<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-27404
PFF BANCORP, INC.
--------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 95-4561623
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
350 SOUTH GAREY AVENUE, POMONA, CALIFORNIA 91766
- ------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
(909) 623-2323
--------------
(Registrant's telephone number, including area code)
Not Applicable
--------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [_] No
The registrant had 17,056,131 shares of common stock, par value $.01 per
share, outstanding as of February 17, 1998.
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I FINANCIAL INFORMATION (UNAUDITED)
Item 1 Financial Statements
Consolidated Balance Sheets as of
December 31, 1997 and March 31, 1997 1
Consolidated Statements of Operations for the
Three Months And Nine Months Ended
December 31, 1997 and 1996 2
Consolidated Statement of Stockholders'
Equity for the Nine Months Ended December 31, 1997 3
Consolidated Statements of Cash Flows for the
Nine Months Ended December 31, 1997 and 1996 4
Notes to Unaudited Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II OTHER INFORMATION
Item 1 Legal Proceedings 25
Item 2 Changes in Securities 25
Item 3 Defaults Upon Senior Securities 25
Item 4 Submission of Matters to a Vote of Security Holders 25
Item 5 Other Information 25
Item 6 Reports on Form 8-K 25
</TABLE>
SIGNATURES
<PAGE>
PART I - FINANCIAL INFORMATION (UNAUDITED)
ITEM L. FINANCIAL STATEMENTS.
PFF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1997
----------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents........................................................................ $ 38,872 $ 31,632
Loans held for sale at lower of cost or fair value (net of valuation
allowance).................................................................................... - 736
Investment securities held-to-maturity (estimated fair value of $728 at
December 31, 1997 and $16,213 at March 31, 1997)................................................ 709 16,190
Investment securities available-for-sale, at fair value.......................................... 257,494 87,647
Mortgage-backed securities held-to-maturity (estimated fair value of
$4,135 at December 31, 1997 and $5,509 at March 31, 1997)..................................... 4,122 5,490
Mortgage-backed securities available-for-sale, at fair value..................................... 507,188 486,009
Loans receivable, net............................................................................ 1,854,392 1,819,209
Federal Home Loan Bank (FHLB) stock, at cost..................................................... 35,410 27,270
Accrued interest receivable...................................................................... 17,673 15,879
Real estate, net................................................................................. 9,042 8,858
Property and equipment, net...................................................................... 26,299 26,521
Prepaid expenses and other assets................................................................ 14,654 10,326
---------- ----------
Total assets........................................................................... $2,765,855 $2,535,767
========== ==========
Liabilities:
Deposits......................................................................................... $1,706,562 $1,711,049
FHLB advances and other borrowings............................................................... 758,086 530,000
Accrued expenses and other liabilities........................................................... 32,845 29,192
---------- ----------
Total liabilities.............................................................................. 2,497,493 2,270,241
---------- ----------
Commitments and contingencies.................................................................... - -
Stockholders' equity:
Preferred stock, $.01 par value. Authorized 2,000,000
shares; none issued.................................................................... - -
Common stock, $.01 par value. Authorized 59,000,000
shares; issued 19,889,949; outstanding 17,955,793 at December 31,
1997 and 18,845,625 at March 31, 1997.................................................. 199 198
Additional paid-in capital....................................................................... 175,032 182,519
Retained earnings, substantially restricted...................................................... 111,199 108,021
Unearned stock-based compensation................................................................ (22,471) (24,711)
Treasury stock................................................................................... (19) (10)
Unrealized gains (losses) on securities available-for-sale, net.................................. 4,422 (491)
---------- ----------
Total stockholders' equity................................................................ 268,362 265,526
---------- ----------
Total liabilities and stockholders' equity............................................. $2,765,855 $2,535,767
========== ==========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
-1-
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------------- ----------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income:
Mortgage loans......................................... $ 34,924 $ 33,430 $ 104,756 $ 96,740
Non-mortgage loans..................................... 1,164 543 2,995 1,640
Mortgage-backed securities............................. 7,883 9,067 24,700 19,018
Investment securities and deposits..................... 3,936 1,772 9,741 5,135
----------- ----------- ----------- -----------
Total interest income................................ 47,907 44,812 142,192 122,533
----------- ----------- ----------- -----------
Interest on deposits..................................... 20,061 20,100 60,723 59,482
Interest on borrowings................................... 9,299 7,508 26,678 12,622
----------- ----------- ----------- -----------
Total interest expense............................... 29,360 27,608 87,401 72,104
----------- ----------- ----------- -----------
Net interest income.................................. 18,547 17,204 54,791 50,429
Provision for loan losses................................ 1,300 2,896 5,799 10,662
----------- ----------- ----------- -----------
Net interest income after provision for loan losses.. 17,247 14,308 48,992 39,767
----------- ----------- ----------- -----------
Non-interest income:
Deposit and other fees................................. 2,487 1,708 7,431 5,609
Trust fees............................................. 462 344 1,304 1,051
Mortgage loan servicing fees........................... 262 246 705 668
Gain (loss) on sale of loans and securities, net....... 1,050 120 1,207 (29)
Other non-interest income.............................. 22 44 69 280
----------- ----------- ----------- -----------
Total non-interest income............................ 4,283 2,462 10,716 7,579
----------- ----------- ----------- -----------
Non-interest expense:
General and administrative:
Compensation and benefits............................ 6,802 5,853 19,984 16,548
Occupancy and equipment.............................. 3,052 2,672 8,743 7,691
Marketing and professional services.................. 996 805 2,437 2,373
Other................................................ 2,395 2,981 7,435 8,876
----------- ----------- ----------- -----------
Total general and administrative..................... 13,245 12,311 38,599 35,488
----------- ----------- ----------- -----------
SAIF recapitalization assessment....................... - - - 10,900
Real estate operations, net............................ (13) 507 520 (558)
----------- ----------- ----------- -----------
Total non-interest expense........................... 13,232 12,818 39,119 45,830
----------- ----------- ----------- -----------
Earnings before income taxes...................... 8,298 3,952 20,589 1,516
Income taxes........................................... 3,546 1,736 8,868 1,292
----------- ----------- ----------- -----------
Net earnings...................................... $ 4,752 $ 2,216 $ 11,721 $ 224
=========== =========== =========== -----------
Basic earnings per share.......................... $ 0.30 $ 0.12 $ 0.72 $ 0.01
=========== =========== =========== ===========
Weighted average shares outstanding for basic
earnings per share calculation.................. 15,946,157 17,752,550 16,257,008 18,114,739
=========== =========== =========== ===========
Diluted earnings per share........................ $ 0.28 $ 0.12 $ 0.69 $ 0.01
=========== =========== =========== ===========
Weighted average shares outstanding for
diluted earnings per share calculation.......... 16,813,785 17,855,837 16,958,258 18,149,168
=========== =========== =========== ===========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
-2-
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED DECEMBER 31 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<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>
Balance at March 31, 1997................. 18,845,625 $ 198 182,519 108,021 (24,711) (10)
Net earnings.............................. - - 11,721 - - -
Purchase of treasury stock................ (942,281) - (9,414) (8,543) - (9)
Amortization and issuance of shares under
stock-based compensation plan............ 52,449 1 1,927 - 2,240 -
Changes in unrealized gains(losses) on
securities available-for-sale, net....... - - - - - -
---------- ------ ------- ------- ------- ---
Balance at December 31, 1997.............. 17,955,793 $ 199 175,032 111,199 (22,471) (19)
========== ====== ======= ======= ======= ===
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED
GAINS
(LOSSES)
ON
SECURITIES
AVAILABLE-
FOR-
SALE,NET TOTAL
---------- --------
<S> <C>
Balance at March 31, 1997................. (491) $ 265,526
Net earnings.............................. - 11,721
Purchase of treasury stock................ - (17,966)
Amortization and issuance of shares under
stock-based compensation plan............ - 4,168
Changes in unrealized gains(losses) on
securities available-for-sale, net....... 4,193 4,913
---------- ---------
Balance at December 31, 1997.............. 4,422 $ 268,362
========== =========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
-3-
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOW
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
------------------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings................................................................ $ 11,721 $ 224
