interest rate risk).
The Company currently utilizes the following strategies to manage interest
rate risk: (i) emphasizing the origination of adjustable-rate loans indexed to
current market indicies such as the one-year Constant Maturity Treasury (CMT),
six-month London Inter Bank Offering Rate (LIBOR), and Prime, (ii) selling to
the secondary market fixed-rate and adjustable-rate loans with reset periods of
greater than one year, (iii) purchasing adjustable-rate and five and seven year
balloon maturity mortgage-backed securities; and (iv) attempting to reduce the
overall sensitivity of liabilities through lengthening maturities and increasing
core deposits. During the year ended March 31, 1997, the Company's average
interest rate spread remained relatively stable increasing to 2.52% from 2.51%
in 1996. Although rates generally rose during the year, the Company did not see
a substantial rise in its interest rate spread. This can be attributed to those
existing loans in the portfolio indexed to the 11th District Cost of Funds
(COFI) coupled with the relatively short duration of interest-bearing
liabilities. COFI remained relatively stable during fiscal 1997, with low,
high and average levels of 4.76%, 4.84% and 4.82%, respectively.
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap". An asset or
liability is said to be interest rate sensitive within a specific time period
if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of interest-
earning assets and interest-bearing liabilities maturing or repricing within a
specific time period. A gap is considered positive when the amount of interest
rate sensitive assets exceeds the amount of interest rate sensitive liabilities.
Conversely, a gap is considered negative when the amount of interest rate
sensitive liabilites exceeds the amount of interest rate sensitive assets.
During periods of rising interest rates, a positive gap would in theory result
in an increase in the interest rate spread. During periods of declining
interest rates, a positive gap would in theory result in a decrease in the
interest rate spread.
At March 31, 1997, the Company's one-year interest sensitivity gap as a
percentage of total assets was a positive 6.00% as compared to a positive 25.71%
at March 31, 1996. The following table sets forth the amounts of interest-
earning assets and interest-bearing liabilities outstanding at March 31, 1997,
which are anticipated by the Company, based upon certain assumptions, to reprice
or mature in each of the future time periods shown. Except as stated below, the
amount of assets and liabilities shown which reprice or mature during a
particular period were determined in accordance with the earlier of term to
repricing or the contractual maturity of the asset or liability. It is intended
to provide an approximation of the projected repricing of assets and
liabilities at March 31, 1997, on the basis of contractual maturities,
anticipated prepayments, and scheduled rate adjustments within a three month
period and subsequent selected time intervals. The loan amounts in the table
reflect principal balances expected to be redeployed and/or repriced as a result
of contractual amortization and anticipated prepayments of adjustable-rate loans
and fixed-rate loans, and as a result of contractual rate adjustments on
adjustable-rate loans. Adjustable-rate loans and fixed-rate loans are projected
to prepay at rates between 9% and 24% with an average of 11% annually.
Mortgage-backed securities are projected to prepay at rates between 10% and 15%
with an average of 12% annually. Passbook, money market and negotiable order of
withdrawal ("NOW") and other demand accounts are assumed to have decay rates of
17% to 32% with an average of 26% annually. The repricing sensitivity of
passbook,
48
<PAGE>
money market and NOW and other demand deposit accounts is a function in part of
the positioning of the current interest rate on the accounts relative to the
general level of interest rates and the stage at which an interest rate cycle
stands. As the general level of short-term interest rates reaches what will
prove to be the lowest level in the cycle and the rates paid on passbook, money
market and NOW and other demand deposits near similarly low levels, the
sensitivity of such accounts to upward and downward repricing will become
increasingly asymmetrical. The lower the interest rates go on the accounts, the
greater will be their sensitivity to upward repricing relative to downward
repricing. Conversely as interest rates approach the high point in an interest
rate cycle, the accounts will have greater sensitivity to downward repricing
than they will to further upward repricing. In the table below, the use of decay
rates for passbook, money market and NOW and other demand deposit accounts
assumes that the sensitivity of these accounts to repricing is symmetrical and
less sensitive than would be the case when interest rates approach either the
high or low extremes of a particular interest rate cycle. This assumption has
the impact of lessening the sensitivity of certain liabilities to repricing,
increasing the positive or reducing the negative interest sensitivity gap.
Certain shortcomings are inherent in the method of analysis presented in the
following table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates (this is commonly referred to as "basis
risk"). Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. Additionally, certain
assets, such as adjustable-rate loans, have features which restrict changes in
interest rates both on a short-term basis and over the life of the asset.
Further, in the event of a change in interest rates, prepayment and early
withdrawal levels (specifically with regard to those accounts that do not impose
penalties upon prepayment or early withdrawal) would likely deviate
significantly from those assumed in calculating the table.
49
<PAGE>
<TABLE>
<CAPTION>
More than 3 More than 6 More than 12
Months to 6 Months to 12 Months to 3
3 Months or Less Months Months years
---------------- ----------- ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Interest-Earning Assets
Interest-earning deposits & short-term
investments................................... $ 5,596 $ - $ - $ -
Investment securities, net (1).................. 9,757 10,531 10,964 14,281
Mortgage-backed securities...................... 93,601 85,142 111,547 82,713
Loans receivable................................ 1,027,495 346,853 119,940 263,856
FHLB Stock...................................... 27,270 - - -
--------- --------- ----------- ----------
Total interest-earning assets................. 1,163,719 442,526 242,451 360,850
Unamortized premiums (discounts) and
deferred loan fees............................ (1,661) (560) (194) (426)
Allowance for loan losses....................... - - - -
--------- ------- ---------- -------
Net interest-earning assets................... 1,162,058 441,966 247,257 360,424
Other non-interest-earning assets............... - - - -
---------- -------- -------- --------
Total assets.................................. $1,162,058 $441,966 $242,757 $360,424
========== ======== ======== ========
Interest-bearing liabilities:
Money market savings accounts................... $ 11,977 $ 11,977 $ 23,954 $ 95,817
Passbook accounts............................... 7,686 7,686 15,372 61,490
NOW and other demand deposit accounts........... 6,963 6,963 13,926 55,705
Certificate accounts............................ 340,220 400,785 366,746 103,806
Borrowings...................................... 190,000 95,000 195,000 25,000
---------- -------- --------- --------
Total interest-bearing liabilities............ 556,846 522,411 614,998 341,818
Non-interest-bearing liabilities................ - - - -
Equity.......................................... - - - -
---------- -------- ---------- --------
Total liabilities and stockholders' equity.... $ 556,846 $522,411 $614,998 $341,818
========== ======== ========== ========
Interest sensitivity gap........................ $ 605,212 ($ 80,445) ($372,741) $ 18,606
Cumulative interest sensitivity gap............. $ 605,212 $524,767 $152,026 $170,632
Cumulative interest sensitivity gap as a
percentage of total assets................... 23.87% 20.69% 6.00% 6.73%
Cumulative interest-earning assets as a
percentage of cumulative interest-bearing
liabilities.................................. 208.98% 148.83% 109.12% 108.52%
</TABLE>
<TABLE>
<CAPTION>
More than 3
Years to 5 More than 5
Years Years Total
---------------- ----------- ------------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest-Earning Assets
Interest-earning deposits & short-term
investments................................... $ - $ - $ 5,596
Investment securities, net (1).................. 31,402 26,902 103,837
Mortgage-backed securities...................... 57,204 61,292 491,499
Loans receivable................................ 30,151 62,362 1,850,657
FHLB Stock...................................... - 27,270
---------- --------- ----------
Total interest-earning assets................. 118,757 150,556 2,478,859
Unamortized premiums (discounts) and
deferred loan fees ........................ (49) (101) (2,991)
Allowance for loan losses....................... - (27,721) (27,721)
---------- --------- ----------
Net interest-earning assets................... 118,708 122,734 2,448,147
Other non-interest-earning assets............... - 87,620 87,620
---------- -------- ----------
Total assets.................................. $ 118,708 $210,354 $2,535,767
========== ======== ==========
Interest-bearing liabilities:
Money market savings accounts................... $ 8,995 $ - $152,720
Passbook accounts............................... 61,490 23,143 176,867
NOW and other demand deposit accounts........... 55,705 1,969 141,231
Certificate accounts............................ 27,974 700 1,240,231
Borrowings...................................... 25,000 - 530,000
---------- -------- ---------
Total interest-bearing liabilities............ 179,164 25,812 2,241,049
Non-interest-bearing liabilities................ - 29,192 29,192
Equity.......................................... - 265,526 265,526
---------- -------- ----------
Total liabilities and stockholders' equity.... $ 179,164 $320,530 $2,535,767
========== ======== ==========
Interest sensitivity gap........................ $ (60,456) $ 96,922
Cumulative interest sensitivity gap............. $ 110,176 $207,098
Cumulative interest sensitivity gap as a
percentage of total assets................... 4.34% 8.17%
Cumulative interest-earning assets as a
percentage of cumulative interest-bearing
liabilities.................................. 105.10% 110.61%
</TABLE>
<PAGE>
(1) Includes investment securities available-for-sale of $87.0 million which
reprice or mature as follows: three months or less $4.1 million, more than
three to six months $500,000, more than six to twelve months $10.5 million,
more than twelve months to three years $14.3 million, more than three to
five years $31.4 million and more than five years $26.2 million.
(2) For purposes of the gap analysis, loss receivable is net of loans in
process and includes non-performing loans and loans held for sale but is
not reduced for the allowance for loan losses, unamortized discounts, net
and deferred loan origination fees, net. Includes loans receivable held for
sale of $736,000 which reprice in more than five years.
(3) Unamortized premiums (discounts) and deferred loan fees are related to
loans receivable and mortgage-backed securities.
Net Portfolio Value. Another method of analyzing an institution's exposure
to interest rate risk is by measuring the change in the institution's net
portfolio value (NPV) under various interest rate scenarios. NPV is the
difference between the net present value of assets, liabilities an off-balance
sheet contracts. An NPV ratio, is any interest rate scenario, is defined as the
NPV in the scenario divided by the market value of assets in the same scenario.
The sensitivity measure is the decline in the NPV ratio, in basis points, caused
by 2% increase or decrease in rates, whichever produces a larger decline. the
higher an institution's sensitivity measure is, the greater its exposure to
interest rate risk is considered to be. The OTS produces an analysis using its
own model, based upon data submitted on the Bank's quarterly Thrift Financial
Reports. The Bank also calculates its NPV ratio utilizing an internal
simulation model. The results of the OTS model may vary from the Bank's
internal model primarily due to difference between assumptions utilized in the
Bank's internal model and the OTS model, including estimated loan market rates,
prepayment rates, reinvestment rates and deposit decay rates. The OTS has
incorporated an interest rate risk component into its regulatory capital rule.
Under the rule, an institution whose sensitivity measure exceeds 2% would be
required to deduct an interest rate risk component in calculating its total
capital for purpose of the risk-based capital requirement. The OTS has
postponed the date that the component will first be deducted from an
institution's total capital to provide themselves with an opportunity to review
the interest rate risk proposals issued by the federal banking agencies. As of
March 31, 1997, the Bank's sensitivity measure, as calculated by the OTS, was a
negative 2.68%. This represents an increase in sensitivity of 26 basis points
from the December results. At the same date, the sensitivity as calculated by
the Bank's internal model was a negative 1.24%. the primary difference involves
the OTS's use of an option-based pricing approach versus the Bank's simulation
model which used static discounted cash flows. Other differences between the
two calculations include the aggregation of the and differences in the
assumptions used such as market rates, prepayments, etc. The decline in the NPV
is attributed largely to the use of shorter-term liabilities to fund longer-term
assets as discussed above and a slight upward movement in rates during the last
quarter. the Bank compares and reconciles the NPV ratio results from the OTS
with those from its internal model and provides this information to management
and the Board of Directors on a quarterly basis.
The Company utilizes simulation modeling to project the interest
income and expense that will be generated from interest-earning assets and
interest-bearing liabilities using the rate, maturity and repricing
characteristics of those assets and liabilities. The simulation modeling is
performed under several hypothetical interest rate scenarios utilizing
prepayment estimates, and other customer behavior tailored to the Company's
asset and liability products. The simulation modeling is utilized by
management to analyze the projected impact of hypothetical interest rate
scenarios on the net interest income to be generated by the Company from the
current as well as projected asset and liability rate, maturity and repricing
structures and is an essential element of the asset/liability management
process conducted by the Company.
51
<PAGE>
AVERAGE BALANCE SHEETS
The following table sets forth certain information relating to the
Company for the years ended March 31, 1997, 1996, and 1995. 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>
Year Ended March 31,
-----------------------------------------------------------------------------
1997 1996
-----------------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
----------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Interest-bearing deposits and short-term
investments.............................. $ 35,676 $ 2,005 5.62% $ 38,381 $ 2,117 5.52%
Investment securities, net(1)(2)............. 62,671 4,292 6.85 48,382 2,682 5.54
Loans receivable, net(3)(4)(5)............... 1,743,487 133,116 7.64 1,574,520 119,776 7.61
Mortgage-backed securities, net(1)(6)........ 406,703 27,723 6.82 150,986 10,853 7.19
FHLB stock................................... 21,383 1,379 6.45 14,680 745 5.07
---------- -------- ---------- --------
Total interest-earning assets........ 2,269,920 168,515 7.42 1,826,949 136,173 7.45
-------- --------
Non-interest-earning assets.................. 78,368 60,934
---------- ----------
Total assets......................... $2,348,288 $1,887,883
========== ==========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities
Passbook accounts............................ $ 192,520 5,525 2.87 115,878 2,657 2.29
Money market savings accounts................ 111,793 3,935 3.52 159,276 4,012 2.52
NOW and other demand deposit accounts........ 133,647 1,096 0.82 125,136 1,752 1.40
Certificate accounts......................... 1,239,510 68,690 5.55 1,272,882 73,830 5.80
---------- -------- ---------- --------
Total................................ 1,677,470 79,246 4.72 1,673,172 82,251 4.92
FHLB advances and other borrowings........... 345,317 19,981 5.79 83,607 4,920 5.88
Other........................................ 3,223 79 2.45 14,088 385 2.73
---------- -------- ---------- --------
Total interest-bearing liabilities.... 2,026,010 99,306 4.90 1,770,867 87,556 4.94
-------- --------
Non-interest bearing liabilities............. 38,143 5,963
---------- ----------
Total liabilities.................... 2,064,153 1,776,830
Stockholders' equity......................... 284,135 111,053
---------- ----------
Total liabilities and
stockholders' equity............ $2,348,288 $1,887,883
========== ==========
Net interest income before provision
for loan losses................... $ 69,209 $ 48,617
======== ========
Net interest rate spread(7).................. 2.52 2.51
Net interest margin(8)....................... 3.05 2.66
Ratio of interest-earnings assets
to interest-bearing liabilities............ 112.04% 103.17%
- ------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------
1995
-----------------------------------------
Average
Average Yield/
Balance Interest Cost
------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Assets:
interest-earning assets:
Interest-bearing deposits and short-term
investments.............................. $ 15,122 $ 793 5.24%
Investment securities, net(1)(2)............. 74,331 3,399 4.57
Loans receivable, net(3)(4)(5)............... 1,521,945 101,948 6.70
Mortgage-backed securities, net(1)(6)........ 15,262 1,184 7.76
FHLB stock................................... 13,608 685 5.03
---------- --------
Total interest-earning assets............ 1,640,268 108,009 6.58
--------
Non-interest-earning assets.................. 71,763
----------
Total assets......................... $1,712,031
==========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities
Passbook accounts............................ $ 121,609 2,493 2.05
Money market savings accounts................ 203,530 4,946 2.43
NOW and other demand deposit accounts........ 120,111 1,129 0.94
Certificate accounts......................... 1,111,234 52,606 4.73
---------- --------
Total................................. 1,556,484 61,174 3.93
FHLB advances and other borrowings........... 8,655 532 6.15
Other........................................ 4,179 360 8.61
---------- --------
Total interest-bearing liabilities.... 1,569,318 62,066 3.95
--------
Non-interest bearing liabilities............. 29,676
----------
Total liabilities.................... 1,598,994
Stockholders' equity..................... 113,037
----------
Total liabilities and
stockholders' equity............ $1,712,031
==========
Net interest income before provision
for loan losses................... $ 45,943
========
Net interest rate spread(7).................. 2.63
Net interest margin(8)....................... 2.80
Ratio of interest-earnings assets
to interest-bearing liabilities............ 104.52%
</TABLE>
<PAGE>
(1) Includes related assets available-for-sale and unamortized discounts and
premiums and certificates of deposit.
(2) Included in the average balance of investment securities for the years
ended March 31, 1997, 1996 and 1995 are average investment securities
available-for-sale of $50.1 million, $4.7 million and $10.7 million,
respectively. Interest income recognized on investment securities
available-for-sale during these periods was $3.6 million, $281,000 and
$544,000 respectively, resulting in average yields of 7.10%, 5.96% and
5.10%, respectively. Yields on average investment securities available-
for-sale have been calculated based upon the historical cost bases of the
underlying securities.
(3) Amount is net of deferred loan origination fees, undisbursed loan funds,
unamortized discounts and allowance for loan losses and includes loans held
for sale and non-performing loans. See "Lending Activities".
(4) Included in loans receivable, net at March 31, 1994 are loans held for
accelerated disposition of $22.6 million, after a write-down of $10.7
million. The transfer of these loans to loans held for accelerated
disposition was made on March 31, 1994. An additional $4.0 million of
loans previously classified as loans receivable, net at March 31, 1994 were
added to loans held for accelerated disposition during the year ended March
31, 1995 and an additional write down of $2.1 million was recorded against
the portfolio of loans held for accelerated disposition. All loans held
for accelerated disposition were disposed of with an effective sale date of
June 30, 1994. The average balances of loans held for accelerated
disposition for the year ended March 31, 1995 is not meaningful due to the
timing of the transfers and subsequent sale. Interest income recognized on
loans held for accelerated disposition for this period was $192,000
(substantially all of which was recognized prior to the loans being
transferred to the loans held for accelerated disposition classification).
(5) Included in the average balance of loans receivable, net for the years
ended March 31, 1997, 1996, and 1995 are loans held for sale of $4.0
million, $1.1 million, and $1.9 million, respectively. Interest income
recognized on loans held for sale during these periods was $286,000,
$80,000, and $135,000, respectively, resulting in average yields of 7.12%,
7.18% and 7.21%, respectively.
(6) Included in the average balance of mortgage-backed securities, net for the
years ended March 31, 1997 and 1996 are average mortgage-backed securities
available-for-sale of $400.6 million and $46.4 million, respectively.
There were no mortgage-backed securities available-for-sale during the
years ended March 31, 1995 or 1994. Interest income recognized on
mortgage-backed securities available-for-sale during the years ended March
31, 1997 and 1996 was $27.3 million and $3.3 million, respectively
resulting in an average yield of 6.81% and 7.09%, respectively.
(7) Net interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
(8) Net interest margin represents net interest income divided by average
interest-earning assets.
53
<PAGE>
RATE/VOLUME ANALYSIS
The following table presents the extent to which changes in interest
rates and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to: (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume); and (iii) the net change. The changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1997 YEAR ENDED MARCH 31, 1996 YEAR ENDED MARCH 31, 1995
COMPARED TO COMPARED TO COMPARED TO
YEAR ENDED MARCH 31, 1996 YEAR ENDED MARCH 31, 1995 YEAR ENDED MARCH 31, 1995
------------------------------- ----------------------------- -----------------------------
INCREASE (DECREASE) INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO DUE TO
------------------------------- ----------------------------- -----------------------------
VOLUME RATE NET VOLUME RATE NET VOLUME RATE NET
------------ -------- ------- --------- -------- -------- ---------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-earning deposits and
short-term investments........... $ (149) 37 (112) 1,283 41 1,324 (532) 532 -
Investment securities, net (1)(2). 792 818 1,610 (1,438) 721 (717) (388) 198 (190)
Loans receivable, net(3).......... 12,854 486 13,340 4,001 13,827 17,828 4,182 (6,126) (1,944)
Mortgage-backed securities,
net (1)(4)....................... 18,381 (1,511) 16,870 9,756 (87) 9,669 777 (44) 733
FHLB stock........................ 340 294 634 54 6 60 81 139 220
------- ------ ------ ------- ------ ------ ----- ------ -------
Total interest-earning assets.. 32,218 124 32,342 13,656 14,508 28,164 4,120 (5,301) (1,181)
------- ------ ------ ------- ------ ------ ----- ------ -------
INTEREST-BEARING LIABILITIES:
Money market savings accounts..... (1,196) 1,119 (77) (1,115) 181 (934) (686) 46 (640)
Passbook accounts................ 1,757 1,111 2,868 (132) 296 164 (163) (207) (370)
NOW and other demand
deposit accounts................. 119 (775) (656) 70 553 623 20 (389) (369)
Certificate accounts.............. (468) (4,672) (5,140) 6,913 14,311 21,224 4,507 3,264 7,771
FHLB advances and other borrowings 15,401 (340) 15,061 4,411 (23) 4,388 532 - 532
Other............................. (297) (9) (306) 271 (246) 25 (36) 239 203
------- ------ ------ ------- ------ ------ ----- ------ -------
Total interest-bearing
liabilities................... 15,316 (3,566) 11,750 10,418 15,072 25,490 4,174 2,953 7,127
------- ------ ------ ------- ------ ------ ----- ------ -------
Change in net interest income...... $16,902 3,690 20,592 3,238 (564) 2,674 (54) (8,254) (8,308)
======= ====== ====== ======= ====== ====== ===== ====== =======
</TABLE>
54
<PAGE>
_________________________
(1) Includes assets available-for-sale.
(2) The Company adopted SFAS No. 115 effective as of April 1, 1994. Included in
the increases (decreases) in interest income on investment securities, net
for the year ended March 31, 1997 compared to 1996, for the year ended
March 31, 1996 compared to 1995 and for the year ended March 31, 1995
compared to 1994 are increases/(decreases) in interest income on investment
securities available-for-sale attributable to volume and rate of $2.7
million and $571,000; $(303,000) and $40,000; and $543,000 and zero,
respectively. There were no investment securities available-for-sale during
the year ended March 31, 1994.
(3) Included in the increases or (decreases) in interest income on loans
receivable, net for the year ended March 31, 1997 compared to 1996, the
year ended March 31, 1996 compared to 1995, the year ended March 31, 1995
compared to 1994 are increases/(decreases) in interest income on loans held
for sale attributable to volume and rate of $208,000 and $(2,000);
$(54,000) and $(1,000); and ($240,000) and $16,000, respectively.
(4) Included in the increase or (decrease) in interest income on mortgage-backed
securities, net for the year ended March 31, 1997 compared to 1996 and for
the year ended March 31, 1996 compared to March 31, 1995 are increases/
(decreases) in interest income on mortgage-backed securities available-for-
sale attributable to volume and rate of $25.1 million and ($1.1 million);
and $3.3 million and zero, respectively.
55
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED MARCH 31, 1997 AND MARCH 31,
1996
GENERAL
- -------
The Company reported net earnings of $2.7 million for fiscal 1997 compared to
net earnings of $2.1 million for fiscal 1996. The slight improvement in
operating results between fiscal 1997 and fiscal 1996 was attributable to the
increase in net interest income before provision for loan losses arising from
higher balances of average interest-earning assets and interest-bearing
liabilities coupled with an increase in the ratio of average interest-earning
assets to average interest-bearing liabilities reflecting the investment of the
net proceeds from the Company's March 28, 1996 initial public offering of common
stock. Net interest income before provision for loan losses was $69.2 million
for fiscal 1997, compared to $48.6 million for fiscal 1996. Provision for loan
losses increased from $10.9 million for fiscal 1996 to $13.7 million for fiscal
1997. Total non-interest income increased from $8.1 million for fiscal 1996 to
$10.2 million for fiscal 1997 due principally to an increase in savings fees
and charges from $3.7 million for fiscal 1996 to $4.8 million for fiscal 1997.
INTEREST INCOME
- ---------------
Interest income for fiscal 1997 was $168.5 million compared to $136.2 million
for fiscal 1996, an increase of $32.3 million or 23.8%. The increase in
interest income between fiscal 1996 and fiscal 1997 was attributable to a $443.0
million increase in average interest-earning assets from $1.83 billion for
fiscal 1996 to $2.27 billion for fiscal 1997. The yield on average interest-
earning assets was 7.42% for fiscal 1997 compared to 7.45% for fiscal 1996.
The increase in average interest-earning assets between fiscal 1996 and fiscal
1997 was comprised of a $255.7 million increase in the average balance of
mortgage-backed securities from $151.0 million for fiscal 1996 to $406.7 million
for fiscal 1997 and a $169.0 million increase in the average balance of loans
receivable, net from $1.57 billion for fiscal 1996 to $1.74 billion for fiscal
1997. The average yield on loans receivable, net increased 3 basis points from
7.61% for fiscal 1996 to 7.64% for fiscal 1997 reflecting the Bank's increased
emphasis on the origination of mortgages which provide higher yields than those
earned on single-family residential COFI based loan products. The disbursed
balance of the Bank's portfolio of construction loans totaled $74.7 million at
an average yield of 11.49% during fiscal 1997 compared to $51.5 million at an
average yield of 9.12% during fiscal 1996. The Bank has also increased the
proportion of its loan portfolio comprised by ("36/6") single-family residential
mortgage loans 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 CMT
index. During fiscal 1997, the Bank's portfolio of these types of loans
averaged $193.9 million at an average yield of 7.12% compared to $37.5 million
at an average yield of 7.12% during fiscal 1996. Unlike the typical COFI based
adjustable-rate loans originated by the Bank, these "36/6" loans are not
originated with lower introductory rates. The increase in yield on loans
receivable, net attributable to the change in the composition of the loan
portfolio was partially offset by a decrease in the COFI to which a large
portion of the Bank's portfolio of adjustable-rate loans are tied. For the year
ended March 31, 1997, COFI averaged 4.83% compared to 5.08% for fiscal 1996.
The yield on mortgage-backed securities decreased from 7.19% for fiscal 1996 to
6.82% for fiscal 1997 as lower-yielding adjustable-rate mortgage-backed
securities indexed primarily to the one-year CMT were purchased and added to the
portfolio in connection with the Bank's strategy of supplementing growth in
loans and deposits with mortgage-backed and other securities funded utilizing
primarily FHLB advances and other borrowings.
INTEREST EXPENSE
- ----------------
Interest expense for fiscal 1997 was $99.3 million compared to $87.6 million
for fiscal 1996, an increase of $11.8 million or 13.4%. The increase in interest
expense between fiscal 1996 and fiscal 1997, was due
56
<PAGE>
to an increase in average interest-bearing liabilities from $1.77 billion for
fiscal 1996 to $2.03 billion for fiscal 1997. The increase in interest expense
attributable to the increase in average interest-bearing liabilities was
partially offset by a slight decrease in the average cost of interest-bearing
liabilities from 4.94% for fiscal 1996 to 4.90% for fiscal 1997. The increase in
the average balance of interest-bearing liabilities was attributable to a $250.8
million increase in the average balance of FHLB advances and other borrowings
from $97.7 million for fiscal 1996 to $348.5 million for fiscal 1997. The
average balance of deposits increased $4.3 million from $1.67 billion for fiscal
1996 to $1.68 billion for fiscal 1997. During fiscal 1997, the Bank utilized
FHLB advances and other borrowings as primary funding sources for its additional
investments in mortgage-backed and other investment securities and as a means of
managing the difference in cash flows between retail loan and deposit activity
in a manner complementary to the overall interest rate risk profile of the Bank.
The average cost of deposits decreased from 4.92% for fiscal 1996 to 4.72% for
fiscal 1997. Contributing to the decrease in the average cost of deposits was a
$37.7 million increase in the average balance of money market savings, passbook
and NOW and other demand deposit accounts from $400.3 million for fiscal 1996 to
$438.0 million for fiscal 1997.
PROVISION FOR LOAN LOSSES
- --------------------------
Provision for loan losses was $13.7 million for fiscal 1997 compared
to $10.9 million for fiscal 1996. The provision for loan losses for fiscal 1997
includes $2.5 million applicable to the establishment of specific allowances on
several loans based upon updated reviews in June 1996. Non-accrual loans were
$23.4 million or 1.24%, of gross loans receivable at March 31, 1997 compared to
$23.0 million or 1.41% of gross loans receivable at March 31, 1996. The
allowance for loan losses was $27.7 million or 1.47% of gross loans receivable
at March 31, 1997 compared to $19.7 million or 1.21% of gross loans receivable
at March 31, 1996.
NON-INTEREST INCOME
- -------------------
Non-interest income was $10.2 million for fiscal 1997 compared to $8.1
million for fiscal 1996, an increase of $2.1 million or 25.7%. The increase
between fiscal 1996 and fiscal 1997 was attributable principally to an increase
in savings fees and charges from $3.7 million for fiscal 1996 to $4.8 million
for fiscal 1997 due to a combination of higher volumes and an increased emphasis
on the assessment and collection of fees. The income from the sale of non-
deposit investments increased from $986,000 for fiscal 1996 to $1.4 million for
fiscal 1997 as the Bank continued to expand its offerings of non-proprietory
annuity and mutual fund products. Trust fee income was $1.4 million for both
fiscal 1997 and fiscal 1996.
NON-INTEREST EXPENSE
- --------------------
Non-interest expense was $60.0 million for fiscal 1997 compared to
$42.1 million for fiscal 1996, an increase of $17.8 million or 42.3%. Non-
interest expense for fiscal 1997 includes a pre-tax charge of $10.9 million
representing the Bank's share of an industry-wide special assessment levied
against the March 31, 1995 deposit bases of all savings institutions in the
country with deposits insured by the SAIF.
General and administrative expense was $49.4 million or 2.10% of
average assets for fiscal 1997 compared to $40.5 million or 2.14% of average
assets for fiscal 1996, an increase of $8.9 million or 22.0%. Compensation and
benefits expense increased $3.9 million from $19.1 million for fiscal 1996 to
$23.0 million for fiscal 1997. The increase between fiscal 1996 and fiscal 1997
was attributable principally to the addition of $2.0 million of expense
associated with the amortization of shares under the Company's ESOP and $830,000
of expense associated with the Company's 1996 Incentive Plan. Other non-
interest expense increased $3.1 million from $9.7 million for fiscal 1996 to
$12.8 million for fiscal 1997. The increase was due principally to
approximately $2.1 million of expenses associated with the Bank's transition of
its EDP systems to a new third-party service provider in October 1996. Other
non-interest expense for fiscal 1997 also includes a $350,000 legal judgment
and a $420,000 accrual for the interest portion of a possible adverse
57
<PAGE>
California franchise tax settlement. Marketing and professional services expense
increased $1.5 million from $1.8 million for fiscal 1996 to $3.2 million for
fiscal 1997 due principally to an increase in marketing expense associated with
the Bank's name change and increased focus on business banking. Real estate
operations, net reflects income of $325,000 for fiscal 1997 compared to expense
of $1.7 million for fiscal 1996. The results for fiscal 1997 reflect a $1.4
million reduction in the allowance for real estate losses based upon updated
property valuations.
INCOME TAXES
- ------------
Income taxes were $3.1 million for fiscal 1997 compared to $1.7
million for fiscal 1996. Income taxes for fiscal 1997 includes a $470,000
accrual for the tax portion of a possible adverse California franchise tax
settlement and $150,000 of Delaware corporate tax applicable to the Company's
incorporation in that state in March 1996. The effective income tax rate for
fiscal 1997, excluding the two items noted above was 43.2% compared to 44.4%
for fiscal 1996.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1997 AND MARCH 31, 1996
- ----------------------------------------------------------------------
Total assets at March 31, 1997 were $2.54 billion compared to $2.01
billion at March 31, 1996 an increase of $527.6 million or 26.3%. Loans
receivable, net increased by $244.3 million from $1.57 billion at March 31, 1996
to $1.82 billion at March 31, 1997 due principally to an increase in loan
originations from $265.2 million in fiscal 1996 to $499.7 million in fiscal
1997. Mortgage-backed securities available-for-sale increased $360.4 million
from $125.6 million at March 31, 1996 to $486.0 million at March 31, 1997.
Investment securities available-for-sale increased $77.7 million from $9.9
million at March 31, 1996 to $87.6 million at March 31, 1997 while investment
securities held-to-maturity decreased $11.8 million from $28.0 million at March
31, 1996 to $16.2 million at March 31, 1997 reflecting the maturation or calling
of investments by the issuers. Cash and cash equivalents decreased $144.3
million from $175.9 million at March 31, 1996 to $31.6 million at March 31, 1997
due principally to the redeployment of the net proceeds from the March 28, 1996
closing of the Company's stock offering. The majority of the net proceeds from
the March 28, 1996 stock offering remained in short-term investments at March
31, 1996 awaiting deployment into longer-term investments. See "Liquidity and
Capital Resources".
