<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-27404
PFF BANCORP, INC.
-----------------
(exact name of registrant as specified in its charter)
DELAWARE 95-4561623
-------- ----------
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
350 SOUTH GAREY AVENUE, POMONA, CALIFORNIA 91766
-------------------------------------------------
(Address of principal executive offices)
(909) 623-2323
--------------
(Registrant's telephone number, including area code)
Not Applicable
--------------
(Former name, former address and former fiscal year, if changed since last
report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--------- --------
The registrant had 16,250,283 shares of common stock, par value $.01 per
share, outstanding as of August 14, 1998.
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION (UNAUDITED) PAGE
----
<S> <C> <C>
Item 1 Financial statements
Consolidated Balance Sheets as of
June 30, 1998 and March 31, 1998 1
Consolidated Statements of Earnings for the
Three Months ended June 30, 1998 and 1997 2
Consolidated Statements of Comprehensive Earnings
for the Three Months ended June 30, 1998 and 1997 3
Consolidated Statement of Stockholders' Equity
for the Three Months Ended June 30, 1998 4
Consolidated Statements of Cash Flows for the
Three Months ended June 30, 1998 and 1997 5
Notes to Unaudited Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3 Qualitative and Quantitative disclosures about
Market Risk 19
PART II OTHER INFORMATION
Item 1 Legal Proceedings 20
Item 2 Changes in Securities 20
Item 3 Defaults Upon Senior Securities 20
Item 4 Submission of Matters to a Vote of Security Holders 20
Item 5 Other Information 20
Item 6 Reports on Form 8-K 20
SIGNATURES
</TABLE>
<PAGE>
PART 1 FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements.
PFF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1998 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $46,449 $46,021
Loans held for sale 832 701
Investment securities held-to-maturity (estimated fair value
of $723 at June 30, 1998 and $725 at March 31, 1998) 712 714
Investment securities available-for-sale, at fair value 294,187 316,410
Mortgage-backed securities held-to-maturity (estimated fair
value of $1,070 at June 30, 1998 and $1,375 at March, 31, 1998) 1,066 1,373
Mortgage-backed securities available-for-sale, at fair value 692,116 481,620
Trading securities, at fair value 5,419 -
Loans receivable, net 1,851,335 1,827,614
Federal Home Loan Bank (FHLB) stock, at cost 48,294 39,504
Accrued interest receivable 18,321 17,320
Real estate, net 7,394 8,326
Property and equipment, net 25,495 25,567
Prepaid expenses and other assets 16,225 47,214
- -------------------------------------------------------------------------------------------------------------
Total assets $3,007,845 $2,812,384
=============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $1,748,440 $1,740,824
FHLB advances and other borrowings 988,886 785,886
Accrued expenses and other liabilities 28,541 31,396
- -------------------------------------------------------------------------------------------------------------
Total liabilities 2,765,867 2,558,106
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 19,902,013; outstanding 16,214,283 at
June 30, 1998, and 17,069,099 March 31, 1998 199 199
Additional paid-in capital 157,739 165,912
Retained earnings, substantially restricted 101,770 106,617
Unearned stock-based compensation (19,966) (20,895)
Treasury stock (37) (28)
Accumulated other comprehensive income - unrealized
gains on securities available-for-sale 2,273 2,473
- -------------------------------------------------------------------------------------------------------------
Total stockholders' equity 241,978 254,278
- -------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $3,007,845 $2,812,384
=============================================================================================================
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
1
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
JUNE 30,
- -----------------------------------------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Mortgage loans $33,656 $34,630
Non-mortgage loans 1,637 835
Mortgage-backed securities 9,066 8,721
Investment securities and deposits 5,771 2,671
- -----------------------------------------------------------------------------------------------------------
Total interest income 50,130 46,857
- -----------------------------------------------------------------------------------------------------------
Interest on deposits 19,692 20,227
Interest on borrowings 12,479 8,315
- -----------------------------------------------------------------------------------------------------------
Total interest expense 32,171 28,542
- -----------------------------------------------------------------------------------------------------------
Interest income before provision for loan losses 17,959 18,315
Provision for loan losses 1,020 2,250
- -----------------------------------------------------------------------------------------------------------
Interest income after provision for loan losses 16,939 16,065
- -----------------------------------------------------------------------------------------------------------
Non-interest income:
Deposit and other fees 2,651 2,529
Trust fees 476 427
Mortgage loan servicing fees 250 219
Gain on sales of assets, net 138 12
Gain on trading securities, net 283 -
Other non-interest income 93 20
- -----------------------------------------------------------------------------------------------------------
Total non-interest income 3,891 3,207
- -----------------------------------------------------------------------------------------------------------
Non-interest expense:
General and administrative:
Compensation and benefits 6,970 6,186
Occupancy and equipment 2,934 2,743
Marketing and professional services 875 784
Other non-interest expense 2,430 2,501
- -----------------------------------------------------------------------------------------------------------
Total general and administrative 13,209 12,214
Real estate operations, net 75 591
- -----------------------------------------------------------------------------------------------------------
Total non-interest expense 13,284 12,805
- -----------------------------------------------------------------------------------------------------------
Earnings before income taxes 7,546 6,467
Income taxes 3,219 2,784
- -----------------------------------------------------------------------------------------------------------
Net earnings $4,327 $3,683
===========================================================================================================
Basic earnings per share $0.29 $0.22
===========================================================================================================
Weighted average shares outstanding for basic
earnings per share 14,751,038 16,629,734
===========================================================================================================