Adjustments to reconcile net earnings to net cash
provided
by operating activities:
Amortization of premiums (discounts) on loans, investments
and mortgage-backed securities........................................... 282 (55)
Amortization of deferred loan origination fees............................ 69 (1,114)
Loan fees collected....................................................... (2,918) (180)
Dividends on FHLB stock................................................... (1,276) (1,452)
Provisions for losses on:
Loans................................................................. 5,799 10,662
Real estate........................................................... (447) (1,046)
Net (gain) on sales of loans, mortgage-backed securities
available-for-sale, real estate and property and equipment................ (648) (503)
Depreciation and amortization of property and equipment................... 2,782 2,313
Loans originated for sale................................................. (3,192) (7,494)
Proceeds from sale of loans held for sale................................. 166,614 10,990
Amortization of unearned stock-based compensation......................... 3,499 1,448
(Increase)/decrease in:
Accrued expenses and other liabilities............................... 7,210 7,797
Accrued interest receivable.......................................... 1,794 (4,020)
Prepaid expenses and other assets.................................... 4,328 11,642
Net cash provided by operating activities......................... 195,617 29,212
Cash flows from investing activities:
Loans originated for investment.......................................... (359,794) (404,390)
Increase/(decrease) in construction loans in process..................... (49,368) 20,610
Purchases of loans held for investment................................... (152,958) (28,417)
Principal payments on loans.............................................. 332,996 168,135
Principal payments on mortgage-backed securities......................... 1,371 1,262
held-to-maturity
Principal payments on mortgage-backed securities
available-for-sale..................................................... 93,765 44,510
Purchases of investment securities available-for-sale.................... (191,539) (61,515)
Purchases of FHLB stock.................................................. (6,864) (9,156)
Purchases of mortgage-backed securities available-for-sale............... (133,550) (441,473)
Proceeds from maturity of certificates of deposit........................ - 190
Proceeds from maturities of investment securities........................ 15,481 26,400
Proceeds from maturities of investment
securities available-for-sale........................................ 15,563 2,152
</TABLE>
(Continued)
-4-
<PAGE>
PFF BANCORP, INC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASHFLOW
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE-MONTHS ENDED
DECEMBER 31,
-------------------------
1997 1996
--------- ---------
<S> <C> <C>
Proceeds from the sale of investment securities available-for-sale......... 7,899 -
Proceeds from the sale of mortgage-backed securities available-for-sale.... 24,955 10,059
Investment in real estate.................................................. 533 (1,020)
Proceeds from sale of real estate.......................................... 9,396 8,350
Purchases of property and equipment........................................ (2,632) (3,512)
Proceeds from sale of property and equipment............................... 67 129
---------- ----------
Net cash used in investing activities................................... (394,679) (667,686)
Cash flows from financing activities:
Proceeds from FHLB advances and other borrowings........................... 1,058,886 1,026,200
Repayment of FHLB advances and other borrowings............................ (830,800) (510,922)
Net change in deposits..................................................... (4,487) 1,057
Proceeds from the issuance of stock related to stock option plans.......... 669 -
Purchase of treasury stock................................................. (17,966) (11,262)
-- ------- ---------
Net cash provided by financing activities............................... 206,302 505,073
Net (decrease) increase in cash and cash equivalents.................... 7,240 (133,401)
Cash and cash equivalents, beginning of period............................... 31,632 175,904
---------- ----------
Cash and cash equivalents, end of period..................................... $ 38,872 $ 42,503
========== ==========
Supplemental information:
Interest paid, including interest credited................................... $ 85,875 $ 65,444
Income taxes paid............................................................ 9,435 1,838
Non-cash investing and financing activities:
Change in unrealized gain (loss) on securities
available-for-sale....................................................... 4,913 (1,931)
Net transfers from loans receivable to real estate......................... 9,362 8,568
Loans originated for the sale of real estate acquired
in settlement of loans................................................... 1,584 810
Transfer of loans held to maturity to loans held for sale.................. 159,854 -
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-5-
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Consolidation
Effective March 28, 1996, pursuant to a plan of conversion, Pomona First Federal
Savings and Loan Association (the Association) reorganized from a federally
chartered mutual savings and loan association to PFF Bank & Trust (the Bank), a
federally chartered stock savings bank. PFF Bancorp, Inc. (the Bancorp) was
incorporated under Delaware law in October 1995 for the purpose of acquiring and
holding all of the outstanding capital stock of the Bank as a part of the Bank's
conversion. Any references to financial information for periods before March
28, 1996, refer to the Association prior to conversion.
The accompanying consolidated financial statements include the accounts of PFF
Bancorp, Inc. and its subsidiary (the Company) PFF Bank & Trust. The Company's
business is conducted primarily through PFF Bank & Trust and subsidiary, Pomona
Financial Services, Inc. Pomona Financial Services, Inc. includes the accounts
of Diversified Services, Inc. and PFF Insurance Service. All material
intercompany balances and transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
principally of normal recurring accruals) necessary for a fair presentation have
been included. Certain reclassifications have been made to the consolidated
financial statements for 1997 to conform to the 1998 presentation.
The results of operations for the three and nine months ended December 31, 1997
are not necessarily indicative of results that may be expected for the entire
fiscal year ending March 31, 1998.
(2) Recent Accounting Pronouncements
In February 1997, the FASB issued Statement of Financial Accounting Standards
No. 129, "Disclosure of Information about Capital Structure" (SFAS 129). This
statement shall be effective for the financial statements for both interim and
annual periods ending after December 15, 1997. The issuance of SFAS No. 129 did
not 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.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenue, expenses, gains, and losses) in full set of
general purpose financial statements. SFAS No. 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS No. 130 requires that
an enterprise (a) classify items of other comprehensive income by their nature
in a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. SFAS No.
130 is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. Management is in the process of determining
the impact, if any, this statement will have on the Company.
-6-
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
In June 1997, the FASB also issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
(SFAS no. 131). SFAS No. 131 establishes standards for the way that public
enterprises report information about operating segments in annual financial
statements and requires that selected information about those operating segments
be reported in interim financial statements. This Statement supersedes Statement
of Financial Accounting Standards No. 14, "Financial Reporting for Segments of a
Business Enterprise". SFAS No. 131 requires that all public enterprises report
financial and descriptive information about their reportable operating segments.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. This Statement is effective for fiscal years beginning
after December 15, 1997. In the initial year of application, comparative
information for earlier years should be restated. This Statement need not be
applied to interim financial statements in the year of application, but
comparative information for earlier years should be restated. This Statement
need not be applied to interim financial statements in the year of application,
but comparative information for interim periods in the initial year of
application shall be reported in financial statements for interim periods in the
second year of application. Early application is encouraged. Management is in
the process of determining the impact, if any, this statement will have on the
Company.
The Securities and Exchange Commission has approved rule amendments to clarify
and expand existing disclosure requirements for derivative financial
instruments. The amendments require enhanced disclosure of accounting policies
for derivative financial instruments in the footnotes to the financial
statements. In addition, the amendments expand existing disclosure requirements
to include quantitative and qualitative information about market risk inherent
in market risk sensitive instruments. The required quantitative and qualitative
information should be disclosed outside the financial statements and related
notes thereto. The enhanced accounting policy disclosure requirements are
effective for the quarterly period ended June 30, 1997. As the Company believes
that the derivative financial instrument disclosures contained with the notes to
the financial statements of its 1997 Form 10-K substantially conform with the
accounting policy requirements of these amendments, no further interim period
disclosure has been provided. The rule amendments that required expanded
disclosure of quantitative and qualitative information about market risk are
effective with the 1998 Form 10-K.