Total liabilities at March 31, 1997 were $2.27 billion compared to
$1.72 billion at March 31, 1996, an increase of $551.2 million. Total deposits
of the Bank were $1.71 billion at March 31, 1997 compared to $1.68 billion at
March 31, 1996. FHLB advances and other borrowings were $530.0 million at March
31, 1997 compared to $19.7 million at March 31, 1996. The increase in FHLB
advances and other borrowings between March 31, 1996 and 1997 was attributable
to the Bank's use of FHLB advances and other borrowings to fund the growth in
loans receivable and the increase in mortgage-backed securities during fiscal
1997.
Total stockholders' equity decreased $23.5 million from $289.1 million
at March 31, 1996 to $265.5 million at March 31, 1997. The $23.5 million
decrease is comprised principally of an $11.2 million decrease in additional
paid-in-capital, an $8.8 million increase in unearned stock-based compensation
and a $2.2 million decrease in retained earnings, substantially restricted. The
$11.2 million decrease in additional paid-in-capital was attributable
principally to the Company's repurchase of 991,875 shares of its outstanding
common stock on January 24, 1997. All shares were repurchased at a price of
$14.94 per share. The $8.8 million increase in unearned stock-based
compensation is comprised of an $13.0 million increase attributable to the
purchase of 793,000 shares of the Company's common stock by the third party
trustee administrator of the Company's 1996 Incentive Plan partially offset by a
$4.1 million decrease attributable to the amortization of shares under the
Company's ESOP. The $2.2 million decrease in retained earnings, substantially
restricted is comprised of $2.7 million of net earnings offset by $4.9 million
which represents the amount paid for the repurchase of treasury stock in excess
of the issuance price of the stock.
58
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED MARCH 31, 1996 AND MARCH 31,
1995
GENERAL
- -------
The Bank reported net earnings of $2.1 million for fiscal 1996
compared to a net loss of $4.2 million for fiscal 1995. The improvement in
operating results between fiscal 1995 and fiscal 1996 was positively influenced
by a $3.0 million decrease in the provision for loan losses from $13.9 million
for fiscal 1995 to $10.9 million for fiscal 1996. Operating results for fiscal
1996 were also positively impacted by the increase in net interest income before
provision for loan losses arising from higher balances of average interest-
earning assets and interest-bearing liabilities. Net interest income before
provision for loan losses was $48.6 million for fiscal 1996, compared to $45.9
million for fiscal 1995. Total non-interest income increased from $4.9 million
for fiscal 1995 to $8.1 million for fiscal 1996 due principally to the inclusion
in fiscal 1996 operating results of a full twelve months of trust fee income
attributable to the full service trust operation acquired in January 1995, as a
key component of the Bank's transition to providing a full range of banking
related services. Trust fee income was $1.4 million for fiscal 1996 compared to
$252,000 for fiscal 1995.
INTEREST INCOME
- ---------------
Interest income for fiscal 1996 was $136.2 million compared to $108.0
million for fiscal 1995, an increase of $28.1 million or 26.1%. The increase in
interest income between fiscal 1995 and fiscal 1996 was attributable to an
increase in the yield on average interest-earning assets from 6.58% in fiscal
1995 to 7.45% in fiscal 1996 coupled with a $186.7 million increase in average
interest-earning assets from $1.64 billion for fiscal 1995 to $1.83 billion for
fiscal 1996. The increase in average interest-earning assets between fiscal
1995 and fiscal 1996 was comprised principally of a $135.7 million increase in
the average balance of mortgage-backed securities from $15.3 million for fiscal
1995 to $151.0 million for fiscal 1996. The yield on mortgage-backed securities
decreased from 7.76% for fiscal 1995 to 7.19% for fiscal 1996 as lower-yielding
adjustable-rate mortgage-backed securities indexed primarily to the one-year CMT
were purchased and added to the portfolio in connection with the Bank's strategy
of supplementing growth in loans and deposits with mortgage-backed and other
securities funded utilizing FHLB advances and other borrowings. The change in
the yield on mortgage-backed securities between fiscal 1995 and fiscal 1996 was
also influenced by the June 1995 securitization of $73.4 million of mortgage
loans originated in prior periods. The weighted average interest rate on the
mortgage-backed securities created through this securitization was 7.59%. These
securitized loans were initially classified as mortgage-backed securities held-
to-maturity. In December 1995, these mortgage-backed securities were
reclassified to mortgage-backed securities available-for-sale along with
principally all of the Bank's other mortgage-backed and other investment
securities. This reclassification was carried out under the provisions of "A
Guide to Implementation of Statement 115 on Accounting for Certain Investments
in Debt and Equity Securities" a Special Report issued by the Financial
Accounting Standards Board in November 1995. The average balance of loans
receivable, net increased $52.6 million during 1996 from $1.52 billion for
fiscal 1995 to $1.57 billion for fiscal 1996 while the average yield on loans
receivable, net increased 91 basis points from 6.70% for fiscal 1995 to 7.61%
for fiscal 1996 as the yields on the 78.8% of the Bank's mortgage loans
receivable indexed to COFI adjusted upward in response to upward movement in the
index during fiscal 1995 and the first quarter of fiscal 1996.
INTEREST EXPENSE
- ----------------
Interest expense for fiscal 1996 was $87.6 million compared to $62.1
million for fiscal 1995, an increase of $25.5 million or 41.1%. The increase in
interest expense between fiscal 1995 and fiscal 1996, was due primarily to an
increase in the average cost of interest-bearing liabilities from 3.95% for
fiscal 1995 to 4.94% for fiscal 1996. The average cost of deposits increased
from 3.93% for fiscal 1995 to 4.92% for fiscal 1996. Contributing to the
increase in the average cost of deposits was an $161.6 million increase in the
average balance of certificate accounts from $1.11 billion for fiscal 1995 to
$1.27 billion for fiscal 1996 coupled with a $50.0 million decrease in the
average balance of passbook and money market savings accounts from $325.1
million for fiscal 1995 to $275.2 million for fiscal 1996. Coupled with a
change in
59
<PAGE>
the composition of the Bank's certificate accounts as the average balance of
COFI based variable-rate certificates of deposit decreased $151.6 million from
$208.4 million for fiscal 1995 to $57.2 million for fiscal 1996 with
corresponding increases to fixed-rate certificates of deposit of varying terms.
Contributing to the increase in interest expense between fiscal 1995 and fiscal
1996 was a $201.5 million increase in the average balance of interest-bearing
liabilities from $1.57 billion for fiscal 1995 to $1.77 billion for fiscal 1996.
The increase in the average balance of interest-bearing liabilities was
comprised of a $116.7 million increase in the average balance of deposits from
$1.56 billion for fiscal 1995 to $1.67 billion for fiscal 1996 coupled with an
$84.9 million increase in FHLB advances and other borrowings from $12.8 million
for fiscal 1995 to $97.7 million for fiscal 1996. During fiscal 1996, the Bank
utilized FHLB advances and other borrowings as primary funding sources for its
additional investments in mortgage-backed securities, and as a means of managing
the differential cash flows associated with retail loan and deposit activity in
a manner complementary to the overall interest rate risk profile of the Bank.
PROVISION FOR LOAN LOSSES
- -------------------------
Provision for loan losses was $10.9 million for fiscal 1996 compared
to $13.9 million for fiscal 1995. The $3.0 million decline in the provision for
loan losses between fiscal 1995 and fiscal 1996 was attributable to a
stabilization in the level of non-performing loans during fiscal 1996. Non-
performing loans were $23.0 million or 1.41% of gross loans at March 31, 1996
compared to $23.7 million or 1.43% of gross loans at March 31, 1995. The
allowance for loan losses was $19.7 million or 1.21% of gross loans receivable
at March 31, 1996 compared to $19.3 million or 1.16% of gross loans receivable
at March 31, 1995.
NON-INTEREST INCOME
- -------------------
Non-interest income was $8.1 million for fiscal 1996 compared to $4.9
million for fiscal 1995, an increase of $3.2 million or 65.7%. The increase
between fiscal 1995 and fiscal 1996 was attributable principally to an increase
in trust fee income from $252,000 for fiscal 1995 to $1.4 million for fiscal
1996 due principally to the January 1995 acquisition of the full service trust
operation. Fee income from the sale of non-deposit investments increased from
$197,000 for fiscal 1995 to $986,000 for fiscal 1996. Deposit fees and charges
increased from $2.9 million for fiscal 1995 to $3.6 million for fiscal 1996.
NON-INTEREST EXPENSE
- --------------------
Non-interest expense was $42.1 million for fiscal 1996 compared to
$44.2 million for fiscal 1995, a decrease of $2.1 million or 4.70%. The
decrease between fiscal 1995 and fiscal 1996 was attributable to a $3.0 million
decrease in the net expenses of real estate operations from $4.7 million for
fiscal 1995 to $1.7 million for fiscal 1996 caused by a $3.0 million decrease in
the provision for losses on real estate from $3.9 million for fiscal 1995 to
$868,000 for fiscal 1996.
General and administrative expense was $40.5 million for fiscal 1996
compared to $39.5 million for fiscal 1995, an increase of $941,000 or 2.4%. The
increase between fiscal 1995 and fiscal 1996 was attributable principally to an
increase in the operating expenses of the trust operation from $216,000 for
fiscal 1995 to $1.6 million for fiscal 1996.
INCOME TAXES
- ------------
Income taxes were $1.7 million for fiscal 1996 compared to income tax
benefits of $3.1 million for fiscal 1995. The $4.8 million or 153.1% increase
in income taxes between fiscal 1995 and fiscal 1996 was attributable to an $11.0
million or 151.1% increase in earnings before income taxes from a loss before
income taxes of $7.3 million for fiscal 1995 to earnings before income taxes of
$3.7 million for fiscal 1996.
60
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Bank's primary sources of funds are deposits, principal and
interest payments on loans and securities, FHLB advances and other borrowings,
proceeds from the maturation of securities and, to a lesser extent, proceeds
from the sale of loans. While maturities and scheduled amortization of loans
and securities are predicable sources of funds, deposit flows and mortgage
prepayments are greatly influenced by general interest rates, economic
conditions and competition. The Bank has maintained the required minimum levels
of liquid assets as defined by OTS regulations. This requirement, which may be
varied at the direction of the OTS depending upon economic conditions and
deposit flows, is based upon a percentage of deposits and short-term borrowings.
The required ratio is currently 5%. The Bank's average liquidity ratios were
5.30%, 6.04% and 6.17% for the years ended March 31, 1997, 1996 and 1995,
respectively. Management attempts to maintain a liquidity ratio between five
and six percent. This reflects management's strategy to invest excess liquidity
in higher yielding interest-earning assets, such as loans or other investments,
depending on market conditions. The Bank has invested in corporate securities
when the yields thereon have been more attractive than U.S. government and
federal agency securities of similar maturity. While corporate securities are
not backed by any government agency, the maturity structure and credit quality
of all corporate securities meet the minimum standards set forth by the OTS for
regulatory liquidity-qualifying investments. The Company invests in callable
debt issued by Federal agencies of the U.S. government when the yields thereon
to call date(s) and maturity exceed the yields on comparable term and credit
quality non-callable investments by amounts which management deems sufficient to
compensate the Company for the call options inherent in the securities.
The Bank's cash flows are comprised of three primary classifications:
cash flows from operating activities, investing activities and financing
activities. Cash flows provided by operating activities were $42.2 million,
$5.9 million, and $41.9 million for the years ended March 31, 1997, 1996 and
1995, respectively. Net cash provided by (used in) investing activities
consisted primarily of disbursements for loan originations and purchases of
mortgage-backed and other investment securities, offset by principal collections
on loans and proceeds from maturation of investments and paydowns on mortgage-
backed securities. Principal payments on loans were $226.0 million, $192.2
million and $199.4 million for the years ended March 31, 1997, 1996 and 1995,
respectively. Disbursements on loans originated and purchased, excluding loans
originated for sale, were $492.8 million, $260.1 million and $429.3 million for
the years ended March 31, 1997, 1996 and 1995, respectively. Disbursements for
purchases of mortgage-backed and other investment securities were $563.1
million, $191.6 million and $162.2 million for the years ended March 31, 1997,
1996 and 1995, respectively. Proceeds from the maturation of investment
securities and paydowns of mortgage-backed securities were $101.8 million,
$198.9 million and $116.6 million for the years ended March 31, 1997, 1996 and
1995, respectively. Net cash provided by (used in) financing activities
consisted primarily of net activity in deposit accounts and FHLB advances and
other borrowings. The net increases in deposits were $29.0 million, $12.7
million and $145.8 million for the years ended March 31, 1997, 1996 and 1995,
respectively. The net changes in FHLB advances and other borrowings were an
$510.3 million increase for 1997, a $29.4 million decrease for 1996 and an
increase of $49.1 million for 1995.
On March 28, 1996, the Company completed its initial public offering
of common stock to the public. The net proceeds from this offering were $193.9
million, after deducting offering expenses. $15.9 million of the net proceeds
were utilized to fund a loan to the ESOP for the purchase of 1,587,000 (8% of
the original issued shares) of the Company's common stock. Concurrent with the
closing of the Company's offering of common stock, the Company acquired 100% of
the outstanding capital stock of the Bank for $105.0 million. The Bancorp
provided to the Bank a $73.0 million interest-bearing loan, due on demand. This
loan was repaid in full on September 26, 1996. As of March 31, 1996, the $178.0
million of net proceeds were utilized by the Bank for investment in cash
equivalents and repayment of short-term FHLB advances and other borrowings
awaiting deployment into longer-term investments.
61
<PAGE>
At March 31, 1997, the Bank exceeded all of its regulatory capital
requirements with a tangible capital level of $209.7 million, or 8.46 % of
adjusted total assets, which is above the required level of $37.2 million, or
1.5%; core capital of $209.7 million, or 8.46% of adjusted total assets, which
is above the required level of $74.4 million, or 3.0%, and total risk-based
capital of $226.3 million, or 16.54% of risk-weighted assets, which is above the
required level of $109.4 million, or 8%. See "Regulation and Supervision -
Federal Savings Institution Regulation".
The Company's most liquid assets are cash and short-term investments.
The levels of these assets are dependent on the Company's operating, financing,
lending and investing activities during any given period. At March 31, 1997
cash and short-term investments totaled $109.7 million. The Company has other
sources of liquidity if a need for additional funds arises, including the
utilization of reverse repurchase agreements and FHLB advances. At March 31,
1997, the Bank has $480.0 million of FHLB advances and $50 million of reverse
repurchase agreements outstanding. Other sources of liquidity include
investment securities maturing within one year.
The Company currently has no material contractual obligations or
commitments for capital expenditures. See "Business of the Company - General".
At March 31, 1997, the Bank had outstanding commitments to originate and
purchase mortgage loans of $10.8 million and zero, respectively, compared to
$13.5 million and $1.4 million, respectively, at March 31, 1996. At March 31,
1997, the Company had outstanding commitments to purchase mortgage-backed
securities and other investment securities of $21.0 million and $5.0 million,
respectively, compared to $27.5 million and $8.0 million , respectively at March
31, 1996. The Company anticipates that it will have sufficient funds available
to meet these commitments. See "Description of Business - General". Certificate
accounts which are scheduled to mature in less than one year from March 31,
1997 totaled $1.10 billion. The Bank expects that a substantial portion of the
maturing certificate accounts will be retained by the Bank at maturity.
During July 1996, the Bank entered into five-year contracts with new
core electronic data processing system providers. The conversion to the new
systems occurred in October 1996. The costs charged to expense for this
conversion aggregated $2.1 million during fiscal 1997. Annual data processing
expenses under these contracts are expected to be within the range of $2.4
million, which is not materially different from the Bank's level of
expenditures to its previous service provider.
IMPACT OF INFLATION
The Consolidated Financial Statements and Notes thereto presented
herein have been prepared in accordance with GAAP, which require the measurement
of financial position and operating results in terms of historical dollar
amounts without considering the changes in the relative purchasing power of
money over time due to inflation. The impact of inflation is reflected in the
increased cost of the Company's operations. Unlike industrial companies, nearly
all of the assets and liabilities of the Company are monetary in nature. As a
result, interest rates have a greater impact on the Company's performance than
do the effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the price of
goods and services.
62
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -----------------------------------------------------
Index to Financial Statements
------------------------------
<TABLE>
<CAPTION>
<S> <C>
Consolidated Balance Sheets - March 31, 1997 and 1996........................... 64
Consolidated Statements of Operations - Years ended March 31, 1997,
1996 and 1995............................................................ 65
Consolidated Statements of Stockholders' Equity - Years ended March 31, 1997,
1996, and 1995............................................................ 66
Consolidated Statements of Cash Flows - Years ended March 31, 1997, 1996
and 1995.................................................................. 67
Notes to Consolidated Financial Statements...................................... 69
Independent Auditors' Report.................................................... 96
</TABLE>
63
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
ASSETS MARCH 31
-----------------------------------------
1997 1996
------------------- -----------------
<S> <C> <C>
Cash and cash equivalents $ 31,632 175,904
Certificates of Deposit - 190
Loans held for sale at lower of cost or fair
value (net of valuation allowance of
$350 at March 31, 1996) (note 19) 736 6,015
Investment securities held-to-maturity (estimated fair value
of $16,213 and $28,109 at March 31,1997 and 1996)
(notes 2 and 9) 16,190 28,026
Investment securities available-for-sale, at fair
value (notes 2, 9 and 11) 87,647 9,932
Mortgage-backed securities held-to-maturity (estimated
fair value of $5,509 and $7,180 at March 31, 1997
and 1996) (notes 3, 9 and 11) 5,490 7,134
Mortgage-backed securities available-for-sale, at fair
value (notes 3, 9, 10 and 11) 486,009 125,588
Loans receivable, net (notes 4, 6, 9 and 11) 1,819,209 1,574,935
Federal Home Loan Bank (FHLB) stock, at cost (note 11) 27,270 15,892
Accrued interest receivable (note 7) 15,879 10,819
Real Estate, net (notes 5 and 6) 8,858 7,644
Property and equipment, net (note 8) 26,521 24,673
Prepaid expenses and other assets (notes 12 and 18) 10,326 21,387
---------- ---------
Total Assets $2,535,767 2,008,139
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (note 9) $1,711,049 1,682,073
FHLB advances and other borrowings (notes 10 and 11) 530,000 19,722
Deferred income taxes payable (note 13) 6,894 9,309
Accrued expenses and other liabilities 22,298 7,964
------- -------
Total liabilities 2,270,241 1,719,068
Commitments and contingencies (notes 12, 16, 17 and 18) - -
Stockholders' equity (notes 14, 21 and 22):
Preferred stock, $.01 par value. Authorized
2,000,000 shares; none issued and outstanding - -
Common stock, $.01 par value. Authorized 59,000,000
shares; issued 19,837,500; outstanding 18,845,625 and
19,837,500 at March 31, 1997 and 1996, respectively 198 198
Additional paid-in capital 182,519 193,677
Retained earnings, substantially
restricted (notes 13 and 14) 108,021 110,187
Unearned stock-based compensation (note 12) (24,711) (15,870)
Treasury stock (10) -
Unrealized gains (losses) on securities available-for-sale, net (491) 879
------- -------
Total stockholders' equity 265,526 289,071
---------- ---------
Total liabilities and stockholders' equity $2,535,767 2,008,139
========== =========
See accompanying notes to consolidated financial statements.
</TABLE>
64
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Operations
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
----------------------------------
1997 1996 1995
--------- ---------- ---------
<S> <C> <C> <C>
Interest Income:
Mortgage loans $ 130,788 117,534 99,872
Non-mortgage loans 2,328 2,242 2,076
Mortgage-backed securities 27,723 10,853 1,184
Investment securities and deposits 7,676 5,544 4,877
---------- ------- -------
Total interest income 168,515 136,173 108,009
---------- ------- -------
Interest on deposits (note 9) 79,246 82,251 61,174
Interest on borrowings (note 10) 20,060 5,305 892
---------- ------- -------
Total interest expense 99,306 87,556 62,066
---------- ------- -------
Net interest income before provision for
loan losses 69,209 48,617 45,943
Provision for loan losses (note 6) 13,661 10,895 13,901
---------- ------- -------
Net interest income after provision for
loan losses 55,548 37,722 32,042
---------- ------- -------
Non-interest income:
Other fees and charges 9,049 7,450 4,695
Mortgage loan servicing fees (note 19) 903 907 563
Gain (loss) on sale of loans and securities,
net (note 19) 150 102 (25)
Other non-interest income 125 (320) (321)
---------- ------- -------
Total non-interest income 10,227 8,139 4,912
---------- ------- -------
Non-interest expense:
General and administrative:
Compensation and benefits (note 12) 23,003 19,062 18,411
Occupancy and equipment 10,305 9,951 8,873
Marketing and professional services 3,238 1,755 2,707
Other non-interest expense (note 15) 12,835 9,707 9,543
---------- ------- -------
Total general and administrative 49,381 40,475 39,534
SAIF recapitalization assessment 10,900 - -
Real estate operations, net (note 5) (325) 1,670 4,691
---------- ------- -------
Total non-interest expense 59,956 42,145 44,225
---------- ------- -------
Earnings (loss) before income taxes 5,819 3,716 (7,271)
Income taxes (benefit) (note 13) 3,087 1,651 (3,112)
---------- ------- -------
Net earnings (loss) $ 2,732 2,065 (4,159)
========== ======= =======
Earnings per share $ .15 N/A N/A
========== ======= =======
Weighted average shares outstanding 18,124,600 N/A N/A
========== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
65
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL EARNINGS UNEARNED
NUMBER OF COMMON PAID-IN SUBSTANTIALLY STOCK-BASED TREASURY
SHARES STOCK CAPITAL RESTRICTED COMPENSATION STOCK
----------- ----------- ----------- -------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1994 - $ - - 112,281 - -
Net loss - - - (4,159) - -
Adoption of SFAS 115 on
April 1, 1994 - - - - - -
Changes in unrealized losses
on securities available-for-
sale, net - - - - - -
---------- ---- ---------- ------- ------------ --------
Balance at March 31, 1995 - - - 108,122 - -
Net earnings - - - 2,065 - -
Proceeds from issuance of
common stock, net of issuance
costs of $4,500 19,837,500 198 193,677 - - -
Purchase of shares for
employee stock ownership
plan (ESOP) - - - - (15,870) -
Changes in unrealized gains
on securities available-for-
sale, net - - - - - -
---------- ---- ---------- ------- ------------ --------
Balance at March 31, 1996 19,837,500 198 193,677 110,187 (15,870) -
Net earnings - - - 2,732 -
Purchase of treasury stock (991,875) - (9,909) (4,898) - (10)
Purchase of 793,500 shares
for the Company's 1996
Incentive plan - - - - (12,974) -
Amortization of shares under
stock-based compensation plans - - (1,249) - 4,133 -
Changes in unrealized losses
on securities available-for
-sale, net - - - - - -
---------- ---- ---------- ------- ------------ --------
Balance at March 31, 1997 18,845,625 $198 182,519 108,021 (24,711) (10)
========== ==== ========== ======= ============ ========
<CAPTION>
UNREALIZED
GAINS(LOSSES)
ON SECURITIES
AVAILABLE-FOR-
SALE, NET TOTAL
--------------- -------
<S> <C> <C>
Balance at March 31, 1994 - 112,281
Net loss - (4,159)
Adoption of SFAS 115 on
April 1, 1994 (27) (27)
Changes in unrealized losses
on securities available-for-sale, net (42) (42)
------ -------
Balance at March 31, 1995 (69) 108,053
Net earnings - 2,065
Proceeds from issuance of
common stock, net of issuance
costs of $4,500 - 193,875
Purchase of shares for
employee stock ownership plan (ESOP) - (15,870)
Changes in unrealized gains
on securities available-for-sale, net 948 948
------ -------
Balance at March 31, 1996 879 289,071
Net earnings - 2,732
Purchase of treasury stock - (14,817)
Purchase of 793,500 shares
for the Company's 1996 Incentive plan - (12,974)
Amortization of shares under
stock-based compensation plans - 2,884
Changes in unrealized losses
on securities available-for
-sale, net (1,370) (1,370)
------ -------
Balance at March 31, 1997 (491) 265,526
====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
66
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
----------------------------------
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
Cash flows for operating activities:
Net earnings (loss) $ 2,732 2,065 (4,159)
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Amortization of premiums (discounts) on
loans, investments and mortgage-backed
securities 331 (1,740) (180)
Amortization of deferred loan origination fees (1,666) (1,716) (1,305)
Loan fees collected (212) 1,059 1,240
Dividends on FHLB stock (1,150) (701) (663)
Provisions for losses on:
Loans 13,661 10,895 13,901
Real estate (970) 868 3,867
Net loss on sales of loans, mortgage-
backed securities available-for-sale,
real estate and property and equipment (764) (475) (182)
Depreciation and amortization of property and
equipment 3,134 3,233 2,817
Loans originated for sale (21,590) (15,294) (2,147)
Proceeds from sale of loans held-for-sale 26,869 9,381 1,290
Proceeds from sale of loans held for
accelerated disposition - 6,080 24,493
Amortization of unearned stock-based compensation 2,884 - -
Increase (decrease) in:
Deferred income taxes (2,415) 1,309 (2,371)
Accrued expenses and other liabilities 15,395 (1,035) (267)
(Increase) decrease in:
Accrued interest receivable (5,060) (1,643) (838)
Prepaid expenses and other assets 11,061 (6,374) 6,379
--------- --------- - --------
Net cash provided by operating activities 42,240 5,912 41,875
--------- --------- - --------
Cash flows from investing activities:
Net maturities of long-term certificates
of deposit 190 5,000 33,000
Loans originated for investment (478,077) (249,916) (400,926)
Increase (decrease) in construction loans
in process 13,695 (904) (6,691)
Purchases of loans held for investment (28,417) (9,303) (21,678)
Principal payments on loans 225,996 192,237 199,362
Principal payments on mortgage-backed securities 1,644 20,531 2,204
Principal payments on mortgage-backed securities
available-for-sale 70,040 9,293 -
Purchases of investment securities
held-to-maturity (15,000) (148,674) (74,952)
Purchases of investment securities
available-for-sale (86,515) (10,068) (6,950)
Purchases of FHLB stock (10,228) (955) (847)
Purchases of mortgage-backed securities
held-to-maturity - (31,952) (79,453)
Purchases of mortgage-backed securities
available-for-sale (451,322) - -
Proceeds from maturities of
investment securities 26,899 162,095 114,369
Proceeds from maturities of investment securities
available-for-sale 3,197 7,000 -
Investment in real estate (1,027) (2,118) 21
Proceeds from sale of investment
securities available-for-sale 5,000 - -
</TABLE>
67
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows, continued
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
-----------------------------------
1997 1996 1995
----------- --------- ---------
<S> <C> <C> <C>
Proceeds from sale of mortgage-backed securities
available-for-sale $ 19,542 25,561 -
Proceeds from sale of real estate 11,325 11,967 12,306
Purchases of property and equipment (5,045) (1,210) (4,342)
Proceeds from sale of property and equipment 129 21 10
---------- -------- --------
Net cash used in investing activities (697,974) (21,395) (234,567)
---------- -------- --------
Cash flows from financing activities:
Proceeds from FHLB advances and other borrowings 1,215,600 340,658 104,516
Repayment of FHLB advances and other borrowings (705,323) (370,031) (55,421)
Net change in deposits 28,976 12,657 145,769
Proceeds from issuance of capital stock - 193,875 -
Purchase of stock for unearned stock-based
compensation plans (12,974) (15,870) -
Purchase of treasury stock (14,817) - -
---------- -------- --------
Net cash provided by financing activities 511,462 161,289 194,864
---------- -------- --------
Net increase in cash and cash equivalents (144,272) 145,806 2,172
Cash and cash equivalents, beginning of year 175,904 30,098 27,926
---------- -------- --------
Cash and cash equivalents, end of year $ 31,632 175,904 30,098
========== ======== ========
Supplemental information:
Interest paid, including interest credited $ 90,298 87,570 62,154
Income taxes paid 1,838 2,230 -
Non-cash investing and financing activities:
Transfer of mortgage-backed securities from held-
to-maturity to available-for-sale - 158,800 -
Securitization of mortgage loans transferred to
mortgage-backed securities held-to-maturity - 73,407 -
Change in unrealized gain (loss) on securities
available-for-sale (2,431) 1,667 -
Net transfers from loans receivable to real estate 9,979 8,961 9,570
Net transfers from loans receivable to loans held
for accelerated disposition - 6,080 1,900
Transfer from loans held-for-sale to loans receivable - - 5,553
Transfer from real estate to property and equipment - - 102
Loans originated for the sale of real estate
acquired in settlement of loans 1,187 2,263 6,594
========== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
68
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Effective March 28, 1996, pursuant to a plan of conversion, Pomona First Federal
Savings and Loan Association (the Association) reorganized from a federally
chartered mutual savings and loan association to PFF Bank & Trust (the Bank), a
federally chartered stock savings bank. PFF Bancorp, Inc. (the Bancorp) was
incorporated under Delaware law in March 1996 for the purpose of acquiring and
holding all of the outstanding capital stock of the Bank as part of the Bank's
conversion. Any references to financial information for periods before March
28, 1996, refer to the Association prior to the conversion (see note 21 for
further discussion).
The following accounting policies, together with those disclosed elsewhere in
the consolidated financial statements, represent the significant accounting
policies used in presenting the accompanying consolidated financial statements.
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of PFF
Bancorp, Inc. and its subsidiary, PFF Bank & Trust (the Company). The Company's
business is conducted primarily through PFF Bank & Trust and its subsidiary,
Pomona Financial Services, Inc. Pomona Financial Services, Inc. includes the
accounts of Diversified Services, Inc. and PFF Insurance Service. All material
intercompany balances and transactions have been eliminated in consolidation.
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to the current year's presentation.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the dates of
the consolidated balance sheets, and revenues and expenses reflected in the
consolidated statements of operations. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand and in banks of $26,123 and
$23,122 and short-term deposits in banks of $5,509 and $152,782 at March 31,
1997 and 1996, respectively. The Company considers all highly liquid debt
instruments with maturities at date of acquisition of three months or less to be
cash equivalents.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
At the time of purchase of an investment security or a mortgage-backed security,
the Company designates the security as either held-to-maturity, available-for-
sale or held for trading based on the Company's investment objectives,
operational needs and intent. The Company then monitors its investment
activities to ensure that those activities are consistent with the established
guidelines and objectives.
Held-to-Maturity
Securities held-to-maturity are carried at cost, adjusted for amortization of
premiums and accretion of discounts which are recognized in interest income
using the interest method. Mortgage-backed securities represent participating
interests in pools of long-term first mortgage loans originated and serviced by
the issuers of the securities. Mortgage-backed securities held-to-maturity are
carried at unpaid principal balances, adjusted for unamortized premiums and
unearned discounts. Premiums and discounts on mortgage-backed securities are
amortized or accreted using the interest method over the remaining period to
contractual maturity, adjusted for anticipated prepayments. It is the positive
intent of the Company and the Company has the ability, to hold these securities
until maturity as part of its portfolio of long-term interest earning assets.
If the cost basis of these securities is determined to be other than temporarily
impaired, the amount of the impairment is charged to operations.
69
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
Available-for-Sale
Securities available-for-sale are carried at fair value. Unrealized holding
gains and losses, or valuation allowances established for net unrealized losses,
are excluded from earnings and reported as a separate component of stockholders'
equity, net of income taxes, unless the security is deemed to be other than
temporarily impaired. If the security is determined to be other than
temporarily impaired, the amount of the impairment is charged to operations.
Realized gains and losses on the sale of securities available-for-sale are
determined using the specific identification method and recorded in earnings.
Trading
The Company has no trading securities at March 31, 1997 and 1996.
LOANS HELD FOR SALE
Loans originated and held for sale in the secondary market are carried at the
lower of cost or market value in the aggregate, as determined by outstanding
commitments from investors or current investor requirements. Loan fees and costs
are deferred and recognized in other income as gain or loss on sale of loans
when the loans are sold. Net unrealized losses are recognized through a
valuation allowance established by charges to operations.
LOANS RECEIVABLE
Loans receivable are stated at unpaid principal balances less the undisbursed
portion of construction loans, unearned discounts, net deferred loan origination
fees and allowances for losses. Premiums/discounts are amortized/accreted using
the interest method over the remaining term to maturity.
Uncollected interest on loans contractually delinquent more than ninety days or
on loans for which collection of interest appears doubtful is excluded from
interest income and accrued interest receivable. Payments received on
nonaccrual receivables are recorded as a reduction of principal or as interest
income depending on management's assessment of the ultimate collectibility of
the loan principal. Such loans are restored to an accrual status only if the
loan is brought contractually current and the borrower has demonstrated the
ability to make future payments of principal and interest.
