<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Annual report pursuant to Section 13 of the
Securities Exchange Act of 1934, as amended
For the fiscal year ended March 31, 1999
Commission File No.: 0-27404
PFF BANCORP, INC.
(exact name of registrant as specified in its charter)
DELAWARE 95-4561623
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
350 South Garey Avenue, Pomona, California 91766
(Address of principal executive offices)
Registrant's telephone number, including area code: (909) 623-2323
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___.
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant, i.e., persons other than the directors and
executive officers of the registrant, was $242,389,738, based upon the last
sales price as quoted on The NASDAQ National Market for June 17, 1999.
The number of shares of Common Stock outstanding as of June 17, 1999:
13,952,370
Documents Incorporated by Reference
Portions of the Registrant's Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the Annual Meeting of
Stockholders to be held September 22, 1999 are incorporated by reference in Part
III hereof.
<PAGE>
INDEX
<TABLE>
<CAPTION>
PART I PAGE
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<S> <C>
Item 1. Description of Business 3
Item 2. Properties 38
Item 3. Legal Proceedings 39
Item 4. Submission of Matters to a vote of Security Holders 39
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholders Matters 39
Item 6. Selected Financial Data 40
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 43
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 57
Item 8. Financial Statements and Supplementary Data 58
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 98
PART III
Item 10. Directors and Executive Officers of the Registrant 98
Item 11. Executive Compensation 98
Item 12. Security Ownership of Certain Beneficial Owners
and Management 98
Item 13. Certain Relationships and Related Transactions 98
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 99
</TABLE>
2
<PAGE>
PART I
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
of PFF Bancorp, Inc. (the "Bancorp") and PFF Bank & Trust (the "Bank"),
(collectively referred to as the "Company") 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-K 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.
Item 1. Description of Business.
- --------------------------------
General
The Bancorp completed its initial public offering of 19,837,500 shares of
common stock on March 28, 1996, in connection with the conversion of Pomona
First Federal Savings and Loan Association from the mutual to stock form of
ownership (the "conversion") and the change of the Association's name to PFF
Bank & Trust. The Bancorp received $198.4 million from this initial public
offering before offering expenses of $4.5 million. The Bancorp utilized $105.0
million of the net proceeds of the initial public offering to acquire all of the
issued and outstanding stock of the Bank. The Bancorp is headquartered in
Pomona, California and its principal business currently consists of the
operations of its wholly owned subsidiary, the Bank. The Bancorp had no
operations prior to March 28, 1996, and accordingly, the results of operations
prior to that date reflect only those of the Bank and its subsidiaries. At March
31, 1999, on a consolidated basis, the Company had total assets of $2.9 billion,
total deposits of $1.8 billion and total stockholders' equity of $242.7 million.
The Bancorp, as a unitary savings and loan holding company, and the Bank, as a
federal savings bank, are subject to regulation by the Office of Thrift
Supervision (the "OTS"), the Federal Deposit Insurance Corporation (the "FDIC")
and the Securities and Exchange Commission (the "SEC").
Prior to the conversion, the Bank's historical focus had been on attracting
retail deposits from the general public in the areas surrounding its branch
offices and investing those deposits, together with funds generated from
operations and borrowings, primarily in one-to-four family residential mortgage
loans. To a lesser extent, the Bank engaged and continues to engage in secondary
market activities, the origination of multi-family mortgage loans and investment
in mortgage-backed securities ("MBS") and other investment securities. The
Bank's current emphasis is on attracting business deposit accounts and
originating commercial, construction and land (primarily tract construction),
commercial real estate and consumer loans. Loan sales come from loans held in
the Bank's portfolio designated as being held for sale. The Bank generally
retains all the servicing rights of loans sold. The Bank's revenues are derived
principally from interest on its loans, and to a lesser extent, interest and
dividends on its mortgage-backed (MBS) and other investment securities and to a
significantly lesser extent income from deposit related and other fees and loan
servicing. The Bank's primary sources of funds are deposits and Federal Home
Loan Bank (FHLB) advances and other borrowings, principal and interest payments
on loans, MBS and other investment securities.
3
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Scheduled payments on loans, MBS and other investment securities are a
relatively stable source of funds, while prepayments on loans, MBS and other
investment securities and deposit flows are subject to significant fluctuation.