(3) Subsequent Event
On December 29, 1997, the office of Thrift Supervision approved the Company's
application to repurchase 5% (895,167 shares) of its outstanding common stock.
All shares were repurchased by January 27, 1998 at an average price of $19.82
per share.
(4) Earnings per share.
The Company adopted, effective December 31, 1997, Statement of Accounting
Standards No. 128 "Earnings Per Share" ("SFAS 128"). SFAS 128 simplifies the
standards for computing and presenting earnings per share ("EPS") as previously
prescribed by Accounting Principles Board Opinion No. 15 "Earnings per Share."
SFAS 128 replaces primary EPS with basic EPS and fully diluted EPS with diluted
EPS. Basic EPS excludes dilution and is computed by dividing earnings available
to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resuited from issuance of common
stock that then shared in earnings.
-7-
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Note 4-Earnings per Share Disclosures(continued)
The following table is a reconciliation of the numerators and denominators of
the basic and diluted EPS computations for net earnings for PFF Bancorp, Inc.
<TABLE>
<CAPTION>
For the Nine Months Ended December 31,
-------------------------------------------------------------------------------------
1997 (1) 1996 (2)
--------------------------------------- --------------------------------------
Earnings Shares Per-Share Earnings Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
--------------------------------------- --------------------------------------
(Dollar in thousands, except share data)
<S> <C> <C> <C> <C> <C> <C>
Net Earnings $11,721 $224
Basic EPS
Income available to
common stockholders 11,721 16,257,008 $0.72 224 18,114,739 $0.01
===== =====
Effect of Dilutive Securities
Options and Stock Awards - 701,250 - 34,429
------ ------------ ---- ----------
Diluted EPSs
Income available to common
stockholders + assumed conversions $11,721 16,958,258 $0.69 $224 18,149,168 $0.01
======= ============ ===== ==== ========== =====
<CAPTION>
For the Three Months Ended December 31,
-------------------------------------------------------------------------------------------
1997 (1) 1996 (2)
------------------------------------------ -----------------------------------------
Earnings Shares Per-Share Earnings Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------------------------------------ -----------------------------------------
(Dollar in thousands, except share data)
<S> <C> <C> <C> <C> <C> <C>
Net Earnings $4,752 $2,216
Basic EPS
Income available to
common stockholders 4,752 15,946,157 $0.30 2,216 17,752,550 $0.12
===== =====
Effect of Dilutive Securities
Options and Stock Awards - 867,628 - 103,287
------ ---------- ------ ----------
Diluted EPSs
Income available to common
stockholders + assumed conversions $4,752 16,813,785 $0.28 $2,216 17,855,837 $0.12
====== ========== ===== ====== ========== =====
</TABLE>
(1) Options to purchase 6,154 shares of common stock at $20.625 per share were
outstanding during the three month and nine month periods ending December 31,
1996 but were not included in the computation of diluted EPS because the
options' exercise price was greater than the average market price of the common
shares. The options, which expire October 22, 2002, were still outstanding at
December 31, 1997.
(2) Options to purchase 1,031 shares of common stock at $13.75 per share were
outstanding during the three month and nine month periods ending December 31,
1996 but were not included in the computation of diluted EPS because the
options' exercise price was greater than the average market price of the common
shares. The options, which expire December 19, 2001, were still outstanding at
December 31, 1996.
8
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
OPERATION
AVERAGE BALANCE SHEETS
The following table sets forth certain information relating to the Company for
the three and nine months ended December 31, 1997 and 1996. The yields and
costs are derived by dividing income or expense by the average balance of assets
or liabilities, respectively, for the periods shown. Average balances are
derived from average daily balances. The yields and costs include fees which are
considered adjustments to yields.
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------------------------------------------------
1997 1996
--------------------------------------- ------------------------------
Avg. Avg.
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-earning deposits and short-term
investments................................... $ 31,492 $ 369 4.65% $ 24,559 $ 329 5.31%
Investment securities, net (1)(2)............... 181,082 3,076 6.74 65,440 1,126 6.83
FHLB Stock, at cost. 29,571 491 6.59 25,719 317 4.93
Mortgage-backed securities(1)(5)................ 466,051 7,883 6.93 528,340 9,067 6.86
Loans receivable, net (3)(4).................... 1,850,375 36,088 7.80 1,797,242 33,973 7.56
---------- ------- ---------- -------
Total interest-earning assets............... 2,558,571 47,907 7.52 2,441,300 44,812 7.34
------- -------
Non-interest-earning assets..................... 93,043 79,256
---------- ----------
Total assets................................ $2,651,614 $2,520,556
========== ==========
LIABILITIES AND EQUITY:
Interest-bearing liabilities
Money market savings accounts................... $ 159,074 2,083 5.20 $ 123,226 1,104 3.55
Passbook accounts............................... 199,369 1,002 1.99 191,649 1,396 2.89
NOW and other demand deposit accounts 162,857 309 0.75 128,149 266 0.82
Certificate accounts............................ 1,191,812 16,667 5.55 1,240,664 17,334 5.54
---------- ------- ---------- -------
Total....................................... 1,713,112 20,061 4.65 1,683,688 20,100 4.74
---------- ------- ---------- -------
FHLB advances and other borrowings.............. 628,015 9,249 5.84 513,366 7,496 5.79
Other........................................... 3,785 50 5.24 3,905 12 1.22
---------- ------- ---------- -------
Borrowed funds............................... 631,800 9,299 5.84 517,271 7,508 5.76
---------- ------- ---------- -------
Total interest-bearing liabilities........... 2,344,912 29,360 4.97 2,200,959 27,608 4.98
------- -------
Non-interest-bearing liabilities................ 41,596 32,181
---------- ----------
Total liabilities........................... 2,386,508 2,233,140
Stockholders' equity............................ 265,106 287,416
---------- ----------
Total liabilities and stockholders' equity.... $2,651,614 $2,520,556
========== ==========
Net interest income before provision for
loan losses.................................. $18,547 $17,204
======= =======
Net interest rate spread (6).................... 2.55% 2.36%
Net interest margin (7)......................... 2.90% 2.82%
Ratio of interest earning assets to interest-
bearing liabilities........................... 109.11% 110.92%
</TABLE>
-9-
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
_______________________________
(1) Includes assets available for sale and held-to-maturity and unamortized
discounts and premiums.
(2) Included in the average balance of investment securities for the three
months ended December 31, 1997 and 1996 are average investment securities
held-to-maturity of $700,000 and $3.5 million, respectively. Interest
income recognized on investment securities held-to-maturity during these
periods was $12,000 and $58,000, respectively, resulting in average yields
of 7.07% and 6.52%, respectively. Yields on average investment securities
have been calculated based upon the historical cost bases of the underlying
securities.
(3) Amount is net of deferred loan origination fees, undisbursed loan funds,
unamortized discounts and allowance for loan losses and includes loans held
for sale and non-performing loans.
(4) Included in the average balance of loans receivable, net for the three
months ended December 31, 1997 and 1996, are average loans held for sale of
$81.5 million and $2.5 million respectively. Interest income recognized on
loans held for sale during these periods was $1.4 million and $42,000,
respectively, resulting in average yields of 7.10% and 6.82%, respectively.
(5) Included in the average balance of mortgage-backed securities, net for
the three months ended December 31, 1997 and 1996 are average mortgage-
backed securities held-to-maturity of $4.4 million and $5.9 million.
Interest income recognized on mortgage backed securities held-to-maturity
during these periods was $72,000 and $107,000, respectively, resulting in
an average yields of 6.57% and 7.22%, respectively.
(6) Net interest rate spread represents the difference between the yield on
interest-earnings assets and the cost of interest-bearing liabilities.
(7) Net interest margin represents net interest income divided by average
interest-earning assets.
-10-
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEET
NINE MONTHS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1997 1996
---------------------------------------- -------------------------------------
AVG. AVG.