LOAN ORIGINATION, COMMITMENT FEES AND RELATED COSTS
Loan fees and certain direct loan origination costs are deferred, with the net
fee or cost being accreted or amortized to interest income over the remaining
term to maturity of the related loan using the interest method. Accretion or
amortization is discontinued in the event the loan becomes contractually
delinquent by more than ninety days. Accretion or amortization resumes in the
period all delinquent interest and principal is paid current. When a loan is
paid in full, any unamortized net loan origination fee or cost is recognized in
interest income. When a loan is sold, any net loan origination fee or cost is
recognized in the calculation of the gain (loss) on sale of loans. Commitment
fees and costs related to commitments where the likelihood of exercise is remote
are recognized over the commitment period on a straight-line basis. If the
commitment is subsequently exercised during the commitment period, the remaining
net unamortized commitment fees at the time of exercise are recognized over the
life of the loan using the interest method.
Origination fees for construction loans are recognized using the straight-line
method over the life of the related loan. The total fees recognized using
straight-line amortization were $1,613, $512 and $833 for the years ended March
31, 1997, 1996 and 1995, respectively.
VALUATION ALLOWANCES FOR LOANS RECEIVABLE AND REAL ESTATE
Valuation allowances for loan losses are provided on both a specific and non-
specific basis. Specific allowances are provided when an identified significant
decline in the value of the underlying collateral occurs or an identified
adverse
70
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
situation occurs that may affect the borrower's ability to repay. Non-specific
allowances are provided based on a formula which incorporates a number of
factors, including the Company's past loan loss experience, current and
prospective economic conditions and management's ongoing evaluation of the
credit risk inherent in the portfolio.
Valuation allowances for losses on real estate are established when a decline in
value reduces the fair value less estimated disposal costs to less than the
carrying value.
Management believes that allowances for loan losses and real estate are
adequate. While management uses available information to recognize losses on
loans and real estate, future additions to the allowances may be necessary based
on changes in economic conditions. In addition, various regulatory agencies, as
an integral part of their examination process, periodically review the Company's
allowances for loan losses and real estate. Such agencies may require the
Company to recognize additions to the allowances based on their judgments of the
information available to them at the time of their examinations.
Management evaluates loans with a principal balance of $500 or more, including
loans to one borrower that exceed $500, for impairment. A loan is considered
impaired if it is probable that the creditor will be unable to collect all
contractual amounts due (principal and interest) as scheduled in the loan
agreement. Impaired loans are measured based on either an estimate of the
present value of expected future cash flows discounted at the loan's effective
interest rate, the loan's market value or the fair value of collateral if the
loan is collateral dependent. The amount by which the recorded investment in
the loan exceeds the measure of the impaired loan is recognized by recording a
valuation allowance with a corresponding charge to operations. The Company will
charge-off a portion of an impaired loan against the valuation allowance when it
is probable that there is no possibility of recovering the full amount of the
impaired loan.
All non-homogeneous loans designated by the Company as impaired are either
placed on nonaccrual status or are designated as restructured loans. Only
nonaccrual loans and restructured loans not performing in accordance with their
restructured terms are included in nonperforming loans. Loans are generally
placed on nonaccrual status when the payment of interest is 90 days or more
delinquent, or if the loan is in the process of foreclosure, or earlier if the
timely collection of interest and/or principal appears doubtful. The Company's
policy allows for loans to be designated as impaired and placed on nonaccrual
status even though the loan may be current as to the principal and interest
payments and may continue to perform in accordance with its contractual terms.
Payments received on impaired loans are recorded as a reduction of principal or
as interest income depending on management's assessment of the ultimate
collectibility of the loan principal. The amount of interest income recognized
is limited to the amount of interest that would have accrued at the loan's
contractual rate applied to the recorded loan balance, any difference would be
recorded as a loan loss recovery. Generally, interest income on an impaired
loan is recorded on a cash basis when the outstanding principal is brought
current.
REAL ESTATE
Real estate properties acquired through loan foreclosure are initially recorded
at fair value less estimated selling costs at the date of foreclosure. Once
real estate properties are acquired, evaluations are periodically performed by
management and an allowance for losses is established by a charge to operations
if the carrying value of a property exceeds its fair value less costs of
disposal. Real estate properties held for sale or development are carried at
the lower of cost, including cost of improvements and amenities incurred
subsequent to acquisition, or net realizable value. Costs related to
development and improvement of properties are capitalized, whereas costs
relating to holding the properties are expensed. During the development period,
the portion of interest costs related to development of real estate are
capitalized.
PROPERTY AND EQUIPMENT
Land is carried at cost. Buildings and improvements, furniture, fixtures and
equipment, and leasehold improvements are carried at cost, less accumulated
depreciation or amortization. Depreciation and amortization are recorded using
the straight-line method over the estimated useful lives of the assets or the
terms of the related leases, if shorter.
71
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
The Company capitalizes interest on all construction in progress based on the
cost of funds in effect during the construction period.
INTANGIBLES
In January 1995, the Company acquired the trust operations of another bank for
$3,470. The cost was capitalized and is being amortized on a straight-line
basis over the estimated average life of the trust accounts of 11 years.
On a periodic basis, the Company reviews its intangible assets for events or
changes in circumstances that may indicate the carrying amounts of the assets
may not be recoverable. Recoverability of an asset to be held and used is
measured by a comparison of the carrying amount of the asset to future net cash
flows expected to be generated by the asset. If such asset is considered to be
impaired, the impairment is measured by the amount by which the carrying amount
exceeds the fair value of the asset.
REVERSE REPURCHASE AGREEMENTS
The Company enters into sales of securities under agreements to repurchase the
same securities. Reverse repurchase agreements are accounted for as financing
arrangements, with the obligation to repurchase securities sold reflected as a
liability in the consolidated balance sheets. The dollar amount of securities
underlying the agreements remains in the respective asset account.
INTEREST ON DEPOSITS
Accrued interest is either paid to the depositor or added to the deposit account
on a periodic basis. On term accounts, the forfeiture of interest (because of
withdrawal prior to maturity) is offset as of the date of withdrawal against
interest expense in the consolidated statements of operations.
INCOME TAXES
The Company files consolidated Federal income and combined state franchise tax
returns. Income taxes or benefits are allocated to the subsidiaries based on
earnings or losses before income taxes as if each subsidiary prepared its own
tax return on a stand alone basis.
Deferred income taxes are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred taxes of a change in tax rates
is recognized in income in the period that includes the enactment date.
PER SHARE INFORMATION
Earnings per share is computed by dividing net earnings by the weighted average
number of shares outstanding, plus the effect, when dilutive, of stock options.
Shares repurchased by the Company are deducted from shares outstanding for
earnings per share calculations. Earnings per share is not presented for the
periods prior to March 31, 1996, as the Bank was a mutual savings bank and no
stock was outstanding.
EMPLOYEE STOCK OWNERSHIP PLAN
The Company accounts for the issuance or sale of treasury shares to the Employee
Stock Ownership Plan (ESOP) when the issuance or sale occurs, and recognizes
compensation expense over the allocation period based upon the fair value of the
shares committed to be released to employees. This may result in fluctuations
in compensation expense as a result of changes in the fair value of the
Company's common stock. However, any such compensation expense fluctuations
result in an equal and offsetting adjustment to additional paid-in capital.
72
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
STOCK OPTION PLAN
On October 23, 1996, the Company granted stock options and adopted Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123), which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS 123 allows entities to apply the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25), and related interpretations, and provide pro forma net
earnings and pro forma earnings income per share disclosures for employee stock
option grants made in 1996 and future years as if the fair-value-based method
defined in SFAS 123 had been applied. As such, compensation expense would be
recorded on the date of grant only if the current market price of the underlying
stock exceeded the exercise price. The Company has elected to apply the
provisions of APB 25 and provide the pro forma disclosure provisions of SFAS
123.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1996, the FASB issued Statement of Financial Accounting Standards No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" (SFAS125). SFAS 125 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of a financial-
components approach that focuses on control. It distinguishes transfers of
financial assets that are sales from transfers that are secured borrowings.
Under the financial-components approach, after a transfer of financial assets,
an entity recognizes all financial and servicing assets it controls and
liabilities it has incurred and derecognizes all financial and servicing assets
it no longer controls and liabilities that have been extinguished. The
financial-component approach focuses on the assets and liabilities that exist
after the transfer. Many of these assets and liabilities are components of
financial assets that existed prior to the transfer. If a transfer does not meet
the criteria for a sale, the transfer is accounted for as a secured borrowing
with pledge of collateral. SFAS 125 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996 and should be applied prospectively. The adoption of SFAS 125 on January
1, 1997 did not have a material impact on the Company's operations.
In February 1997, 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 specifies the computation, presentation, and
disclosure requirements for earnings per share (EPS) for entities with publicly
held common stock or potential common stock. SFAS 128 replace 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 position or results of operations, or
earnings per share.
In February 1997, the FASB issued Statement of Financial Standards, "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 FASB
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.
73
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
(2) INVESTMENT SECURITIES
The amortized cost and estimated fair values of investment securities are
summarized as follows:
<TABLE>
<CAPTION>
March 31, 1997
------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
Cost gains losses value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Held-to-maturity:
Bonds, notes and debentures at amortized cost:
Domestic corporate $15,000 - - 15,000
Collateralized mortgage obligations 472 2 - 474
U.S. Government and federal agency obligations 718 21 - 739
------- -------- ---------- ------
Total $16,190 23 - 16,213
======= ====== ========== ======
Available-for-sale:
Collateralized mortgage obligations $24,709 - (272) 24,437
U.S. Government and federal agency obligations 57,992 12 (394) 57,610
FHLMC Non-cumulative preferred stock 5,600 - - 5,600
------- ------ ---------- ------
Total $88,301 12 (666) 87,647
======= ====== ========== ======
During the years ended March 31, 1997 and 1996, the Company realized a gain on
the sale of securities available-for-sale of $23 and zero, respectively.
<CAPTION>
March 31, 1996
------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
Cost gains losses value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Held-to-maturity:
Bonds, notes and debentures at amortized cost:
Domestic corporate $24,936 57 (18) 24,975
Collateralized mortgage obligations 2,374 21 - 2,395
U.S. Government and federal agency obligations 716 23 - 739
--------- --------- ---------- -------
Total $28,026 101 (18) 28,109
========= ========= ========== ======
Available-for-sale:
Collateralized mortgage obligations $ 4,988 - (38) 4,950
U.S. Government and federal agency
obligations 5,080 - (98) 4,982
--------- --------- ---------- -------
Total $10,068 - (136) 9,932
========= ========= ========== =======
</TABLE>
74
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
Maturities of investment securities at March 31, 1997 are summarized as follows:
<TABLE>
<CAPTION>
Held-to-maturity Available-for sale
---------------------------- --------------------
Estimated Estimated
Amortized fair fair
cost value value
------------- ------------ --------------------
<S> <C> <C> <C>
Due in one year $15,472 15,474 14,838
Due in one to five years 718 739 38,460
Due after five to ten years - - 9,910
Due after ten years - - 24,439
------- ------ ------
$16,190 16,213 87,647
======= ====== ======
</TABLE>
(3) MORTGAGE-BACKED SECURITIES
The amortized cost and estimated fair values of mortgage-backed securities are
summarized as follows:
<TABLE>
<CAPTION>
March 31, 1997
------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
Cost gains losses value
--------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Held-to-maturity:
FHLMC $ 5,490 19 - 5,509
======== ===== ========== =======
Available-for-sale:
GNMA $ 56,462 460 (240) 56,682
FHLMC 149,808 660 (680) 149,788
FNMA 279,932 1,345 (1,738) 279,539
-------- ----- ---------- -------
Total $486,202 2,465 (2,658) 486,009
======== ===== ========== =======
<CAPTION>
March 31, 1996
------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
Cost gains losses value
--------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Held-to-maturity:
FHLMC $ 7,134 46 - 7,180
======== ===== ========== =======
Available-for-sale:
GNMA $ 16,997 168 - 17,165
FHLMC 79,899 1,243 (323) 80,819
FNMA 27,042 562 - 27,604
-------- ----- ---------- -------
Total $123,938 1,973 (323) 125,588
======== ===== ========== =======
</TABLE>
75
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
The mortgage-backed securities have maturities of up to 30 years.
On November 15, 1995, the FASB issued Special Report No. 155B, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities" (the "Special Report"). Pursuant to the Special Report,
the Company was permitted to conduct a one-time reassessment of the
classifications of all securities held at that time. Any reclassifications from
the held-to-maturity category made in conjunction with that reassessment would
not call into question an enterprise's intent to hold other debt securities to
maturity in the future. The Company undertook such a reassessment and,
effective December 31, 1995 certain mortgage-backed securities then classified
as held-to-maturity were reclassified as available-for-sale. On the effective
date of the reclassification, the securities transferred had a carrying value of
$158,760 and an estimated fair value of $161,130, resulting in a net increase to
stockholders' equity for the net unrealized appreciation of $1,375, after
deducting applicable income taxes of $995.
(4) LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
March 31
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Mortgage loans:
Residential:
One-to-four family $1,499,122 1,262,734
Multi-family 108,896 114,477
Commercial real estate 137,169 148,300
Construction and land 113,188 76,529
---------- ----------
Total mortgage loans 1,858,375 1,602,040
Commercial 3,100 -
Consumer 26,931 21,853
---------- ---------
1,888,406 1,623,893
Less:
Undisbursed portion of construction loans (38,485) (25,030)
Unearned discounts (1,629) (803)
Net deferred loan origination fees (1,362) (3,384)
Allowance for loan losses (note 6) (27,721) (19,741)
---------- ---------
$1,819,209 1,574,935
========== =========
Weighted average yield 7.64% 7.61%
========== =========
</TABLE>
During fiscal 1996, the Company identified loans for accelerated disposition
with an aggregate principal balance of $8,795 which resulted in a $2,716
provision for loan losses and a charge-off of the same amount for the year
ended March 31, 1996. The closing sale of the $8,795 of loans held for
accelerated disposition occurred in December 1995.
Loans receivable for officers and directors of the Company were as follows:
<TABLE>
<CAPTION>
March 31
------------------------
1997 1996
---------- -----------
<S> <C> <C>
Beginning balance $1,406 1,428
Additions 747 47
Repayments (256) (69)
------ -----
Ending Balance $1,897 1,406
====== =====
</TABLE>
76
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
The following table provides information with respect to the Company's
nonaccrual loans and troubled debt restructured (TDR) loans at the dates
indicated:
<TABLE>
<CAPTION>
March 31
----------------------------------
1997 1996 1995
-------- --------- --------
<S> <C> <C> <C>
Nonaccrual loans $23,350 22,951 23,713
TDR loans 14,559 13,810 4,896
------- ------ ------
Total Nonaccrual and TDR loans $37,909 36,761 28,609
======= ====== ======
</TABLE>
The following table identifies the Company's total recorded investment in
impaired loans by type at the dates indicated:
<TABLE>
<CAPTION>
March 31
-----------------------------------------------------------
1997 1996
--------------------------- -----------------------------
Recorded Specific Recorded Specific
Investment Allowances Investment Allowances
-------------- ---------- ---------- ----------------
<S> <C> <C> <C> <C>
Nonaccrual loans:
Residential:
One-to-four family $ 1,545 329 3,035 599
Multi-family 1,650 386 1,705 475
Commercial real estate 1,775 - 152 -
Construction and land 1,447 485 3,254 149
Restructured loans 14,559 2,972 13,810 535
------- ----- ------ -----
Total $20,976 4,172 21,956 1,758
======= ===== ====== =====
</TABLE>
During the year ended March 31, 1997 and 1996, the Company's average
investment in impaired loans was $24,940 and $17,847, respectively and
interest income recorded during these periods was $764 and $583, respectively
of which $784 and $585, respectively were recorded utilizing the cash basis
method of accounting.
The effect of nonaccrual and TDR loans on interest income is presented below:
<TABLE>
<CAPTION>
Year ended March 31
--------------------------------------------
1997 1996 1995
------------- ------------ -------------
<S> <C> <C> <C>
Contractual interest due:
Nonaccrual loans $ 2,226 858 987
TDR loans 1,312 1,172 506
-------- ------- --------
3,538 2,030 1,493
Interest income recognized 942 891 326
-------- ------- -------
Interest income not recognized $ 2,596 1,139 1,167
======== ======= =======
</TABLE>
(5) REAL ESTATE
Real estate is summarized as follows:
<TABLE>
<CAPTION>
March 31
-----------------------------
1997 1996
------------ --------------
<S> <C> <C>
Properties:
Acquired in settlement of loans $ 8,074 11,495
Held for sale or development 1,113 911
-------- -------
Allowance for losses (note 6) 9,187 12,406
(329) (4,762)
-------- -------
Total $ 8,858 7,644
======== =======
</TABLE>
77
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
(Income) loss from real estate operations, net is summarized as follows:
<TABLE>
<CAPTION>
Year ended March 31
------------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Gain on sale of real estate, net $ (519) (363) (253)
Real estate expense 1,164 1,165 1,077
Provision for (recoveries of)
losses on real estate (970) 868 3,867
-------- -------- -------
$ (325) 1,670 4,691
======== ======== =======
</TABLE>
(6) ALLOWANCES FOR LOSSES ON LOANS RECEIVABLE AND REAL ESTATE
Activity in the allowances for losses on loans and real estate is summarized as
follows:
<TABLE>
<CAPTION>
Year ended March 31
--------------------------------
1997 1996 1995
-------- --------- --------
<S> <C> <C> <C>
Loans receivable:
Beginning balance $19,741 19,294 11,723
Provision 13,661 10,895 13,901
Charge-offs (5,782) (10,451) (6,335)
Recoveries 101 3 5
------- -------- -------
Ending balance 27,721 19,741 19,294
------- -------- -------
Real estate:
Beginning balance 4,762 5,440 3,754
Provision (recovery) (970) 868 3,867
Charge-offs (3,463) (1,546) (2,181)
------- -------- -------
Ending balance 329 4,762 5,440
------- -------- -------
Total loans receivable and
real estate:
Beginning balance 24,503 24,734 15,477
Provision 12,691 11,763 17,768
Charge-offs (9,245) (11,997) (8,516)
Recoveries 101 3 5
------- -------- -------
Ending balance $28,050 24,503 24,734
======= ======== =======
</TABLE>
(7) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
March 31
------------------
1997 1996
-------- -------
<S> <C> <C>
Investment securities $ 1,397 360
Mortgage-backed securities 3,863 1,033
Loans receivable 10,619 9,426
-------- -------
$ 15,879 10,819
======== =======
</TABLE>
78
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
(8) PROPERTY AND EQUIPMENT, NET
Property and equipment, net is summarized as follows:
<TABLE>
<CAPTION>
March 31
--------------------------
1997 1996 Estimated Life
-------- -------- --------------
<S> <C> <C> <C>
Land $ 5,254 5,324 -
Buildings and improvements 20,781 20,348 10 to 50 years
Leasehold improvements 1,824 1,608 Life of lease
Furniture, fixtures and equipment 20,161 17,141 1 to 10 years
Automobiles 198 174 3 years
Construction in progress 1,074 9 -
-------- ----------
49,292 44,604
Accumulated depreciation and
amortization (22,771) (19,931)
-------- ----------
$ 26,521 24,673
======== ==========
</TABLE>
(9) DEPOSITS
Deposits and their respective weighted average interest rates are
summarized as follows:
<TABLE>
<CAPTION>
March 31
-------------------------------------------------
1997 1996
--------------------- -----------------------
Weighted Weighted
Average Average
Rate Amount Rate Amount
-------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Regular passbook 2.76% $ 176,867 2.77% $ 142,670
NOW and other demand
deposit accounts 0.81 141,231 0.86 134,970
Fixed and variable-rate
certificate accounts 5.54 1,240,231 5.63 1,258,958
Money market checking
and savings 4.05 152,720 2.51 145,475
---------- ----------
4.73% $1,711,049 4.89% $1,682,073
========== ==========
</TABLE>
Fixed and variable-rate certificate accounts maturing subsequent to March 31,
1997 are summarized as follows:
<TABLE>
<CAPTION>
Year ending March 31 Amount
-------------------- ------
<S> <C>
1998 $1,103,076
1999 63,436
2000 43,038
2001 18,883
2002 11,006
thereafter 792
----------
$1,240,231
==========
</TABLE>
79
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
Year ended March 31
-------------------------
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
Regular passbook $ 5,525 2,657 2,493
NOW and other demand
deposit accounts 1,096 1,752 1,129
Money market checking and savings 3,935 4,012 4,946
Certificates of deposit 68,690 73,830 52,606
------- ------ ------
$79,246 82,251 61,174
======= ====== ======
</TABLE>
At March 31, 1997 and 1996, the Company had accrued interest payable on
deposits of $476 and $191, respectively, which is included in other
liabilities in the accompanying consolidated balance sheets.
At March 31, 1997 and 1996, $5,737 and $2,592 of public funds on deposit were
secured by loans receivable, mortgage-backed securities and investment
securities with aggregate carrying values of $11,945 and $7,411, respectively.
Accounts which are greater than $100 at March 31, 1997 and 1996 total $293,332
and $288,506, respectively. Deposit accounts greater than $100 are not
federally insured.
(10) FHLB ADVANCES AND OTHER BORROWINGS
The Company utilizes FHLB advances and reverse repurchase agreements as
sources of funds. The advances are generally short-term and are
collateralized by mortgage-backed securities and/or loans. Reverse repurchase
agreements could be longer in term and are collateralized by mortgage-backed
securities. The Company only transacts business with the FHLB or brokerage
firms which are recognized as primary dealers in U.S. government securities.
FHLB advances at March 31, 1997 and 1996 were $480,000 and $19,722,
respectively. All FHLB advances at March 31, 1997 and 1996 mature within one
year. See Note 11.
Information on reverse repurchase agreements is summarized as follows:
<TABLE>
<CAPTION>
Underlying Repurchase
Collateral Liability Book Value* Fair value
- -------------- -------------- -------------- -------------
March 31, 1997 March 31, 1997 March 31, 1997
- -------------- -------------- -------------- -------------
<S> <C> <C> <C>
FHLMC securities $29,700 29,868 29,935
FNMA securities 20,300 22,099 22,011
------- ------ ------
Total $50,000 51,967 51,946
======= ====== ======
</TABLE>
* Book value includes premiums/discounts
The original final maturities for reverse repurchase agreements outstanding at
March 31, 1997 range from 3 to 5 years. Under these agreements, the debt may be
called by the creditor at dates ranging from February 1999 to December 1999.
The underlying collateral for reverse repurchase agreements is held by and under
the control of Morgan Stanley.
80
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
March 31
-----------------------
1997 1996
----------- ----------
<S> <C> <C>
FHLB advances:
Average amount outstanding during the year $335,188 19,768
Maximum amount outstanding at any month end 545,400 68,985
Amount outstanding at year end 480,000 19,722
Average interest rate:
For the year 5.78% 5.66%
At year end 5.78% 5.52%
Reverse repurchase agreements:
Average amount outstanding during the year 10,129 63,839
Maximum amount outstanding at any month end 50,000 96,681
Amount outstanding at year end 50,000 --
Average interest rate:
For the year 5.96% 5.97%
At year end 5.87% --
</TABLE>
Interest expense on borrowings is summarized as follows:
<TABLE>
<CAPTION>
Year ended March 31
--------------------------------------------
1997 1996 1995
---------- --------- -------
<S> <C> <C> <C>
FHLB advances $ 19,378 983 185
Reverse repurchase agreements 604 3,937 532
Other interest expense 78 385 175
------- ------ -----
$20,060 5,305 892
======= ====== =====
</TABLE>
(11) LINES OF CREDIT
At March 31, 1997, the Company had maximum borrowing capacity from the FHLB
of San Francisco in the approximate amount of $620,861. Based upon pledged
collateral in place, the Company had available borrowings of $269,882 and
$199,343 as of March 31, 1997 and 1996, respectively. Pledged collateral
consists of certain loans receivable, mortgage-backed securities and
investment securities aggregating $857,087 and $238,784 and the Company's
required investment in one hundred dollar par value capital stock of the
FHLB of San Francisco at March 31, 1997 and 1996 totaling, at cost, $27,270
and $15,892, respectively.
(12) EMPLOYEE BENEFIT PLANS
Prior to December 31, 1995, the Company maintained a defined benefit
Pension Plan ("Pension Plan") covering substantially all of its employees.
The benefits were based on each employee's years of service and final
average earnings determined over the five-year period prior to the benefit
determination date. Employees became fully vested upon completion of five
years of qualifying service. The Company also maintained a Retirement Plan
for all directors and a Supplemental Plan for all senior officers of the
Company. Effective December 31, 1995, the Company elected to freeze the
Pension Plan and Directors' Retirement and Supplemental Plans. Accordingly,
no new accrual for future years of service will occur after December 31,
1995. The following table sets forth the plans' funded status and amounts
recognized by the Company at the plans' most recent measurement dates of
December 31, 1996 and 1995:
81
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1996 1995
----------------------- -----------------------
Directors' Directors'
Retirement and Retirement and
Pension Supplemental Pension Supplemental
Plan Plans Plan Plans
-------- -------------- -------- -------------
<S> <C> <C> <C> <C>
Actuarial present value of benefit
obligation:
Accumulated benefit
obligation $ 18,038 2,561 18,691 2,826
======== ======== ======== ========
Vested benefit obligation $ 18,038 2,561 18,691 2,826
======== ======== ======== ========
Projected benefit obligation for
service rendered to date $ 18,038 2,561 18,691 2,826
Plan assets at fair value (20,090) -- (17,682) --
-------- -------- -------- --------
Projected benefit obligation less
than (in excess of) plan assets (2,052) 2,561 1,009 2,826
-------- -------- -------- --------
Unrecognized net loss from past
experience different from that
assumed and effects of
changes in assumptions 354 (473) (1,028) (503)
Unrecognized net obligation at
April 1, 1987 being recognized
over twelve years (73) (165) (363) (287)
Unrecognized prior service cost (292) 22 (147) (198)
Adjustment required to recognize
minimum liability -- 616 1,538 988
-------- -------- -------- --------
Accrued (prepaid) pension and retirement
and supplemental costs $ (2,063) 2,561 1,009 2,826
======== ======== ======== ========
</TABLE>
The total pension expense for the pension plan was $220, $1,354 and $1,543, for
the years ended March 31, 1997, 1996 and 1995, respectively. The total pension
expense for the directors' retirement and supplemental plans (including
amortization of prior service cost over 15 years) was $1,773, $343 and $372 for
the years ended March 31, 1997, 1996 and 1995, respectively. The $1,527
difference between total pension expense and net periodic pension cost for the
Directors' Retirement and Supplemental Plans for the year ended March 31, 1997,
results from the curtailment of these plans.
82
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
Net periodic pension costs for 1996, 1995 and 1994 included the following
components:
<TABLE>
<CAPTION>
December 31
-----------------------------------------------------------------
1996 1995 1994
-----------------------------------------------------------------
Directors' Directors' Directors'
Retirement Retirement Retirement
Pension and Supple- Pension and Supple- Pension and Supple-
Plan mental Plans Plan mental Plans Plan mental Plans
--------- ------------ -------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C>
Service cost-benefits
earned during the
period $ -- -- 627 95 796 80
Interest cost on projected
benefit obligation 1,357 188 1,661 200 1,598 197
Return on plan assets (1,917) -- (2,604) -- (423) --
Net amortization and
deferral 780 58 1,670 48 (428) 95
------- ------- ------- ------- ------- -------
Net periodic
pension cost $ 220 246 1,354 343 1,543 372
======= ======= ======= ======= ======= =======
</TABLE>
The assumptions used in determining the actuarial present value of the
accumulated benefit obligation and the expected return on plan assets for 1996
and 1995 are as follows:
<TABLE>
<CAPTION>
December 31
------------------------------------------------------
1996 1995
------------------------------------------------------
Directors' Directors'
Retirement Retirement
Pension and Supple- Pension and Supple-
Plan mental Plans Plan mental Plans
-------- ------------ -------- ------------
<S> <C> <C> <C> <C>
Actuarial present values:
Weighted average discount rate 7.75% 7.75% 7.50% 7.50%
Rate of increase in future
compensation -- -- 7.00 7.00
Net periodic pension cost:
Weighted average discount rate 7.50 7.50 8.50 8.50
Rate of increase in future
compensation -- -- 7.00 7.00
Expected long-term return on
plan assets 8.50 8.50 8.50 8.50
</TABLE>
In 1985, the Company established a capital accumulation plan (401(k) Plan) which
is available to all full-time employees over 21 years of age with more than six
months of service. Under the 401(k) Plan, the Company contributes funds in an
amount equal to a percentage of employee contributions. In 1997, 1996 and 1995,
the total 401(k) Plan expense was approximately $290, $226 and $260,
respectively.
The Company provides a non-qualified Directors' Deferred Compensation Plan and a
non-qualified Employees' Deferred Compensation Plan which offers directors and
senior officers of the Company, respectively, the opportunity to defer
compensation through a reduction in salary and then receipt of a benefit upon
retirement. The benefit for the Directors' Deferred Compensation Plan is payable
upon the occurrence of the first fiscal Board of Directors' meeting held in the
year following the Participant attaining age 73. The benefit for the Employees'
Deferred Compensation Plan is payable at normal retirement (age 65) or actual
retirement but no later than age 70, or alternatively upon termination if
termination occurs earlier due to disability. The primary form of benefit is 120
monthly installment payments of the account balance. Such balance shall equal
the amount of the deferrals and interest thereon. Other actuarially equivalent
payout schedules, including a lump sum payout, are available with certain
restrictions. Deferrals are currently credited with an interest rate equal to
the highest interest rate paid on
83
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
a designated date to depositors of the Company or at the Participants' election,
investment earnings or losses equivalent to that of the Company's common stock.
At March 31, 1997, the liability for these plans is included in accrued expenses
and other liabilities.
As part of the reorganization to the stock form of ownership, the PFF Bank &
Trust's Employee Stock Ownership Plan (ESOP) purchased 1,587,000 shares of the
Company's common stock at $10 per share, or $15,870, which was funded by a loan
from the Company. The loan will be repaid from the Company's or the Bank's
discretionary contributions over a period of 10 years. The loan is secured by
the common stock owned by the ESOP. Shares purchased with the loan proceeds are
held in a suspense account for allocation among Participants as the loan is
repaid. ESOP shares are allocated to the eligible Participants based on
compensation as described in the ESOP plan. No shares have been allocated among
the Participants as of March 31, 1997. At March 31, 1997, the unearned balance
of the ESOP shares is included in unearned stock-based compensation, a reduction
of stockholders' equity in the accompanying consolidated financial statements.
The value of ESOP shares committed to be released is included in compensation
expense based upon the fair value of the shares on the dates they were
committed. At March 31, 1997, the fair value of the unearned ESOP shares is
$20,552. Compensation expense associated with the ESOP was $2,050 for the year
ended March 31, 1997.
During October, 1996, the stockholders of the Company approved the PFF Bancorp,
Inc. 1996 Incentive Plan (the "1996 Plan"). The 1996 Plan authorizes the
granting of options to purchase Common Stock, option related awards, and awards
of Common Stock (collectively "Awards"). Concurrent with the approval of the
1996 Plan, the Company adopted SFAS No. 123, Accounting for Stock-Based
Compensation, which permits a company to account for stock options granted under
either the fair-value-based or the intrinsic-value-based (as described in
Accounting Principles Bulletin Opinion No. 25) method of accounting; however, if
the Company elects to account for options granted under the intrinsic-value-
based method, it must make certain disclosures with respect thereto. The Company
has elected to account for stock options granted under the intrinsic-value-based
method of accounting.
The maximum number of shares reserved for Awards under the 1996 Plan is
2,777,250 shares, with 1,983,750 reserved for purchase pursuant to options and
option-related awards and 793,500 reserved for award of Common Stock. The
exercise price of all options and option-related awards must be 100% of the fair
value of the underlying Common Stock at the time of grant and the term of the
option may not exceed 10 years.
With respect to awards of common stock granted to employees, the 1996 Plan
provides that each stock award will be eligible to vest in five equal annual
installments, with 75% of the third, fourth and fifth annual installments
subject to the attainment of certain performance goals. Of the 793,500 shares
reserved for stock awards, 746,745 shares with a fair value of $9,521 were
granted during the year ended March 31, 1997. Compensation expense, associated
with the stock awards recognized based upon the market price of the Common Stock
at the time of grant, was $834 for the year ended March 31, 1997. At March 31,
1997, the unamortized balance of the Awards is included in unearned stock-based
compensation in the accompanying consolidated financial statements.