The Bank engages in trust activities through its trust department and offers
certain annuity and mutual fund non-deposit investment products through a
subsidiary.
As new technologies become more important to the success of businesses in
general and financial institutions in particular, the Bank remains strongly
committed to their effective use. The Bank has used the Year 2000 compliance
project as a method to assist in evaluating the technologies currently used and
to map out directions for new implementations. During fiscal 1999, personal
computer operating systems and word processing and spreadsheet programs were
upgraded throughout the Bank. Similarly, the Bank is in the final implementation
stage of a new mortgage loan origination system, incorporating automated
underwriting, tracking, pricing and workflow technology, that will significantly
improve the efficiency and speed of mortgage loan approvals and fundings. During
fiscal 2000 the Bank plans to implement new messaging and groupware technology
to further enhance the efficiency of its employees. The Bank maintains a process
of continuous evaluation and enhancement of technologies for file servers,
networks and communications. Regular training for technical staff is also
recognized as a key component of getting the most out of technologies being
used. See Item 7 "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for a further discussion of Year 2000 activities and
readiness.
Market Area and Competition
The Bank is a community-oriented savings institution whose lending, deposit
gathering and trust activities are concentrated in eastern Los Angeles, San
Bernardino, Riverside and central Orange counties. The Bank also originates
loans on a wholesale basis throughout Southern California and has expanded its
lending markets outside of Southern California on a limited basis. The Bank's
deposit gathering is concentrated in the communities surrounding its offices.
The Bank's primary market area is highly competitive for financial services
and the Bank faces significant competition both in making loans and in
attracting deposits. The Bank faces direct competition from a significant number
of financial institutions operating in its market area, many with a state-wide,
regional or national presence. Many of these financial institutions are
significantly larger and have greater financial resources than the Bank. The
Bank's competition for loans comes principally from savings and loan
associations, mortgage banking companies, commercial banks, credit unions and
insurance companies. Its most direct competition for deposits has historically
come from savings and loan associations and commercial banks. In addition, the
Bank faces increasing competition for deposits and other financial products from
non-bank institutions such as brokerage firms and insurance companies in such
areas as short-term money market funds, mutual funds and annuities. Competition
may also increase as a result of the lifting of restrictions on the interstate
operations of financial institutions. Additionally, the Bank's operations are
significantly influenced by general economic conditions, the monetary and fiscal
policies of the federal government and the regulatory policies of governmental
authorities. Deposit flows and the costs of interest-bearing liabilities to the
Bank are influenced by interest rates on competing investments and general
market interest rates. Similarly, the Bank's loan volume and yield on loans, MBS
and other investment securities and the level of prepayments on loans, MBS and
other investment securities are affected by market interest rates, as well as
additional factors affecting the supply of and demand for housing and the
availability of funds.
Trust Activities
In January 1995, the Bank acquired the trust operations of another bank for
$3.5 million. As a result of the acquisition, the Bank now has additional
fiduciary responsibilities acting as trustee, executor, administrator, guardian,
custodian, record keeper, agent, registrar, advisor and manager. The trust
assets are not the assets of the Bank and are not included in the balance sheet
of the Bank. Trust fee income for the year ended March 31, 1999 and 1998 was
$1.9 million. See Note 18 to the Consolidated Financial Statements.
4
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Lending Activities
Loan Portfolio Composition. The Bank's loan portfolio consists primarily of
conventional first mortgage loans secured by one-to-four family residences. At
March 31, 1999, the Bank had total gross loans outstanding of $2.22 billion, of
which $1.48 billion were one-to-four family residential mortgage loans, or 66.8%
of the Bank's total gross loans. The remainder of the portfolio consisted of
$87.9 million of multi-family mortgage loans, or 4.0% of total gross loans;
$156.5 million of commercial real estate loans, or 7.0% of total gross loans;
$349.1 million of construction and land loans, or 15.7% of total gross loans;
consumer loans of $70.7 million or 3.2% of total gross loans and commercial
business loans of $74.5 million or 3.3% of total gross loans. At March 31, 1999,
89.6% of the Bank's total loans had adjustable interest rates of which 37.9% are
indexed to the 11th FHLB District Cost of Funds Index (COFI).