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-earning deposits and short-term
investments $ 27,321 $ 1,159 5.63% $ 36,130 $ 1,517 5.57%
Investment securities, net (1)(2)....... 145,247 7,271 6.64 53,469 2,800 6.95
FHLB Stock, at cost..................... 28,411 1,311 6.12 19,492 818 5.57
Mortgage-backed securities(1)(5)........ 481,728 24,700 6.89 369,350 19,018 6.87
Loans receivable, net (3)(4)............ 1,857,624 107,751 7.73 1,722,134 98,380 7.62
---------- --------- ---------- ----------
Total interest-earning assets....... 2,540,331 142,192 7.47 2,200,575 122,533 7.42
--------- ----------
Non-interest-earning assets............. 82,386 78,748
---------- ----------
Total assets........................ $2,622,717 $2,279,323
========== ==========
LIABILITIES AND EQUITY:
Interest bearing liabilities
Money market savings accounts........... $ 166,055 5,710 4.56 $ 103,370 2,562 3.29
Passbook accounts....................... 183,718 3,302 2.39 196,247 4,285 2.90
NOW and other demand deposit accounts 155,054 910 0.78 131,572 820 0.83
Certificate accounts.................... 1,212,485 50,801 5.56 1,239,822 51,815 5.55
---------- --------- ---------- ----------
Total............................... 1,717,312 60,723 4.69 1,671,011 59,482 4.72
---------- --------- ---------- ----------
FHLB advances and other borrowings...... 599,661 26,595 5.89 279,082 12,584 5.98
Other................................... 2,913 83 3.78 2,992 38 1.69
---------- --------- ---------- ----------
Borrowed funds....................... 602,574 26,678 5.88 282,074 12,622 5.94
---------- --------- ---------- ----------
Total interest-bearing liabilities... 2,319,886 87,401 5.00 1,953,085 72,104 4.90
--------- ----------
Non-interest-bearing liabilities........ 36,007 36,836
---------- ----------
Total liabilities................... 2,355,893 1,989,921
Stockholders' equity.................... 266,824 289,402
--------- ----------
Total liabilities and stockholders'
equity............................... $2,622,717 $2,279,323
========== ==========
Net interest income before provision
for loan losses........................ $ 54,791 $ 50,429
========= ==========
Net interest rate spread (6)............ 2.47% 2.52%
Net interest margin (7)................. 2.88% 3.06%
Ratio of interest-earning assets to
interest-bearing liabilities........ 109.50% 112.67%
</TABLE>
-11-
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
_______________________________
(1) Includes assets available for sale and held-to-maturity and unamortized
discounts and premiums.
(2) Included in the average balance of investment securities for the nine
months ended December 31, 1997 and 1996 are average investment securities
held-to-maturity of $4.2 million and $11.5 million, respectively.
Interest income recognized on investment securities held-to-maturity during
these periods was $191,000 and $496,000 respectively, resulting in average
yields of 5.99% and 5.85%, respectively. Yields on average investment
securities have been calculated based upon the historical cost bases of the
underlying securities.
(3) Amount is net of deferred loan origination fees, undisbursed loan funds,
unamortized discounts and allowance for loan losses and includes loans held
for sale and non-performing loans.
(4) Included in the average balance of loans receivable, net for the nine
months ended December 31, 1997 and 1996, are average loans held for sale of
$33.3 million and $4.6 million, respectively. Interest income recognized on
loans held for sale during these periods were $3.2 million and $437,000,
respectively, resulting in average yields of 7.23% and 7.13%, respectively.
(5) Included in the average balance of mortgage-backed securities, net for the
nine months ended December 31, 1997 and 1996 are average mortgage-backed
securities held-to-maturity of $4.8 million and $6.3 million. Interest
income recognized on mortgage backed securities held-to-maturity during
these periods were $255,000 and $341,000, respectively, resulting in an
average yields of 7.05% and 7.23%, respectively.
(6) Net interest rate spread represents the difference between the yield on
interest-earnings assets and the cost of interest-bearing liabilities.
(7) Net interest margin represents net interest income divided by average
interest-earning assets.
-12-
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
RATE/VOLUME ANALYSIS
The following table presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to: (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume); and (iii) the net change. The changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, 1997 DECEMBER 31, 1997
COMPARED TO DECEMBER 31, 1996 COMPARED TO DECEMBER 31, 1996
INCREASE (DECREASE) INCREASE(DECREASE)
--------------------------------- ----------------------------
VOLUME RATE NET VOLUME RATE NET
------- ------ ------- ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
------- ------ ------- ------- ------ -------
Interest-earning assets:
Interest-earning deposits
and short-term investments....... $ 93 $ (53) $ 40 $ (370) $ 12 $ (358)
Investment securities, net(1)(2).. 1,990 (40) 1,950 4,806 (335) 4,471
FHLB Stock, at cost............... 51 123 174 376 117 493
Mortgage-backed securities(1)(4).. (1,259) 75 (1,184) 5,596 86 5,682
Loans receivable, net(3).......... 1,004 1,111 2,115 7,740 1,631 9,371
------- ------ ------- ------- ------ -------
Total interest-earning
assets...................... 1,879 1,216 3,095 18,148 1,511 19,659
------- ------ ------- ------- ------ -------
Interest-bearing liabilities:
Money market savings accounts 319 660 979 1,554 1,594 3,148
Passbook accounts................. 56 (450) (394) (274) (709) (983)
NOW and other demand deposit
accounts......................... 72 (29) 43 150 (60) 90
Certificate accounts.............. (683) 16 (667) (1,143) 129 (1,014)
FHLB advances and other
borrowings....................... 1,674 79 1,753 14,455 (444) 14,011
Other............................. - 38 38 (2) 47 45
------- ------ ------- ------- ------ -------
Total interest-bearing
liabilities................... 1,438 314 1,752 14,740 557 15,297
------- ------ ------- ------- ------ -------
Change in net interest income.......... $ 441 $ 902 $ 1,343 $ 3,408 $ 954 $ 4,362
======= ====== ======= ======= ====== =======
</TABLE>
__________________________
(1) Includes assets held-to-maturity.
(2) Included in the increase/(decrease) in interest income on investment
securities, net for the three and nine months ended December 31, 1997
compared to 1996 are increases/(decreases) in interest income on investment
securities held-to-maturity attributable to volume and rate of $(46,000)
and $1,000, and $(213,000) and $3,000 , respectively.
(3) Included in the increase in interest income on loans receivable, net for
the three and nine months ended December 31, 1997 compared to 1996 are
increases in interest income on loans held for sale attributable to volume
and rate of $1.3 million and $57,000 and $1.0 million and $17,000,
respectively.
(4) Included in the increase/(decrease) in interest income on mortgage-backed
securities, net for the three and nine months ended December 31, 1997
compared to 1996 are decreases in interest income on mortgage-backed
securities held-to-maturity attributable to volume and rate of $(28,000)
and $(7,000) and $(80,000) and $(7,000), respectively.
-13-
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND
- --------------------------------------------------------------------------------
1996
- ----
GENERAL
- -------
The Company recorded net earnings of $4.8 million or $0.30 per basic share for
the three months ended December 31, 1997 compared to net earnings of $2.2
million or $0.12 per basic share for the comparable period of 1996. Net
earnings for the quarter ended December 31, 1997 include a gain of $701,000
($407,000 or $0.03 per basic share after tax) from the sale of $149.6 million of
single family loans indexed to the Federal Home Loan Bank (FHLB) 11th District
Cost of Funds Index (COFI). These loans were sold and a similar amount of loans
indexed to the one year Constant maturity Treasury (CMT) were purchased during
the quarter in connection with the Bank's efforts to diversify the repricing
characteristics of its loan portfolio.