The following table contains certain information with respect to the stock
options granted under the 1996 Plan.
<TABLE>
<CAPTION>
Options Granted During Year ended March 31, 1997 Assumptions Used in Determining Options' Values Calculated
- ------------------------------------------------ ----------------------------------------------- Value of
Amount Exercise Expected Risk-Free Expected Each
Grant Date Granted Price Term(1) Rate (2) Volatility(3) Option
- ---------- ------- -------- ------- -------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
October 23, 1996...... 1,900,611 $12.75 8.00 6.92% 25.00% $ 7.64
December 19, 1996..... 1,031 13.75 8.00 6.92 25.00 7.23
February 27, 1997..... 1,446 16.25 8.00 6.92 25.00 6.30
March 1, 1997......... 96,000 16.25 8.00 6.92 25.00 6.30
March 26, 1997........ 62,162 15.50 8.00 6.92 25.00 6.57
</TABLE>
(1) Because of the lack of historical information relating to the expected term
of the options, the expected term of a comparable and more seasoned company
was used.
(2) The risk-free rate is the market rate for U.S. Government securities with
the same maturities as the options, as of March 31, 1997.
(3) Because of the lack of historical information relating the Company's stock
price volatility, the volatility rate for a more seasoned company of
similar size was used.
84
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
If the Company had accounted for the effects of the issuance of the stock
options utilizing the fair-value-based method of accounting, net earnings for
the year ended March 31, 1997 would have been $1.0 million, or $.06 per share of
Common Stock.
The table below reflects, for the periods indicated, the activity in the
Company's stock options issued under the 1996 Plan.
<TABLE>
<CAPTION>
For the Year Ended March 31, 1997
---------------------------------
<S> <C>
Balance at beginning of period................................................................ -
Granted....................................................................................... 2,061,250
Canceled or expired........................................................................... (101,181)
Exercised..................................................................................... -
----------
Balance at end of period...................................................................... 1,960,069
==========
Options exercisable........................................................................... 2,452
Shares available for grant.................................................................... 23,681
Weighted average option price per share:
Under option............................................................................. $ 13.01
Exercisable.............................................................................. 12.75
Exercised................................................................................ -
</TABLE>
The following table summarizes information with respect to the Company's stock
options outstanding as of March 31, 1997.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------- ----------------------------------
Range of Number Weighted-Average Weighted- Number Weighted-
Exercise Outstanding Remaining Average Outstanding Average
Prices at March 31, 1997 Contractual Life Exercise price at March 31, 1997 Exercise Price
- --------- ----------------- ------------------- --------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
$12 to 14 1,800,461 9.5 years $ 12.75 2,452 $ 12.75
$14 to 16 62,162 9.9 years 15.50 - -
$16 to 18 97,446 9.9 years 16.25 - -
---------- -------- ------ --------
1,960,069 $ 13.01 2,452 $ 12.75
========== ======== ====== ========
</TABLE>
The Company currently provides post retirement medical coverage to eligible
employees. At March 31, 1997 and 1996, the expected cost associated with this
coverage is included in accrued expenses and other liabilities.
(13) Income Taxes
Income taxes (benefit) is summarized as follows:
<TABLE>
<CAPTION>
Current Deferred Total
------- -------- -----
<S> <C> <C> <C>
Year ended March 31, 1997:
Federal $ 3,289 (1,867) 1,422
State 1,935 (270) 1,665
------- ------- -------
$ 5,224 (2,137) 3,087
======= ======= =======
Year ended March 31, 1996:
Federal $ 342 854 1,196
State -- 455 455
------- ------- -------
$ 342 1,309 1,651
======= ======= =======
Year ended March 31, 1995:
Federal $ (741) (1,653) (2,394)
State -- (718) (718)
------- ------- -------
$ (741) (2,371) (3,112)
======= ======= =======
</TABLE>
85
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
A reconciliation of total income taxes (benefit) and the amount computed by
applying the applicable Federal income tax rate to earnings (loss) before income
taxes follows:
<TABLE>
<CAPTION>
Year ended March 31
--------------------------------------------------------------------
1997 1996 1995
------------------- ------------------- ---------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Computed "expected" taxes
(benefit) $ 2,037 35% $ 1,300 35% $(2,545) (35)%
Increase (reduction) in taxes
resulting from:
California franchise
tax, net of Federal
tax benefit 433 7 296 7 (474) (7)
California franchise tax
examination, net of
Federal tax benefit 649 10 -- -- -- --
Other items (32) 1 55 2 (93) (1)
------- ----- ------- ----- ------- -----
$ 3,087 53% $ 1,651 44% $(3,112) (43)%
======= ===== ======= ===== ======= =====
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities and the related income
taxes (benefits) are presented below:
<TABLE>
<CAPTION>
March 31, Taxes March 31, Taxes March 31,
1997 (Benefit) 1996 (Benefit) 1995
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Deferred tax assets:
Allowance for real estate
loan losses $ (8,003) 1,389 (9,392) 793 (10,185)
California franchise tax (1,026) (42) (984) (212) (772)
Accrued expenses (1,576) (910) (666) 638 (1,304)
Core deposit intangibles (271) (68) (203) (56) (147)
Nonaccrual interest (1,033) (1,033) -- -- --
Unrealized gains (loss) on
securities available-for-
sale, net 356 (279) 635 686 (51)
Other (1,088) (919) (169) (61) (108)
-------- -------- -------- -------- --------
(12,641) (1,862) (10,779) 1,788 (12,567)
-------- -------- -------- -------- --------
Deferred tax liabilities:
Deferred loan origination
fees 13,374 (1,400) 14,774 (137) 14,911
Unredeemed stock
dividends 4,040 640 3,400 346 3,054
Pension plan liability 330 (320) 650 437 213
Accumulated depreciation 474 (147) 621 (363) 984
Forfeited interest
depreciation 218 (44) 262 (64) 326
Accrued interest on pre-
1985 loans 23 (179) 202 (2) 204
Excess servicing rights
amortization 95 (3) 98 (3) 101
Other 981 900 81 (7) 88
-------- -------- -------- -------- --------
19,535 (553) 20,088 207 19,881
-------- -------- -------- -------- --------
Net deferred tax liability $ 6,894 (2,415) 9,309 1,995 7,314
======== ======== ======== ======== ========
</TABLE>
86
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
In determining the possible future realization of deferred tax assets, the
future taxable income from the following sources need to be taken into account:
(a) the reversal of taxable temporary difference, (b) future operations
exclusive of reversing temporary differences and (c) tax planning strategies
that, if necessary, would be implemented to accelerate taxable income into years
in which net operating losses might otherwise expire. Deferred tax assets as of
March 31, 1997, 1996 and 1995 have been recognized to the extent of the expected
reversal of taxable temporary differences.
Based on the Company's current and historical pretax earnings, adjusted for
significant items, management believes it is more likely than not that the
Company will realize the benefit of the deferred tax asset at March 31, 1997.
Management believes the existing net deductible temporary differences will
reverse during periods in which the Company generates net taxable income;
however, there can be no assurance that the Company will generate any earnings
or any specific level of continuing earnings in future years. Certain tax
planning or other strategies could be implemented, if necessary, to supplement
income from operations to fully realize recorded tax benefits.
On August 20, 1996, the President signed the Small Business Job Protection Act
(the Act) into law. The act repeals the reserve method of accounting for bad
debts for savings institutions effective for taxable years beginning after 1995.
The Company, therefore, will be required to use the specific charge-off method
on its 1996 and subsequent Federal income tax returns. Prior to 1996, savings
institutions that met certain definitional tests and other conditions prescribed
by the Internal Revenue Code were allowed to deduct, within limitations, a bad
debt deduction. The deduction percentage was 8% for the years ended March 31,
1996 and 1995. Alternately, a qualified savings institution could compute its
bad debt deduction based upon actual loan loss experience (the Experience
Method). The Company computed its bad debt deduction utilizing the Experience
Method in 1995 and 1994. Retained earnings at March 31, 1997 and 1996 includes
approximately $25,300 for which no deferred income tax liability has been
recognized.
(14) REGULATORY CAPITAL
Savings institutions are subject to the provisions of the Federal Deposit
Insurance Corporation Improvement Act of 1991 (FDICIA), which was signed into
law on December 19, 1991. Regulations implementing the prompt corrective action
provisions of FDICIA became effective on December 19, 1992. In addition to the
prompt corrective action requirements, FDICIA includes significant changes to
the legal and regulatory environment for insured depository institutions,
including reductions in insurance coverage for certain kinds of deposits,
increased supervision by the federal regulatory agencies, increased reporting
requirements for insured institutions, and new regulations concerning internal
controls, accounting and operations.
The FDICIA requires financial institutions to take certain actions relating to
their internal operations, including: providing annual reports on financial
condition and management to the appropriate Federal banking regulators, having
an annual independent audit of financial statements performed by an independent
public accountant, and establishing an independent audit committee comprised
solely of outside directors. The FDICIA also imposes certain operational and
managerial standards on financial institutions relating to internal controls,
loan documentation, credit underwriting, interest rate exposure, asset growth
and compensation, fees and benefits.
The prompt corrective action regulations define specific capital categories
based on an institution's capital ratio. The capital categories, in declining
order, are "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized."
Institutions categorized as "undercapitalized" or worse are subject to certain
restrictions, including requirements to file a capital plan with the OTS,
prohibitions on the payment of dividends and management fees, restrictions on
executive compensation, and increased supervisory monitoring, among other
things. Other restrictions may be imposed on the institution either by the OTS
or by the FDIC, including requirements to raise additional capital, sell assets,
or sell the entire institution. Once an institution becomes "critically
undercapitalized" it is generally placed in receivership or conservatorship
within 90 days.
87
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
To be considered "well capitalized," a savings institution must generally have a
core capital of at least 5%, a Tier 1 risk-based capital ratio of at least 6%,
and a total risk-based capital of at least 10%. An institution is deemed to be
"critically undercapitalized" if it has a tangible equity ratio of 2% or less.
Management believes that at March 31, 1997, the Bank met the definition of "well
capitalized."
The following is a reconciliation of the Bank's GAAP capital to regulatory
capital as of March 31, 1997:
<TABLE>
<CAPTION>
PFF Bank & Trust's
Regulatory Capital Requirement
---------------------------------------
Tangible Core Risk-Based
Capital Capital Capital(1)
--------- ------- -----------
<S> <C> <C> <C>
Capital of the Bank presented on a GAAP
basis $ 213,711 213,711 213,711
Adjustments to GAAP capital to arrive
at Regulatory capital:
Unrealized losses on securities
available-for-sale, net 567 567 567
Investments in and advances to
"non-includable" consolidated
subsidiaries (1,596) (1,596) (1,596)
Goodwill and other intangible assets (2,994) (2,994) (2,994)
General loan valuation allowance (1) -- -- 17,121
Real Estate held for sale -- -- (558)
--------- --------- ---------
Regulatory capital 209,688 209,688 226,251
Regulatory capital requirement 37,194 74,388 109,448
--------- --------- ---------
Amount by which regulatory
capital exceeds requirement $ 172,494 135,300 116,803
========= ========= =========
</TABLE>
(1) Limited to 1.25% of risk-weighted assets.
The following table summarizes the Bank's actual capital and required capital
under prompt corrective action provisions of Federal Deposit Insurance
Corporation Improvement Act of 1991 (FDICIA) as of March 31, 1997:
<TABLE>
<CAPTION>
To be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------- ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk-weighted assets) $226,251 16.54% $109,448 *8.00% $136,810 *10.00%
Core (Tier 1) capital (to total assets) 209,688 8.46 99,184 *4.00 123,980 *5.00
Tier 1 leverage (to average assets) 209,688 8.90 94,211 *4.00 94,211 *4.00
Tier 1 capital (to risk-weighted assets) 209,688 15.33 54,724 *4.00 82,086 *6.00
Tangible capital (to total assets) 209,688 8.46 49,592 *2.00 99,184 *4.00
</TABLE>
- -----------
*=Greater than or equal to.
At periodic intervals, both the OTS and the FDIC routinely examine the Bank's
financial statements as part of their legally prescribed oversight of the thrift
industry. Based on these examinations, the regulators can direct that the Bank's
financial statements be adjusted in accordance with their findings.
88
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
(15) OTHER NON-INTEREST EXPENSE
Other non-interest expense amounts are summarized as follows:
<TABLE>
<CAPTION>
Year ended March 31
---------------------------
1997 1996 1995
---------- ------ -------
<S> <C> <C> <C>
SAIF insurance premiums(1) $ 3,270 3,889 3,612
Office supplies and expense 2,803 2,226 2,345
Savings and NOW account expenses 947 1,000 873
Loan expenses 221 343 838
System conversion expenses 2,117 -- --
Other 3,477 2,249 1,875
------- ------- -------
$12,835 9,707 9,543
======= ======= =======
</TABLE>
(1) The SAIF recapitalization assessment of $10,900 is recorded as a separate
line item on the statements of operations.
(16) COMMITMENTS AND CONTINGENCIES
The Company and subsidiaries have various outstanding commitments and contingent
liabilities in the ordinary course of business that are not reflected in the
accompanying consolidated financial statements as follows:
LITIGATION
The Company and subsidiaries have been named as defendants in various lawsuits
arising in the normal course of business. The outcome of these lawsuits cannot
be predicted, but the Company intends to vigorously defend the actions and is of
the opinion that the lawsuits will not have a material effect on the Company.
LEASE COMMITMENTS
The Company leases various office facilities under noncancellable operating
leases which expire through the year 2044. Net rent expense under operating
leases, included in occupancy and equipment expense for the years ended March
31, 1997, 1996 and 1995, was approximately $512, $502, and $492, respectively. A
summary of future minimum lease payments under these agreements follows at March
31, 1997:
<TABLE>
<CAPTION>
Amount
------
<S> <C>
Year ending March 31:
1998 $ 563
1999 547
2000 446
2001 249
2002 187
thereafter 332
------
$2,324
======
</TABLE>
(17) OFF-BALANCE SHEET RISK
CONCENTRATIONS OF OPERATIONS AND ASSETS
The Company's operations are located entirely within Southern California at both
March 31, 1997 and 1996, approximately 96.3% of the Company's mortgage loans
were secured by real estate in Southern California. In addition, substantially
all of the Company's real estate is located in Southern California.
89
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
OFF-BALANCE-SHEET CREDIT RISK/INTEREST-RATE RISK
In the normal course of meeting the financing needs of its customers and
reducing exposure to fluctuating interest rates, the Company is a party to
financial instruments with off-balance sheet risk. These financial instruments
(commitments to originate loans and commitments to purchase loans) include
elements of credit risk in excess of the amount recognized in the accompanying
consolidated financial statements. The contractual amounts of those instruments
reflect the extent of the Company's involvement in these particular classes of
financial instruments.
The Company's exposure to off-balance sheet credit risk (i.e., losses resulting
from the other party's nonperformance of financial guarantees) and interest rate
risk (for fixed-rate mortgage loans) in excess of the amount recognized in the
accompanying consolidated financial statements is represented by the following
contractual amounts:
<TABLE>
<CAPTION>
March 31
------------------------
1997 1996
--------- --------
<S> <C> <C>
Commitments to originate mortgage loans:
Variable-rate $ 9,747 11,059
Fixed-rate 1,010 2,459
------- -------
Total $10,757 13,518
======= =======
Interest rate range for fixed-rate mortgage loans 8.250%-8.750% 7.625%-8.125%
Commitments to purchase mortgage-backed securities $20,998 27,505
======= =======
Commitments to purchase investment securities $ 4,995 7,953
======= =======
Commitments to purchase loans $ -- 1,378
======= =======
</TABLE>
Commitments to originate fixed and variable-rate loans represent commitments to
lend to a customer, provided there are no violations of conditions specified in
the agreement. Commitments to purchase variable-rate loans represent commitments
to purchase mortgage loans originated by other financial institutions. These
commitments generally have fixed expiration dates or other termination clauses
and may require the payment of a fee. Since some of the commitments may expire
without being drawn upon, the total commitment amounts above do not necessarily
represent future cash requirements. The Company uses the same credit policies in
making commitments to originate and purchase loans as it does for on-balance
sheet instruments. The Company controls credit risk by evaluating each
customer's creditworthiness on a case-by-case basis and by using systems of
credit approval, loan limitation, and various underwriting and monitoring
procedures.
The Company does not require collateral or other security to support off-balance
sheet financial instruments with credit risk, however, when the commitment is
funded, the Company receives collateral to the extent collateral is deemed
necessary, with the most significant category of collateral being real property
underlying mortgage loans.
(18) TRUST OPERATIONS
Included in prepaid expenses and other assets is the net unamortized trust
acquisition cost of approximately $2,884 and $3,200 at March 31, 1997 and 1996,
respectively.
As a result of the acquisition, the Company now has certain additional fiduciary
responsibilities which include acting as trustee, executor, administrator,
guardian, custodian, record keeper, agent, registrar, advisor and manager. In
addition, the Company's Trust department holds assets for the benefit of others.
These assets are not the assets of the Company and are not included in the
consolidated balance sheets of the Company at March 31, 1997 and 1996.
90
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
(19) LOAN SERVICING AND SALE ACTIVITIES
Loan servicing and sale activities are summarized as follows:
<TABLE>
<CAPTION>
As of and for the year ended March 31
--------------------------------------
1997 1996 1995
-------- -------- ---------
<S> <C> <C> <C>
Balance sheet information:
Loans held for sale $ 736 6,015 --
======== ======== ========
Statements of operations information:
Loan servicing fees $ 945 943 709
Amortization of excess servicing fees (42) (36) (146)
-------- -------- --------
Loan servicing fees, net $ 903 907 563
======== ======== ========
Gain (loss) on sale of loans $ 9 102 (25)
======== ======== ========
Statements of cash flows information:
Loans originated for sale $ 21,590 15,294 2,147
======== ======== ========
Proceeds from sale of loans $ 26,869 9,381 1,290
======== ======== ========
</TABLE>
The Company originates mortgage loans, which depending upon whether the loans
meet the Company's investment objectives may be sold in the secondary market or
to other private investors. The servicing of these loans may or may not be
retained by the Company. Indirect non-deferrable costs associated with
origination, servicing and sale activities cannot be presented as these
operations are integrated with and not separable from the origination and
servicing of portfolio loans, and as a result, cannot be accurately estimated.
At March 31, 1997, 1996 and 1995, the Company was servicing loans and
participations in loans owned by others of $252,057, $261,288 and $231,059,
respectively.
(20) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments" (SFAS
107). The estimated fair value amounts have been determined using available
market information and appropriate valuation methodologies. However,
considerable judgment is necessarily required to interpret market data to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts that could be realized in a
current market exchange. The use of different market assumptions or estimation
methodologies may have a material impact on the estimated fair value amounts.
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
March 31, 1997 March 31, 1996
------------------------- ----------------------
Carrying Fair Carrying Fair
Value Value Value Value
----------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents
and certificates of
deposit $ 31,632 31,632 176,094 176,094
Investment securities 103,837 103,860 37,958 38,041
Mortgage-backed securities 491,499 491,518 132,722 132,768
Loans held for sale 736 736 6,015 6,015
Loans receivable, net 1,819,209 1,806,674 1,574,935 1,573,882
</TABLE>
91
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
<TABLE>
March 31, 1997 March 31, 1996
----------------------- ----------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------ --------- ----------- --------
<S> <C> <C> <C> <C>
Financial liabilities:
Deposits 1,711,049 1,713,387 1,682,073 1,687,456
FHLB advances and other
borrowings 530,000 530,000 19,722 19,722
Off-balance sheet instruments:
Commitments to originate loans 10,757 10,757 13,518 13,518
Commitments to purchase mortgage-
backed securities 20,998 20,998 27,505 27,505
Commitments to purchase investment
securities 4,995 4,995 7,953 7,953
Commitments to purchase loans -- -- 1,378 1,378
</TABLE>
The following methods and assumptions were used in estimating the Company's fair
value disclosures for financial instruments.
Cash, Cash Equivalents and Certificates of Deposit: The fair values of cash and
cash equivalents, and certificates of deposit approximate the carrying values
reported in the consolidated balance sheet.
Investment Securities: The fair values of investment securities are based on
quoted market prices.
Mortgage-Backed Securities: The fair value of mortgage-backed securities is
based on quoted market prices or dealer quotations obtained from market sources.
Loans Receivable: For purposes of calculating the fair value of loans
receivable, loans were segregated by payment type, such as those with fixed
interest rates and those with adjustable interest rates as well as by prepayment
and repricing frequency. For all mortgage loans, fair value is estimated using
discounted cash flow analyses. Discount rates are based on current loan rates
for similar loan types adjusted for differences in credit and servicing
characteristics. The fair values of significant nonperforming loans are based on
recent appraisals, or if not available, on estimated cashflows, discounted using
a rate commensurate with the risk associated with the specific properties.
Deposits: The fair values of passbook accounts, demand deposits and certain
money market deposits are assumed to be the carrying values at the reporting
date. The fair value of term accounts is based on projected contractual cash
flows discounted at rates currently offered for deposits of similar maturities.
FHLB advances and Other Borrowings: The fair value of FHLB advances and other
borrowings is based on discounted cash flows using contractual rates currently
offered for similar borrowings of similar maturities.
Off-Balance Sheet Financial Instruments: The fair value of commitments to
purchase loans, mortgage-backed securities and investment securities is based
upon bid quotations received from securities dealers. Commitments to fund loans
outstanding at March 31, 1997 and 1996 would be offered at substantially the
same rates and terms as commitments offered on March 31, 1997 and 1996 to
parties of similar credit worthiness. Therefore, the carrying value of the
commitments approximates their esimated fair value.
(21) CONVERSION TO CAPITAL STOCK FORM OF OWNERSHIP
The Bancorp was incorporated under Delaware law in March 1996 for the purpose of
acquiring and holding all of the outstanding capital stock of PFF Bank & Trust
as part of the Bank's conversion from a federally chartered mutual savings and
loan association to a federal stock savings bank. On March 28, 1996, the Bank
became a wholly-owned subsidiary of the Bancorp. In connection with the
conversion, the Bancorp issued and sold to the public 19,837,500 shares of its
common stock (par value $.01 per share) at a price of $10 per share. The
proceeds, net of $4,500 in conversion costs, received by the Bancorp from the
conversion (before deduction of $15,870 to fund the Employee
92
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
Stock Ownership Plan) amounted to $193,875. The Bancorp retained approximately
45.8% of the net proceeds and used the remaining net proceeds to purchase the
capital stock of the Bank and fund the ESOP. The financial position of the
Bancorp (parent company only) as of March 31, 1997 and the results of its
operations for the year then ended are presented in Note 22. Earnings per share
data are not presented in the consolidated statements of operations for the year
end March 31, 1996, which would be based on the actual operating results of the
Bancorp from March 28, 1996 (the date of the conversion) to March 31, 1996, as
it would be insignificant. Prior to the completion of the conversion, the
Bancorp had no assets or liabilities and did not conduct any business other than
of an organizational nature.
At the time of the conversion, the Bank established a liquidation account in the
amount of $109,347 which is equal to its total retained earnings as of September
30, 1995. The liquidation account will be maintained for the benefit of eligible
account holders who continue to maintain their accounts at the Bank after the
conversion. The liquidation account will be reduced annually to the extent that
eligible account holders have reduced their qualifying deposits. Subsequent
increases will not restore an eligible account holder's interest in the
liquidation account. In the event of a complete liquidation, each eligible
account holder will be entitled to receive a distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying balances
for accounts then held. The balance in the liquidation account at March 31, 1997
is $57,307.
The Company may not declare or pay cash dividends on or repurchase any of its
shares of common stock, if the effect would cause stockholders' equity to be
reduced below applicable regulatory capital maintenance requirements or if such
declaration and payment would otherwise violate regulatory requirements.
(22) PARENT COMPANY CONDENSED FINANCIAL INFORMATION
This information should be read in conjunction with the other notes to the
consolidated financial statements. The following are the condensed financial
statements for PFF Bancorp, Inc. (parent company only) as of March 31, 1997 and
1996 and for the years then ended.
<TABLE>
<CAPTION>
Condensed Balance Sheets
------------------------
ASSETS 1997 1996
--------- ---------
<S> <C> <C>
Cash and cash equivalents $ 4,849 --
Mortgage-backed securities available-for-sale,
at fair value 42,610 --
Investment securities available-for-sale, at
fair value 4,850 --
Investment in Bank subsidiary 213,711 216,054
Note receivable from Bank subsidiary -- 73,005
Other assets 591 31
-------- --------
Total Assets $266,611 289,090
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 1,085 19
Stockholders' equity 265,526 289,071
-------- --------
Total liabilities and stockholders' equity $266,611 289,090
======== ========
Condensed Statements of Operations
----------------------------------
Interest and other income $ 5,727 31
General and administrative expense 1,548 9
-------- --------
Earnings before equity in earnings of the subsidiary 4,179 22
Equity in earnings of the subsidiary 365 2,053
-------- --------
Earnings before income taxes 4,544 2,075
Income taxes 1,812 10
-------- --------
Net earnings $ 2,732 2,065
======== ========
</TABLE>
93
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
Condensed Statements of Cash Flows
----------------------------------
<TABLE>
<CAPTION>
1997 1996
----------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 2,732 2,065
Adjustments to reconcile net earnings to cash used by operating activities:
Amortization of unearned stock-based compensation 4,133 --
Equity in earnings of the subsidiary (365) (2,053)
Increase in other assets (560) --
Increase in other liabilities 1,025 19
--------- ---------
Net cash provided by operating activities 6,965 31
--------- ---------
Cash flow from investing activities:
Increase in investment securities
available-for-sale (4,919) --
Increase in mortgage-backed securities
available-for-sale (42,411) --
Purchase of outstanding stock of Bank -- (105,000)
Note receivable from the Bank 73,005 (73,036)
--------- ---------
Net cash provided by (used by) investing activities 25,675 (178,036)
--------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common stock -- 193,875
Purchase of stock for unearned stock-based compensation plans (12,974) (15,870)
Purchase of treasury stock (14,817) --
--------- ---------
Net cash provided by (used by) financing activities (27,791) 178,005
--------- ---------
Net increase in cash during the year 4,849 --
Cash and cash equivalents, beginning of year -- --
--------- ---------
Cash and cash equivalents, end of year $ 4,849 $ --
========= =========
</TABLE>
(23) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
-----------------------------------------------
June 30, September 30, December 31, March 31, Total
1996 1996 1996 1997 1997
--------- ------------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
Net interest income $ 16,869 16,779 17,204 18,357 69,209
Provision for loan losses (4,694) (3,071) (2,896) (3,000) (13,661)
Other income 2,552 2,563 2,462 2,650 10,227
Other expenses (10,407) (23,027) (12,818) (13,704) (59,956)
-------- -------- -------- -------- --------
Earnings (loss) before income
taxes 4,320 (6,756) 3,952 4,303 5,819
Income taxes (benefit) 1,895 (2,339) 1,736 1,795 3,087
-------- -------- -------- -------- --------
Net earnings (loss) $ 2,425 (4,417) 2,216 2,508 2,732
======== ======== ======== ======== ========
Net earnings (loss) per share $ 0.13 (0.24) 0.12 0.14 0.15
======== ======== ======== ======== ========
</TABLE>
94
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
-----------------------------------------------
June 30, September 30, December 31, March 31, Total
1995 1995 1995 1996 1996
-------- ------------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
Net interest income $ 10,519 12,168 12,472 13,458 48,617
Provision for loan losses (1,524) (1,612) (4,310) (3,449) (10,895)
Other income 1,766 2,039 2,165 2,169 8,139
Other expenses (10,375) (10,816) (10,418) (10,536) (42,145)
-------- -------- -------- -------- --------
Earnings (loss) before income
taxes 386 1,779 (91) 1,642 3,716
Income taxes (benefit) 171 770 (20) 730 1,651
-------- -------- -------- -------- --------
Net earnings (loss) $ 215 1,009 (71) 912 2,065
======== ======== ======== ======== ========
</TABLE>
The net earnings (loss) per share for quarters ended in fiscal year 1996 is not
applicable since the Company's reorganization to stock form was not completed
until March 28, 1996.
(24) SUBSEQUENT EVENT
On May 5, 1997, the Office of Thrift Supervision approved the Company's intent
to repurchase up to 5% (942,281 shares) of the Company's common stock. As of
June 4, 1997, the Company has repurchased 130,000 shares at an average price of
$15.17 per share.
95
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
PFF Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of PFF Bancorp,
Inc. and subsidiary (the Company) as of March 31, 1997 and 1996 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended March 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of PFF Bancorp, Inc.
and subsidiary as of March 31, 1997 and 1996 and the results of their operations
and their cash flows for each of the years in the three-year period ended March
31, 1997 in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
April 23, 1997, except as to note 24 to
the consolidated financial statements,
which is as of June 4, 1997.
96
<PAGE>
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -----------------------------------------------------------------------
FINANCIAL DISCLOSURE.
- --------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- ------------------------------------------------------------
The information appearing in the definitive Proxy Statement to be filed
with the Securities and Exchange Commission pursuant to Regulation 14 A in
connection with PFF Bancorp Inc.'s Annual Meeting of Stockholders to be held on
August 27, 1997 (the "Proxy Statement") under the captions "Election of
Directors" and "Executive Officers Who Are Not Directors" is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The information appearing in the Proxy Statement under the caption
"Executive Compensation" is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- ------------------------------------------------------------------------
The following table sets forth certain information as to those persons
believed by the Company to be beneficial owners of more than 5% of the Company's
outstanding shares of Common Stock as disclosed in certain reports regarding
such ownership filed with the Company and with the Securities and Exchange
Commission ("SEC") in accordance with Sections 13(d) or 13(g) of the Securities
Exchange Act of 1934, as amended, (the "Exchange Act") by such persons. Other
than those persons listed below, the Company is not aware of any person or
group, as such term is defined in the Exchange Act, that owns more than 5% of
the Common Stock as of March 31, 1997.
<TABLE>
<CAPTION>
PERCENT
NAME AND ADDRESS OF BENEFICIAL NUMBER OF OF
TITLE OF CLASS OWNER SHARES CLASS
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock PFF Bank & Trust 1,587,000(1) 8.00%
Employee Stock Ownership Plan
and Trust ("ESOP")
350 South Garey Avenue
Pomona, California 91766
Common Stock Thomson, Horstmann & Bryant, Inc. 1,074,300 5.40%
Park 80 West/Plaza Two
Saddlebrook, New Jersey 67663
</TABLE>
--------------------
(1) Shares of Common Stock were acquired by the ESOP in the conversion of the
Bank from mutual to stock form and the formation of the Company. The
Company's Compensation Pension & Personal Practices Committee serves as the
ESOP Committee and administers the ESOP. California Central Trust Bank,
Costa Mesa, California has been appointed to corporate trustee for the ESOP
(the "ESOP Trustee").
97
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- --------------------------------------------------------
The FIRREA requires that all loans or extensions of credit to executive
officers and directors must be made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with the general public and must not involve more than the normal
risk of repayment or present other unfavorable features. In addition, loans
made to a director or executive officer in excess of the greater of $25,000 or
5% of the Bank's capital and surplus (up to a maximum of $500,000) must be
approved in advance by a majority of the disinterested members of the Board of
Directors.
The Bank currently makes loans to executive officers and directors on the
same terms and conditions offered under the Bank's employee loan policy. The
Bank's policy provides that all loans made by the Bank to its executive officers
and directors be made in the ordinary course of business, on substantially the
same terms, including collateral, as those prevailing at the time for comparable
transactions with other eligible employees and may not involve more than the
normal risk of collectibility or present other unfavorable features. Any loan
made to an executive officer or director must be approved by the Board of
Directors prior to its being committed. The Bank offers to its employees loans
which are made on substantially the same terms and conditions offered to the
general public except that employees in good standing are eligible to receive
preferred interest rates on loans which are for the purchase, refinancing,
constructing, adding to, improving, altering, repairing, equipping, or
furnishing a home; overdraft line of credit; and loan on secured reserve
accounts. The preferred interest rate on a new loan will be determined at the
time of commitment and will be the COFI that is most recently available plus the
amount of the FDIC Insurance premium charged to the Bank plus the margin
specified for each type of loan program. As of March 31, 1997, ten of the
Bank's executive officers or directors had a total of twelve loans outstanding,
totaling $1.4 million in the aggregate. Of the twelve loans currently
outstanding to executive officers or directors ten loans are receiving a
preferred rate as described above and are secured by residential property. The
other two loans to executive officers are not receiving a preferred rate. Six
of the preferred rate loans are to executive officers and were originated during
the time they were employees of the Bank and prior to their becoming an
executive officer or director. Four of the preferred rate loans are to
directors and were originated prior to FIRREA.