Diluted earnings per share $0.28 $0.22
===========================================================================================================
Weighted average shares outstanding for diluted
earnings per share 15,613,794 17,020,796
===========================================================================================================
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
2
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
JUNE 30,
- -----------------------------------------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net earnings $4,327 $3,683
- -----------------------------------------------------------------------------------------------------------
Other comprehensive earnings (loss), net of income taxes
Unrealized gains (losses) on securities available-for-sale:
U.S. Treasury and agency securities and other investment
securities available-for-sale, at fair value (87) 430
Reclassification of realized gains included in earnings (119) -
Mortgage-backed securities available-for-sale, at fair value 6 2,897
- ------------------------------------------------------------------------------------------------------------
Other comprehensive income (200) 3,327
- ------------------------------------------------------------------------------------------------------------
Comprehensive earnings $4,127 $7,010
===========================================================================================================
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
3
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
(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> <C>
Balance at March 31, 1998 17,067,099 $199 $165,912 $106,617 $(20,895) $(28)
Net earnings - - - 4,327 - -
Purchase of treasury stock (853,407) - (8,525) (9,174) - (9)
Amortization of shares under stock-based
compensation plans - - 345 - 929 -
Stock options exercised 591 - 7 - - -
Changes in unrealized gains on
securities available for sale, net - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 16,214,283 $199 $157,739 $101,770 $(19,966) (37)
===================================================================================================================================
<CAPTION>
UNREALIZED
GAINS(LOSSES)
ON SECURITIES
AVAILABLE-FOR-
SALE, NET TOTAL
- ----------------------------------------------------------------------------------
<S> <C> <C>
Balance at March 31, 1998 $2,473 $254,278
Net earnings - 4,327
Purchase of treasury stock - (17,708)
Amortization of shares under stock-based
compensation plans - 1,274
Stock options exercised - 7
Changes in unrealized gains on
securities available for sale, net (200) (200)
- ----------------------------------------------------------------------------------
Balance at June 30, 1998 $2,273 $241,978
==================================================================================
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
4
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
- -----------------------------------------------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $4,327 $3,683
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Amortization of premiums (discounts) on loans,
investments and mortgage-backed securities 1,038 411
Amortization of deferred loan origination fees (277) (503)
Loan fees collected (701) 242
Dividends on FHLB stock (558) (377)
Provisions for losses on:
Loans 1,020 2,250
Real estate - 380
Gains on sales of loans, mortgage-backed securities
available-for-sale, real estate and property and equipment (378) (110)
Depreciation and amortization of property and equipment 974 863
Loans originated for sale - (1,785)
Proceeds from sale of loans held-for-sale 11,765 2,466
Amortization of unearned stock-based compensation 1,274 1,052
(Increase) decrease in:
Accrued expenses and other liabilities (2,973) (237)
Accrued interest receivable 964 (268)
Prepaid expenses and other assets 30,990 903
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 47,465 8,970
- -----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Loans originated for investment (191,593) (149,324)
Increase (decrease) in construction loans in process 6,270 8,436
Purchases of loans held for investment (49,832) -
Principal payments on loans 195,276 88,722
Principal payments on mortgage-backed securities
held-to-maturity 302 389
Principal payments on mortgage-backed securities
available-for-sale 63,813 23,164
Purchases of investment securities available-for-sale (38,675) (33,525)
Purchases of FHLB stock (8,232) -
Purchases of mortgage-backed securities available-
for-sale (275,192) (20,942)
Proceeds from maturities of investment securities
held-to-maturity - 5,181
Proceeds from maturities of investment securities
available-for-sale 27,255 8,383
(Continued)
</TABLE>
5
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
- ----------------------------------------------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment in real estate $ 10 $ (350)
Proceeds from sale of investment securities available-for-sale 28,017 -
Proceeds from sale of real estate 3,530 1,638
Purchases of property and equipment (905) (975)
Proceeds from sale of property and equipment 4 -
- ----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (239,952) (69,203)
- ----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from FHLB advances and other borrowings 626,876 605,000
Repayment of FHLB advances and other borrowings (423,876) (530,000)
Net change in deposits 7,616 12,692
Proceeds from exercise of stock options 7 -
Purchase of treasury stock (17,708) (1,968)
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 192,915 85,724
- ----------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 428 25,491
Cash and cash equivalents, beginning of period 46,021 31,632
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 46,449 $ 57,123
================================================================================================================
Supplemental information:
Interest paid, including interest credited 19,388 29,950
Non-cash investing and financing activities:
Change in unrealized gain (loss) on securities
available-for-sale (285) 5,787
Net transfers from available-for-sale securities to
trading securities 5,419 -
Net transfers from loans receivable to real estate 3,324 3,154
================================================================================================================
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
6
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Consolidation
The accompanying consolidated financial statements include the accounts of PFF
Bancorp, Inc. and its subsidiary PFF Bank & Trust (collectively, "the Company").
The Company's business is conducted primarily through PFF Bank & Trust and its
subsidiary, Pomona Financial Services, Inc. Pomona Financial Services, Inc.
includes the account 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 months ended June 30, 1998 are not
necessarily indicative of results that may be expected for the entire fiscal
year ending March 31, 1999.