Net interest income was $18.5 million for the three months ended December 31,
1997 compared to $17.2 million for the comparable period of 1996. The increase
resulted principally from a $117.3 million increase in average interest-earning
assets. The Company's ratio of average interest-earning assets to average
interest-bearing liabilities was 109.11% for the three months ended December 31,
1997 compared to 110.92% for the comparable period of 1996 reflecting the
Company's efforts to leverage its capital base. Average interest spread was
2.55% for the three months ended December 31, 1997 compared to 2.36% for the
comparable period of 1996. Net interest margin was 2.90% for the three months
ended December 31, 1997 compared to 2.82% for the comparable period of 1996.
Provision for loan losses was $1.3 million for the three months ended December
31, 1997 compared to $2.9 million for the comparable period of 1996.
Total non-interest income was $4.3 million for the three months ended December
31, 1997 compared to $2.5 million for the comparable period of 1996. Non-
interest income for the quarter ended December 31, 1997 includes the $701,000
gain on loan sale noted above. Total non-interest expense was $13.2 million for
the three months ended December 31, 1997 compared to $12.8 million for the
comparable period of 1996.
INTEREST INCOME
- ---------------
Interest income was $47.9 million for the three months ended December 31, 1997
compared to $44.8 million for the comparable period of 1996. The increase in
interest income was attributable principally to a $117.3 million increase in
average interest-earning assets from $2.44 billion for the three months ended
December 31, 1996 to $2.56 billion for the comparable period of 1997. The yield
on earning assets increased to 7.52% for the three months ended December 31,
1997 from 7.34% for the comparable period of 1996. The increase in average
interest-earning assets was due principally to a $115.6 million increase in the
average balance of investment securities from $65.4 million for the three months
ended December 31, 1996 to $181.1 million for the comparable period of 1997, and
an increase of $53.1 million in the average balance of loans receivable, net
from $1.80 billion for the three months ended December 31, 1996 to $1.85 billion
for the comparable period of 1997. The average balance of mortgage-backed
securities (MBS) decreased $62.3 million from $528.3 million for the three
months ended December 31, 1996 to $466.1 million for the comparable period of
1997.
-14-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
The yield on loans receivable increased to 7.80% for the three months ended
December 31, 1997 from 7.56% for the comparable period of 1996. The Bank has
placed emphasis on originating construction, consumer, commercial business and
commercial real estate loans, the majority of which provide higher yields than
those earned on single-family residential COFI-based loan products. The
disbursed balance of the Bank's portfolio of construction loans totaled
$82.1million at a yield of 13.26% at December 31, 1997 compared to $63.5 million
at a yield of 12.96% at December 31, 1996. The Bank also increased the
proportion of its loan portfolio comprised by ("36/6") single-family residential
mortgage loans which provide for a fixed rate of interest for 36 months before
transitioning to a six-month adjustable-rate loan tied to the one-year constant
maturity treasury (CMT) index. At December 31, 1997, the Bank's portfolio of
these loans totaled $314.4 million at an average yield of 7.23% compared to
$212.9 million at an average yield of 7.19% at December 31, 1996. The increase
in the yield on loans receivable, net attributable to the change in the
composition of the loan portfolio was additionally impacted by an increase in
COFI to which a large portion of the Bank's portfolio of adjustable-rate loans
are tied. COFI in effect for the three months ended December 31, 1997 averaged
4.95% compared to 4.84% for the comparable period of 1996.
The weighted average yield on MBS was 6.93% for the three months ended December
31, 1997 compared to 6.86% for the comparable period of 1996. The increase in
the yield on MBS was due primarily to the indexing upward from teaser rates of
adjustable-rate MBS partially offset by an increase in premium amortization
caused by an acceleration in prepayment levels.
The weighted average yield on investment securities decreased from 6.83% for the
three months ended December 31, 1996 to 6.74% for the comparable period of 1997.
The decrease in the weighted average yield on investment securities reflects a
significant increase in the proportion of the portfolio comprised by floating-
rate collateralized mortgage obligations (CMO) during the three months ended
December 31, 1997.
INTEREST EXPENSE
- ----------------
Interest expense was $29.4 million for the three months ended December 31, 1997
compared to $27.6 million for the comparable period of 1996. The increase was
attributable to a $144.0 million increase in the average balance of interest-
bearing liabilities from $2.20 billion for the three months ended December 31,
1996 to $2.34 billion for the comparable period of 1997. The weighted average
cost of interest-bearing liabilities was 4.97% for the three months ended
December 31, 1997 compared to 4.98% for the comparable period of 1996. The
increase in interest-bearing liabilities was due principally to a $114.6 million
increase in the average balance of FHLB advances and other borrowings from
$513.4 million for the three months ended December 31, 1996 to $628.0 million
for the comparable period of 1997. The increase in FHLB advances
and other borrowings was due to the Company's strategy of utilizing both
wholesale and retail sources of funding to achieve its strategic growth
objectives and control its overall cost of funds. The weighted average
-15-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
cost of FHLB advances and other borrowings increased from 5.79% for the three
months ended December 31, 1996 to 5.84% for the comparable period of 1997
reflecting an increase in the weighted average maturity of non-putable FHLB
advances from 5.2 months to 9.0 months and an increase in the general level of
interest rates. These increases in funding cost were partially offset by the
Bank's increased usage of putable FHLB advances. At December 31, 1997, the
Bank's putable FHLB advances totaled $180 million at an weighted average
interest rate of 5.49% with fiscal maturities of December 1999 to December 2002
and first put dates of June 1998 to December 2000. The average balance of
deposits was $1.71 billion for the three months ended December 31, 1997 compared
to $1.68 billion for the comparable period of 1996, an increase of $29.4
million. The average balance of money market, passbook and demand accounts
increased $78.3 million from $443.0 million for the three months ended December
31, 1996 to $521.3 million for the comparable period of 1997 while the average
balance of certificate accounts decreased $48.9 million from $1.24 billion for
the three months ended December 31, 1996 to $1.19 billion for the comparable
period of 1997. The Bank is making a conscious effort through its marketing,
pricing and business development efforts to increase the proportion of its
deposit base comprised by money market, passbook and demand accounts. The
weighted average cost of deposits decreased from 4.74% for the three months
ended December 31, 1996 to 4.65% for the comparable period of 1997.
PROVISION FOR LOAN LOSSES
- -------------------------
The provision for loan losses was $1.3 million for the three months ended
December 31, 1997 compared to $2.9 million for the comparable period of 1996.
See "Comparison of Financial Condition at December 31, 1997 and March 31, 1997."
NON-INTEREST INCOME
- -------------------
Non-interest income was $4.3 million for the three months ended December 31,
1997 compared to $2.5 million for the comparable period of 1996. Excluding the
net gains on sales of loans and securities, the ratio of non-interest income to
average assets was .54% for the three months ended December 31, 1997 compared to
.39% for the comparable period of 1996. Net gains on the sales of loans and
securities were $1.1 million for the three months ended December 31, 1997
(including the $701,000 gain discussed earlier) compared to $120,000 for the
comparable period of 1996. Savings fees and charges were $1.6 million for the
three months ended December 31, 1997 compared to $1.1 million for the comparable
period of 1996. Sales of non-deposit investment products generated fee income of
$283,000 for the three months ended December 31, 1997 compared to $176,000 for
the comparable period of 1996. The increase in trust fee was primarily
attributable to an increase in assets under custody or management by the Bank's
trust department to $232.3 million at December 31, 1997 from $189.4 million at
December 31, 1996.
NON-INTEREST EXPENSE
- --------------------
Non-interest expense was $13.2 million for the three months ended December 31,
1997 compared to $12.8 million for the comparable period of 1996. General and
administrative expenses were $13.2 million or 1.99% of average assets for the
three months ended December 31, 1997 compared to $12.3 million or 1.95% of
average assets for the comparable period of 1996. Compensation and benefits
expense increased from $5.9 million for the three months ended December 31, 1996
to $6.8 million for the comparable period of 1997, due
-16-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
principally to increased staffing associated with the Bank's offering of
additional products and services to both consumers and businesses, including a
Telebanking Center which opened in May 1997, and also the expense associated
with the Company's 1996 Incentive Plan under which stock has been granted to key
officers and directors subject to the Company's achieving certain performance
levels. Other non-interest expense decreased $586,000 from $3.0 million for the
three months ending December 31, 1996 to $2.4 million for the comparable period
of 1997. The decrease was due principally to the reduction in the SAIF insurance
rate from 18 cents to 6.5 cents per $1,000 of average deposits. For the three
months ended December 31, 1996, there was approximately $570,000 of expenses
associated with the Bank's transition of its EDP systems to a new third party
service provider in October 1996.