It is the policy of the Company that all transactions between the Company
and its executive officers, directors, holders of 10% or more of the shares of
any class of its common stock and affiliates thereof, contain terms no less
favorable to the Company than could have been obtained by it in arm's-length
negotiations with unaffiliated persons and are required to be approved by a
majority of independent outside directors of the Company not having any interest
in the transaction.
98
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
- -------------------------------------------------------------------------
(a)(3) Exhibits
(a) The following exhibits are filed as part of this report:
3.1 Certificate of Incorporation of PFF Bancorp, Inc. (1)
3.2 Bylaws of PFF Bancorp, Inc. (1)
4.0 Stock Certificate of PFF Bancorp, Inc. (1)
10.1 Form of Employment Agreement between PFF Bank & Trust and PFF
Bancorp, Inc. and certain executive officers (1)
10.2 Form of Change in Control Agreement between PFF Bank & Trust and PFF
Bancorp, Inc. and certain executive officers (1)
10.3 Form of PFF Bank & Trust Employee Severance Compensation Plan (1)
10.4 Capital Accumulation Plan for Employees of Pomona First Federal
Savings and Loan Association (1)
10.5 PFF Bancorp, Inc. 1996 Incentive Plan (2)
10.6 Form of Non-Statutory Stock Option Agreement for officers and
employees of PFF Bancorp, Inc.
10.7 Form of Incentive Stock Option Agreement for officers and employees
of PFF Bancorp, Inc.
10.8 Form of Stock Award Agreement for officers and employees of PFF
Bancorp, Inc.
10.9 Form of Stock Award and Stock Option Agreement for Outside Directors
of PFF Bancorp, Inc.
10.10 The Pomona First Federal Bank & Trust Restated Supplemental Executive
Retirement Plan
10.11 The Pomona First Federal Bank & Trust Directors' Deferred
Compensation Plan
11 Computation of Per Share Earnings
21 Subsidiary information is incorporated herein by reference to "Part
I - Subsidiary Activities."
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
99.1 Annual Report on Form 11-K for Capital Accumulation Plan for
employees of PFF Bank & Trust
(b) Report on Form 8-K
None
The Registrant did not file any reports on Form 8-K during the last quarter
of the fiscal year ended March 31, 1997.
- ------------------------------------
(1) Incorporated herein by reference from the Exhibits to the Registration
Statement on Form S-1, as amended, filed on December 8, 1995, Registration
No. 33-80259.
(2) Incorporated herein by reference from the Proxy Statement for the 1996
Annual Meeting of Stockholders dated September 16, 1996.
99
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
PFF BANCORP, INC.
BY: /s/ LARRY M. RINEHART
-------------------------------
Larry M. Rinehart
DATED: June 20, 1997 President, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ LARRY M. RINEHART
- --------------------------
Larry M. Rinehart President, Chief Executive June 20, 1997
Officer and Director
(Principal Executive Officer)
/s/ GREGORY C. TALBOTT
- --------------------------
Gregory C. Talbott Executive Vice President, Chief June 20, 1997
Financial Officer and Treasurer
(Principal Accounting Officer)
/s/ DONALD R. DESCOMBES
- --------------------------
Donald R. DesCombes Chairman of the Board June 20, 1997
of Directors
/s/ ROBERT W. BURWELL
- --------------------------
Robert W. Burwell Director June 20, 1997
/s/ DWIGHT E. BERT
- --------------------------
Dwight E. Bert Director June 20, 1997
/s/ CURTIS W. MORRIS
- --------------------------
Curtis W. Morris Director June 20, 1997
</TABLE>
100
<PAGE>
<TABLE>
<S> <C> <C>
- --------------------------
William T. Dingle Director June , 1997
/s/ ROBERT D. NICHOLS
- --------------------------
Robert D. Nichols Director June 20, 1997
/s/ JIL H. STARK
- --------------------------
Jil H. Stark Director June 20, 1997
</TABLE>
101
<PAGE>
EXHIBIT 10.6
PFF BANCORP, INC.
1996 INCENTIVE PLAN
NON-STATUTORY STOCK OPTION AGREEMENT
FOR OFFICERS AND EMPLOYEES
This agreement ("Agreement") between PFF Bancorp, Inc. ("Company") and
[ ] ("Recipient") shall evidence an award made on
------------ --------------------
("Award"). For purposes of this Agreement, the terms contained herein shall have
the same meanings as those contained in the PFF Bancorp, Inc. 1996 Incentive
Plan ("Plan"). This Agreement shall be qualified by the terms of the Plan which
shall govern, except where this Agreement represents the discretionary
determinations of the Committee as permitted in the Plan and where this
Agreement represents the interpretation of Plan terms by the Committee as
provided in Section 2 of the Plan.
WHEREAS, a purpose of the Plan is to provide officers and employees of the
Company and its affiliates an incentive to achieve the long-term objectives of
the Company by providing such key personnel with a proprietary interest in the
Company and its affiliates, including Pomona First Federal Bank & Trust
("Bank"); and
WHEREAS, the Committee has determined to grant the Recipient an option to
purchase shares of common stock of the Company ("Common Stock") ("Option"),
which Option is not intended to be an Incentive Stock Option under the Internal
Revenue Code of 1986, as amended (the "Code"), such grant being made under the
terms of the Plan;
THEREFORE, to evidence the grant of this Option, and subject to the terms
and conditions of the Plan and this Agreement, the Company and the Recipient
hereby agree as follows:
1. Grant of Award. This Agreement hereby evidences and confirms the
--------------
grant to the Recipient on ("Date of Grant"), of a Non-Statutory
-----------------
Stock Option to purchase shares of Common Stock at an exercise price
-----------
of $ per share (the "Exercise Price"), which was the Fair Market Value
-------
of the underlying shares of Common Stock on the Date of Grant. Simultaneously
with the grant of this Non-Statutory Stock Option, this Agreement hereby
evidences and confirms the grant of related Limited Rights and Equitable
Adjustment Rights as described under Paragraphs 5 and 6 below.
2. Term of Option. The term of the Option shall not exceed a period of 10
--------------
years, beginning on , and ending on .
---------- ----------------
3. Vesting of Option. Except as provided in paragraph 10 herein, the
-----------------
Option shall vest and become exercisable on a cumulative basis in equal
installments at a rate of twenty percent (20%) per year commencing on
and twenty percent (20%) on each
- -------------------- ----------------------
thereafter. Underlying fractional shares shall be aggregated and shall vest in
the last installment of the Option on the last
--------------------------------
on which the Award vests. Except in the case of death or Disability, the Option
may be earned by the Recipient only while serving as an officer or employee
<PAGE>
of the Company or the Bank. In the event the Recipient's service or employment
is terminated for any reason other than death, Disability or Termination for
Cause, an Option will be exercisable only as to those shares that were
immediately exercisable by the Recipient at the date of termination and only for
a period of one year following termination. Notwithstanding any provisions set
forth in the plan, in the event of termination for Disability or death, all
Options will immediately vest and be exercisable for one year after such
termination, and in the event of Termination for Cause all rights under the
Recipient's Option will expire immediately upon termination.
If the Recipient's service or employment terminates due to death or
Disability, all options subject to this Agreement shall be deemed vested as of
the Recipient's last day of service or employment with the Company or an
affiliate and be exercisable for one year after such date.
4. Manner of Exercise of the Option.
--------------------------------
(a) Notice. The Option or any portion thereof may be exercised by
------
written notice pursuant to Paragraph 11 hereof delivered to the Company signed
by the Recipient or the person or persons eligible to exercise the Option under
the terms of this Agreement and the Plan. Such notice shall state the number of
shares of Common Stock with respect to which the Option is being exercised, the
nature of the Option being exercised (i.e., Incentive Stock Option or Non-
statutory Stock Option), Exercise Price and such written covenants, agreements
and representations as the Committee administering the Plan may from time to
time deem necessary or desirable in order to ensure compliance with applicable
laws, regulations or governmental authority and requirements of any stock market
or exchange upon which the Common Stock is traded. Such notice shall be
accompanied by payment of the full Exercise Price. In the event the Option is
exercised by any person other than by the Recipient pursuant to this Agreement
and the terms of the Plan, the notice of exercise of the Option shall be
accompanied by proof satisfactory to the Committee administering the Plan of the
right of such person to exercise the Option. As soon as practicable after such
notice and payment shall have been received, the Company shall deliver a
certificate or certificates representing the number of shares of Common Stock
with respect to which the Option was exercised in the name of the person or
persons exercising the Option.
(b) Consideration. Payment of the Exercise Price shall be made in
-------------
cash or upon operation of an Alternative Option Payment Mechanism set out in
Section 13 of the Plan. All shares of Common Stock that shall be purchased upon
the exercise of the Option as provided herein shall be fully paid and
nonassessable.
(c) No Stockholder Rights Before Exercise. The Recipient shall not
-------------------------------------
be entitled to any rights as a stockholder with respect to such shares of Common
Stock being acquired pursuant to the exercise of the Option unless and until
certificates evidencing such Common Stock are issued. No adjustments shall be
made for dividends or distributions or other rights for which the record date is
prior to the date such certificates are issued except pursuant to the related
Equitable Adjustment Right, as provided in Paragraph 6 hereof, or as otherwise
provided in Paragraph 11.
2
<PAGE>
(d) Exercise Period. Subject to the condition that the Option shall
---------------
not be exercisable for more than ten years from the date of grant, the Recipient
may exercise the Option only while in the continuous employ or service of the
Company or its affiliates, or within one year after the last day on which the
Recipient is employed by or in service with the Company or its affiliates
(unless the Recipient is terminated for Cause or on account of death or
Disability). The grant of the Option shall impose no obligation upon the
Recipient to exercise all or any portion of the Option. If the Recipient's
employment is terminated by reason of Disability or death, the Recipient or his
or her beneficiary or personal representative, shall have the right to exercise
the Option for all of the shares covered by the Option for a period of one year
from the last day on which the Recipient is employed by the Company or its
affiliates. In the event of Termination for Cause all rights under the Incentive
Stock Options shall expire immediately upon termination.
5. Limited Rights. The Recipient, for each share underlying the Option
--------------
granted in Paragraph 1 herein, has also been granted one Limited Right, subject
to the terms and conditions set out in Section 8 of the Plan and the following:
(a) In no event shall a Limited Right be exercisable in whole or in
part before the expiration of six months from the Date of Grant. A Limited Right
may be exercised only in the event of a Change in Control of the Company.
(b) The Limited Right may be exercised only when the related Option
is eligible to be exercised, and only when the Fair Market Value of the
underlying shares on the date of exercise is greater than the Exercise Price of
the related Option.
(c) Upon exercise of a Limited Right, the Option with respect to
such underlying shares shall cease to be exercisable. Upon exercise or
termination of this Option, the Limited Rights for the related shares shall
terminate. The Limited Rights shall be for no more than 100% of the difference
between the Exercise Price and the Fair Price and the Fair Market Value of the
shares of underlying Common Stock remaining subject to this Option when the
Limited Right is exercised. The Limited Right is transferable only when this
Option is transferable and under the same conditions:
(d) Upon exercise of a Limited Right, the Recipient shall promptly
receive from the Company an amount of cash or some other payout alternative set
forth under Section 13 of the Plan equal to the difference between the Exercise
Price on the Date of Grant of the Option and the Fair Market Value of the
underlying shares on the date the Limited Right is exercised, multiplied by the
number of shares with respect to which such Limited Right is being exercised.
Payments shall be less any applicable tax withholding as set forth in Section 18
of the Plan.
3
<PAGE>
6. Equitable Adjustment Right. In connection with each Option granted in
--------------------------
Paragraph 1 herein, an Equitable Adjustment Right has been granted in accordance
with Section 11 of the Plan. Upon the payment of an Extraordinary Dividend (as
such term is defined in Section 10(c) of the Plan), the Committee may adjust the
number of shares and/or the Exercise Price of the related Options underlying the
Equitable Adjustment Right, as the Committee deems appropriate.
7. Compliance with the Federal Securities Laws. Notwithstanding anything
-------------------------------------------
herein to the contrary, the Company shall not be obligated to cause to be issued
or delivered any certificate evidencing shares of Common Stock purchased
pursuant to the exercise of the Option, unless and until the Company is advised
by its counsel that the issuance and delivery of such certificates is in
compliance with all applicable laws, regulations and governmental authority and
requirements of any exchange or stock market upon which the Common Stock is
traded or listed. The Company shall in no event be obligated to register any
securities pursuant to the Securities Act of 1933 (as now in effect or as
hereafter amended) (the "Securities Act") or to take any other affirmative
action in order to cause the issuance and delivery of such certificates to
comply with any such law, regulation or requirement.
Also under current law, depending upon the nature of the Recipient's
transactions in the Common Stock, the grant of the option and/or sale of the
underlying shares may be deemed to be a purchase and sale, respectively, under
Section 16 of the Securities Exchange Act of 1934, as amended, ("Exchange Act")
and therefore may incur short swing profit recovery under this Act and the
regulations promulgated thereunder. If the Recipient is subject to Section 16,
he or she should consult with the Company or his or her own counsel prior to the
sale of Common Stock received pursuant to this Award.
8. Non-Transferability. Except as permitted under the Code and the rules
-------------------
promulgated pursuant to Section 16(b) of the Exchange Act or any successor
statues or rules, no Award under this Agreement shall be transferable by the
Recipient other than by will or the laws of intestate succession or pursuant to
a qualified domestic relations order unless determined otherwise by the
Committee.
9. Designation of Beneficiary. The Recipient may designate a person or
--------------------------
persons to receive, in the event of death, any rights that may be available to
the Recipient pursuant to the Plan under this Agreement. Such designation must
be made in writing and delivered to the Company and may be revoked by the
Recipient in writing. If the Recipient fails effectively to designate a
beneficiary, then the Recipient's estate will be deemed to be the beneficiary.
The Recipient may designate a beneficiary or beneficiaries in this Agreement or
otherwise in writing to the person designated in Paragraph 11 hereof.
4
<PAGE>
10. Dilution and Other Adjustments. In the event of any change in the
------------------------------
outstanding shares of Common Stock by reason of any stock dividend or split,
recapitalization, merger, consolidation, spin-off, reorganization, combination,
or exchange of shares or other similar corporate change or other increase or
decrease in such shares without receipt or payment of consideration by the
Company, the Committee will make such proportionate and equitable adjustments to
the Option and to the Exercise Price per share covered by the Option as provided
for in Section 17 of the Plan to prevent dilution or enlargement of the rights
of the Recipient under this Agreement.
11. Notice. Any notice required or permitted under this Agreement shall be
------
deemed given when delivered in person or when mailed by registered mail with
return receipt requested to the Company addressed to PFF Bancorp, Inc., 350
South Garey Avenue, Pomona, California 91766 ATTN: Chief Executive Officer, (or,
if the Recipient is the Chief Executive Officer, "ATTN: Secretary") and to the
Recipient or beneficiary at the addresses given below or at such address as the
Recipient may subsequently designate in writing to the Company.
12. Modification and Waiver. Neither this Agreement nor any provision
-----------------------
hereof can be changed, modified, amended, terminated or waived orally or by any
course of dealing or purported course of dealing, but only by an agreement in
writing signed by the Recipient or his legal representative and the Company. The
waiver of or failure to enforce any breach of this Agreement shall not be deemed
to be a waiver or acquiescence in any other breach thereof. Nothing herein,
however, shall be construed to prevent the Board of Directors at any time, and
from time to time, to terminate, modify or amend the Plan in any respect,
prospectively or retroactively; provided, however, no such termination,
modification or amendment may affect the rights of the Recipient under this
Agreement without the written permission of such Recipient.
13. Governing Law. This Award shall be governed by and construed in
------------
accordance with the laws of the State of Delaware and applicable federal law.
14. Withholding. There shall be deducted from each distribution of cash
-----------
and/or Common Stock under the Plan an amount of cash or stock relating to
withholding tax, if any, imposed by any federal or state government in
accordance with Section 18 of the Plan.
15. Rights of the Recipient. Nothing in the Plan or this Agreement confers
-----------------------
on the Recipient any right to continue in the employment of the Company or its
Affiliates or interferes in any way with the right of the Company or its
Affiliates to terminate the Recipient's services as an employee at any time.
16. Recipient Acknowledgment. The Recipient hereby acknowledges that all
------------------------
decisions, determinations and interpretations of the Board of Directors, or the
Committee thereof, in respect of the Plan and this Award shall be final and
conclusive.
5
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed,
and said Recipient has hereunto set his hand, the day and year first above
written.
PFF BANCORP, INC.
------------------------------------------
President and
Chief Executive Officer
- ------------------------------- ------------------------------------------
Witness Recipient
Date:
------------------------- ------------------------------------------
Address
------------------------------------------
<PAGE>
I hereby designate as my Beneficiary under the terms of the Plan the
following person(s) in the designated portions:
<TABLE>
<CAPTION>
Name Percentage Relationship Address
- ----------------------------------------------------------------
<S> <C> <C> <C>
</TABLE>
Date: Signed:
------------------------ ----------------------
Witness
----------------------
<PAGE>
EXHIBIT 10.7
PFF BANCORP, INC.
1996 INCENTIVE PLAN
INCENTIVE STOCK OPTION AGREEMENT
FOR OFFICERS AND EMPLOYEES
This agreement ("Agreement") between PFF Bancorp, Inc. ("Company") and
[ ] ("Recipient") shall evidence an award made on
------------- ------------------
("Award"). For purposes of this Agreement, the terms contained herein shall have
the same meanings as those contained in the PFF Bancorp, Inc. 1996 Incentive
Plan ("Plan"). This Agreement shall be qualified by the terms of the Plan which
shall govern, except where this Agreement represents the discretionary
determinations of the Committee as permitted in the Plan and where this
Agreement represents the interpretation of Plan terms by the Committee as
provided in Section 2 of the Plan.
WHEREAS, a purpose of the Plan is to provide officers and employees of the
Company and its affiliates an incentive to achieve the long-term objectives of
the Company by providing such key personnel with a proprietary interest in the
Company and its affiliates, including Pomona First Federal Bank & Trust
("Bank"); and
WHEREAS, the Committee has determined to grant the Recipient an option to
purchase shares of common stock of the Company ("Common Stock") ("Option"),
which Option is intended to be an Incentive Stock Option to the extent allowable
under the Internal Revenue Code of 1986, as amended (the "Code"), such grant
being made under the terms of the Plan;
THEREFORE, to evidence the grant of this Option, and subject to the terms
and conditions of the Plan and this Agreement, the Company and the Recipient
hereby agree as follows:
1. Grant of Award. This Agreement hereby evidences and confirms the
--------------
grant to the Recipient on ("Date of Grant"), of an Incentive
--------------
Stock Option (for those underlying shares to the extent allowable under the
Code) to purchase shares of Common Stock at an exercise price of $
---------- -----
per share (the "Exercise Price"), which was the Fair Market Value of the
underlying shares of Common Stock on the Date of Grant. Simultaneously with the
grant of this Incentive Stock Option, this Agreement hereby evidences and
confirms the grant of related Limited Rights and Equitable Adjustment Rights as
described under Paragraphs 5 and 6 below.
2. Term of Option. The term of the Option shall not exceed a period of 10
--------------
years, beginning on , and ending on . Incentive Stock
------------- ----------------
Options granted to any person who is the beneficial owner of more than 10% of
the outstanding voting stock may not be exercised after the date that is five
years from the Date of Grant and the Exercise Price must be at least equal to
110% of the Fair Market Value of the underlying Common Stock on the Date of
Grant.
1
<PAGE>
3. Vesting of Option. Except as provided in Paragraph 10 herein, the
-----------------
Option shall vest and become exercisable on a cumulative basis in equal
installments at a rate of twenty percent (20%) per year commencing on
----------
and twenty percent (20%) on each thereafter. Underlying
----------------
fractional shares shall be aggregated and shall vest in the last installment
of the Option on the last on which the Award vests. Except in
-----------------
the case of death or Disability, the Option may be earned by the Recipient only
while serving as an officer or employee of the Company or the Bank. In the event
the Recipient's service or employment is terminated other than due to death or
Disability prior to the time all installments of the Option have vested, any
installment of the Option which has not yet vested as of the last day of service
shall be forfeited. If the Recipient is Terminated for Cause, all rights and
Awards under this Agreement shall expire upon the date of termination. Any
unexercised or undistributed Awards shall be forfeited.
If the Recipient's service or employment terminates due to death or
Disability, all options subject to this Agreement shall be deemed vested as of
the Recipient's last day of service or employment with the Company or an
affiliate and be exercisable for one year after such date.
4. Manner of Exercise of the Option.
--------------------------------
(a) Notice. The Option or any portion thereof may be exercised by
------
written notice pursuant to Paragraph 11 hereof delivered to the Company signed
by the Recipient or the person or persons eligible to exercise the Option under
the terms of this Agreement and the Plan. Such notice shall state the number of
shares of Common Stock with respect to which the Option is being exercised, the
nature of the Option being exercised (i.e., Incentive Stock Option or Non-
statutory Stock Option), Exercise Price and such written covenants, agreements
and representations as the Committee administering the plan may from time to
time deem necessary or desirable in order to ensure compliance with applicable
laws, regulations or governmental authority and requirements of any stock market
or exchange upon which the Common Stock is traded. Such notice shall be
accompanied by payment of the full Exercise Price. In the event the Option is
exercised by any person other than by the Recipient pursuant to this Agreement
and the terms of the Plan, the notice of exercise of the Option shall be
accompanied by proof satisfactory to the Committee administering the Plan of the
right of such person to exercise the Option. As soon as practicable after such
notice and payment shall have been received, the Company shall deliver a
certificate or certificates representing the number of shares of Common Stock
with respect to which the Option was exercised in the name of the person or
persons exercising the Option.
(b) Consideration. Payment of the Exercise Price shall be made in
-------------
cash or by check, or, in whole or in part, through the tender of shares of
Common Stock which will be valued at their Fair Market Value on he date prior
to the date of exercise of the Option or portion thereof. All shares of Common
Stock that shall be purchased upon the exercise of the Option as provided herein
shall be fully paid and nonassessable.
2
<PAGE>
The Exercise Price, upon the election of the Recipient, may be paid by
such Recipient's broker dealer if such broker dealer is to be repaid with the
proceeds of the sale of a portion of the shares of Common Stock underlying the
exercised Options as permitted under Section 16(b) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") and the rules promulgated
thereunder ("Cashless Exercise").
(c) No Stockholder Rights Before Exercise. The Recipient shall not
-------------------------------------
be entitled to any rights as a stockholder with respect to such shares of Common
Stock being acquired pursuant to the exercise of the Option unless and until
certificates evidencing such Common Stock are issued. No adjustments shall be
made for dividends or distributions or other rights for which the record date is
prior to the date such certificates are issued except pursuant to the related
Equitable Adjustment Right, as provided in Paragraph 6 hereof, or as otherwise
provided in Paragraph 11.
(d) Exercise Period. Subject to the condition that the Option shall
-----------------
not be exercisable for more than ten years from the date of grant, the Recipient
may exercise the Option only while in the continuous employ or service of the
Company or its affiliates or in the case of Incentive Stock Options within three
months after the last day on which the Recipient is employed by the Company or
its affiliates (unless the Recipient is terminated for Cause or on account of
death or Disability). The grant of the Option shall impose no obligation upon
the Recipient to exercise all or any portion of the Option. If the Recipient's
employment is terminated by reason of Disability or death, the Recipient or his
or her beneficiary or personal representative, shall have the right to exercise
the Option for all of the shares covered by the Option for a period of one year
from the last day on which the Recipient is employed by the Company or its
affiliates. In the event of Termination for Cause all rights under the Incentive
Stock Options shall expire immediately upon termination.
5. Limited Rights. The Recipient, for each share underlying the Option
--------------
granted in Paragraph 1 herein, has also been granted one Limited Right, subject
to the terms and conditions set out in Section 8 of the Plan and the following:
(a) In no event shall a Limited Right be exercisable in whole or in
part before the expiration of six months from the Date of Grant. A Limited Right
may be exercised only in the event of a Change in Control of the Company.
(b) The Limited Right may be exercised only when the related Option
is eligible to be exercised, and only when the Fair Market Value of the
underlying shares on the date of exercise is greater than the Exercise Price of
the related Option.
(c) Upon exercise of a Limited Right, the Option with respect to
such underlying shares shall cease to be exercisable. Upon exercise or
termination of this Option, the Limited Rights for the related shares shall
terminate. The Limited Rights shall be for no more than 100% of the difference
between the Exercise Price and the Fair market Value of the shares of underlying
Common Stock remaining subject to this Option when the Limited Right is
exercised. The Limited Right is transferable only when this Option is
transferable and under the same conditions.
3
<PAGE>
(d) Upon exercise of a Limited Right, the Recipient shall promptly
receive from the Company an amount of cash or some other payout alternative set
forth under Section 13 of the Plan equal to the difference between the Exercise
Price on the Date of Grant of the Option and the Fair Market Value of the
underlying shares on the date the Limited Right is exercised, multiplied by the
number of shares with respect to which such Limited Right is being exercised.
Payments shall be less any applicable tax withholding as set forth in Section 18
of the Plan.
6. Equitable Adjustment Right. In connection with each Option granted in
--------------------------
Paragraph 1 herein, an Equitable Adjustment Right has been granted in accordance
with Section 11 of the Plan. Upon the payment of an Extraordinary Dividend (as
such term is defined in Section 10(c) of the Plan), the Committee may adjust the
number of shares and/or the Exercise Price of the related Options underlying the
Equitable Adjustment Right, as the Committee deems appropriate.
7. Compliance with the Federal Securities Laws. Notwithstanding anything
-------------------------------------------
herein to the contrary, the Company shall not be obligated to cause to be issued
or delivered any certificate evidencing shares of Common Stock purchased
pursuant to the exercise of the Option, unless and until the Company is advised
by its counsel that the issuance and delivery of such certificates is in
compliance with all applicable laws, regulations and governmental authority and
requirements of any exchange or stock market upon which the Common Stock is
traded or listed. The Company shall in no event be obligated to register any
securities pursuant to the Securities Act of 1933 (as now in effect or as
hereafter amended) (the "Securities Act") or to take any other affirmative
action in order to cause the issuance and delivery of such certificates to
comply with any such law, regulation or requirement.
Also under current law, depending upon the nature of the Recipient's
transactions in the Common Stock, the grant of the option and/or sale of the
underlying shares may be deemed to be a purchase and sale, respectively, under
Section 16 of the Securities Exchange act of 1934, as amended, ("Exchange Act")
and therefore may incur short swing profit recovery under this Act and the
regulations promulgated thereunder. If the Recipient is subject to Section 16,
he or she should consult with the Company or his or her own counsel prior to he
Sale of Common Stock received pursuant to this Award.
8. Non-Transferability. Except as permitted under the Code and the
-------------------
rules promulgated pursuant to Section 16(b) of the Exchange Act or any successor
statutes or rules, no Award under this Agreement shall be transferable by the
Recipient other than by will or the laws of intestate succession or pursuant to
a qualified domestic relations order unless determined otherwise by the
Committee.
9. Designation of Beneficiary. The Recipient may designate a person or
--------------------------
persons to receive, in the event of death, any rights that may be available to
the Recipient pursuant to the Plan under this Agreement. Such designation must
be made in writing and delivered to the Company and may be revoked by the
Recipient in writing. If the Recipient fails effectively to designate a
beneficiary, then the Recipient's estate will be deemed to be the beneficiary.
The Recipient may designate a beneficiary or beneficiaries in this Agreement or
otherwise in writing to the person designated in Paragraph 11 hereof.
4
<PAGE>
10. Dilution and Other Adjustments. In the event of any change in the
------------------------------
outstanding shares of Common Stock by reason of any stock dividend or split,
recapitalization, merger, consolidation, spin-off, reorganization, combination,
or exchange of shares or other similar corporate change or other increase or
decrease in such shares without receipt or payment of consideration by the
Company, the Committee will make such proportionate and equitable adjustments to
the Option and to the Exercise Price per share covered by the Option as provided
for in Section 17 of the Plan to prevent dilution or enlargement of the rights
of the Recipient under this Agreement.
11. Notice. Any notice required or permitted under this Agreement shall be
------
deemed given when delivered in person or when mailed by registered mail with
return receipt requested to the Company addressed to PFF Bancorp, Inc., 350
South Garey Avenue, Pomona, California 91766 ATTN: Chief Executive Officer, (or,
if the Recipient is the Chief Executive Officer, "ATTN: Secretary") and to the
Recipient or beneficiary at the addresses given below or at such address as the
Recipient may subsequently designate in writing to the Company.
12. Holding Period. The Recipient hereby acknowledges that in order to have
--------------
the tax treatment provided for Incentive Stock Options under Section 422 of the
Internal Revenue Code apply, the Recipient may not dispose of shares acquired
under this Option (i) for two (2) years from the Date of Grant and (ii) for one
(1) year after the date the shares of Common Stock are transferred to the
Recipient. The Recipient agrees and is required hereby to notify, pursuant to
Paragraph 12 herein, the Company within 30 days of a disqualifying disposition
of an Incentive Stock Option.
13. Modification and Waiver. Neither this Agreement nor any provision
-----------------------
hereof can be changed, modified, amended, terminated or waived orally or by any
course of dealing or purported course of dealing, but only by an agreement in
writing signed by the Recipient or his legal representative and the Company. The
waiver of or failure to enforce any breach of this Agreement shall not be deemed
to a waiver or acquiescence in any other breach thereof. Nothing herein,
however, shall be construed to prevent the Board of Directors at any time, and
from time to time, to terminate, modify or amend the Plan in any respect,
prospectively or retroactively; provided however, no such termination,
modification or amendment may affect the rights of the Recipient under this
Agreement without the written permission of such Recipient.
14. Governing Law. This Award shall be governed by and construed in
-------------
accordance with the laws of the State of Delaware and applicable federal law.
15. Withholding. There shall be deducted from each distribution of cash
-----------
and/or Common Stock under the Plan an amount of cash or stock relating to
withholding tax, if any, imposed by any federal or state government in
accordance with Section 18 of the Plan.
16. Rights of the Recipient. Nothing in the Plan or this Agreement confers
-----------------------
on the Recipient any right to continue in the employment of the Company or its
Affiliates or interferes in any way with the right of the Company or its
Affiliates to terminate the Recipient's services as an employee at any time.
5
<PAGE>
17. Recipient Acknowledgment. The Recipient hereby acknowledges that all
------------------------
decisions, determinations and interpretations of the Board of Directors, or the
Committee thereof, in respect of the Plan and this Award shall be final and
conclusive.
6
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed, and said Recipient has hereunto set his hand, the day and year first
above written.
PFF BANCORP, INC.
-----------------------------------------
President and
Chief Executive Officer
- ----------------------------- -----------------------------------------
Witness Recipient
Date:
----------------------- -----------------------------------------
Address
-----------------------------------------
7
<PAGE>
I hereby designate as my Beneficiary under the terms of the Plan the
following person(s) in the designated portions:
<TABLE>
<CAPTION>
================================================================================
Name Percentage Relationship Address
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
================================================================================
</TABLE>
Date: Signed:
--------------------- -------------------------
- ---------------------------
Witness
8
<PAGE>
EXHIBIT 10.8
PFF BANCORP, INC.
1996 INCENTIVE PLAN
STOCK AWARD AGREEMENT
FOR OFFICERS AND EMPLOYEES
This agreement between PFF Bancorp Inc. ("Company") and [_________________]
("Recipient") shall evidence an award made on _______________ ("Award
Agreement"). For purposes of this Award Agreement, the terms contained herein
shall have the same meanings as those contained in the PFF Bancorp, Inc. 1996
Incentive Plan ("Plan"). This Award Agreement shall be qualified by the terms of
the Plan which shall govern, except where this Award Agreement represents the
discretionary determinations of the Committee as permitted in the Plan and where
this Award Agreement represents the interpretation of the Plan terms by the
Committee as provided in Section 2 of the Plan.
WHEREAS, a purpose of the Plan is to provide officers and employees of the
Company and its affiliates an incentive to achieve the long-term objectives of
the Company by providing such key personnel with a proprietary interest in the
Company and its affiliates, including Pomona First Federal Bank & Trust
("Bank");
WHEREAS, the Committee has determined to grant the Recipient an award in
the form of shares ("Stock Award"), such grant being of common stock of the
Company ("Common Stock") made under the terms of the Plan;
THEREFORE, to evidence the grant of this Stock Award, and subject to the
terms and conditions of the Plan and this Award Agreement, the company and the
Recipient hereby agree as follows:
1. Grant of Award. This Award Agreement hereby evidences and confirms
----------------
the grant to the Recipient on ____________ ("Date of Grant") of a Stock Award to
earn _______ shares of Common Stock. The Stock Award shall be subject to the
provisions of the Plan and this Award Agreement.