(2) New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 is effective
for fiscal years beginning after December 15, 1997. SFAS No. 131 establishes
standards for reporting financial and descriptive information about an
enterprise's operating segments in its annual financial statements and selected
segment information in interim financial reports. Restatement of comparative
financial statements or financial information for earlier periods is required
upon adoption of SFAS No. 131. Application of FASB No. 131 requirements is not
expected to have a material impact on the Company's disclosures.
In February 1998, the FASB issued Statement of Financial Accounting Standards
No. 132 ("SFAS No. 132"), "Employers' Disclosures about Pension and Other
Postretirement Benefits." SFAS No. 132 amends the disclosure requirements of
SFAS No. 87, "Employers' Accounting for Pensions", SFAS No. 88, "Employer's
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits," and SFAS No. 106, "Employer's Accounting for
Retirement Benefits Other than Pensions." SFAS No. 132 standardizes the
disclosure requirements of SFAS Nos. 87 and 106 to the extent practicable and
recommends a parallel format for presenting information about pensions and other
retirement benefits. SFAS No. 132 is effective for fiscal years beginning after
December 15, 1997. SFAS No. 132 will result in disclosure changes only.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment, (b)
a hedge of the exposure to variable cash flows of a forecasted transaction, or
(c) a hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm
7
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
commitment, an available-for-sale security, or a foreign-currency-denominated
forecasted transaction.
Under SFAS No. 133, an entity that elects to apply hedge accounting is required
to establish at the inception of the hedge the method it will use for assessing
the effectiveness of the hedging derivative and the measurement approach of
determining the ineffective aspect of the hedge. Those methods must be
consistent with the entity's approach to managing risk.
This statement is effective for all quarters of fiscal years beginning after
June 15, 1999.
Management is in the process of determining the impact of FASB No. 133 on the
Company's Financial position and results of operations.
8
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(3) Earnings per share
The Company adopted, effective December 31, 1997, Statement of Financial
Accounting Standards No. 128 "Earnings Per Share" ("SFAS No. 128"). SFAS No. 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 No. 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 resulted from issuance of
common stock that then shared in earnings.
The following table is a reconciliation of the numerators and denominators of
the basic and diluted EPS computations for net earnings for PFF Bancorp, Inc.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30, 1998
---------------------------------------------------------------------------------------
1998 (1) 1997
-------------------------------------------- -----------------------------------------
EARNINGS SHARES PER-SHARE EARNINGS SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
---------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net Earnings $4,327 $3,683
BASIC EPS
Earnings available to common stockholders 4,327 14,751,038 $0.29 3,683 16,629,734 $0.22
========= =========
EFFECT OF DILUTIVE SECURITIES
Options and Stock Awards - 862,756 - 391,062
------------------------------ ------------------------------
DILUTED EPS
Earnings available to common stockholders
and assumed conversions $4,327 15,613,794 $0.28 $3,683 17,020,796 $0.22
=========================================== =========================================
</TABLE>
(1) Options to purchase 6,154 shares of common stock at $20.625 per share were
outstanding during the three month period ending June 30, 1998 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 June 30,
1998.
9
<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 months ended June 30, 1998 and 1997. 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 JUNE 30,
------------------------------------------------------------------------------
1998 1997
------------------------------------------------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
ASSETS:
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-earning deposits and short-term
Investments $ 34,868 $ 423 4.87% $ 24,380 $ 352 5.79%
Investment securities, net (1)(2) 296,216 4,778 6.47 114,565 1,942 6.80
Loans receivable, net (3)(4) 1,844,746 35,293 7.65 1,851,278 35,465 7.66
Mortgage-backed securities, net (1)(5) 572,535 9,066 6.33 498,450 8,721 7.00
FHLB stock 42,804 570 5.34 27,576 377 5.48
-------------------------- ---------------------------
Total interest-earning assets 2,791,169 50,130 7.18 2,516,249 46,857 7.45
Non-interest-earning assets 127,351 75,345
------------- -------------
Total assets $2,918,520 $2,591,594
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Passbook accounts $ 152,427 891 2.34 $ 173,266 1,181 2.73
Money market savings accounts 236,090 2,494 4.24 165,280 1,687 4.09
NOW and other demand deposit accounts 179,783 320 0.71 148,253 298 0.81
Certificate accounts 1,170,572 15,987 5.48 1,231,778 17,061 5.56
-------------------------- ---------------------------
Total 1,738,872 19,692 4.54 1,718,577 20,227 4.72
FHLB advances and other borrowings 874,952 12,464 5.71 566,655 8,298 5.87
Other 2,459 15 2.45 2,660 17 2.56
-------------------------- ---------------------------
Total interest-bearing liabilities 2,616,283 32,171 4.93 2,287,892 28,542 5.00
--------- ---------
Non-interest-bearing liabilities 54,440 34,513
------------- -------------
Total liabilities 2,670,723 2,322,405
Stockholders' Equity 247,797 269,189
------------- -------------
Total liabilities and stockholders' equity $2,918,520 $2,591,594
============= =============
Net interest income before provision for loan losses $17,959 $18,315
========= =========
Net interest rate spread (6) 2.25 2.45
Effective interest spread (7) 2.57 2.91
Ratio of interest-earning assets to interest-bearing
liabilities 106.68% 109.98%
</TABLE>
10
<PAGE>
- ------------------
(1) Includes related assets available-for-sale and unamortized discounts and
premiums.