The types of loans that the Bank may originate are subject to federal and
state laws and regulations. Interest rates charged by the Bank on loans are
affected by the demand for such loans, the supply of money available for lending
purposes and the rates offered by competitors. These factors are, in turn,
affected by, among other things, economic conditions, monetary policies of the
federal government, including the Federal Reserve Board, and legislative tax
policies.
5
<PAGE>
The following table sets forth the composition of the Bank's loan portfolio
in dollar amounts and as a percentage of the portfolio at the dates indicated.
<TABLE>
<CAPTION>
At March 31,
---------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
of of of of of
Amount Total Amount Total Amount Total Amount Total Amount Total
---------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate:
Residential:
One-to-four family $ 1,482,839 66.8% 1,467,857 75.3% 1,499,858 79.4% 1,269,099 77.9% 1,291,300 78.0%
Multi-Family 87,856 4.0 97,350 5.0 108,896 5.8 114,477 7.0 119,802 7.2
Commercial real estate 156,474 7.0 144,035 7.4 137,169 7.2 148,300 9.1 146,746 8.9
Construction and land 349,119 15.7 185,225 9.5 113,188 6.0 76,529 4.7 76,007 4.6
Commercial 74,451 3.3 12,468 0.6 3,100 0.2 - - - -
Consumer 70,686 3.2 42,826 2.2 26,931 1.4 21,853 1.3 22,606 1.3
---------------------------------------------------------------------------------------------
Total loans, gross 2,221,425 100.0% 1,949,761 100.0% 1,889,142 100.0% 1,630,258 100.0% 1,656,461 100.0%
Undisbursed loan funds (167,042) (95,457) (38,485) (25,030) (25,934)
Net premiums on loans 1,665 1,114 (1,629) (803) (1,158)
Deferred loan origination fees, net (276) (1,101) (1,362) (3,384) (4,400)
Allowance for loan losses (26,160) (26,002) (27,721) (19,741) (19,294)
------------ --------- --------- --------- ---------
Total loans, net 2,029,612 1,828,315 1,819,945 1,581,300 1,605,675
Less:
Loans held for sale (3,531) (701) (736) (6,365) -
----------- --------- --------- --------- ---------
Loans receivable, net $ 2,026,081 1,827,614 1,819,209 1,574,935 1,605,675
=========== ========= ========= ========= =========
</TABLE>
6
<PAGE>
Loan Maturity. The following table shows the contractual maturity of the
Bank's gross loans at March 31, 1999.
<TABLE>
<CAPTION>
At March 31, 1999
------------------------------------------------------------------------------------------
One-to- Total
Four Multi- Commercial Construction and Loans
Family Family Real Estate Land Commercial Consumer Receivable
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(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Amounts due:
One year or less $ 4,941 697 7,492 193,944 18,745 11,009 236,828
After one year:
More than one year to three years. 9,209 404 19,794 144,157 20,170 447 194,181
More than three years to five years 3,261 2,198 18,696 - 32,018 462 56,635
More than five years to ten years 23,200 6,778 38,845 - 3,518 3,388 75,729
More than ten years to twenty years 166,042 39,115 64,340 8,200 - 55,198 332,895
More than twenty years 1,276,186 38,664 7,307 2,818 - 182 1,325,157
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Total due after March 31, 2000 1,477,898 87,159 148,982 155,175 55,706 59,677 1,984,597
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Total amount due 1,482,839 87,856 156,474 349,119 74,451 70,686 2,221,425
Less:
Undisbursed loan funds - - (167,042) - - (167,042)
Net premiums on loans 1,645 20 - - - - 1,665
Deferred loan origination fees, net 2,624 (329) (598) (2,582) 310 299 (276)
Allowance for loan losses (5,724) (2,026) (2,048) (8,911) (2,761) (4,690) (26,160)
------------------------------------------------------------------------------------------
Total loans, net 1,481,384 85,521 153,828 170,584 72,000 66,295 2,029,612
Loans held for sale (3,531) - - - - - (3,531)
------------------------------------------------------------------------------------------
Loans receivable, net $1,477,853 85,521 153,828 170,584 72,000 66,295 2,026,081
==========================================================================================
</TABLE>
7
<PAGE>
The following table sets forth at March 31, 1999, the dollar amount of
total gross loans receivable contractually due after March 31, 2000, and whether
such loans have fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
Due after March 31, 2000
----------------------------------------------
Fixed Adjustable Total
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(Dollars in Thousands)
<S> <C> <C> <C>
Real estate loans: (1)
Residential:
One-to-four family $173,627 1,304,271 1,477,898
Multi-family 17,842 69,317 87,159
Commercial real estate 10,947 138,035 148,982
Construction and land 120 155,055 155,175
Commercial - 55,706 55,706
Consumer 28,930 30,747 59,677
----------------------------------------------
Total gross loans receivable $231,466 1,753,131 1,984,597
==============================================
</TABLE>
(1) Includes loans held for sale.