2. Term of Stock Award. The term of this Stock Award shall be for such
---------------------
period until the entire Stock Award evidenced hereby has been vested (as
provided in Paragraph 3 hereof) and distributed or forfeited.
3. Vesting of Stock Award. Shares underlying the Stock Award and any
------------------------
dividends paid thereon shall vest in five (5) equal annual installments of
twenty percent (20%) of the aggregate number of shares stated in Paragraph 1
(referred to in this paragraph as "Annual Allocation"). The first Annual
Allocation vests on _____________. The second Annual Allocation of 20% vests on
________________. The third, fourth and fifth Annual Allocations vest in the
following manner:
1
<PAGE>
A. Twenty-five percent (25%) of the third, fourth and fifth Annual
Allocations vest on ________________, ___________ and ___________,
respectively.
B. The remaining seventy-five percent (75%) of the third, fourth and
fifth Annual Allocations are subject to the attainment of a
performance goal and such portion of each Annual Allocation is
placed in the "Risk Pool." The Risk Pool vests in certain
proportions:
(i) upon certification by the Committee of the attainment of a
performance goal ("Performance Goal A") established by the
Committee on the Date of Grant; or
(ii) in the event this primary performance goal is not reached,
upon certification by the Committee of the attainment of a
secondary performance goal ("Performance Goal B") established
by the Committee on the Date of Grant.
Fractional shares shall be aggregated and shall vest in the last
installment on the last _______________________ on which this Stock Award vests.
Except in the case of death or disability, this Stock Award may be earned by the
Recipient only while serving as an officer or employee of the Company or the
Bank.
The portion of this Stock Award not included in the Risk Pool portion of
the Recipients Annual Allocation shall immediately vest in full upon the
termination of employment due to Disability or death of the Recipient. The
portion of this Stock Award included in the Risk Pool portion of the Recipient's
Annual Allocation will vest, in the event of termination of employment due to
Disability or Death, when and to the extent that the Performance Goals A or B
for such Risk Pool are achieved.
4. Accrual of Dividends. Whenever an installment of this Stock Award is
--------------------
distributed to the Recipient or his or her beneficiary, the Recipient or
beneficiary shall also be entitled to receive, with respect to each share
underlying such Stock Award, a payment equal to any cash dividends and a number
of shares of Common Stock equal to any stock dividends, declared and paid with
respect to a share of the Common Stock between the date the relevant Stock Award
was granted and the date the Stock Awards are being distributed. There shall
also be distributed an appropriate amount of net earnings, if any, of the Trust
with respect to any cash dividends paid out.
5. Voting of Stock Awards. The Recipient is entitled to direct the
----------------------
Trustee as to the voting of the Common Stock which this Stock Award covers but
which has not yet been earned and distributed to the Recipient pursuant hereto,
subject to the rules and procedures adopted by the Committee for this purpose.
All shares of Common Stock which this Stock Award covers as to which the
Recipient has not directed the voting, shall be voted by the Trustee in the same
proportion as all Common Stock in the Trust covered by Stock Awards which have
been awarded and voted.
2
<PAGE>
6. Distribution of Stock Awards. Except as provided below, as soon as
----------------------------
practicable after any portion of this Stock Award has vested, the Plan Trustee
shall deliver to the Recipient (or his beneficiary) a certificate or
certificates representing the number of shares of Common Stock with respect to
which the Stock Award was vested. All shares of the Common Stock vested pursuant
to this Stock Award, together with any shares representing stock dividends,
shall be distributed in the form of Common Stock.
Payments representing accumulated cash dividends (and earnings thereon)
shall be made in cash or Common Stock. All shares of Common Stock that are
distributed upon the vesting of this Stock Award as provided herein shall be
fully paid and nonassessable.
7. Compliance with Federal Securities Laws. Notwithstanding anything
---------------------------------------
herein to the contrary, the Company shall not be obligated to cause to be issued
or delivered any certificate evidencing Common Stock awarded pursuant to the
Plan, unless and until the Company is advised by its counsel that the issuance
and delivery of such certificate(s) are in compliance with all applicable laws,
regulations and governmental authority and requirements of any exchange upon
which the Common Stock is traded. The Company shall in no event be obligated to
register any securities pursuant to the Securities Act of 1933 (as now in effect
or as hereafter amended) or to take any other affirmative action in order to
cause the issuance and delivery of such certificates to comply with any such
law, regulation or requirement.
8. Non-Transferability. Except to the extent, permitted by the Internal
-------------------
Revenue Code of 1986, as amended (the "Code"), the rules promulgated under
Section 16(b) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") or any successor statutes or rules:
(a) The recipient of a Stock Award payable in shares shall not sell,
transfer, assign, pledge or otherwise encumber shares subject to
the Award until full vesting has occurred. For purposes of this
section the separation of beneficial ownership and legal title
through the use of any "swap" transaction is deemed a prohibited
encumbrance.
(b) Stock Awards shall not be transferable other than by will, the
laws of intestate succession or pursuant to a qualified domestic
relations order. The designation of a beneficiary does not
constitute a transfer.
(c) If a recipient of a Stock Award is subject to the provisions of
Section 16 of the Exchange Act, shares of Common Stock subject to
such Award may not, without the written consent of the Committee,
be sold or otherwise disposed of within six months following the
date of grant of the Award.
3
<PAGE>
9. Designation of Beneficiary. The Recipient may designate a person or
--------------------------
persons to receive, in the event of death, any rights that may be available to
the Recipient pursuant to the Plan under this Award Agreement. Such designation
must be made in writing and delivered to the Company and may be revoked by the
Recipient in writing. If the Recipient fails effectively to designate a
beneficiary, then the Recipient's estate will be deemed to be the beneficiary.
The Recipient may designate a beneficiary or beneficiaries in this Award
Agreement or otherwise in writing to the person designated in Paragraph 12
hereof.
10. Rights in Event of Death or Disability. Notwithstanding the general
--------------------------------------
rule set forth in Paragraphs 2 and 3, above, if the Recipient's service or
employment terminates due to death or Disability, all shares subject to this
Stock Award shall be deemed earned as of the Recipient's last day of service or
employment with the Company or a subsidiary or affiliate of the Company.
11. Dilution and Other Adjustments. In the event of any change in the
------------------------------
outstanding shares of Common Stock by reason of any stock dividend or split,
recapitalization, merger, consolidation, spin-off, reorganization, combination,
or exchange of shares or other similar corporate change or other increase of
decrease in such shares without receipt of payment or consideration by the
Company, the Committee shall make such proportionate and equitable adjustments
to the Stock Award to prevent dilution or enlargement of the rights of the
Recipient under this Award Agreement.
12. Notice. Any notice required or permitted under this Award shall be
------
deemed given when delivered in person or when mailed by registered mail with
return receipt requested to the Association addressed to PFF Bancorp, Inc., 350
South Garey Avenue, Pomona, California 91766 ATTN: Chief Executive Officer, and
to the Recipient or beneficiary at the addresses given below or at such address
as the Recipient may subsequently designate in writing to the Company.
13. Modification and Waiver. Neither this Stock Award nor any provision
-----------------------
hereof can be changed, modified, amended, discharged, terminated or waived
orally or by any course of dealing or purported course of dealing, but only by
an agreement in writing signed by the Recipient or his legal representative and
the Company. The waiver of or failure to enforce any breach of this Award
Agreement shall not be deemed to be a waiver or acquiescence in any other breach
thereof. Nothing herein, however, shall be construed to prevent the Board of
Directors at any time, and from time to time, to terminate, modify or amend the
Plan in any respect, prospectively or retroactively; provided however, no such
termination, modification, or amendment may affect the rights of the Recipient
under this Award Agreement without written permission of such Recipient.
14. Governing Law. This Award Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of Delaware, and applicable
federal law.
15. Withholding. There may be deducted from each distribution of Common
-------------
Stock and/or cash under the Plan an amount of cash or stock relating to
withholding tax imposed by any federal or state government in accordance with
Section 18 of the Plan.
4
<PAGE>
16. Rights of Recipient. Nothing in the Plan or this Award Agreement
--------------------
confers on the Recipient any right to continue in the employ of the Company or
its Affiliates or interferes in any way with the right of the Company or its
Affiliates to terminate the Recipient's services or employment at any time.
17. Recipient Acknowledgement. The Recipient hereby acknowledges that all
-------------------------
decisions, determinations and interpretations of the Committee, in respect of
the Plan and this Award Agreement shall be final and conclusive.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed,
and said Recipient has hereunto set his hand, the day and year first above
written.
PFF BANCORP, INC.
-----------------------------------------
President and
Chief Executive Officer
- -------------------------------- -----------------------------------------
Witness Recipient
Date:
--------------------------- -----------------------------------------
Address
-----------------------------------------
5
<PAGE>
I hereby designate as my Beneficiary under the terms of the Plan the
following person(s) in the designated portions:
<TABLE>
<CAPTION>
===============================================================================
Name Percentage Relationship Address
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
- -------------------------------------------------------------------------------
===============================================================================
</TABLE>
Date: _______________ Signed:___________________________________
____________________________
Witness
6
<PAGE>
EXHIBIT 10.9
PFF BANCORP, INC. 1996 INCENTIVE PLAN
STOCK AWARD AND STOCK OPTION AGREEMENT FOR OUTSIDE DIRECTORS
This agreement between PFF Bancorp, Inc. (The "Company") and [ ]
-----------
("Recipient") ("Agreement") shall evidence awards made on October 23, 1996
("Awards"). For purposes of this Agreement, the terms contained herein shall
have the same meanings as those qualified by the terms of the Plan which shall
govern, except where this Agreement represents the discretionary determinations
of the Committee as permitted in the Plan and where this Agreement represents
the interpretation of Plan terms by the Committee as provided in Section 2 of
the Plan.
WHEREAS, a purpose of the Plan is to provide outside directors of the
Company and its affiliates an incentive to achieve the long-term objectives of
the Company by providing such key personnel with a proprietary interest in the
Company and its Affiliates, including Pomona First Federal Bank & Trust (the
"Bank"); and
WHEREAS, the Committee grants the Recipient a Director Award in the form of
an option to purchase shares of Common Stock of the Company ("Option"), which
Option is Non-statutory Stock Option, such grant being made under the terms of
the Plan; and
WHEREAS, the Committee grants the Recipient a Stock Award in the form of
shares of common stock of the Company, such grant being made under the terms of
the Plan ("Stock Award").
THEREFORE, to evidence the grant of the Stock Award and the Option, the
Company and the Recipient hereby agree as follows:
1. Grant of Awards. This Agreement hereby evidences and confirms the
---------------
grant to the Recipient on _______________ ("Date of Grant") of (i) a Stock Award
of _________ shares of Common Stock and (ii) a Non-statutory Stock Option with
related Equitable Adjustment Rights to purchase 76,516 shares of Common Stock at
an exercise price of $______ per share (the "Exercise Price"), which was the
Fair Market Value of the underlying shares of Common Stock on the Date of Grant.
2. Stock Award.
-----------
(a) Term of Stock Award. The term of the Stock Award shall be for
-------------------
such period until the entire Stock Award evidenced hereby has been vested (as
provided in Paragraph 2. (b) hereof) and distributed or forfeited.
(b) Vesting of Stock Award. Except as provided in Paragraphs 5 and
----------------------
6 herein, Shares underlying the Stock Award and any dividends paid thereon shall
vest in installments at the rate of twenty percent (20%) of the aggregate number
of shares stated in Paragraph 1 (i) commencing
<PAGE>
on _____________________ and at the rate of twenty percent (20%) of such amount
on each ____________________ thereafter. Fractional shares shall be aggregated
and shall vest in the last installment on the last __________________ on which
the Stock Award vests. The Stock Award may be earned by the Recipient only while
serving as director, advisory director or consultant of or to the Company or the
Bank. In the event the Recipient's service is terminated prior to the time all
shares subject to the Stock Award have vested, any shares which have not yet
vested as of the last day of service shall be forfeited.
(c) Accrual of Dividends. Whenever an installment of this Stock
--------------------
Award is distributed to the Recipient or his or her beneficiary, the Recipient
or beneficiary shall also be entitled to receive, with respect to each share
underlying such Stock Award, a payment equal to any cash dividends and a number
of shares of Common Stock equal to any stock dividends, declared and paid with
respect to a share of the Common Stock between the date the relevant Stock Award
was granted and the date the Stock Awards are being distributed. There shall
also be distributed an appropriate amount of net earnings, if any, of the Trust
with respect to any cash dividends paid out.
(d) Voting of Stock Awards. The Recipient is entitled to direct the
----------------------
Trustee as to the voting of the Common Stock which this Stock Award covers but
which has not yet been earned and distributed to the Recipient pursuant hereto,
subject to the rules and procedures adopted by the Committee for this purpose.
All shares of Common Stock which this Stock Award covers as to which the
Recipient has not directed the voting, shall be voted by the Trustee in the same
proportion as all Common Stock in the Trust covered by Stock Awards which have
been awarded and voted.
(d) Distribution of Stock Awards. Except as provided below, as soon
----------------------------
as practicable after any portion of this Stock Award has vested, the Plan
Trustee shall deliver to the Recipient (or his beneficiary or personal
representative) a certificate or certificates in the name of the Recipient or
his beneficiary representing the number of shares of Common Stock with respect
to which the Stock Award was vested. All shares of Common Stock vested pursuant
to this Stock Award, together with any shares representing stock dividends,
shall be distributed in the form of Common Stock. Payments representing
accumulated cash dividends (and earnings thereon) shall be made in cash or
Common Stock at the discretion of the Committee. All shares of Common Stock that
are distributed upon the vesting of this Stock Award as provided herein shall be
fully paid and nonassessable.
3. Option Award.
------------
(a) Term of Option. The term of the Option shall not exceed a
--------------
period of 10 years, beginning on ______________, and ending on _______________.
2
<PAGE>
(b) Vesting of Option. Except as provided in Paragraph 5 and 6
-----------------
herein, the Option shall vest and become exercisable on a cumulative basis in
equal installments at a rate of twenty percent (20%) per year commencing on
___________________ and twenty percent (20%) on each ____________________
thereafter. Underlying fractional shares shall be aggregated and shall vest in
the last installment of the Option, on the last __________________ on which the
Award vests. Except in the case of death or Disability, the Option may be earned
by the Recipient only while serving as a director, advisory director or
consultant of or to the Company or the Bank. In the event the Recipient's
service is terminated other than due to death, or Disability prior to the time
all installments of the Option have vested, any installment of the Option which
has not yet vested as of the last day of service shall be forfeited.
(c) Manner of Exercise of the Option.
--------------------------------
(1) Notice. The Option or any portion thereof may be exercised
------
by written notice pursuant to Paragraph 11 hereof delivered to the Company
signed by the Recipient or the person or persons eligible to exercise Options
under the terms of this Agreement and the Plan. Such notice shall state the
number of shares of Common Stock with respect to which the representations as
the Committee administering the Plan may from time to time deem necessary or
desirable in order to ensure compliance with applicable laws, regulations of
governmental authority and requirements of any stock market or exchange upon
which the Common Stock is traded. Such notice shall be accompanied by payment of
the full Exercise Price. In the event Options are exercised by any person other
than by the Recipient pursuant to Paragraphs 3 (c) (2) (4) and 9 hereof or the
terms of the Plan, the notice of exercise of Options shall be accompanied by
proof satisfactory to the Committee administering the Plan of the right of such
person to exercise the Option. As soon as practicable after such notice and
payment shall have been received, the Company shall cause to be issued and
delivered a certificate or certificates representing the number of shares of
Common Stock with respect to which the Option or portion thereto was exercised
in the name of the person or persons entitled to exercise the Option.
(2) Consideration. Payment of the Exercise Price shall be made
-------------
in cash or by certified check, or, in whole or in part, through the tender of
shares of Common Stock which will be valued at their Fair Market Value on the
date prior to the date of exercise of the Option or portion thereof. All shares
of Common Stock that shall be purchased upon the exercise of the Option as
provided herein shall be fully paid and nonassessable.
The exercise price, upon the election of the Recipient, may be paid by such
Recipient's broker-dealer if such broker-dealer is to be repaid with the
proceeds of the sale of a portion of the shares of Common Stock underlying the
exercised options as permitted under Section 16(b) of the Exchange Act
("Cashless Exercise").
3
<PAGE>
(3) No Stockholder Rights Before Exercise. The Recipient shall
-------------------------------------
not be entitled to any rights as a stockholder with respect to such shares of
Common Stock being acquired pursuant to the exercise of Options unless and until
certificates evidencing such Common Stock are issued. No adjustments shall be
made for dividends or distributions or other rights for which the record date is
prior to the date such certificates are issued except pursuant to the related
Equitable Adjustment Right as provided in Paragraph 4 hereof and Section 11 of
the Plan or as otherwise provided in Paragraph 10 hereof.
(4) Exercise Period. Subject to the condition that the Option
---------------
shall not be exercisable for more than ten years from the date of grant, the
Recipient may exercise the Option only while in the continuous service of the
Company or its Affiliates (unless the Recipient is removed for Cause or service
is terminated on account of Disability or death). The grant of the Option shall
impose no obligation upon the Recipient to exercise all or any portion of the
Option. If the Recipient's service is terminated by reason of Disability or
death, the Recipient or his or her beneficiary or personal representative shall
have the right to exercise the Option for all of the shares covered by the
Option for a period of one year from the last day on which the Recipient ceases
to serve the Company or its Affiliates.
4. Equitable Adjustment Right.
--------------------------
In connection with each Non-statutory Stock Option granted herein, an
Equitable Adjustment Right has been granted in Paragraph 1 hereof with respect
to all of the shares covered by such Option. Equitable Adjustment Rights are
subject to the following terms and conditions:
(a) Extraordinary Dividend. Pursuant to Section 10(c) of the Plan,
----------------------
an extraordinary dividend is any dividend paid on shares of Common Stock where
the rate of the dividend exceeds the Bank's weighted average cost of funds on
interest-bearing liabilities for the current and preceding three quarters.
(b) Payment. Upon the payment of an extraordinary dividend, the
-------
Committee may adjust the number of shares and/or Exercise Price of the related
Options underlying the Equitable Adjustment Right, as the Committee deems
appropriate.
5. Vesting in the Event of Death or Disability. Notwithstanding the
------------------------------------------
general rule set forth in paragraphs 2 and 3, above, if the Recipient's service
terminates due to death or Disability, all Awards subject to this Agreement
shall be deemed vested as of the Recipient's last day of service with the
Company or an Affiliate.
6. Rights to Exercise Options in Event of Removal For Cause. If the
--------------------------------------------------------
Recipient is removed for Cause, all rights under this Agreement shall expire
upon the date of removal. Any unexercised or undistributed Awards shall be
forfeited.
4
<PAGE>
7. Compliance with Federal Securities Laws. Notwithstanding anything
---------------------------------------
herein to the contrary, the Company shall not be obligated to cause to be issued
or delivered any certificate evidencing Common Stock awarded pursuant to the
Plan or purchased pursuant to the exercise of the Option, unless and until the
Company is advised by its counsel that the issuance and delivery of such
certificate(s) are in compliance with all applicable laws, regulations and
governmental authority and requirements of any exchange upon which the Common
Stock is traded.
The Company shall in no event be obligated to register any securities pursuant
to the Securities Act of 1933 (as now in effect or as hereafter amended) or to
take any other affirmative action in order to cause the issuance and delivery of
such certificates to comply with any such law, regulation or requirement.
Also under current law, the grant of the option and sale of the underlying
shares may be deemed to be a purchase and sale, respectively, under Section 16
of the Securities Exchange Act of 1934, as amended, ("Exchange Act") and
therefore may incur short swing profit recovery under this Act and the
regulations promulgated thereunder. To avoid liability under Section 16 of the
Exchange Act, the Recipient should consult with the Company or his or her own
counsel.
8. Non-Transferability. Except as permitted under the rules promulgated
-------------------
pursuant to Section 16(b) of the Exchange Act or any successor statutes or
rules, no Award under this Agreement shall be transferable by the Recipient
other than by will or the laws of intestate succession or pursuant to a
qualified domestic relations order or unless determined otherwise by the
Committee.
If the Recipient is subject to the provisions of Section 16 of the Exchange
Act, shares of Common Stock subject to this Stock Award may not, without written
consent to the Committee, be sold or otherwise disposed of within six months
following the date of grant of the Award.
9. Designation of Beneficiary. The Recipient may designate a person or
--------------------------
persons to receive, in the event of death, any rights that may be available to
the Recipient pursuant to the Plan under this Award Agreement. Such designation
must be made in writing and delivered to the Company and may be revoked by the
Recipient in writing. If the Recipient fails effectively to designate a
beneficiary, then the Recipient's estate will be deemed to be the beneficiary.
The Recipient may designate a beneficiary or beneficiaries in this Agreement or
otherwise in writing to the person designated in Paragraph 11 hereof.
10. Dilution and Other Adjustments. In the event of any change in the
------------------------------
outstanding shares of Common Stock by reason of any stock dividend or split,
recapitalization, merger, consolidation, spin-off, reorganization, combination,
or exchange of shares or other similar corporate change, or other increase or
decrease in such shares without receipt or payment or consideration by the
Company, the Committee shall make such proportionate and equitable adjustments
to the Stock Award and Option and to the exercise price per share covered by the
Option pursuant to Section 17 of the Plan to prevent dilution or enlargement of
the rights of the Recipient under this Agreement.
5
<PAGE>
11. Notice. Any notice required or permitted under this Award shall be
------
deemed given when delivered in person or when mailed by registered mail with
return receipt requested to the Company addressed to PFF Bancorp, Inc., 350
South Garey Avenue, Pomona, California 91766, ATTN: Chief Executive Officer, and
to the Recipient or beneficiary at the addresses given below or at such address
as the Recipient may subsequently designate in writing to the Company.
12. Modification and Waiver. Neither this Award nor any provision hereof
-----------------------
can be changed, modified, amended, discharged, terminated or waived orally or by
any course of dealing or purported course of dealing, but only by an agreement
in writing signed by the Recipient or his legal representative and the Company.
The waiver of or failure to enforce any breach of this Award Agreement shall not
be deemed to be a waiver or acquiescence in any other breach thereof. Nothing
herein, however, shall be construed to prevent the Board of Directors at any
time, and from time to time, to terminate, modify or amend the Plan in any
respect, prospectively or retroactively; provided however, no such termination,
modification or amendment may affect the rights of the Recipient under this
Award without the written permission of such Recipient.
13. Governing Law. This Award shall be governed by and construed in
-------------
accordance with the laws of the State of Delaware and applicable federal law.
14. Withholding. There may be deducted from each distribution of cash
-----------
and/or stock under the Plan an amount of cash or stock relating to withholding
tax imposed by any federal or state government in accordance with Section 18 of
the Plan.
15. Rights of the Recipient. Nothing in the Plan or this Award Agreement
-----------------------
confers any rights to continue in the service of the Company or its Affiliates
or interferes in any way with the right of the Company or its Affiliates to
terminate the Recipient's services at any time.
16. Recipient Acknowledgment. The Recipient hereby acknowledges that all
------------------------
decisions, determinations and interpretations of the Board of Directors of the
Committee in respect of the Plan and this Award shall be final and conclusive.
The Recipient further acknowledges that he has read this Agreement and in
signing this Agreement and accepting the grant of Awards evidenced hereby, the
Recipient agrees to abide by its terms and conditions.
6
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Award Agreement to be
executed, and said Recipient has hereunto set his hand, the day and year first
above written.
PFF BANCORP, INC.
-------------------------------------
President and
Chief Executive Officer
- --------------------------- -------------------------------------
Witness Recipient
7
<PAGE>
I hereby designate as my Beneficiary under the terms of the Plan the
following person(s) in the designated portions:
================================================================================
Name O=Option Percentage Relationship Address
S=Stock Award
================================================================================
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Contingent
Beneficiary/1/
================================================================================
/1/ In the event one or more of the primary beneficiaries predeceases the
Recipient
Date: _______________________ Signed: _________________________________
_____________________________
Witness
8
<PAGE>
EXHIBIT 10.10
THE POMONA FIRST FEDERAL BANK & TRUST
RESTATED SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C>
ARTICLE I..................................................... 2
Purpose of the Plan....................................... 2
ARTICLE II.................................................... 2
Definitions............................................... 2
2.1 Bank............................................. 2
----
2.2 Board............................................ 2
-----
2.3 Code............................................. 2
----
2.4 Defined Benefit Plan............................. 2
--------------------
2.5 Eligible Employee................................ 2
-----------------
2.6 Employee......................................... 2
--------
2.7 ERISA............................................ 2
-----
2.8 ESOP............................................. 2
----
2.9 Former Participant............................... 3
------------------
2.10 Matching Contribution........................... 3
---------------------
2.11 Nonqualified Plan............................... 3
-----------------
2.12 Participant..................................... 3
-----------
2.13 Period of Participation......................... 3
-----------------------
2.14 Retirement Benefit.............................. 3
------------------
2.15 Savings Plan.................................... 3
------------
2.16 SERP............................................ 3
----
2.17 Supplemental ESOP Benefit....................... 3
-------------------------
2.18 Supplemental Savings Plan Benefit............... 3
---------------------------------
2.19 Termination of Service.......................... 3
----------------------
ARTICLE III................................................... 4
Participation............................................. 4
3.1 Eligibility for Participation.................... 4
-----------------------------
3.2 Supplemental Savings Plan Benefit Account........ 4
-----------------------------------------
3.3 Commencement of Participation.................... 5
-----------------------------
3.4 Termination of Participation..................... 5
----------------------------
ARTICLE IV.................................................... 5
Benefits to Participants.................................. 5
4.1 Supplemental Benefits............................. 5
--------------------
4.2 Benefits Under Previous Benefit Formulas......... 6
----------------------------------------
4.3 Payment to Missing Person........................ 6
-------------------------
4.4 Release from Liability........................... 7
----------------------
</TABLE>
i
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C>
ARTICLE V................................................... 7
- ---------
Administration.......................................... 7
5.1 Duties of the Board....................... 7
-------------------
5.2 Liabilities of the Board.................. 7
------------------------
5.3 Expenses.................................. 7
--------
5.4 Unfunded Character of Plan................ 8
--------------------------
ARTICLE VI.................................................. 8
- ----------
Amendment and Termination............................... 8
6.1 Amendment and Termination................. 8
-------------------------
6.2 Vesting and Payment Upon Termination...... 8
------------------------------------
6.3 Preservation of Benefits on Amendment..... 8
-------------------------------------
ARTICLE VII................................................. 9
- -----------
Miscellaneous Provisions................................ 9
7.1 Governing Law............................. 9
-------------
7.2 No Right to Continued Employment.......... 9
--------------------------------
7.3 Construction of Language.................. 9
------------------------
7.4 Non-alienation of Benefits................ 9
--------------------------
7.5 Operation as Unfunded Nonqualified Plan... 9
---------------------------------------
7.6 Reliance Upon Information................. 10
-------------------------
7.7 Effective Date............................ 10
--------------
</TABLE>
ii
<PAGE>
THE POMONA FIRST FEDERAL BANK & TRUST
RESTATED SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
WHEREAS, the employees of the Pomona First Federal Bank & Trust ("Bank")
are provided with benefits under the Pomona First Federal Bank & Trust
Employees' Pension Plan ("Defined Benefit Plan"), the Pomona First Federal Bank
& Trust Capital Accumulation Plan ("Savings Plan") and the Pomona First Federal
Bank & Trust Employee Stock Ownership Plan ("ESOP"); and
WHEREAS, the Internal Revenue Code of 1986, as amended ("Code") imposes
limitations on the level of retirement income which may be provided to
Participants under the Defined Benefit Plan, the level of savings which may be
contributed by Participants to the Savings Plan, the amount of contributions
that may be made to the ESOP by the Bank on the behalf of Participants, and
limits the amount of compensation which may be considered in determining
benefits under all of these plans; and
WHEREAS, the Board of Directors of the Bank desires to restate the plan to
provide certain employees with benefits to replace benefits to which they would
be entitled but for the application of the limitations imposed by the Code;
THEREFORE, by resolution of the Board of Directors, the Supplemental
Executive Retirement Plan has been restated.
1
<PAGE>
ARTICLE I
Purpose of the Plan
-------------------
The purpose of the Pomona First Federal Bank & Trust Supplemental Executive
Retirement Plan ("SERP") is to provide designated executives of the Bank with
deferred benefits to which they would otherwise be entitled under the terms of
the Defined Benefit Plan, the Savings Plan and the ESOP, but for limitations on
benefits and includible compensation imposed by the Code. The benefits will be
paid out of the Bank's general assets exclusively.
ARTICLE II
Definitions
-----------
Wherever appropriate to the purposes of the SERP, capitalized terms shall
have the meanings assigned to them under the Defined Benefit Plan, the Savings
Plan and the ESOP. Notwithstanding the preceding, the following definitions
shall apply for the purposes of this SERP unless a different meaning is clearly
indicated by the context.
2.1 Bank means Pomona First Federal Bank & Trust having its principal
----
office as 350 South Garey Avenue, Pomona California 91766 and its
successors or assigns.
2.2 Board means the Board of Directors of the Bank.
-----
2.3 Code means the Internal Revenue Code of 1986, as amended from time to
----
time (including the corresponding provisions of any succeeding law).
2.4 Defined Benefit Plan means the Pomona First Federal Bank & Trust
--------------------
Employees' Pension Plan, as may be amended from time to time (including the
corresponding provisions of any successor qualified defined benefit plan
adopted by the Bank).
2.5 Eligible Employee means an Employee who is eligible for participation
-----------------
in the SERP in accordance with the provisions of Article III.
2.6 Employee means any person, including an officer, who is employed by the
--------
Bank.
2.7 ERISA means the Employee Retirement Income Security Act of 1974, as
-----
amended from time to time (including the corresponding provisions of any
succeeding law).
2.8 ESOP means the Pomona First Federal Bank & Trust Employee Stock
----
Ownership Plan.
2
<PAGE>
2.9 Former Participant means a person whose participation in the SERP has
------------------
terminated as provided under Section 3.4.
2.10 Matching Contribution means an amount equal to the product of (i) the
---------------------
amount such Participant is contributing to the SERP under Section 3.2
subject to any limitation on Employer Matching Contributions under the
Savings Plan and (ii) the percentage of the Employer Match being made under
the Savings Plan during the same period.
2.11 Nonqualified Plan means a plan of deferred compensation which does not
-----------------
meet the requirements of Section 401(a) of the Code.
2.12 Participant means any person who is participating in the SERP in
-----------
accordance with its terms.
2.13 Period of Participation means the period during which a person is a
-----------------------
Participant.
2.14 Retirement Benefit means the benefit payable to a Participant pursuant
------------------
to the terms of the Defined Benefit Plan.
2.15 Savings Plan means the Pomona First Federal Bank & Trust Capital
------------
Accumulation Plan, as may be amended from time to time (including the
corresponding provisions of any successor qualified savings plan adopted by
the Bank).
2.16 SERP means this Pomona First Federal Bank & Trust Restated
----
Supplemental Executive Retirement Plan as amended from time to time.
2.17 Supplemental ESOP Benefit means the benefit provided by this SERP
-------------------------
based on limitations, imposed by Sections 401(a)(17) and/or 415 of the
Code, on the benefits of a Participant under the ESOP. Such benefit equals
the positive difference between the number of shares allocated to a
Participant under the ESOP and the number which would have been allocated
under the ESOP at that time except for the operation of the limitations of
the Code.
2.18 Supplemental Savings Plan Benefit means the benefit provided by this
---------------------------------
SERP based on limitations, imposed by the Code, on the level of savings
which may be contributed by Participants under the Savings Plan. In
particular, the Supplemental Savings Plan Benefit shall be a benefit equal
to the amount contributed to the Bank by the Participants and the Bank, and
earnings thereon, both in accordance with Section 3.2 of this SERP.
2.19 Termination of Service means an Employee's separation from the service
----------------------
of the Bank, whether by resignation, discharge, death, disability,
retirement or otherwise.
3
<PAGE>
ARTICLE III
-----------
Participation
-------------
3.1 Eligibility for Participation.
-----------------------------
Only Eligible Employees may be or may become Participants.
(a) An Employee shall become an Eligible Employee for Supplemental
Savings Plan Benefits if:
(1) The Board, in its sole discretion, designates him as an Eligible
Employee; and
(2) He is a Member of the Savings Plan and his benefits thereunder
would be limited by Sections 401 (m), 401 (a)(17) and/or 415 of the
Code if maximum contributions were desired; and
(3) He elects to participate in the Savings Plan; and
(4) He deposits with the Bank, for credit to his Supplemental Savings
Plan Benefit Account, the amount defined in Section 3.2.