Real estate operations, net reflects income of $13,000 for the three months
ended December 31, 1997 compared to expense of $507,000 for the comparable
period of 1996.
INCOME TAXES
- ------------
Income tax expense was $3.5 million for the three months ended December 31, 1997
compared to $1.7 million for the comparable period of 1996. The increase in
income tax expense was primarily the result of an increase in earnings before
income taxes from $4.0 million for the three months ended December 31, 1996 to
$8.3 million for the comparable period of 1997.
-17-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED DECEMBER 31, 1997 AND
- -------------------------------------------------------------------------------
1996
- ----
GENERAL
- --------
The Company recorded net earnings of $11.7 million or $0.72 per basic share for
the nine months ended December 31, 1997 compared to $224,000 or $0.01 per basic
share for the comparable period of 1996. Net earnings for the nine months
ended December 31, 1996 reflect the Bank's $10.9 million ($6.3 million or $0.35
per basic share, after tax) share of the industry wide SAIF assessment recorded
in September 1996.
Net interest income was $54.8 million for the nine months ended December 31,
1997 compared to $50.4 million for the comparable period of 1996. The increase
resulted from a $339.8 million increase in average interest-earning assets. The
Company's ratio of average interest-earning assets to average interest-bearing
liabilities was 109.50% for the nine months ended December 31, 1997 compared to
112.67% for the comparable period of 1996. Average interest rate spread was
2.47% for the nine months ended December 31, 1997 compared to 2.52% for the
comparable period of 1996. Net interest margin was 2.88% for the nine months
ended December 31, 1997 compared to 3.06% for the comparable period of 1996.
Provision for loan losses was $5.8 million for the nine months ended December
31, 1997 compared to $10.7 million for the comparable period of 1996.
Total non-interest income was $10.7 million for the nine months ended December
31, 1997 compared to $7.6 million for the comparable period of 1996. Total non-
interest expense decreased from $45.8 million for the nine months ended December
31, 1996 to $39.1 million for the comparable period of 1997 due to the $10.9
million SAIF assessment noted above.
INTEREST INCOME
- ---------------
Interest income was $142.2 million for the nine months ended December 31, 1997
compared to $122.5 million for the comparable period of 1996. The increase was
attributable to a $339.8 million increase in average interest-earning assets
from $2.20 billion for the nine months ended December 31, 1996 to $2.54 billion
for the comparable period of 1997. The average balance of MBS increased
$112.4 million from $369.4 million for the nine months ended December 31, 1996
to $481.7 million for the comparable period of 1997. The average balance of
loans receivable, net increased $135.5 million from $1.72 billion for the nine
months ended December 31, 1996 to $1.86 billion for the comparable period of
1997 and the average balance of investment securities increased $91.8 million
from $53.5 million for the nine months ended December 31, 1996 to $145.2 million
for the comparable period of 1997. The yield on average interest-earning assets
increased from 7.42% for the nine months ended December 31, 1996 to 7.47% for
the comparable period of 1997.
The weighted average yield on loans receivable, net was 7.73% for the nine
months ended December 31, 1997 compared to 7.62% for the comparable period of
1996. The increase in the yield on loans receivable
-18-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
was a result of the Bank's increased emphasis on originating higher yielding
mortgage loans coupled with an increase in COFI. COFI in effect for the nine
months ended December 31, 1997 averaged 4.88% compared to 4.83% for the
comparable period of 1996.
The weighted average yield on MBS was 6.89% for the nine months ended December
31, 1997 compared to 6.87% for the comparable period of 1996. The increase in
the yield on MBS was due primarily to the repricing of MBS purchased with
teaser rates partially offset by an increase in premium amortization caused by
an acceleration in prepayment levels. The weighted average yield on investment
securities was 6.64% for the nine months ended December 31, 1997 compared to
6.95% for the comparable period of 1996. The nine months ended December 31, 1996
reflects an adjustment of $158,000. Without this adjustment, the yield for the
nine months ended December 31, 1996 would have been 6.56%. The adjusted increase
in the yield on investment securities of 8 basis points reflects an increase in
the proportion of the portfolio comprised by callable agency securities and
CMOs.
INTEREST EXPENSE
- ----------------
Interest expense was $87.4 million for the nine months ended December 31, 1997
compared to $72.1 million for the comparable period of 1996. The average
balance of interest-bearing liabilities increased $366.8 million from $1.95
billion for the nine months ended December 31, 1996 to $2.32 billion for the
comparable period of 1997. The weighted average cost of interest-bearing
liabilities increased from 4.90% for the nine months ended December 31, 1996 to
5.00% for the comparable period of 1997.
The increase in average interest-bearing liabilities was due to a $320.6 million
increase in the average balance of FHLB advances and other borrowings from
$279.1 million for the nine months ended December 31, 1996 to $599.7 million for
the comparable period of 1997. The average balance of deposits was $1.72
billion for the nine months ended December 31, 1997, an increase of $46.3
million from the comparable period of 1996. The weighted average cost of
deposits decreased from 4.72% for the nine months ended December 31, 1996 to
4.69% for the comparable period of 1996. For the nine months ended December
31, 1997, the average cost of FHLB advances and other borrowings was 5.89%
compared to 5.98% for the comparable period of 1996 reflecting the Bank's usage
of putable FHLB advances.
PROVISION FOR LOAN LOSSES
- -------------------------
The provision for loan losses was $5.8 million for the nine months ended
December 31, 1997 compared to $10.7 million for the comparable period of 1996.
The provision for the nine months ended December 31, 1996 included $2.5 million
applicable to the establishment of specific allowances on several loans based
upon updated reviews. See "Comparison of Financial Condition at December 31,
1997 and March 31, 1997."
NON-INTEREST INCOME
- -------------------
Non-interest income was $10.7 million for the nine months ended December 31,
1997 compared to $7.6 million for the comparable period of 1996 excluding the
net gains on the sales of loans and securities, the ratio of non-interest income
to average assets was .48% for the nine months ended December 31, 1997 compared
to .45% for the comparable period of 1996. Gain (loss) on
-19-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
the sale of loans and securities, net were $1.2 million for the nine months
ended December 31, 1997 (including the $701,000 gain discussed earlier) compared
to a loss of $29,000 for the comparable period of 1996. Savings fees and
charges were $4.9 million for the nine months ended December 31, 1997 compared
to $3.4 million for the comparable period of 1996. Sales of non-deposit
investment products generated fees of $1.3 million for the nine month period
ending December 31, 1997 compared to $1.1 million for the comparable period of
1996.
NON-INTEREST EXPENSE
- --------------------
Non-interest expense was $39.1 million for the nine months ended December 31,
1997 compared to $45.8 million for the comparable period of 1996. General and
administrative expenses were $38.6 million or 1.96% of average assets for the
nine months ended December 31, 1997 compared to $35.5 million or 2.08% of
average assets for the comparable period of 1996. Compensation and benefits
expense was $20.0 million for the nine months ended December 31, 1997 compared
to $16.5 million for the comparable period of 1996, due principally to the
addition of staffing associated with the Bank's offering of additional products
and services, including a Telebanking Center which opened in May 1997, and the
expense associated with the Company's 1996 Incentive Plan under which stock has
been granted to key officers and directors subject to the Company's achieving
certain performance levels. The increase in occupancy and equipment expense
from $7.7 million for the nine months ended December 31, 1996 to $8.7 million
for the comparable period of 1997 was due principally to the upgrading of
computer software and equipment due to the system conversion in 1996 and the
opening of the Telebanking Center. Other non-interest expense decreased from
$8.9 million for the nine months ended December 31, 1996 to $7.4 million for the
comparable period of 1997 due primarily to a reduction in the FDIC insurance
rate charged on average deposits.