Origination, Sale, Servicing and Purchase of Loans. The Bank's lending
activities are conducted primarily by loan representatives through its 24
banking branches, its loan origination center and wholesale brokers approved by
the Bank. All loans originated by the Bank, either through internal sources or
through wholesale brokers, are underwritten by the Bank pursuant to the Bank's
policies and procedures. The Bank originates both adjustable-rate and fixed-rate
loans. The Bank's ability to originate loans is influenced by general economic
conditions affecting housing, business and consumer activities as well as the
relative customer demand for fixed-rate or adjustable-rate loans, which is
affected by the current and expected future levels of interest rates.
Loan originations were $987.6 million for fiscal 1999 compared to $557.4
million for fiscal 1998. Beginning during fiscal 1997, the Bank began reducing
its emphasis on the origination of one-to-four family residential mortgage loans
with a corresponding increased emphasis on the origination of tract
construction, commercial, commercial real estate and consumer loans as a means
of enhancing the Bank's yield on interest-earning assets. Originations of tract
construction, commercial, commercial real estate and consumer loans aggregated
$577.8 million or 58.5% of total originations for fiscal 1999 compared to $306.5
million or 55.0% of total originations for fiscal 1998. The weighted average
initial contract rate on total originations was 8.58% for fiscal 1999, compared
to 8.75% for fiscal 1998.
It is the general policy of the Bank to sell substantially all of the 15
and 30-year fixed-rate mortgage loans that it originates and retain
substantially all of the adjustable-rate mortgage loans that it originates. The
Bank generally utilizes 10-day Federal National Mortgage Association (FNMA)
forward commitments in connection with the origination and funding of fixed-rate
loans held for sale. The Bank generally retains servicing of the loans sold. At
March 31, 1999, the Bank was servicing $325.7 million of loans for others. See
"Loan Servicing". When loans are sold on a servicing retained basis, the Company
records gains or losses from the sale based on the difference between the net
sales proceeds and the allocated basis of the loans sold. The Company
capitalizes mortgage servicing rights ("MSRs") through the sale of mortgage
loans which are sold with servicing rights retained. The total cost of the
mortgage loans designated for sale is allocated to the MSRs and the mortgage
loans without the MSRs based on their relative fair values. MSRs are included in
the financial statements in the category of "other assets." The Bank had $1.2
million and $1.6 million of MSRs as of March 31, 1999 and 1998, respectively.
Impairment losses are recognized through a valuation allowance, with any
associated provision recorded as a component of loan servicing fees. At March
31, 1999, there were $3.5 million of mortgage loans categorized as held for sale
consisting of fixed-rate one-to-four family residential mortgage loans.
8
<PAGE>
To supplement loan production, based upon the Bank's investment needs and
market opportunities, the Bank engages in secondary marketing activities,
including the purchase of whole or participating interests in loans originated
by other institutions. The Bank intends to continue to purchase various types of
loans originated by other institutions both in its primary market area and to a
limited extent other geographic areas throughout the country depending on market
opportunities. The Bank generally purchases loans with servicing retained by the
seller. The following tables set forth the Bank's loan originations, purchases,
sales and principal repayments for the periods indicated.