(b) An Employee shall become an Eligible Employee for Supplemental ESOP
Benefits if:
(1) The Board, in its sole discretion, designates him as an Eligible
Employee; and
(2) He is a Participant in the ESOP and his benefits thereunder are
limited by the application of Sections 401(a)(17) and/or 415 of the
Code.
3.2 Supplemental Savings Plan Benefit Account
-----------------------------------------
The Bank will accept deferrals of compensation from each Participant who is
an Eligible Employee pursuant to Section 3.1 (a) and who elects to participate
in the SERP. Each such Eligible Employee may make annual deferrals of
compensation in an amount equal to the difference between (i) the maximum amount
the Participant would be permitted to contribute to the Savings Plan for the
given year but for the limitations of Sections 401 (m), 401(a)(17), 415, or any
other Section of the Code and (ii) deferrals actually made to the Savings Plan.
Amounts returned from the Savings Plan because of any discrimination testing or
other limitations on contributions will be deferred into this SERP without
further action on the Participant being required, to the extent such deferral is
permitted under applicable law. If such deferral is not permitted, Participant's
election will run to other Compensation in an amount equal to such returned
monies. The Bank will establish a memorandum account, maintained as a
Supplemental Savings Plan Benefit Account for such Participant on the
4
<PAGE>
Bank's books, which will be credited with the amount of such contributions. The
Supplemental Savings Plan Benefit Accounts are not insured by the Federal
Deposit Insurance Corporation and shall be considered an asset of the Bank
subject to the claims of general creditors.
Amounts credited to a Participant's Supplemental Savings Plan Benefit
Account shall be credited with interest at a rate equal to the combined weighted
return provided to the Participant's Account under the Savings Plan. Such
interest shall be credited monthly. The Bank will credit the Participant's
Supplemental Savings Plan Benefits Account with the Matching Contribution when
otherwise due under the Savings Plan.
3.3 Commencement of Participation.
-----------------------------
An Eligible Employee shall become a Participant on the date determined by
the Board. However, in no event will an Employee become a Participant prior to
January 1, 1996.
3.4 Termination of Participation.
----------------------------
Participation in the Plan shall cease on the: (a) date of the
Participant's Termination of Service; or (b) date on which he ceases to be an
Eligible Employee.
ARTICLE IV
----------
Benefits to Participants
------------------------
4.1 Supplemental Benefits.
---------------------
(a) A Participant who satisfies Section 3.l(a) shall be entitled to an
unfunded, unsecured promise from the Bank of Supplemental Savings Plan
Benefits.
(b) A Participant who satisfies Section 3.l(b) of the SERP shall be
entitled to an unfunded, unsecured promise from the Bank of Supplemental
ESOP Benefits.
(c) The Supplemental Savings Plan Benefit provided for in Section 3.1(a)
shall be paid commencing upon Termination of Service to the Participant
or his designated beneficiary in the manner and for the period as the
Participant shall have elected with respect to his benefit under the
Savings Plan.
(d) Participants shall be vested in the benefits payable under Section
3.1(a), in the same percentage that they are vested in benefits payable
under the Savings Plan.
(e) A Participant shall be vested in benefits payable under Section
3.1(b) of this SERP in the same percentage that such Participant has a
vested interest in his account under the ESOP.
5
<PAGE>
(f) The Supplemental ESOP Benefit provided for in Section 3.1 (b) shall
be paid commencing upon Termination of Service to the Participant or his
designated beneficiary in the manner and for the period as the Participant
shall have elected with respect to his benefit under the ESOP.
4.2 Benefits Under Previous Benefit Formulas
----------------------------------------
(a) A Participant shall be vested in the actuarial present value of
benefits accrued by him under this SERP under the previous defined benefit
formula as of January 1, 1996. Such benefit ("DB Benefit") shall be
calculated by an enrolled actuary and each Participant shall be notified of
the value of such benefit as soon as administratively feasible after
January 1, 1996.
(b) An amount equal to the DB Benefit (and subsequent earnings thereon)
shall be credited with interest for each calendar year. The amount of
interest shall be determined according to one of two methods as elected by
the Participant in writing and in a form and at a time acceptable to the
Board. The methods which may be chosen are either interest as determined:
(i) using a percentage rate and method of calculation which is the
same as the maximum yield which is paid by the Bank to its
general deposit base with respect to any account offered by the
Bank as of the beginning of each calendar quarter and adjusted
quarterly thereafter, or
(ii) using a percentage rate which is the same as the percentage
increase or decrease in the closing price of a share of Common
Stock of PFF Bancorp, Inc. as such closing price is reported in
the Wall Street Journal, from the first day to the last day of
the period for which interest is being credited.
(c) Benefits under this sub-section 4.2 shall be paid in the manner and
at the same time as the benefits provided for in section 4. l(c) regarding
the Supplemental Savings Plan Benefit.
4.3 Payment to Missing Person.
-------------------------
If the Bank is unable to effect delivery of any amount payable hereunder to
the person entitled thereto, or upon his death, to his personal representative,
it shall so advise the Board and the Board shall give written notice to such
person at his last known address as shown in such Participant's record of
employment. If such person or his personal representative does not present
himself to the Board after three years from the date of mailing such notice,
then the Board shall direct such amount, including any amount thereafter
becoming due to such person or his personal representative to be distributed in
the manner provided herein with respect to the death of a Participant. If there
is no valid designation of Beneficiary on file;
6
<PAGE>
or, if there can be no distribution under the foregoing provision, the same
shall be treated as a forfeiture in accordance with the provisions hereof.
4.4 Release from Liability.
----------------------
Payment to any Participant, legal representative or Beneficiary, in
accordance with the provisions of this Plan, is deemed to be in full
satisfaction of all claims by the Participant, representative or Beneficiary
against this SERP, the Board, and the Bank. The Board may require such
Participant, legal representative, or Beneficiary as a condition precedent to
payment to execute a receipt and release in such form as shall be determined by
the Board.
ARTICLE V
---------
Administration
--------------
5.1 Duties of the Board.
-------------------
The Board shall have full responsibility for the management, operation,
interpretation and administration of the Plan in accordance with its terms, and
shall have such authority as is necessary or appropriate in carrying out its
responsibilities. Actions taken by the Board pursuant to this Section 5.1 shall
be conclusive and binding upon the Bank, Participants, Former Participants,
Beneficiaries, and other interested parties. The Board may delegate any duties
to persons of its choosing.
5.2 Liabilities of the Board.
------------------------
Neither the Board nor its individual members shall be deemed to be a
fiduciary with respect to this Plan; nor shall any of the foregoing individuals
or entities be liable to any Participants, Former Participants or Beneficiaries
in connection with the management, operation, interpretation or administration
of the Plan, any such liability being solely that of the Bank.
5.3 Expenses.
--------
Any expenses incurred in the management, operation, interpretation or
administration of the Plan shall be paid by the Bank. In no event shall the
benefits otherwise payable under this Plan be reduced to offset the expenses
incurred in managing, operating, interpreting or administering the Plan.
7
<PAGE>
5.4 Unfunded Character of Plan.
--------------------------
The SERP shall be unfunded. Neither the Bank nor the Board nor its
individual members shall segregate or otherwise identify specific assets to be
applied to the purposes of the Plan, nor shall any of them be deemed to be a
trustee of any amounts to be paid under the Plan. Any liability of the Bank to
any person with respect to benefits payable under the Plan shall be based solely
upon such contractual obligations, if any, as shall be created by the Plan, and
shall give rise only to a claim against the general assets of the Bank. No such
liability shall be deemed to be secured by any pledge or any other encumbrance
on any specific property of the Bank.
ARTICLE VI
----------
Amendment and Termination
-------------------------
6.1 Amendment and Termination.
-------------------------
Subject to the provisions of Sections 6.2 and 6.3, the Board shall have
the right to amend or terminate the Plan, in whole or in part.
6.2 Vesting and Payment Upon Termination.
------------------------------------
(a) In the event of the termination or partial termination of this
SERP, the rights of all affected parties, if any, to any benefits
accrued to the date of such termination or partial termination, shall
become nonforfeitable.
(b) In the event of the termination of this SERP all benefit shall be
immediately payable to the Participant by the Bank in whatever form the
SERP otherwise provides, or in the discretion of the Board may be paid
in a lump sum payment of the present value as determined in accordance
with the assumptions and methodology of Section 7520 of the Code.
6.3 Preservation of Benefits on Amendment.
-------------------------------------
No amendment of this SERP shall reduce the vested and accrued benefits, if
any, of a Participant under this SERP.
8
<PAGE>
ARTICLE VII
-----------
Miscellaneous Provisions
------------------------
7.1 Governing Law.
-------------
The SERP shall be construed, administered, and enforced according to laws
of the State of California, except to the extent that such laws are pre-empted
by the federal laws of the United States of America.
7.2 No Right to Continued Employment.
--------------------------------
Neither the establishment of the SERP nor any provisions of the SERP, nor
any action of the Board shall be held or construed to confer upon any Employee
the right to a continuation of employment by the Bank. Subject to any employment
contract or Change in Control Agreement, the Bank reserves the right to dismiss
any Employee or otherwise deal with any Employee to the same extent as though
the SERP had not been adopted.
7.3 Construction of Language.
------------------------
Wherever appropriate in the SERP, words used in the singular may be read in
the plural, words in the plural may be read in the singular, and words importing
the masculine gender shall be deemed equally to refer to the feminine and the
neuter. Any reference to any Article or Section shall be to an Article or
Section of this SERP, unless otherwise indicated.
7.4 Non-alienation of Benefits.
--------------------------
The right to receive a benefit under the SERP shall not be subject in any
manner to anticipation, alienation, or assignment, nor shall such right be
liable for or subject to debts, contracts, liabilities. Should any Participants,
Former Participants, Beneficiaries or other person attempt to anticipate,
alienate or assign his interest in or right to a benefit, or should any person
claiming against him seem to subject such interest or right to legal or
equitable process, all the interest or right of such Participants or Former
Participants, Beneficiaries or other person entitled to benefits under the SERP
shall cease, and in that event, such interest or right shall be held or applied,
at the direction of the Board, for or to the benefit of such Participants,
Former Participants, Beneficiaries or other person or his spouse, children or
other dependents in such manner and in such proportions as the Board may deem
proper.
7.5 Operation as Unfunded Nonqualified Plan.
---------------------------------------
The SERP is intended to be an unfunded, nonqualified plan maintained
primarily for the purpose of providing deferred compensation for a select group
of management or highly compensated employees. The SERP is not intended to
comply with the requirements of Section 401(a) of the Code. The SERP shall be
administered and construed so as to effectuate this intent.
9
<PAGE>
7.6 Reliance Upon Information
-------------------------
The Board shall not be liable for any decision or action taken in good
faith in connection with the administration of the SERP. Without limiting the
generality of the foregoing, any such decision or action taken by the Board in
reliance upon any information supplied to them by an officer of the Bank, the
Bank's legal counsel, or the Bank's independent accountants in connection with
the administration of the SERP shall be deemed to have been taken in good faith.
7.7 Effective Date
--------------
The SERP shall become effective January 1, 1996.
10
<PAGE>
Executed at Pomona, California on the 15th day of July, 1996.
POMONA FIRST FEDERAL BANK & TRUST
By /s/ Larry M. Rinehart
--------------------------------------
Title President/CEO
-----------------------------------
11
<PAGE>
EXHIBIT 10.11
POMONA FIRST FEDERAL BANK & TRUST
DIRECTOR'S DEFERRED COMPENSATION PLAN
<PAGE>
POMONA FIRST FEDERAL BANK & TRUST
DIRECTOR'S DEFERRED COMPENSATION PLAN
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C> <C>
ARTICLE I - DEFINITIONS.................................................. 1
1.01 Title........................................................ 1
1.02 Bank......................................................... 1
1.03 Board of Directors........................................... 1
1.04 Administrative Committee..................................... 1
1.05 Director..................................................... 1
1.06 Participant.................................................. 2
1.07 Beneficiary.................................................. 2
1.08 Effective Date............................................... 2
1.09 Anniversary Date............................................. 2
1.10 Plan Year.................................................... 2
1.11 Account...................................................... 2
1.12 Compensation................................................. 2
1.13 Normal Retirement Date....................................... 3
1.14 Early Retirement Date........................................ 3
1.15 Net Income................................................... 3
ARTICLE II - DEFERRAL OF COMPENSATION..................................... 4
3.01 Amount of Deferral........................................... 4
3.02 Filing of Application........................................ 4
3.03 Designation of Beneficiary................................... 4
3.04 Administration of Deferrals.................................. 5
ARTICLE III- ACCRUAL OF BENEFITS.......................................... 5
4.01 Earnings on Deferrals........................................ 5
4.02 Vesting...................................................... 5
ARTICLE IV - DISTRIBUTION OF DEFERRALS.................................... 5
5.01 Payment upon Retirement...................................... 5
5.02 Payment upon Termination as a Director....................... 6
5.03 Payment upon Death........................................... 6
5.04 Optional Methods of Payment.................................. 6
5.05 Deferred Election............................................ 7
5.06 Disabled Participant......................................... 7
5.07 Amount Distributable......................................... 8
5.08 Small Benefit................................................ 8
5.09 Financial Hardship Exception................................. 8
</TABLE>
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
ARTICLE V - THE ADMINISTRATIVE COMMITTEE................................ 8
6.01 Administrative Committee.................................... 8
6.02 Rights and Duties........................................... 9
6.03 Information................................................. 11
6.04 Compensation, Indemnity, and Liability...................... 11
ARTICLE VI - AMENDMENT AND DISCONTINUANCE
7.01 Amendments.................................................. 12
7.02 Discontinuance of Plan...................................... 12
ARTICLE VII - MISCELLANEOUS
8.01 No Interest in Assets....................................... 12
8.02 Limitation on Rights of Directors........................... 13
8.03 Restriction Against Assignment.............................. 13
8.04 Receipt or Release.......................................... 13
8.05 Payment on Behalf of Minor.................................. 13
8.06 Forfeiture.................................................. 14
8.07 Withholding................................................. 14
8.08 California Law Governs...................................... 14
8.09 Interpretation.............................................. 14
8.10 Instrument in Counterparts.................................. 14
8.11 Successors and Assigns...................................... 15
</TABLE>
<PAGE>
POMONA FIRST FEDERAL BANK & TRUST
DIRECTOR'S DEFERRED COMPENSATION PLAN
THIS AGREEMENT evidences the terms of a Deferred Compensation Plan for
Directors of Pomona First Federal Bank & Trust and is a restatement of the
preexisting plan for Directors entitled the Pomona First Federal Savings and
Loan Association Director's Deferred Compensation Plan.
WITNESSETH:
-----------
ARTICLE I - DEFINITIONS
1.01 TITLE
This Plan shall be known as "The Pomona First Federal Bank & Trust
Director's Deferred Compensation Plan," as now adopted or hereafter amended.
1.02 BANK
"Bank" shall mean Pomona First Federal Bank & Trust.
1.03 BOARD OF DIRECTORS
"Board of Directors" means the Board of Directors of Pomona First Federal
Bank & Trust.
1.04 ADMINISTRATIVE COMMITTEE
The "Administrative Committee" shall mean the committee of at least three
persons appointed by the Board of Directors to perform the duties detailed in
Article VI.
1.05 DIRECTOR
"Director" shall mean, with respect to any Plan Year, all members of the
Board of Directors.
1
<PAGE>
1.06 PARTICIPANT
"Participant" shall mean any Director who actually participated in this
Plan in any Plan Year and who is entitled to a benefit hereunder.
1.07 BENEFICIARY
"Beneficiary" or "Beneficiaries" shall mean the person or persons
(including, without limitation, any trustee) last designated by a Participant to
receive the benefits specified hereunder, in the event of the Participant's
death, or if there is no designated Beneficiary or surviving Beneficiary, the
Participant's estate.
1.08 EFFECTIVE DATE
"Effective Date" shall mean January 1, 1987.
1.09 ANNIVERSARY DATE
"Anniversary Date" or "Allocation Date" shall mean the 31st day of
December in each year.
1.10 PLAN YEAR
"Plan Year" shall mean each year beginning the first day of January and
ending on the 31st day of December.
1.11 ACCOUNT
"Account" shall mean the account maintained by the Administrative
Committee for each Participant which is to be credited, as hereinafter set
forth, with the amounts of the Participant's compensation which are deferred
pursuant to this Plan, together with the earnings thereon as provided for
herein.
1.12 COMPENSATION
"Compensation" shall mean the fees due to be paid to Directors for the
Plan Year (before reduction for any deferral pursuant to this Plan).
2
<PAGE>
1.13 NORMAL RETIREMENT DATE
The Participant's Normal Retirement Date shall be the annual meeting
conducted in the first month of the year next succeeding the date on which the
Participant must retire under the terms of the By-laws of the Bank.
1.14 EARLY RETIREMENT DATE
The Participant's Early Retirement Date shall be the first day of any
month coinciding with or next succeeding the date on which the Participant
attains a total of ten (10) years of combined service on the Board or as an
employee, and elects to retire.
1.15 NET INCOME
"Net Income" shall mean the earnings credited to a Participant's account, or any
lesser portion of a Participant's Account pursuant to Section 4.01 of this Plan.
Such earnings shall for each quarter subject to the election of the Participant,
no later than 15 days prior to such quarterly period, be determined either by:
(i) using a percentage rate and method of calculation which is the same
as the maximum yield which is paid by the Bank to its general
deposit base with respect to any account offered by the Bank as of
the beginning of each calendar quarter and adjusted quarterly
thereafter, or
(ii) using a percentage rate which is the same as the percentage increase
or decrease in the closing price of a share of Common Stock of PFF
Bancorp, Inc. as such closing price is reported in the Wall Street
Journal, from the first day to the last day of the period for which
interest is being credited.
3
<PAGE>
ARTICLE III- DEFERRAL OF COMPENSATION
3.01 AMOUNT OF DEFERRAL
Any amount of the Compensation may be deferred at the discretion of the
Participant.
3.02 FILING OF APPLICATION
To be eligible for deferral of any part of Compensation that may be
awarded for any Plan Year, a Director must file a written application with the
Administrative Committee no later than the latest of December 1, 1987 or
December 1 of the preceding Plan Year. The Administrative Committee shall notify
each Director of his prospective eligibility to participate in the Plan at least
thirty (30) days prior to the time he must file an application for
participation. Notwithstanding the foregoing, the Administrative Committee may,
in its sole and absolute discretion, permit a Director to file an application on
or after December 1 if, in its judgment, is failure to do so prior to said date
was due to reasonable cause, but in no event may such application be filed after
December 31. The application for participation shall signify the Director's
acceptance of the terms of this Plan, the portion of Compensation that he elects
to defer and, where appropriate, the form of payment for amounts distributable
to him as set forth herein.
Notwithstanding the above, no further application shall be required for
1987 from any Director who was previously a participant in the Pomona First
Federal Savings and Loan Association Director's Deferred Compensation Plan.
Until the Effective Date of this document, the terms thereof shall be deemed
incorporated herein, at which time the Director shall become subject to all of
the provisions of this Plan.
3.03 DESIGNATION OF BENEFICIARY
Upon forms provided by the Administrative Committee, each Director shall
designate the Beneficiary or Beneficiaries to receive the amounts distributable
in the event of such Director's death. A Participant may from time to time
change the designated Beneficiary or Beneficiaries, without the consent of such
Beneficiary or Beneficiaries, by filing a new designation in writing with the
Administrative Committee. The spouse of a Participant shall join in any
designation of
4
<PAGE>
the Beneficiary or Beneficiaries other than such spouse. The Bank and the
Administrative Committee may rely upon the designation of the Beneficiary or
Beneficiaries last filed in accordance with the terms of this Plan.
3.04 ADMINISTRATION OF DEFERRALS
Any portion of Compensation which is deferred will be administered by the
Administrative Committee.
ARTICLE III - ACCRUAL OF BENEFITS
4.01 EARNINGS ON DEFERRALS
There shall be credited to each Participant's Account as of the end of
each calendar quarter earnings on the balance(s) credited thereto. Such Net
Income, determined pursuant to Section 1.15, shall be credited as though the
amount credited to the Participant's Account pursuant to Section 3.01 was
contributed on the normal payment date for such Compensation. When a Participant
terminates his status as a Director with the Bank, earnings shall be credited to
such Participant's account on a pro rata basis from the normal payment date for
such Compensation to the payment starting date.
4.02 VESTING
The interest of each Participant in any benefit accrued hereunder shall be
fully vested and nonforfeitable at all times, except as provided in Section
8.06.
ARTICLE IV - DISTRIBUTION OF DEFERRALS
5.01 PAYMENT UPON RETIREMENT
If a Participant terminates his position as a Director due to retirement
on an Early Retirement Date or on the Participant's Normal Retirement Date (or
thereafter), the amount distributable to the Participant (determined pursuant to
Section 5.07) as of such retirement date, plus earnings as described below,
shall be paid to the Participant in 120 monthly installments. The amount of each
payment shall be such as to pay out, in equal installments, the amount
5
<PAGE>
distributable to the Participant as of the payment starting date, together with
interest on the declining balance of such amount. The rate of interest to be
applied shall be the rate specified in Section 1.15.
5.02 PAYMENT UPON TERMINATION AS A DIRECTOR
If a Participant terminates his position as a Director with the Bank for
any reason other than retirement or death, the amount distributable to the
Participant (determined pursuant to Section 5.07) as of the date of termination
shall promptly be distributed to the Participant in a cash lump sum. Where a
termination occurs and the Director is eligible for retirement, the termination
shall be treated as retirement for purposes of distributions to be made under
this Plan.
5.03 PAYMENT UPON DEATH
In the event of a Participant's death as an active Director, the amount
distributable to the Participant (determined pursuant to Section 5.07) shall be
paid to the Participant's Beneficiary or Beneficiaries in 60 monthly
installments. The amount of each payment shall be such as to pay out, in equal
installments, the total amount distributable as of the payment starting date,
together with interest on the declining balance of such amount. The rate of
interest to be applied shall be the rate specified in Section 1.15. The payment
starting date shall be as soon as reasonably possible under the circumstances.
If the Participant's death occurs after the Participant has terminated his
position as a Director but prior to receiving all amounts distributable to his
under this Plan, the remaining amounts due the Participant will be paid to the
Participant's Beneficiary or Beneficiaries. Such payment will be made in the
same amount and manner as was scheduled to be paid to the Participant unless the
Participant prior to his death had filed a written election (received and
approved by the Administrative Committee) specifying an alternative manner of
distribution upon death.
5.04 OPTIONAL METHODS OF PAYMENT
Notwithstanding Sections 5.01, 5.02, and 5.03, with the Committee's
approval, a Participant may, on the application filed pursuant to Section 3.02,
irrevocably elect to receive
6
<PAGE>
payment of the amount distributable to the Participant or to a designated
Beneficiary or Beneficiaries (determined pursuant to Section 5.07), in
accordance with one of the following options:
(a) A cash lump sum payable promptly upon termination as a Director (for
any reason, including death or retirement).
(b) 60 monthly installments promptly after termination for any reason. The
amount of each monthly payment shall be such as to pay out, in equal
installments, the amounts distributable to the Participant or a
designated Beneficiary or Beneficiaries as of the payment starting
date, together with interest on the declining balance of such amount.
The rate of interest to be applied shall be the rate specified in
Section 1.15.
(c) Any other method selected by the Participant which is approved by the
Administrative Committee in its sole and absolute discretion.
5.05 DEFERRED ELECTION
Notwithstanding Section 5.01, 5.02, 5.03, and 5.04, a Participant may, on
the application filed by him pursuant to Section 3.02, elect to defer the time
by which he is required to elect the method of payment for his benefit hereunder
attributable to the Plan Year for which the election is made. Any such
Participant may elect one of the options set forth in Section 5.04 at any time
prior to termination of employment. If such a Participant fails to make a timely
election, the benefit payable hereunder shall be paid in accordance with
Sections 5.01, 5.02, or 5.03, as appropriate. Nothing in this Section 5.05 shall
be construed to permit a Participant to elect more than one method of payment,
except as provided in Section 5.04(c).
5.06 DISABLED PARTICIPANT
A Participant who is on a leave of absence due to disability, or who is
otherwise not engaged as an active Director with the Bank due to disability,
shall not be entitled to a distribution of benefits hereunder until the earlier
of (i) the Participant's retirement date, (ii) the termination by Participant as
a Director, or (iii) the Participant's death (whereupon distribution shall be
made to the Participant's Beneficiary or Beneficiaries as hereinabove provided).
7
<PAGE>
5.07 AMOUNT DISTRIBUTABLE
The amount distributable to a Participant or any designated Beneficiary or
Beneficiaries as of any date specified in this Plan shall be an amount equal to
the balance credited to the Participant's Account as of said date pursuant to
Sections 3.01 and 4.01.
5.08 SMALL BENEFIT
Notwithstanding any provision in Sections 5.01 through 5.07 to the
contrary, if the amount distributable in a form other than a cash lump sum to a
Participant or Beneficiary is twenty-five thousand dollars ($25,000) or less,
such amount shall be paid in the form of a cash lump sum to the Participant or
Beneficiary, as applicable. Notwithstanding the preceding sentence, Participant
may, on the application filed pursuant to Section 3.02, irrevocably elect to
receive payment of a small benefit distributable to Participant or Beneficiary
(as applicable) in the minimum amount of $500 per month.
Furthermore, notwithstanding any election made by the Participant, the
Administrative Committee has the unilateral authority to increase any monthly
installment such that the monthly payment would be no less than would be
required to pay out the entire balance in 120 equal installments, together with
interest on the unpaid balance at the rate specified in Section 1.15.
5.09 FINANCIAL HARDSHIP EXCEPTION
Notwithstanding anything herein to the contrary, in the event a Participant
suffers a financial hardship of such magnitude that it would qualify as a
hardship under standards similar to those provided by Section 401(k) (2) (B)
(vi) of the Internal Revenue Code of 1986, the Administrative Committee shall
have the option of accelerating the time of payment of any deferrals previously
made by the Participant to the extent necessary to alleviate such hardship.
ARTICLE V - THE ADMINISTRATIVE COMMITTEE
6.01 ADMINISTRATIVE COMMITTEE
The Administrative Committee, as appointed by the Board of Directors,
shall keep minutes of the Committee's proceedings and all records and documents
pertaining to the Committee's
8
<PAGE>
administration of the Plan. Any action of the Administrative Committee shall be
taken pursuant to a majority vote, or with the written consent of a majority of
its members, and such action shall constitute the action of the Administrative
Committee and be binding the same as if all members had joined therein. A quorum
of the Administrative Committee shall consist of two members. A member of the
Administrative Committee shall not vote or act upon any matter which relates
solely to such member as a Participant. Any member may execute any certificate
or other written direction on behalf of the Administrative Committee. Third
persons dealing with the Administrative Committee may conclusively rely upon any
certificate or other written direction signed by a member which purports to have
been duly authorized by the Administrative Committee.
6.02 RIGHTS AND DUTIES
The Administrative Committee, on behalf of the Participants and their
Beneficiaries, shall enforce the Plan in accordance with its terms, shall be
charged with the general administration of the Plan, and shall have all powers
necessary to accomplish those purposes, including, but not by way of limitation,
the following:
(a) To determine all questions relating to the eligibility of Directors to
participate;
(b) To certify the amount of Compensation, if any, declared by the Board
of Directors as payable to Participants and their Beneficiaries;
(c) To maintain or to designate any person or entity to maintain all the
necessary records for the administration of the Plan;
(d) To make and publish such rules for the regulation of the Plan as are
not inconsistent with the terms hereof;
(e) To provide for disclosure of all information and filing or provision
of all reports and statements to Participants or Beneficiaries under
this Plan or to governmental bodies as shall be required by ERISA; and
(f) To establish claims procedures consistent with regulations of the
Secretary of Labor for presentation of claims by Participants and
Beneficiaries for Plan benefits, consideration of such claims, review
of claim denials and issuance of decisions on review. Such claims
procedures at a minimum shall consist of the following:
9
<PAGE>
(i) The Administrative Committee shall notify Participants and,
where appropriate, Beneficiaries, of their right to claim
benefits under the claims procedures, shall make forms available
for filing of such claims, and shall provide the name of the
person or persons with whom such claims should be filed.
(ii) The Administrative Committee shall establish procedures for
action upon claims initially made and the communication of a
decision to the claimant promptly and, in any event, not later
than sixty (60) days after the date of the claim; the claim may
be deemed by the claimant to have been denied for purposes of
further review described below in the event a decision is not
furnished to the claimant within such sixty (60) day period.
Every claim for benefits which is denied shall be denied by
written notice setting forth in a manner calculated to be
understood by the claimant (1) the specific reason or reasons
for the denial, (2) specific reference to any provisions of this
Plan on which denial is based, (3) description of any additional
material or information necessary for the claimant to perfect
his claim with an explanation of why such material or
information is necessary, and (4) an explanation of the
procedure for further reviewing the denial of the claim under
the Plan.
(iii) The Administrative Committee shall establish a procedure for
review of claim denials, with such review to be undertaken by
the Committee. The review given after denial of any claim shall
be a full and fair review, with the claimant or his duly
authorized representative having sixty (60) days after receipt
of denial of his claim to request such review, and having the
right to review all pertinent documents and the right to submit
issues and comments in writing.
(iv) The Administrative Committee shall establish a procedure for
issuance of a decision by the Committee not later than sixty
(60) days after receipt of
10
<PAGE>
a request for review from a claimant unless special
circumstances, such as the need to hold a hearing, require a
longer period of time, in which case a decision shall be
rendered as soon as possible but not later than one hundred
twenty (120) days after receipt of the claimant's request for
review. The decision on review shall be in writing and shall
include specific reasons for the decision written in a manner
calculated to be understood by the claimant, with specific
reference to any provision of the Plan on which the decision is
based.
All action of the Administrative Committee shall be conclusive on all
persons interested in the Plan, except to the extent otherwise specifically
indicated herein. The Administrative Committee may appoint a Plan administrator
and other agents, and delegate thereto such powers and duties in connection with
the administration of the Plan as the Administrative Committee may from time to
time prescribe.
6.03 INFORMATION
To enable the Administrative Committee to perform its functions, the Bank
shall supply full and timely information to such Committee on all matters
relating to the payment of Compensation of all Participants, their Director
status, their retirement, death, or the cause for termination as a Director, and
such other pertinent facts as the Administrative Committee may require.
6.04 COMPENSATION, INDEMNITY, AND LIABILITY
The members of the Administrative Committee shall serve without bond,
except as otherwise required by law, and without compensation for their services
hereunder. All expenses of the Administrative Committee shall be paid by the
Bank and the Bank shall furnish the Administrative Committee with such clerical
and other assistance as is necessary in the performance of its duties.
No member of the Administrative Committee shall be liable for any act or
omission of any other member of the Administrative Committee nor for any act or
omission on his own part,
11
<PAGE>
excepting only his own willful misconduct or gross negligence. The Bank shall
indemnify and save harmless each member of the Administrative Committee against
any and all expenses and liabilities arising out of his membership on the
Administrative Committee, excepting only expenses and liabilities arising out of
his own willful misconduct or gross negligence.
ARTICLE VI - AMENDMENT AND DISCONTINUANCE
7.01 AMENDMENTS
The Board of Directors shall have the right to amend this Plan from time
to time or to cancel any amendments.
7.02 DISCONTINUANCE OF PLAN
It is the expectation of the Bank that this Plan will be continued
indefinitely, but continuance of the Plan is not assumed as a contractual
obligation of the Bank, and the right is reserved by the Bank at any time to
reduce, suspend, or discontinue this Plan; provided, however, the Bank shall in
no event have the power to reduce the amount already paid or credited to a
Participant.
ARTICLE VII - MISCELLANEOUS
8.01 NO INTEREST IN ASSETS
No Participant or any other person shall have any interest in any fund or
in any specific asset of the Bank by reason of any amount credited to him
hereunder, nor any right to receive any distribution under the Plan except as
and to the extent expressly provided in the Plan. There shall be no funding of
any benefits which may become payable hereunder. Any benefits which become
payable hereunder shall be paid from the general assets of the Bank. Nothing in
the Plan shall be deemed to give any Director of the Bank any right to
participate in the Plan, except in accordance with the provisions of the Plan.
12
<PAGE>
8.02 LIMITATION ON RIGHTS OF DIRECTORS
Neither the adoption nor the amendment of the Plan, nor any action of the
Board of Directors of the Bank, shall be held or construed to confer on any
person any legal right to be continued as a Director of the Bank or to receive
any particular level of compensation.
8.03 RESTRICTION AGAINST ASSIGNMENT
The Bank shall pay all amounts payable hereunder only to the person(s)
designated by the Plan and not to any other person or corporation. No part of a
Participant's Account shall be liable for the debts, contracts, or engagements
of any Participant, his Beneficiaries, or successors in interest, nor shall it
be subject to execution by levy, attachment or garnishment or by any other legal
or equitable proceeding, nor shall any such person have any right to alienate,
anticipate, commute, pledge, encumber, or assign any benefits or payments
hereunder in any manner whatsoever.