(2) Included in the average balance of investment securities for the three
months ended June 30, 1998 and 1997 are average investment securities
available-for-sale of $266.2 million and $11.1 million, respectively.
Interest income recognized on investment securities available-for-sale
during these periods was $4.3 million and $160,000, respectively, resulting
in average yields of 6.45% and 5.82%, respectively. Yields on average
investment securities available-for-sale have been calculated based upon
the historical cost basis 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 June 30, 1998 and 1997 are loans held for sale of $1.1 million
and $1.5 million, respectively. Interest income recognized on loans held
for sale during these periods was $35,000 and $37,000, respectively,
resulting in average yields of 12.53% and 9.59%, respectively.
(5) Included in the average balance of mortgage-backed securities, net for the
three months ended June 30, 1998 and 1997 are average mortgage-backed
securities available-for-sale of $559.8 million and $5.3 million,
respectively. Interest income recognized on mortgage-backed securities
available-for-sale during the three months ended June 30, 1998 and 1997 was
$9.3 million and $96,000, respectively, resulting in an average yield of
6.68% and 7.29%, respectively.
(6) Net interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
(7) Effective interest spread represents net interest income divided by average
interest-earning assets.
11
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
RATE/VOLUME ANALYSIS
The following table presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to: (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume); and (iii) the net change. The changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1998
COMPARED TO
THREE MONTHS ENDED JUNE 30, 1997
--------------------------------------------------------------
INCREASE (DECREASE)
DUE TO
--------------------------------------------------------------
VOLUME RATE NET
--------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-earning deposits and short-term investments $ 152 (81) 71
Investment securities, net (1)(2) 3,087 (251) 2,836
Loans receivable, net (3) (125) (47) (172)
Mortgage-backed securities, net (1)(4) 1,295 (950) 345
FHLB stock 208 (15) 193
--------------------------------------------------------------
Total interest-earning assets 4,617 (1,344) 3,273
--------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Passbook accounts (142) (148) (290)
Money market savings accounts 722 85 807
NOW and other demand deposit accounts 64 (42) 22
Certificate accounts (845) (229) (1,074)
FHLB advances and other borrowings 4,610 (444) 4,166
Other (1) (1) (2)
--------------------------------------------------------------
Total interest-bearing liabilities 4,408 (779) 3,629
--------------------------------------------------------------
Change in net interest income $209 (565) (356)
==============================================================
</TABLE>
__________________________________
(1) Includes assets available-for-sale.
(2) Included in the increases/(decreases) in interest income on investment
securities, net for the three months ended June 30, 1998 compared to
1997 are increases/(decreases) in interest income on investment
securities available-for-sale attributable to volume and rate of $3.7
million and $400,000, respectively.
(3) Included in the increases/(decreases) in interest income on loans
receivable, net for the three months ended June 30, 1998 compared to
1997 are increases/(decreases) in interest income on loans held for sale
attributable to volume and rate of ($10,000) and $8,000, respectively.
(4) Included in the increases/(decreases) in interest income on mortgage-
backed securities, net for the three months ended June 30, 1998 compared
to 1997 are increases/(decreases) in interest income on mortgage-backed
securities available-for-sale attributable to volume and rate of $10.1
million and ($850,000), respectively.
12
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
FORWARD-LOOKING STATEMENTS
Except for historical information contained herein, the matters discussed in
this report contain forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended (the "Securities Act"), and Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
that involve substantial risks and uncertainties. When used in this report, or
in the documents incorporated by reference herein, the words "anticipate,"
"believe," "estimate," "may," "intend," "expect" and similar expressions
identify certain of such forward-looking statements. Actual results could
differ materially from such forward-looking statements contained herein.
Factors that could cause future results to vary from current expectations
include, but are not limited to, the following: changes in economic conditions
(both generally and more specifically in the markets in which the Company
operates); changes in interest rates, deposit flows, loan demand, real estate
values and competition; changes in accounting principles, policies or guidelines
and in government legislation and regulation (which change from time to time and
over which the Company has no control); other factors affecting the Company's
operations, markets, products and services, including but not limited to, year
2000 compliance issues; and other risks detailed in this Form 10-Q and in the
Company's other Securities and Exchange Commission filings. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's analysis only as of the date hereof. The Company
undertakes no obligation to publicly revise these forward-looking statements to
reflect events or circumstances that arise after the date hereof.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND
- ----------------------------------------------------------------------------
1997
- ----
GENERAL
- -------
The Company recorded net earnings of $4.3 million or $0.28 per diluted share for
the three months ended June 30, 1998 compared to net earnings of $3.7 million or
$0.22 per diluted share for the comparable period of 1997.
Net interest income was $18.0 million for the three months ended June 30, 1998
compared to $18.3 million for the comparable period of 1997. The decrease in
net interest income was attributable to a decrease in effective interest spread
from 2.91% for the three months ended June 30, 1997 to 2.57% for the comparable
period of 1998. The 34 basis point decrease in effective interest spread was
caused by a 20 basis point decrease in average interest rate spread from 2.45%
for the three months ended June 30, 1997 to 2.25% for the comparable period of
1998, coupled with a decrease in the ratio of average interest-earning assets to
average interest-bearing liabilities from 109.98% for the three months ended
June 30, 1997 to 106.68% for the comparable period of 1998.