Other non-interest expense for the nine months ended December 31, 1997 includes
approximately $350,000 associated with the preparation for the year 2000 (Y2K);
whereas, the nine months ended December 31, 1996 includes expenses associated
with the name change and the Bank's transition of its EDP systems to a new third
party provider. The Bank is highly dependent on both internal and external EDP
systems for the conduct of its business and expects to incur between $750,000
and $1.0 million of expense over the next two fiscal years in connection with
its Y2K efforts. As a part of its evaluation and response to Y2K, the Bank will
also be evaluating and reacting to the potential impact, if any, of Y2K on its
major borrowers, and suppliers.
Real estate operations, net reflects income of $558,000 for the nine months
ended December 31, 1996 compared to a loss of $520,000 for the comparable period
of 1997. The results for the nine months ended December 31, 1996 reflect a $1.4
million reduction in the allowance for real estate losses based upon updated
property valuations. The results for the nine months ended December 31, 1997
include a provision of $325,000 on a single-family residential development
project.
INCOME TAXES
- ------------
Income tax expense was $8.9 million for the nine months ended December 31, 1997
compared to $1.3 million for the comparable period of 1996. The income tax
expense for the nine months ended December 31, 1996 includes a $470,000 accrual
for the tax portion of a possible adverse California franchise tax settlement.
-20-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997 AND MARCH 31, 1997
- -------------------------------------------------------------------------
Total assets increased $230.1 million or 9.07% to $2.77 billion at December 31,
1997 from $2.54 billion at March 31, 1997 due principally to growth in
investment securities and MBS. Investment securities and MBS increased $174.2
million to $769.5 million at December 31, 1997 from $595.3 million at March 31,
1997. Loans receivable, net increased $35.2 million to $1.85 billion at December
31, 1997 from $1.82 billion at March 31, 1997. During the three months ended
December 31, 1997, the Company sold $149.6 million of mortgage loans which were
held for sale as of September 30, 1997. This sale reflects the Company's
intention to alter the repricing profile of its loan portfolio by selling a
portion of the portfolio indexed to COFI while increasing the proportion of the
portfolio indexed to current indices such as prime and the one-year CMT. The
Company purchased $154.4 million of residential mortgage loans indexed to the
one-year CMT during the three months ended December 31, 1997.
Loan originations for the nine months ended December 31, 1997 were $363.0
million compared to $411.9 million for the comparable period of 1996. Non-
performing loans declined from $23.4 million or 1.24% of gross loans at March
31, 1997 to $15.6 million or 0.79% of gross loans at December 31, 1997. Non-
performing assets, which includes foreclosed real estate, net of specific
allowances and restructured loans, decreased from $45.7 million or 1.80% of
total assets at March 31, 1997 to $38.3 million or 1.38% of total assets at
December 31, 1997. Troubled-debt restructured loans were $14.6 million at March
31, 1997 compared to $14.7 million at December 31, 1997.
The allowance for loan losses is maintained at an amount management considers
adequate to cover future losses on loans receivable which are deemed probable
and estimable. The allowance is based upon a number of factors, including
current economic conditions, actual loss experience and industry trends. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowance for loan losses. Such
agencies may require the Bank to make additional provisions for loan losses
based upon information available at the time of the review. At December 31,
1997, the Bank's allowance for loan losses was $25.9 million or 1.32% of gross
loans compared to $27.7 million or 1.47% of gross loans at March 31, 1997. The
Bank will continue to monitor and modify its allowance for loan losses as
conditions dictate. During the three months ended December 31, 1997, the Bank
charged off a $1.0 million lot development loan that had been fully provided for
in previous periods. The following table sets forth activity in the Bank's
allowance for loan losses for the nine months ended December 31, 1997.
<TABLE>
<CAPTION>
Three months Nine months
ended ended
December 31, 1997 December 31, 1997
------------------ ------------------
<S> <C> <C>
Beginning Balance $27,221 $27,721
Provision for loan losses 1,300 5,799
Charge-offs, net (2,630) (7,629)
------- -------
Balance at December 31, 1997 $25,891 $25,891
======= =======
</TABLE>
-21-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
Total liabilities increased $227.3 million or 10.0% to $2.50 billion at December
31, 1997 from $2.27 billion at March 31, 1997. Deposits decreased $4.5 million
between March 31 and December 31, 1997. FHLB advances and other borrowings
increased $228.1 million to $758.1 million at December 31, 1997 from $530.0
million at March 31, 1997. FHLB advances were utilized to fund the growth in
loans receivable and the increase in investment securities and MBS.
Total stockholders' equity was $268.4 million at December 31, 1997 compared to
$265.5 million at March 31, 1997. The $2.8 million increase in stockholders'
equity is comprised of an $11.7 million increase representing net earnings for
the nine months ended December 31, 1997, a $4.9 million increase representing
the change in unrealized gains on securities available-for-sale, a $4.2 million
increase reflecting the amortization and issuance of shares under stock-based
compensation plans, and a $18.0 million decrease reflecting the increase in
treasury stock resulting from the Company's repurchase of 942,281 shares of its
common stock. On December 29, 1997, the Office of Thrift Supervision approved
the Company's application to repurchase 5% (895,167 shares) of its outstanding
common stock. All shares were repurchased by January 27, 1998 at an average
price of $19.82 per share.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's primary sources of funds are deposits, principal and interest
payments on loans and securities, FHLB advances and other borrowings, proceeds
from the maturation of securities and, to a lesser extent, proceeds from the
sale of loans. While maturities and scheduled amortization of loans and
securities are predictable sources of funds, deposit flows and mortgage
prepayments are greatly influenced by general interest rates, economic
conditions and competition. The Bank is subject to minimum regulatory liquidity
requirements. The Bank has maintained the required minimum levels of liquid
assets as defined by OTS regulations. These requirements, which may be varied
at the direction of the OTS depending upon economic conditions and deposit
flows, are based upon a percentage of deposits and short-term borrowings. The
required ratios are currently 4% for the total qualifying liquidity. The Bank's
average total liquidity ratio was 6.65% for the quarter ended December 31,
1997.
The Company's cash flows are comprised of three primary classifications: cash
flows from operations, investing activities and financing activities. Cash
flows provided by operating activities were $195.6 million and $29.2 million for
the nine months ended December 31, 1997 and 1996, respectively.
Net cash provided by (used in) investing activities consisted primarily of
disbursements for loan originations and purchase of mortgage-backed and other
investment securities, offset by principal collections on loans and proceeds
from maturation of investments and pay downs on mortgage-backed securities.
Principal payments on loans were $333.0 million and $168.1 million for the nine
months ended December 31, 1997 and 1996, respectively. Disbursements on loans
originated and purchased were $565.3 million and $432.8 million for the nine
months ended December 31, 1997 and 1996, respectively.
-22-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
Disbursements for purchases of mortgage-backed and other investment securities
were $325.1 million and $503.0 million for the nine months ended December 31,
1997 and 1996, respectively. Proceeds from the maturation of investment
securities and pay downs of MBS were $126.2 million and $74.3 million for the
nine months ended December 31, 1997 and 1996, respectively. Proceeds from the
sale of investment securities and MBS available-for-sale were $32.9million and
$10.1 million for the nine months ended December 31, 1997 and 1996,
respectively.
Net cash provided by (used in) financing activities consisted primarily of net
activity in deposit accounts, FHLB advances and other borrowings and treasury
stock. The net increases/(decreases) in deposits were $(4.5 million) and
$1.1million for the nine months ended December 31, 1997 and 1996, respectively.