Notwithstanding the above, nothing herein shall be deemed a waiver of the
Bank's right of offset as set forth in the laws of the State of California.
8.04 RECEIPT OR RELEASE
Any payment to any Participant or his Beneficiary in accordance with the
provisions of this Agreement shall, to the extent thereof, be in full
satisfaction of all claims against the Committee and the Bank, and the Committee
may require such Participant or Beneficiary, as a condition precedent to such
payment, to execute a receipt and release to such effect.
8.05 PAYMENT ON BEHALF OF MINOR
In the event any amount becomes payable under the Plan to a minor or a
person who, in the sole judgment of the Committee, is considered by reason of
physical or mental condition to be unable to give a valid receipt therefor, the
Committee may direct that such payment be made to any person found by the
Committee, in its sole judgment, to have assumed the care of such minor or other
person. Any payment made pursuant to such determination shall constitute a full
release and discharge of the Committee and the Bank.
13
<PAGE>
8.06 FORFEITURE
Any payment or distribution to a Participant under the Plan which is not
claimed by the Participant, Beneficiary, or other person entitled thereto within
three years after becoming payable shall be forfeited and cancelled and shall
remain with the Bank, and no other person shall have any right thereto or
interest therein. The Bank shall not have any duty to give notice that amounts
are payable under the Plan to any person other than the Participant and the
designated Beneficiary or Beneficiaries.
8.07 WITHHOLDING
The Bank shall deduct from the amount of all distributions under the Plan
any taxes required to be withheld by the Federal or any state or local
government.
8.08 CALIFORNIA LAW GOVERNS
This Plan shall be construed, regulated and administered under the laws of
the State of California. If any provision of this instrument shall be held by a
court of competent jurisdiction to be invalid or unenforceable, the remaining
provisions thereof shall continue to be fully effective.
8.09 INTERPRETATION
Headings and subheadings in the Plan are inserted for convenience only and
are not to be considered in the construction of the provision thereof. Singular
nouns may include the plural and plural nouns may include the singular where
appropriate. The masculine gender may mean the feminine and/or neuter gender
where appropriate.
8.10 INSTRUMENT IN COUNTERPARTS
This Plan has been executed in several counterparts, each of which shall
be deemed an original, and said counterparts shall constitute but one and the
same instrument, which may be sufficiently evidenced by one counterpart.
14
<PAGE>
8.11 SUCCESSORS AND ASSIGNS
This Plan shall insure to the benefit of, and be binding upon, the parties
hereto and their successors and assigns.
Executed at Pomona, California on the 29th day of March, 1996.
POMONA FIRST FEDERAL BANK & TRUST
By /s/ [ILLEGIBLE SIGNATURE]
------------------------------
Approved as to form: Title PRESIDENT / CEO
---------------------------
By /s/ [ILLEGIBLE SIGNATURE]
------------------------------
/s/ [ILLEGIBLE SIGNATURE] Title S.V.P.
- ----------------------------------- ---------------------------
Counsel for Bank Director of Administrative
Services
15
<PAGE>
EXHIBIT 11
PFF BANCORP, INC. AND SUBSIDIARY
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
The calculations of earnings per share of common stock are as follows for the
year ended March 31, 1997.
<TABLE>
<CAPTION>
PRIMARY FULLY DILUTED
------- -------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C>
Net Earnings............................... $ 2,732 $ 2,732
=========== ===========
Weighted average number of common shares
and equivalents outstanding:
Issued and outstanding..................... 19,837,500 19,837,500
Less:
Unearned ESOP shares and shares held
by benefit plans..................... 1,811,326 1,811,326
Add:
Common stock equivalents due to dilutive
effect of stock options............... 98,426 107,330
----------- -----------
Weighted average number of common shares
and equivalents outstanding.............. 18,124,600 18,133,504
=========== ===========
Earnings per share......................... $ 0.15 $ 0.15
=========== ===========
</TABLE>
Earnings per share is only meaningful for the year ended March 31, 1997, since
the Company's common stock was issued March 28, 1996 in connection with the
conversion of the Bank from the mutual to stock form of ownership.
<PAGE>
EXHIBIT 23
[LETTERHEAD OF KPMG PEAT MARWICK LLP]
The Board of Directors
PFF Bancorp, Inc.:
We consent to incorporation by reference in the registration statement (No.
333-20337) on Form S-8 of PFF Bancorp, Inc. of our report dated April 23,1997,
except as to Note 24 to the consolidated financial statements, which is as of
June 4, 1997, relating to the consolidated balance sheets of PFF Bancorp, Inc.
and subsidiary as of March 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
years in the three-year period ended March 31, 1997, which report appears in the
March 31, 1997, annual report on Form 10-K of PFF Bancorp, Inc.
/s/ KPMG Peat Marwick LLP
Orange County, California
June 4, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-K FOR THE YEAR ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 31,632
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 573,656
<INVESTMENTS-CARRYING> 21,680
<INVESTMENTS-MARKET> 21,722
<LOANS> 1,819,945
<ALLOWANCE> 27,721
<TOTAL-ASSETS> 2,535,767
<DEPOSITS> 1,711,049
<SHORT-TERM> 0
<LIABILITIES-OTHER> 559,192
<LONG-TERM> 0
0
0
<COMMON> 198
<OTHER-SE> 265,328
<TOTAL-LIABILITIES-AND-EQUITY> 2,535,767
<INTEREST-LOAN> 133,116
<INTEREST-INVEST> 35,399
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 168,515
<INTEREST-DEPOSIT> 79,246
<INTEREST-EXPENSE> 99,306
<INTEREST-INCOME-NET> 69,209
<LOAN-LOSSES> 13,661
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 59,956
<INCOME-PRETAX> 5,819
<INCOME-PRE-EXTRAORDINARY> 2,732
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,732
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
<YIELD-ACTUAL> 7.42
<LOANS-NON> 23,350
<LOANS-PAST> 0
<LOANS-TROUBLED> 14,559
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 19,741
<CHARGE-OFFS> 5,782
<RECOVERIES> 101
<ALLOWANCE-CLOSE> 27,721
<ALLOWANCE-DOMESTIC> 27,721
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 11-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 15(b) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
--------------- ---------------
Commission File Number _______
CAPITAL ACCUMULATION PLAN FOR EMPLOYEES OF PFF BANK & TRUST
-----------------------------------------------------------
(Full title of the plan)
PFF BANCORP, INC.
350 SO. GAREY AVENUE
POMONA, CALIFORNIA 91766
- -------------------------------------------------------------------------------
(Name of issuer of the securities held pursuant to the plan and address of its
principal executive office)
<PAGE>
CAPITAL ACCUMULATION PLAN
FOR EMPLOYEES OF
PFF BANK & TRUST
Financial Statements and Supplemental Schedules
December 31, 1996 and 1995
(With Independent Auditors' Report Thereon)
<PAGE>
CAPITAL ACCUMULATION PLAN FOR EMPLOYEES OF
PFF BANK & TRUST
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES
--------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report 1
Statements of Net Assets Available for Benefits, with Fund Information
December 31, 1996 and 1995 2-3
Statements of Changes in Net Assets Available for Benefits,
with Fund Information
Years Ended December 31, 1996 and 1995 4-5
Notes to Financial Statements 6
SCHEDULE
--------
Item 27a - Schedule of Assets Held for Investment Purposes
at December 31, 1996 1
Item 27d - Schedule of Reportable Transactions
Year ended December 31, 1996 2
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Plan Administrator
Capital Accumulation Plan For Employees of PFF Bank & Trust:
We have audited the accompanying statements of net assets available for benefits
of the Capital Accumulation Plan for Employees of PFF Bank & Trust (the Plan),
formerly Capital Accumulation Plan for Employees of Pomona First Federal Savings
and Loan Association, as of December 31, 1996 and 1995 and the related
statements of changes in net assets available for benefits for the years then
ended, as listed in the accompanying index. These financial statements are the
responsibility of the Plan's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the net assets available for benefits of the Plan as of
December 31, 1996 and 1995 and the changes in net assets available for benefits
for the years ended in conformity with generally accepted accounting principles.
Our audits were performed for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedules of assets held
for investment purposes and reportable transactions are presented for the
purpose of additional analysis and are not a required part of the basic
financial statements but are supplementary information required by the
Department of Labor's Rules and Regulations for Reporting and Disclosure under
the Employee Retirement Income Security Act of 1974. The Fund Information in the
statements of net assets available for benefits and the statement of changes in
net assets available for benefits is presented for purposes of additional
analysis rather than to present the net assets available for benefits and
changes in net assets available for benefits of each fund. The supplemental
schedules and Fund Information have been subjected to the auditing procedures
applied in the audits of the basic financial statements and, in our opinion, are
fairly stated in all material respects in relation to the basic financial
statements taken as a whole.
/s/ KPMG Peat Marwick LLP
June 17, 1997
<PAGE>
DATE
CAPITAL ACCUMULATION PLAN FOR EMPLOYEES OF
PFF BANK & TRUST
STATEMENTS OF NET ASSETS AVAILABLE
FOR BENEFITS, WITH FUND INFORMATION
DECEMBER 31, 1996
<TABLE>
<CAPTION>
KEYSTONE
CUSTODIAN VALUE CERTIFICATES
FUND BALANCED MOMENTUM OF DEPOSIT
ASSETS: SERIES S-3 PORTFOLIO PORTFOLIO VARIABLE
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
INVESTMENTS (NOTE 3):
Cash and cash equivalents $ - - - -
Certificates of deposit - - - 1,564,936
Mutual Funds 953,885 1,239,420 2,748,614 -
Common Stock - - - -
Loans to participants - - - -
-------- --------- --------- ---------
Total investments
at fair value 953,885 1,239,420 2,748,614 1,564,936
RECEIVABLES:
Employer contribution - - - -
Participants' contributions - - - -
-------- --------- --------- ---------
Net assets available for
plan benefits $953,885 1,239,420 2,748,614 1,564,936
======== ========= ========= =========
NET ASSETS AVAILABLE TO:
Terminating participants $ 3,304 2,814 - -
Continuing participants 950,581 1,236,606 2,748,614 1,564,936
-------- --------- --------- ---------
Net assets available for
plan benefits $953,885 1,239,420 2,748,614 1,564,936
======== ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
CERTIFICATES
OF DEPOSIT STOCK PARTICIPANT
ASSETS: FIXED FUND LOANS OTHER TOTAL
----------- --------- --------- ----- -----
<S> <C> <C> <C> <C> <C>
INVESTMENTS (NOTE 3):
Cash and cash equivalents - 1,330 - - 1,330
Certificates of deposit 1,705,786 - - - 3,270,722
Mutual Funds - - - - 4,941,919
Common Stock - 2,750,983 - - 2,750,983
Loans to participants - - 420,185 - 420,185
--------- --------- ------- ------- ----------
Total investments
at fair value 1,705,786 2,752,313 420,185 - 11,385,139
RECEIVABLES:
Employer contribution - - - 35,075 35,075
Participants' contributions - - - 281,632 281,632
--------- --------- ------- ------- ----------
Net assets available for
plan benefits 1,705,786 2,752,313 420,185 316,707 11,701,846
========= ========= ======= ======= ==========
NET ASSETS AVAILABLE TO:
Terminating participants 142,067 14,847 - - 163,032
Continuing participants 1,563,719 2,737,466 420,185 316,707 11,538,814
--------- --------- ------- ------- ----------
Net assets available for
plan benefits 1,705,786 2,752,313 420,185 316,707 11,701,846
========= ========= ======= ======= ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
CAPITAL ACCUMULATION PLAN FOR EMPLOYEES OF
PFF BANK & TRUST
STATEMENTS OF NET ASSETS AVAILABLE
FOR BENEFITS, WITH FUND INFORMATION (CONTINUED)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
KEYSTONE
CUSTODIAN VALUE CERTIFICATES CERTIFICATES
FUND BALANCED MOMENTUM OF DEPOSIT OF DEPOSIT PARTICIPANT
ASSETS: SERIES S-3 PORTFOLIO PORTFOLIO VARIABLE FIXED LOANS OTHER TOTAL
---------- --------- --------- ------------ ------------ ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENTS (NOTE 3):
Certificates of deposit $ - - - 2,584,917 1,593,154 - - 4,178,071
Mutual Funds 1,364,980 895,134 1,658,202 - - - - 3,918,316
Loans to participants - - - - - 381,544 - 381,544
---------- --------- --------- ------------ ------------ ----------- --------- ---------
Total investments at
fair value 1,364,980 895,134 1,658,202 2,584,917 1,593,154 381,544 - 8,477,931
RECEIVABLES:
Employer contribution - - - - - - 27,777 27,777
Participants' contributions - - - - - - 241,402 241,402
---------- --------- --------- ------------ ------------ ----------- --------- ---------
Net assets available for
plan benefits $1,364,980 895,134 1,658,202 2,584,917 1,593,154 381,544 269,179 8,747,110
========== ========= ========= ============ ============ =========== ========= =========
NET ASSETS AVAILABLE TO:
Terminating participants $ 8,486 3,984 - 4,258 4,448 - - 21,176
Continuing participants 1,356,494 891,150 1,658,202 2,580,659 1,588,706 381,544 269,179 8,725,934
---------- --------- --------- ------------ ------------ ----------- --------- ---------
Net assets available for
plan benefits $1,364,980 895,134 1,658,202 2,584,917 1,593,154 381,544 269,179 8,747,110
========== ========= ========= ============ ============ =========== ========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
CAPITAL ACCUMULATION PLAN FOR EMPLOYEES OF
PFF BANK & TRUST
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE
FOR BENEFITS, WITH FUND INFORMATION
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
KEYSTONE
CUSTODIAN VALUE CERTIFICATES CERTIFICATES
FUND BALANCED MOMENTUM OF DEPOSIT OF DEPOSIT STOCK
CONTRIBUTIONS: SERIES S-3 PORTFOLIO PORTFOLIO VARIABLE FIXED FUND
------------- --------- ----------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Employer's (note 1) $ 36,489 47,343 69,673 45,158 35,014 --
Employees' 111,957 171,098 350,189 131,729 106,061 10,763
----------- --------- --------- ---------- --------- ----------
148,446 218,441 419,862 176,887 141,075 10,763
----------- --------- --------- ---------- --------- ----------
INVESTMENT INCOME:
Interest/dividends earned on
investments 7,735 43,312 68,214 107,281 77,393 12,343
Realized gain (loss) on sale of
investments (3,866) 12,673 57,147 -- -- 63,940
Capital gains 243,980 48,236 110,158 -- -- --
Net unrealized appreciation
(depreciation) of investments (21,590) 61,972 306,436 -- -- 889,934
----------- --------- --------- ---------- --------- ----------
226,259 166,193 541,955 107,281 77,393 966,217
----------- --------- --------- ---------- --------- ----------
Total additions 374,705 384,634 961,817 284,168 218,468 976,980
----------- --------- --------- ---------- --------- ----------
Participant loans 2,570 (457) 5,580 (34,042) (731) (18,642)
Benefits paid to participants (85,398) (12,108) (90,002) (78,739) (10,514) (9,722)
Transfers in (out) of funds (702,972) (27,783) 213,017 (1,191,368) (94,591) 1,803,697
----------- --------- --------- ---------- --------- ----------
Increase (decrease) in net
assets available for benefits (411,095) 344,286 1,090,412 (1,019,981) 112,632 2,752,313
Net assets available for benefits:
Beginning of year 1,364,980 895,134 1,658,202 2,584,917 1,593,154 --
----------- --------- --------- ---------- --------- ----------
End of year $ 953,885 1,239,420 2,748,614 1,564,936 1,705,786 2,752,313
=========== ========= ========= ========== ========= ==========
<CAPTION>
PARTICIPANT
CONTRIBUTIONS: LOANS OTHER TOTAL
---------------- --------- -----------
<S> <C> <C> <C>
Employer's (note 1) -- 40,230 273,907
Employees' -- 7,298 889,095
------- ------- ----------
-- 47,528 1,163,002
------- ------- ----------
INVESTMENT INCOME:
Interest/dividends earned on
investments -- -- 316,278
Realized gain (loss) on sale of
investments -- -- 129,894
Capital gains -- -- 402,374
Net unrealized appreciation
(depreciation) of investments -- -- 1,236,752
------- ------- ----------
-- -- 2,085,298
------- ------- ----------
Total additions -- 47,528 3,248,300
------- ------- ----------
Participant loans 45,722 -- --
Benefits paid to participants (7,081) -- (293,564)
Transfers in (out) of funds -- -- --
------- ------- ----------
Increase (decrease) in net
assets available for benefits 38,641 47,528 2,954,736
Net assets available for benefits:
Beginning of year 381,544 269,179 8,747,110
------- ------- ----------
End of year 420,185 316,707 11,701,846
======= ======= ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
CAPITAL ACCUMULATION PLAN FOR EMPLOYEES OF
PFF BANK & TRUST
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE
FOR BENEFITS, WITH FUND INFORMATION (CONTINUED)
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
KEYSTONE
CUSTODIAN VALUE CERTIFICATES
FUND BALANCED MOMENTUM OF DEPOSIT
CONTRIBUTIONS: SERIES S-3 PORTFOLIO PORTFOLIO VARIABLE
----------- --------- ---------- --------------
<S> <C> <C> <C> <C>
Employer's (note 1) $ (1,766) (1,200) (1,891) 5,232
Employees' 122,825 141,172 200,538 77,655
----------- --------- ---------- --------------
121,059 139,972 198,647 82,887
----------- --------- ---------- --------------
INVESTMENT INCOME:
Interest/dividends earned
on Investments 156,481 23,877 27,741 136,312
Realized gain on sale
of Investments 70,294 20,324 22,901 -
Capital gains - 22,942 37,462 -
Net unrealized appreciation
of investments 79,793 104,243 293,327 -
----------- --------- ---------- --------------
306,568 171,386 381,431 136,312
----------- --------- ---------- --------------
TOTAL ADDITIONS 427,627 311,358 580,078 219,199
----------- --------- ---------- --------------
Participant loans (110,138) (39,229) (52,884) (129,658)
Benefits paid to participants (105,108) (31,971) (10,486) (172,617)
Transfers in (out) of funds (456,956) 96,485 439,287 (1,084,753)
----------- --------- ---------- --------------
INCREASE (DECREASE) IN NET
ASSETS AVAILABLE FOR BENEFITS (244,575) 336,643 955,995 (1,167,829)
NET ASSETS AVAILABLE FOR BENEFITS:
Beginning of year 1,609,555 558,491 702,207 3,752,746
----------- --------- ---------- --------------
End of year $1,364,980 895,134 1,658,202 2,584,917
=========== ========= ========== ==============
<CAPTION>
CERTIFICATES
OF DEPOSIT PARTICIPANT
CONTRIBUTIONS: FIXED LOANS OTHER TOTAL
---------- ----------- ------- ---------
<S> <C> <C> <C> <C>
Employer's (note 1) (354) - 241,402 241,423
Employees' 165,112 - 27,777 735,079
---------- ----------- ------- ---------
164,758 - 269,179 976,502
---------- ----------- ------- ---------
INVESTMENT INCOME:
Interest/dividends earned
on Investments 66,901 17,487 - 428,799
Realized gain on sale
of Investments - - - 113,519
Capital gains - - - 60,404
Net unrealized appreciation
of investments - - - 477,363
---------- ----------- ------- ---------
66,901 17,487 - 1,080,085
---------- ----------- ------- ---------
TOTAL ADDITIONS 231,659 17,487 269,179 2,056,587
---------- ----------- ------- ---------
Participant loans (47,817) 379,726 - -
Benefits paid to participants (20,462) (1,992) - (342,636)
Transfers in (out) of funds 1,019,614 (13,677) - -
---------- ----------- ------- ---------
INCREASE (DECREASE) IN NET
ASSETS AVAILABLE FOR BENEFITS 1,182,994 381,544 269,179 1,713,951
NET ASSETS AVAILABLE FOR BENEFITS:
Beginning of year 410,160 - - 7,033,159
--------- ----------- ------- ---------
End of year 1,593,154 381,544 269,179 8,747,110
========= =========== ======= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
CAPITAL ACCUMULATION PLAN FOR EMPLOYEES OF
PFF BANK & TRUST
Notes to Financial Statements
December 31, 1996 and 1995
(1) DESCRIPTION OF PLAN
The following description of the Capital Accumulation Plan for Employees of
PFF Bank & Trust (the Plan), formerly Capital Accumulation Plan for
employees of Pomona First Federal Savings and Loan Association, provides
only general information. Participants should refer to the Plan agreement
for a more complete description of the Plan's provisions.
GENERAL
The Plan is a defined contribution plan covering all eligible employees of
PFF Bank & Trust (the Bank or Plan Sponsor). Employees become eligible for
participation in the Plan upon 6 months of employment. Participants must
complete 501 hours of service to share in the employer's matching
contribution. In order to become a participant, each eligible employee
authorizes contributions by filing a 401(k) enrollment/change of status
election. The Plan is subject to the provisions of the Employee Retirement
Income Security Act of 1974 (ERISA).
In December 1994, the Bank amended and restated the Plan by adopting the
Union Bank Non-Standardized 401(k) Profit Sharing Adoption Agreement.
CONTRIBUTIONS
No contribution is required by the Bank; however, at the discretion of its
Board of Directors, the Bank may contribute out of its income and/or
accumulated earned surplus an amount equal to a specified percentage of the
tax-deferred contribution of the participants or a profit sharing
contribution with the amount to be determined by the Board of Directors.
The maximum annual participant contribution is 15% of the participant's
annual salary. For 1996 and 1995, the Bank chose to match the
participants' contribution at a rate of 50% of the first 6% contributed.
Forfeitures of matching contributions are used to reduce the Bank's
matching contributions.
PARTICIPANT ACCOUNTS
Each participant's account is credited with the participant's contribution
and allocation of (a) the Bank's contribution and (b) Plan earnings.
Allocations are based on participant earnings or account balances, as
defined. The benefit to which a participant is entitled is the benefit
that can be provided from the participant's account.
PARTICIPANTS LOANS
Participants may borrow from their fund account a minimum of $1,000 and up
to a maximum equal to the lesser of $50,000 or 50% of their vested account
balance. Loan repayments are to be made over a period not to exceed 5
years, except loans for the purchase of a primary residence may exceed 5
years. The loans are secured by the balance in the participant's account
and bear interest at a rate of prime plus 1%.
<PAGE>
CAPITAL ACCUMULATION PLAN FOR EMPLOYEES OF
PFF BANK & TRUST
Notes to Financial Statements, Continued
VESTING
Participation in the Plan is voluntary. Employee contributions and the
earnings as a result of each participant's contributions are 100% vested
and nonforfeitable. Bank contributions vest to participants in accordance
with a specified schedule with 100% vesting occurring after 5 years of
service, on the participant's attaining age 65, or on the participant's
death or total and permanent disablement.
PAYMENT OF BENEFITS
On termination of service, a participant may elect to receive either a
lump-sum amount equal to the vested balance of his or her account or annual
(or more frequent) installments over a period not to exceed the life
expectancy of the participant.
(2) SUMMARY OF SIGNIFICANT ACCOUNT POLICIES
BASIS OF PRESENTATION
The accompanying financial statements have been prepared on the accrual
basis of accounting.
TRUST FUND MANAGED BY INVESTMENT ADVISORY COMMITTEE
Under the terms of the Plan, the assets of the Plan are placed in trust
(the Trust), and are held under the trusteeship of Union Bank of
California, N.A. (Union Bank); they are managed by the Compensation,
Pension and Personnel Practices Committee of the Bank's Board of Directors
(the Committee). The Committee has delegated certain of its ordinary
management and investment responsibilities to the members of the Bank's
Executive Committee and the Human Resources Director. Committee members are
appointed for an indefinite term by the Bank. The Committee has full
discretionary authority to administer the Plan and the trust agreement.
The investments and changes therein of these trust funds have been reported
by Union Bank as having been determined through the use of fair market
values based upon quotations obtained from national securities exchanges or
latest bid prices. Security transactions are accounted for on the trade-
date. Realized gains and losses on the sale of investments are computed
using the average cost method.
DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Substantially all of the Plan's financial instruments are carried at fair
value or amounts approximating fair value.
<PAGE>
CAPITAL ACCUMULATION PLAN FOR EMPLOYEES OF
PFF BANK & TRUST
Notes to Financial Statements, Continued
USE OF ESTIMATES
Management of the Plan has made estimates and assumptions relating to the
reporting of assets and liabilities to prepare the financial statements in
conformity with generally accepted accounting principles. Actual results
could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to conform with the current year presentation.
ADMINISTRATIVE EXPENSES
All administrative expenses of the Plan were paid directly by the Bank in
1996 and 1995.
(3) INVESTMENTS
Investments that represent 5% or more of the Plan's net assets are
separately identified. The following table presents the cost and fair
values of those investments at December 31.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------- ------------------------
IDENTITY OF PARTY AND FAIR FAIR
DESCRIPTION OF ASSET COST VALUE COST VALUE
- --------------------- ---------- ----------- --------- ----------
<S> <C> <C> <C> <C>
PFF Bank & Trust
Certificates of Deposit:
Fixed Rate $1,705,786 $1,705,786 $1,593,154 $1,593,154
Variable Rate 1,564,936 1,564,936 2,584,917 2,584,917
Mutual Funds:
Keystone Custodian Fund
Series S-3 984,628 953,885 1,370,967 1,364,980
Balanced Portfolio 1,110,851 1,239,420 799,314 895,134
Value Momentum Portfolio 2,219,724 2,748,614 1,365,804 1,658,202
Stock Fund 1,862,122 2,752,313 - -
---------- ----------- ---------- ----------
Total $9,448,047 $10,964,954 $7,714,156 $8,096,387
========== =========== ========== ==========
</TABLE>
Net appreciation in fair value, included realized gain (loss), capital
gains, and unrealized appreciation (depreciation), of mutual funds for the
years ended December 31, 1996 and 1995 was $1,769,020 and $651,286,
respectively.
<PAGE>
CAPITAL ACCUMULATION PLAN FOR EMPLOYEES OF
PFF BANK & TRUST
Notes to Financial Statements, Continued
ALLOCATION OF PLAN ASSETS
Employee contributions are allocated to various funds based on the election
made by each participant. Net income or loss of each fund is allocated on
the basis of the proportionate asset balance of each participant as of the
previous valuation date after adjustment for withdrawals, distributions and
other additions or subtractions that may be appropriate. Under the daily
valuation record-keeping system, earnings are allocated daily and paid at
the end of the month. Earnings are allocated on the basis of current
shares held in each participant's account and the accounts are valued
daily.
A description of each investment fund follows:
Keystone Custodian Fund Series S-3 - The fund consists of the stocks
that characteristically move faster than the market during major price
movements. The fund may invest up to 25% of its assets in foreign
securities.
Balanced Portfolio - The Portfolio invests between 10% and 70% in
common stocks and a minimum of 25% in fixed income securities.
Value Momentum Portfolio - The Portfolio invests primarily in equity
securities of undervalued companies experiencing positive price and
earnings momentum.
Certificates of Deposit Variable - The Variable Rate Tiered
Certificate of Deposit pays a market rate of return tied to the
Federal Home Loan Bank Eleventh District Cost of Funds Index adjusted
monthly during the fixed term of one year.
Certificates of Deposit Fixed - The Fixed Rate Certificate of Deposit
pays a market rate of return for a fixed term of one year.
Stock Fund - Trust assets are reinvested in PFF Bancorp, Inc. common
stock and cash and cash equivalents. PFF Bancorp, Inc., is the holding
company of the Plan's sponsor, the Bank.
(4) PLAN TERMINATION
Although the Bank has not expressed any interest to terminate the Plan, it
may do so at any time subject to the provisions of ERISA. In the event the
Plan is terminated, all participants become 100% vested in their account
balances.
(5) FEDERAL INCOME TAXES
The Internal Revenue Service has determined and informed the Bank by a
letter dated July 24, 1995, that the Plan is designed in accordance with
applicable sections of the Internal Revenue Code (IRC). The Bank and the
Plan's tax counsel believe that the Plan is designed and is currently being
operated in compliance with the applicable requirements of the IRC.
<PAGE>
CAPITAL ACCUMULATION PLAN FOR EMPLOYEES OF
PFF BANK & TRUST
Notes to Financial Statements, Continued
(6) RELATED-PARTY TRANSACTIONS
The Plan had $3.27 million and $4.18 million on deposit at December 31,
1996 and 1995 respectively, in certificates of deposit at the Bank (the
employer). In addition, the Plan held 184,940 shares of common stock of PFF
Bancorp, Inc. At December 31, 1996. The Plan purchased 210,548 shares at a
price of $10.00 per share in the initial public offering.
(7) SUBSEQUENT EVENTS
On January 1, 1997, the Plan was amended whereby new investment options are
offered to the Plan participants.
<PAGE>
SCHEDULE 1
CAPITAL ACCUMULATION PLAN FOR EMPLOYEES OF
PFF BANK & TRUST
Item 27a - Schedule of Assets Held for
Investment Purposes at December 31, 1996
<TABLE>
<CAPTION>
DESCRIPTION OF
INVESTMENT, INCLUDING
PARTY IN IDENTITY OF ISSUE, MATURITY DATE, RATE OF
INTEREST BORROWER, LESSOR INTEREST, COLLATERAL, PAR CURRENT
IDENTIFICATION OR SIMILAR PARTY OR MATURITY VALUE COST VALUE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
* PFF Bank & Trust Fixed rate certificate 1,705,786 $1,705,786
of deposit; 6.06%
* PFF Bank & Trust Variable rate
certificate of deposit;
5.316% 1,564,936 1,564,936
* PFF Bancorp, Inc. Common Stock 1,860,792 2,750,983
184,940 shares
* PFF Bancorp, Inc. Stock Liquidity Fund 1,330 1,330
Keystone Custodian Fund Series S-3 109,768 shares 984,628 953,885
Balanced Portfolio 84,544 shares 1,110,851 1,239,420
Value Momentum Portfolio 133,623 shares 2,219,724 2,748,614
* Various Plan Participants Participant loans 420,185 420,185
---------- ----------
Assets held for investment purposes $9,868,232 11,385,139
========== ==========
</TABLE>
*Party in interest.
See accompanying independent auditors' report.
<PAGE>
SCHEDULE 2
CAPITAL ACCUMULATION PLAN FOR EMPLOYEES OF
PFF BANK & TRUST
Item 27d - Schedule of Reportable Transactions
Year ended December 31, 1996
<TABLE>
<CAPTION>
DESCRIPTION OF ASSET EXPENSE CURRENT VALUE OF
IDENTITY OF (INCLUDE INTEREST RATE AND PURCHASE SELLING INCURRED WITH COST OF ASSETS ON NET GAIN
PARTY INVOLVED MATURITY IN CASE OF A LOAN) PRICE PRICE TRANSACTION ASSETS TRANSACTION DATE OR (LOSS)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PFF Bank & Trust* Certificates of deposit, $ 487,048 - - 487,048 487,048 -
variable - 1,507,029 - 1,507,029 1,507,029 -
PFF Bank & Trust* Certificates of deposit, 1,241,241 - - 1,241,241 1,241,241 -
fixed - 1,128,608 - 1,128,608 1,128,608 -
Keystone Keystone Custodian Fund 546,520 - - 546,520 546,520 -
Series S-3 - 932,158 - 936,024 932,158 (3,866)
Union Capital Advisors Balanced Portfolio 660,906 - - 660,906 660,906 -
- 391,265 - 378,592 391,265 12,673
Union Capital Advisors Value Momentum Portfolio 1,490,158 - - 1,490,158 1,490,158 -
- 763,330 - 706,183 763,330 57,147
Plan Sponsor* PFF Bancorp, Inc. 2,174,946 - - 2,174,946 2,174,946 -
- 313,899 - 313,899 377,839 63,940
Plan Sponsor* PFF Bancorp, Inc. 2,264,478 - - 2,264,478 2,264,478 -
Stock liquidity Fund - 2,263,149 - 2,263,149 2,263,149 -
</TABLE>
*Party in interest.
See accompanying independent auditors' report.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Employee Compensation and Benefits Committee of the Board of Directors of PFF
Bancorp, Inc., has duly caused this annual report to be signed by the
undersigned thereunto duly authorized.
CAPITAL ACCUMULATION PLAN
FOR EMPLOYEES OF
PFF BANK & TRUST
Date: June 23, 1997 By:
--------------------------------------
Larry M. Rinehart
President, Chief Executive Officer and
Director
PFF Bancorp, Inc.