Provision for loan losses was $1.0 million for the three months ended June
30,1998 compared to $2.3 million for the comparable period of 1997.
Total non-interest income was $3.9 million for the three months ended June 30,
1998 compared to $3.2 million for the comparable period of 1997. Total non-
interest expense increased from $12.8 million for the three months ended June
30, 1997 to $13.3 million for the comparable period of 1998 due to a $995,000
increase in general and administrative expense partially offset by a $516,000
reduction in the net expense associated with foreclosed real estate activity.
INTEREST INCOME
- ---------------
Interest income was $50.1 million for the three months ended June 30, 1998
compared to $46.9 million for the comparable period of 1997. The increase was
attributable to a $274.8 million increase in average interest-earning
13
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
assets from $2.52 billion for the three months ended June 30, 1997 to $2.79
billion for the comparable period of 1998. The yield on average interest-
earning assets decreased from 7.45% for the three months ended June 30, 1997 to
7.18% for the comparable period of 1998. The increase in average interest-
earnings assets was due principally to a $181.6 million increase in the average
balance of investment securities from $114.7 million for the three months ended
June 30, 1997 to $296.2 million for the comparable period of 1998 and a $74.1
million increase in the average balance of mortgage-backed securities (MBS) from
$498.5 million for the three months ended June 30, 1997 to $572.5 million for
the comparable period of 1998. The average balance of loans receivable, net
decreased $6.5 million from $1.85 billion for the three months ended June 30,
1997 to $1.84 billion for the comparable period of 1998.
The average yield on loans receivable decreased from 7.66% for the three months
ended June 30, 1997 to 7.65% for the comparable period of 1998. The decrease in
the average yield on loans receivable was attributable to the high level of loan
principal payoffs and paydowns (See "Comparison of Financial Condition at June
30, 1998 and March 31, 1998", below). Amortization of premiums paid on loans
purchased was $804,000 (representing a 17 basis point reduction in the average
yield on loans receivable) for the three months ended June 30, 1998 compared to
$7,000 (representing a reduction of less than one basis point in the average
yield on loans receivable) for the comparable period of 1997. In an effort to
increase the yield on the loan portfolio, the Bank has placed emphasis on
originating construction, consumer, commercial business and commercial real
estate loans. For the three months ended June 30, 1998, originations of these
loans totaled $107.2 million or 56% of total loan originations compared to $63.4
million or 42.0% of total loan originations for the comparable period of 1997.
The change in the composition of loan originations is reflected in an increase
in the weighted average initial contract rate on total loan originations from
8.26% for the three months ended June 30, 1997 to 8.73% for the comparable
period of 1998.
The average yield on investment securities (excluding MBS) decreased from 6.80%
for the three months ended June 30, 1997 to 6.47% for the comparable period of
1998. The decrease in the average yield on investment securities reflects an
increase in the proportion of the portfolio comprised by floating rate
collateralized mortgage obligations ("CMOs"). These floating rate CMOs, most of
which are indexed to the one-month London Inter-Bank Offered Rate, comprised
39.44% of total investment securities at June 30, 1998 compared to 3.78% at June
30, 1997.
The average yield on MBS decreased from 7.00% for the three months ended June
30, 1997 to 6.33% for the comparable period of 1998. The decrease in average
yield on MBS was attributable principally to the prepayment of higher yielding
MBS and the replacement of these prepayments, along with the incremental growth
in the portfolio, being comprised principally by five and seven year balloon
maturity fixed rate and "5/1 and 7/1" adjustable rate ("hybrid") MBS. 5/1 and
7/1 hybrid MBS are backed by mortgages which provide for a fixed rate of
interest for the first five or seven years of the loan after which the interest
rate adjusts annually based on a specified margin over the one year Constant
Maturity Treasury index.
INTEREST EXPENSE
- ----------------
Interest expense was $32.2 million for the three months ended June 30, 1998
compared to $28.5 million for the comparable period of 1997. The increase was
attributable to a $328.4 million increase in the average balance of interest-
bearing liabilities from $2.29 billion for the three months ended June 30, 1997
to $2.62 billion for the comparable period of 1998. The average cost of
interest-bearing liabilities decreased from 5.00% for the three months ended
June 30, 1997 to 4.92% for the comparable period of 1998. The increase in
average interest-bearing liabilities was due principally to a $308.3 million
increase in the average balance of FHLB advances and other borrowings from
$566.7 million for the three months ended June 30, 1997 to $875.0 million for
the comparable period of 1998. The increase in FHLB advances and other
borrowings was utilized principally to fund the Bank's increased investment in
MBS and other investment securities. The weighted average cost of FHLB advances
and other borrowings decreased from 5.87% for the three months ended June 30,
1997 to 5.71% for the comparable period of 1998 reflecting a decrease in the
general level of interest rates and the Bank's increased utilization of putable
fixed rate FHLB advances. Under the putable advance program, in exchange for a
favorable interest rate
14
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
on the borrowing, the Bank grants to the FHLB an option to "put" the advance
back to the Bank at specified "put" dates prior to maturity but after the
conclusion of a specified lock out period. Under the putable advance program,
the Bank obtains funds below the cost of non-putable FHLB advances of comparable
or shorter final maturity. In exchange for this favorable funding rate, the
Bank is exposed to the risk that the advance is put back to the Bank following
an increase in the general level of interest rates causing the Bank to initiate
a borrowing at a less advantageous cost. The Bank's increased use of putable
advances has allowed the Bank to extend the term to maturity and initial put
dates of its funding in connection with increased investment in balloon and
hybrid MBS products. At June 30, 1998 the Bank's putable borrowings totaled
$450.0 million compared to $50.0 million at June 30, 1997. The average balance
of deposits increased $20.3 million from $1.72 billion for the three months
ended June 30, 1997 to $1.74 billion for the comparable period of 1998. The
average balance of money market, passbook and demand accounts ("core deposits")
increased $81.5 million from $486.8 million or 28% of average total deposits for
the three months ended June 30, 1997 to $568.3 million or 33% of average total
deposits for the comparable period of 1998 while the average balance of
certificate accounts decreased $61.2 million from $1.23 billion for the three
months ended June 30, 1997 to $1.17 billion for the comparable period of 1998.