The net increases in FHLB advances and other borrowings were $228.1 million and
$515.3 million for the nine months ended December 31, 1997 and 1996,
respectively. The net increases in treasury stock were $18.0 million and $11.3
million for the nine months ended December 31, 1997 and 1996, respectively.
At December 31, 1997, on a consolidated basis, the Company had total capital of
$268.4 million or 9.70% of total assets. At December 31, 1997, the Bank
exceeded all of its regulatory capital requirements with a tangible capital
level of $220.6 million, or 8.11% of adjusted total assets, which is above the
required level of $40.8 million, or 1.5%; core capital of $220.6 million, or
8.11% of adjusted total assets, which is above the required level of $81.6
million, or 3%, and risk-based capital of $238.4 million or 15.65% of risk-
weighted assets, which is above the required level of $117.6 million, or 8%. On
January 16, 1998 the OTS approved the declaration of a dividend from PFF Bank
and Trust to the Company of $30 million. The dividend was paid by the Bank on
January 28, 1998. The Bank's pro-forma capital ratios as of December 31, 1997
reflecting the dividend are 7.01% for core and tangible and 13.68% for risk-
based capital.
The Company's most liquid assets are cash and short-term investments. The level
of these assets are dependent on the Company's operating, financial, lending and
investing activities during any given period. At December 31, 1997, cash and
cash equivalents totaled $38.9 million. The Company has other sources of
liquidity if a need for additional funds arises, including the utilization of
reverse repurchase agreements and FHLB advances and collateralized borrowings.
At December 31, 1997, the Company had $708.1 million in FHLB advances and $50.0
million in reverse repurchase agreements outstanding. Other sources of
liquidity include MBS and other investment securities available-for-sale or
maturing within one year.
At December 31, 1997, the Bank had outstanding commitments to originate mortgage
loans of $16.9 million and no outstanding commitments to purchase MBS or other
investment securities. The Bank anticipates that it will have sufficient funds
available to meet these commitments. Certificate accounts which are scheduled
to mature in less than one year from December 31, 1997 totaled $1.0 billion.
The Bank expects that a substantial portion of the maturing certificate accounts
will be retained by the Bank at maturity.
-23-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
LEGISLATIVE MATTERS
- -------------------
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. Various proposals to eliminate the federal thrift charter, create a
uniform financial institutions charter and abolish the OTS have been introduced
in Congress. Some 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. Under some proposals,
converted federal thrifts would generally be required to conform their
activities to those permitted for the charter selected and divesture of
nonconforming assets would be 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 passed by the House Banking Committee would allow savings institutions to
continue to exercise activities being conducted when they convert to a bank
regardless of whether a national bank could engage in the activity. Holding
companies for savings institutions would become subject to the same regulation
as holding companies that control commercial banks, with some limited
grandfathering, including savings and loan holding company activities. The
grandfathering would be lost under certain circumstances such as a change in
control of the Company. The Bank is unable to predict whether such legislation
would be enacted or the extent to which the legislation would restrict or
disrupt its operation.
Legislation regarding bad debt recapture has been passed. The legislation
requires recapture of reserves accumulated after 1987. The recapture tax on
post 1987 reserves must be paid over a six year period starting in 1996. The
payment of the tax can be deferred in each of 1996 and 1997 if an institution
originates at least the same average annual principal amount of mortgage loans
that it originated in the six years prior to 1996. In the opinion of
management, this legislation will not have a material impact on the financial
condition or operations of the Company.
-24-
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company and subsidiary have been named as defendants in various
lawsuits arising in the normal course of business. The outcome of the lawsuits
cannot be predicted, but the Company intends to vigorously defend the actions
and is of the opinion that the lawsuits will not have a material adverse effect
on the Company.
ITEM 2. CHANGES IN SECURITIES.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit 3(I) - Certificate of Incorporation of PFF Bancorp, Inc.*
Exhibit 3(ii) - Bylaws of PFF Bancorp, Inc.*
Exhibit 11 - Statement Re: Computation of Earnings Per Share.
Exhibit 27.0 - Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K
None.
____________________
*Incorporated herein by reference to Form S-1, Registration Statement, as
amended, filed on December 8, 1995, SEC Registration Number 33-94860.
-25-
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PFF BANCORP, INC.
February 17, 1998 /s/ LARRY M. RINEHART
- -------------------- ------------------------------------
Date Larry M. Rinehart
President, Chief Executive Officer
and Director
February 17, 1998 /s/ GREGORY C. TALBOTT
- -------------------- -------------------------------------
Date Gregory C. Talbott
Executive Vice President, Chief Financial
Officer and Treasurer
- 26-
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
EXHIBIT 11. STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------- ------------------
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1997 DECEMBER 31,1996
----------------- ------------------ ----------------- ----------------
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
BASIC NET EARNINGS PER SHARE:
Net Earnings....................................... $ 4,752 $ 2,216 $ 11,721 $ 224
=========== =========== =========== ==========
Weighted average number of common
shares and equivalents outstanding:
Issued............................................. 19,889,949 19,889,949 19,889,949 19,889,949
Less:
Unearned ESOP shares and shares held by
benefit plans..................................... (3,943,792) (2,137,399) (3,632,941) (1,775,210)
----------- ----------- ----------- ------------
Weighted average number of common
shares and equivalents outstanding................ 15,946,157 17,752,550 16,257,008 18,114,739
=========== =========== =========== ============
Earnings per share................................. $ 0.30 $ 0.12 $ 0.72 $ 0.01
=========== =========== =========== ===========
DILUTED NET EARNINGS PER SHARE:
Net Earnings....................................... $ 4,752 $ 2,216 $ 11,721 $ 224
=========== =========== =========== ===========
Weighted average number of common
shares and equivalents outstanding:
Issued............................................. 19,889,949 19,889,949 19,889,949 19,889,949
Less:
Unearned ESOP shares held and shares held
by benefit plans.................................. (3,943,792) (2,137,399) (3,632,941) (1,775,210)
Add:
Common stock equivalents due to dilutive
effect of stock options (1)....................... 867,628 103,287 701,250 34,429
----------- ----------- ----------- -----------
Weighted average number of common
shares and equivalents outstanding 16,813,785 17,855,837 16,958,258 18,149,168
=========== =========== =========== ===========
Earnings per share................................. $ 0.28 $ 0.12 $ 0.69 $ 0.01
=========== =========== =========== ===========
</TABLE>
(1) The PFF Bancorp, Inc. 1996 Incentive Plan was adopted and approved by the
stockholders on October 23, 1996.
(2) Weighted average shares outstanding has been restated to comply with SFAS
128.
-27-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DECEMBER 31,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 38,872
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 257,494
<INVESTMENTS-CARRYING> 709
<INVESTMENTS-MARKET> 728
<LOANS> 1,854,392
<ALLOWANCE> 25,891
<TOTAL-ASSETS> 2,765,855
<DEPOSITS> 1,706,562
<SHORT-TERM> 0
<LIABILITIES-OTHER> 790,931
<LONG-TERM> 0
0
0
<COMMON> 199
<OTHER-SE> 268,163
<TOTAL-LIABILITIES-AND-EQUITY> 2,765,855
<INTEREST-LOAN> 107,751
<INTEREST-INVEST> 34,441
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 142,192
<INTEREST-DEPOSIT> 60,723
<INTEREST-EXPENSE> 26,678
<INTEREST-INCOME-NET> 54,791
<LOAN-LOSSES> 5,799
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 39,119
<INCOME-PRETAX> 20,589
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,721
<EPS-PRIMARY> 0.72
<EPS-DILUTED> 0.69
<YIELD-ACTUAL> 7.47
<LOANS-NON> 15,613
<LOANS-PAST> 0
<LOANS-TROUBLED> 14,684
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 27,721
<CHARGE-OFFS> 7,629
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 25,891
<ALLOWANCE-DOMESTIC> 25,891
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