<TABLE>
<CAPTION>
For the Years Ended March 31,
---------------------------------------------------
1999 1998 1997
---------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Beginning balance(1) $ 1,828,315 1,819,945 1,580,950
Loans originated:
One-to-four family 406,445 248,224 354,391
Multi-family 3,371 2,721 4,844
Commercial real estate 27,465 16,693 2,656
Construction and land 384,991 226,321 109,747
Commercial 89,852 19,988 3,719
Consumer 75,480 43,481 24,310
---------------------------------------------------
Total loans originated 987,604 557,428 499,667
Loans purchased 168,395 163,045 28,417
---------------------------------------------------
Total 2,984,314 2,540,418 2,109,034
Less:
Principal payments (831,468) (471,544) (225,996)
Sales of loans (38,829) (163,035) (27,019)
Transfer to foreclosed real
estate owned (REO) (14,038) (25,274) (15,661)
Change in undisbursed loan
funds (71,585) (56,972) (13,695)
Change in allowance for loan
losses (158) 1,719 (7,980)
Other(2) 1,376 3,003 1,262
---------------------------------------------------
Total loans 2,029,612 1,828,315 1,819,945
Loans held for sale, net (3,531) (701) (736)
---------------------------------------------------
Ending balance loans receivable,
Net $ 2,026,081 1,827,614 1,819,209
===================================================
</TABLE>
______________________
(1) Includes loans held for sale.
(2) Includes net capitalization of fees and amortization of premium or
accretion of discount on loans.
9
<PAGE>
One-to-Four Family Residential Mortgage Lending. The Bank offers both
fixed-rate and adjustable-rate mortgage loans with maturities up to 40 years
secured by one-to-four family residences substantially all of which are located
in the Bank's primary market area. Loan originations are obtained from the
Bank's loan representatives and their contacts with the local real estate
industry, existing or past customers, members of the local communities and
wholesale brokers who are compensated on a fee basis.
At March 31, 1999, the Bank's one-to-four family residential mortgage loans
totaled $1.48 billion or 66.8% of total loans. Of the $1.48 billion, 29.2% were
classified as loans secured by non-owner-occupied properties, which are
generally considered to involve a higher degree of credit risk than loans
secured by owner-occupied properties because repayment is generally dependent
upon the property producing sufficient cash flow to cover debt service and other
operating expenses. Of the one-to-four family residential mortgage loans
outstanding at March 31, 1999, 88.3% were adjustable-rate loans. The Bank's one-
to-four family residential adjustable-rate mortgage loans have historically been
primarily indexed to COFI. The Bank has been increasing the origination of
adjustable-rate mortgage loans tied to other indices, primarily the one-year CMT
index. The Bank currently offers a number of adjustable-rate mortgage loan
programs with interest rates that adjust monthly, semi-annually or annually. A
portion of the Bank's adjustable-rate mortgage loans have introductory terms
below the fully indexed rate. In underwriting such loans, the Bank qualifies the
borrowers based upon the fully indexed rate. At the end of the introductory
period, such loans will adjust either monthly, semi-annually or annually
according to their terms. The Bank's adjustable-rate mortgage loans generally
provide for periodic and overall caps on the increase or decrease in interest
rate at any adjustment date and over the life of the loan.
The Bank currently has a number of mortgage loan programs that may be
subject to negative amortization. At March 31, 1999, the outstanding principal
balances of these loans totaled $403.8 million (including $30.7 million of loans
serviced by others in which the Bank has purchased a participating interest), or
27.3% of total one-to-four family residential mortgage loans. At March 31, 1999,
the total outstanding negative amortization on these loans (excluding the $30.7
million of loans serviced by others) was $2.6 million. The negative amortization
is generally capped at up to 110% of the original loan amount. Negative
amortization involves a greater risk to the Bank because during a period of
higher interest rates the loan principal may increase above the amount
originally advanced, which may increase the risk of default. However, the Bank
believes that the risk of default is reduced by negative amortization caps,
underwriting criteria and the stability provided by payment schedules.
The Bank's policy is to originate one-to-four family residential mortgage
loans in amounts up to 85% of the lower of the appraised value or the selling
price of the property securing the loan and up to 95% of the appraised value or
selling price if private mortgage insurance is obtained. Mortgage loans
originated by the Bank generally include due-on-sale clauses which provide the
Bank with the contractual right to deem the loan immediately due and payable in
the event the borrower transfers ownership of the property without the Bank's
consent. Due-on-sale clauses are an important means of adjusting the rates on
the Bank's fixed-rate mortgage loan portfolio and the Bank has generally
exercised its rights under these clauses when it has been advantageous for the
Bank to do so.