The weighted average cost of deposits decreased from 4.72% for the three months
ended June 30, 1997 to 4.54% for the comparable period of 1998.
PROVISION FOR LOAN LOSSES
- -------------------------
Provision for loan losses was $1.0 million for the three months ended June 30,
1998 compared to $2.3 million for the three months ended 1997. See "Comparison
of Financial Condition at June 30, 1998 and March 31, 1998."
NON-INTEREST INCOME
- -------------------
Non-interest income was $3.9 million or .53% of average assets for the quarter
ended June 30, 1998 compared to $3.2 million or .50% of average assets for the
comparable period of 1997. Trust fees were $476,000 for the three months ended
June 30, 1998 compared to $427,000 for the comparable period of 1997. Included
in non-interest income for the quarter ended June 30, 1998 is a $283,000 gain on
trading securities. During the quarter, the Company reclassified a $5.4 million
equity investment portfolio from "available for sale" to "trading" to facilitate
the active management of the portfolio.
NON-INTEREST EXPENSE
- --------------------
Non-interest expense was $13.3 million for the three months ended June 30, 1998
compared to $12.8 million for the comparable period of 1997. General and
administrative expense was $13.2 million or 1.82% of average assets for the
three months ended June 30, 1998 compared to $12.2 million or 1.89% of average
assets for the comparable period of 1997. Compensation and benefits expense
increased from $6.2 million for the three months ended June 30, 1997 to $7.0
million for the comparable period of 1998, due principally to increased staffing
associated with the Bank's increased focus on commercial lending and deposit
products and services and the opening of its twenty-fourth full service banking
branch in Corona, California on April 1, 1998.
The non-cash expense associated with the amortization of shares under the
Company's Employee Stock Ownership Plan and 1996 Incentive Plan was $598,499 for
the three months ended June 30, 1998 compared to $779,960 for the comparable
period of 1997. Real estate operations, net expense was $75,000 for the three
months ended June 30, 1998 compared to $591,000 for the comparable period of
1997. The results for the three months ended June 30, 1997 include a loss
provision of $325,000 on a single family residential development project. The
decrease in
15
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
real estate operations expense reflects an improvement in real estate sales
activity and valuations in portions of the Bank's market area.
INCOME TAXES
- ------------
Income taxes were $3.2 million for the three months ended June 30, 1998 compared
to $2.8 million for the comparable period of 1997. The increase in income taxes
was primarily the result of an increase in earnings before income taxes from
$6.5 million for the three months ended June 30, 1997 to $7.5 million for the
comparable period of 1998.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1998 AND MARCH 31, 1998
- ---------------------------------------------------------------------
Total assets increased $195.5 million or 7.0% from $2.81 billion at March 31,
1998 to $3.01 billion at June 30, 1998. Loans receivable, net increased $23.7
million from $1.83 billion at March 31, 1998 to $1.85 billion at June 30, 1998.
MBS increased $210.2 million from $483.0 million at March 31, 1998 to $693.2
million at June 30, 1998. Investment securities decreased $22.2 million from
$317.1 million at March 31, 1998 to $294.9 million at June 30, 1998.
Loan originations for the three months ended June 30, 1998 were $191.6 million,
compared to $151.1 million for the comparable period of 1997. Loan principal
payoffs and paydowns increased dramatically from $88.7 million for the three
months ended June 30, 1997 to $195.3 million for the comparable period of 1998.
Non-accrual loans declined from $17.2 million or 0.88% of gross loans at March
31, 1998 to $14.0 million or 0.71% of gross loans at June 30, 1998. Non-
performing assets, which includes non-accrual loans, foreclosed real estate, net
of specific allowances and restructured loans, declined from $37.3 million or
1.33% of total assets at March 31, 1998 to $31.8 million or 1.06% of total
assets at June 30, 1998.
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 June 30, 1998,
the Bank's allowance for loan losses was $25.6 million or 1.29% of gross loans
and 182.93% of non-accrual loans compared to $26.0 million or 1.33% of gross
loans and 151.27% of non-accrual loans at March 31, 1998. The Bank will
continue to monitor and modify its allowances for loan losses as conditions
dictate. The following table sets forth activity in the Bank's allowance for
loan losses for the three months ended June 30, 1998.
<TABLE>
<S> <C>
Balance at March 31, 1998 $26,002
Provision for loan losses 1,020
Charge-offs (1,476)
Recoveries 5
- --------------------------------------------------------------------------------------------------
Balance at June 30, 1998 $25,551
==================================================================================================
</TABLE>
Total liabilities increased $207.8 million or 8.1% to $2.77 billion at June 30,
1998 from $2.56 billion at March 31, 1998. Deposits increased $7.6 million from
$1.74 billion at March 31, 1998 to $1.75 billion at June 30, 1998. FHLB
advances and other borrowings increased $203.0 million from $785.9 million at
March 31, 1998 to $988.9 million at June 30, 1998.
16
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
Total stockholders' equity was $242.0 million at June 30, 1998 compared to
$254.3 million at March 31, 1998. The $12.3 million decrease in total
stockholders' equity is comprised principally of a $8.2 million decrease in
additional paid-in-capital, a $4.8 million decrease in retained earnings,
substantially restricted and a $929,000 decrease in unearned stock-based
compensation. During the three months ended June 30, 1998, the Company
completed its fourth 5% stock repurchase program under which 853,407 shares of
its common stock were repurchased at a price of $20.75 per share. The $8.2
million decrease in additional paid-in-capital was attributable principally to
the removal from additional paid-in-capital of the original amount of additional
paid-in-capital recorded upon the March 1996 initial issuance of the shares
repurchased ($9.99 per share, net of the $.01 per share credited to common
stock). The $4.8 million decrease in retained earnings, substantially
restricted reflects the $9.2 million difference between the $10.00 per share
original issuance price of the 853,407 shares repurchased and the $20.75 per
share price paid to repurchase the shares, partially offset by the $4.3 million
of net earnings for the three months ended June 30, 1998. The $929,000 decrease
in unearned stock-based compensation reflects the amortization of shares under
the Company's ESOP ($396,750) and 1996 Incentive Plan ($532,250).
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's primary sources of funds are deposits, principal and interest
payments on loans, MBS and other investment 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 the general level of
interest rates, economic conditions and competition. The Bank is subject to a
minimum regulatory liquidity requirement. The Bank has maintained the required
minimum level of liquid assets as defined by OTS regulations. This requirement,
which may be varied at the direction of the OTS, is based upon a percentage of
deposits and short-term borrowings. The required ratio is currently 4%. The
Bank's average liquidity ratio was 4.36% for the three months ended June 30,
1998.
The Company's cash flows are comprised of three primary classifications: cash
flows from operating activities, investing activities and financing activities.
Cash flows provided by operating activities were $47.5 million and $9.0 million
for the three months ended June 30, 1998 and 1997 respectively.
Net cash provided by (used in) investing activities consists primarily of
disbursements for loan originations and purchases of MBS and other investment
securities, offset by principal collections on loans, proceeds from maturation
of investments and paydowns on MBS. Principal payments on loans were $195.3
million and $88.7 million for the three months ended June 30, 1998 and 1997,
respectively. Disbursements on loans originated and purchased, excluding loans
originated for sale, were $241.4 million and $149.3 million for the three months
ended June 30, 1998 and 1997, respectively. Disbursements for purchases of MBS
and other investment securities were $313.9 million and $54.5 million for the
three months ended June 30, 1998 and 1997, respectively. Proceeds from the
maturation of investment securities and paydowns of MBS were $91.4 million and
$37.1 million for the three months ended June 30, 1998 and 1997, respectively.
Net cash provided by (used in) financing activities consists primarily of net
activity in deposit accounts and FHLB advances and other borrowings. The net
increases in deposits were $7.6 million and $12.7 million for the three months
ended June 30, 1998 and 1997, respectively. The net increases in FHLB advances
and other borrowings were $203.0 million and $75.0 million for the three months
ended June 30, 1998 and 1997, respectively.
At June 30, 1998, on a consolidated basis, the Company had total capital of
$242.0 million or 8.04% of total assets. At June 30, 1998, the Bank exceeded all
of its regulatory capital requirements with a tangible capital level of $184.4
million, or 6.25% of adjusted total assets, which is above the required level of
$44.3 million, or 1.5%; core capital
17
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
of $184.4 million, or 6.25% of adjusted total assets, which is above the
required level of $88.5 million, or 3%, and total risk based capital of $203.8
million or 12.76% of risk weighted assets, which is above the required level of
$127.8 million or 8%. The Bank's capital ratios exceed the "well capitalized"
standards of 5% for core and tangible and 10% for risk-based, as defined by
regulations.
The Company's most liquid assets are cash and short-term investments. The level
of these assets is dependent on the Company's operating, financing, lending and
investing activities during any given period. At June 30, 1998, cash and cash
equivalents totaled $46.4 million. The Company has other sources of liquidity
if a need for additional funds arises, including the utilization of FHLB
advances and other collateralized borrowings including reverse repurchase
agreements. At June 30, 1998, the Company had $938.9 million in FHLB advances
and $50.0 million in reverse repurchase agreements outstanding. Other sources
of liquidity include MBS and other investment securities available-for-sale.
At June 30, 1998, the Bank had outstanding commitments to originate mortgage
loans of $15.8 million and no outstanding commitments to purchase MBS or other
investment securities. The Bank anticipates that it will have sufficient funds
available to meet these commitments. Certificate accounts, which are scheduled
to mature in less than one year from June 30, 1998 totaled $1.0 billion. The
Bank expects that a substantial portion of the maturing certificate accounts
will be retained by the Bank at maturity.
STOCK REPURCHASE
On August 6, 1998 the OTS granted permission to the Company to implement a
program to repurchase up to 810,737 shares of its common stock. Under this
program, shares will be purchased by the Company from time to time, depending on
market conditions, in open market transactions.
YEAR 2000
Like most financial organizations, the Company utilizes many computer systems
that identify dates using only the last two digits of the year. These systems
must be prepared to distinguish dates such as 1900 from 2000. Computer system
failures due to processing errors potentially arising from calculations using
Year 2000 dates are a known risk.
The Company has established processes to identify, prioritize, renovate or
replace systems that may be affected by year 2000 dates. To date, the Company
has completed an inventory of all systems, determined which processes are most
critical to its operations and developed a plan to implement Year 2000
compliance. System renovation and replacement activities have been started and
mission critical systems are targeted for completion by the end of calendar year
1998. Compliance testing and installation processes have begun and are intended
to be completed during calendar 1999.
The Company believes that this process will be successful. However, there can
be no assurance that it will be successful. To the extent that the Company's
systems are not fully year 2000 compliant, there can be no assurance that
partial system interruptions or the cost necessary to update software would not
have a material adverse effect on the Company's business, financial condition,
results of operations and business prospects. Additionally, third party vendor
dependency, including government entities, may impact the Company's efforts to
successfully complete Year 2000 compliance for all systems in a timely fashion.
The Company is requesting that third party vendors represent their products to
be Year 2000 compliant and has a program to test for compliance. Contingency
plans are being developed in the event that a vendor is not able to provide a
Year 2000 compliant solution.
Year 2000 issues may also impact borrowers of the Bank. The Company has
embarked on an awareness program to bring this issue to its borrower's attention
and to determine the extent of their preparations for Year 2000. In addition,
lending guidelines will take into consideration how Year 2000 issues will impact
borrowers' businesses and possibly their ability to repay loan obligations to
the Bank.
The Company expects to incur approximately $2.0 million over the next two fiscal
years in connection with its Year 2000 efforts. This cost is in addition to
existing personnel who may participate in the project. Approximately 35%
18
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
of the cost represents expenditures to replace certain older hardware and
software, which the Company might otherwise have replaced during the period
notwithstanding the Year 2000 issue. Approximately $1.9 million is expected to
be incurred in fiscal 1999 and approximately $100,000 is expected to be incurred
in fiscal 2000. As the Company progresses in addressing the Year 2000 issue,
estimates of costs could change if third party vendors fail to provide Year 2000
compliant solutions and in a timely fashion or due to other circumstances
outside the Company's control. For the three months ended June 30, 1998,
approximately $134,000 of expenses were incurred in connection with the
Company's Year 2000 efforts.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Readers should refer to the qualitative and quantitative disclosures (consisting
primarily of interest rate risk) in the Company's fiscal 1998 Form 10-K, as
there has been no significant change in these disclosures during the quarter
ended June 30, 1998.
19
<PAGE>
PART II OTHER INFORMATION
PFF BANCORP, INC. AND SUBSIDIARY
ITEM 1. LEGAL PROCEEDINGS
The Company and subsidiary have been named as defendants in various
lawsuits arising in the normal course of business. The outcome of the lawsuits
cannot be predicted, but the Company intends to vigorously defend the actions
and is of the opinion that the lawsuits will not have a material adverse effect
on the Company.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS.
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 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.
20
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
PFF BANCORP, INC.
DATED: August 14, 1998 BY:/s/ LARRY M. RINEHART
-------------------------------
Larry M. Rinehart
President, Chief Executive Officer
and Director
DATED: August 14, 1998 BY:/s/ GREGORY C. TALBOTT
--------------------------------
Gregory C. Talbott
Executive Vice President, Chief
Financial Officer and Treasurer
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JUNE 30,
1998 AND 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 46,449
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 5,419
<INVESTMENTS-HELD-FOR-SALE> 986,303
<INVESTMENTS-CARRYING> 1,778
<INVESTMENTS-MARKET> 1,793
<LOANS> 1,877,718
<ALLOWANCE> 25,551
<TOTAL-ASSETS> 3,007,845
<DEPOSITS> 1,748,440
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,017,427
<LONG-TERM> 0
0
0
<COMMON> 162
<OTHER-SE> 241,816
<TOTAL-LIABILITIES-AND-EQUITY> 3,007,845
<INTEREST-LOAN> 35,293
<INTEREST-INVEST> 14,837
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 50,130
<INTEREST-DEPOSIT> 19,691
<INTEREST-EXPENSE> 12,480
<INTEREST-INCOME-NET> 17,959
<LOAN-LOSSES> 1,020
<SECURITIES-GAINS> 283
<EXPENSE-OTHER> 13,209
<INCOME-PRETAX> 7,564
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,327
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0.28
<YIELD-ACTUAL> 7.18
<LOANS-NON> 13,968
<LOANS-PAST> 0
<LOANS-TROUBLED> 10,598
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 26,002
<CHARGE-OFFS> 1,476
<RECOVERIES> 5
<ALLOWANCE-CLOSE> 25,551
<ALLOWANCE-DOMESTIC> 25,551
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