Multi-Family Lending. The Bank originates multi-family mortgage loans
generally secured by properties located in Southern California. As a result of
declining economic conditions in its primary market area during the period of
1990 to 1995, the Bank de-emphasized the origination of multi-family loans
through fiscal 1996. The University of California at Los Angeles Economic
Forecast has reported an improvement in the Southern California economy which
began during fiscal 1997. With that improvement, the Bank has selectively
increased loan originations in this type of product. In reaching its decision on
whether to make a multi-family loan, the Bank considers a number of factors
including: the net operating income of the mortgaged premises before debt
service and depreciation; the debt service ratio (the ratio of net operating
income to debt service); and the ratio of loan amount to appraised value.
Pursuant to the Bank's current underwriting policies, a multi-family mortgage
loan may only be made in an amount up to 80% of the appraised value of the
underlying property. In addition, the Bank generally requires a debt service
ratio of at least 120-125%. Properties securing these loans are appraised and
title insurance is required on all loans. Declines in the real estate values in
the Bank's primary market area as a result of
10
<PAGE>
adverse economic conditions over the past several years, have resulted in an
increase in the loan-to-value ratios on some mortgage loans subsequent to
origination. However, most segments of the Bank's primary market area are
presently experiencing strong economic conditions and real estate value
appreciation.
When evaluating a multi-family loan, the Bank also considers the financial
resources and income level of the borrower, the borrower's experience in owning
or managing similar properties, and the Bank's lending experience with the
borrower. The Bank's underwriting policies require that the borrower be able to
demonstrate strong management skills and the ability to maintain the property
from current rental income. The borrower is required to present evidence of the
ability to repay the mortgage and a history of making mortgage payments on a
timely basis. In making its assessment of the creditworthiness of the borrower,
the Bank generally reviews the financial statements, employment and credit
history of the borrower, as well as other related documentation.
Loans secured by multi-family residential properties generally involve a
greater degree of risk than one-to-four family residential mortgage loans.
Because payments on loans secured by multi-family properties are often dependent
on successful operation or management of the properties, repayment of such loans
may be subject to a greater extent to adverse conditions in the real estate
market or the economy. The Bank seeks to minimize these risks through its
underwriting policies, which require such loans to be qualified at origination
on the basis of the property's income and debt service ratio.
The Bank's multi-family loan portfolio at March 31, 1999 totaled $87.9
million or 4.0% of total gross loans. At March 31, 1999, 80.0% of the Bank's
multi-family loans were adjustable-rate indexed to COFI. The Bank's largest
multi-family loan at March 31, 1999, had an outstanding balance of $3.0 million
and is secured by a 51-unit apartment complex.
Commercial Real Estate Lending. The Bank originates commercial real estate
loans that are generally secured by properties such as small office buildings or
retail facilities located in Southern California. The Bank's underwriting
policies provide that commercial real estate loans may be made in amounts up to
75% of the appraised value of the property. These loans may be made with terms
up to thirty years and have generally been indexed to COFI. However, the Bank
has begun to originate loans of this type which are indexed to either the one-
year CMT or six-month London Interbank Offered Rate (LIBOR) in an effort to
diversify away from COFI indexed loan products. Terms on such loans are
generally 5 to 7 years with 25 to 30 year amortization. The Bank's underwriting
standards and procedures are similar to those applicable to its multi-family
loans, whereby the Bank considers the net operating income of the property and
the borrower's expertise, credit history and profitability. The Bank has
generally required that the properties securing commercial real estate loans
have debt service ratios of at least 120%. The largest commercial real estate
loan in the Bank's portfolio at March 31, 1999 was $3.4 million and is secured
by a gas station in Ontario, California. At March 31, 1999, the Bank's
commercial real estate loan portfolio was $156.5 million, or 7.0% of total gross
loans.
Loans secured by commercial real estate properties, like multi-family
loans, are generally larger and involve a greater degree of risk than one-to-
four family residential mortgage loans. Because payments on loans secured by
commercial real estate properties are often dependent upon the successful
operation or management of the properties, repayment of such loans may be
influenced to a great extent by conditions in the real estate market or the
economy. The Bank seeks to minimize these risks through its underwriting
standards, which require such loans to be qualified on the basis of the
property's income and debt service ratio. Land loans are underwritten on an
individual basis, but generally do not exceed 65% of the actual cost or current
appraised value of the property, whichever is less.
Construction and Land Lending. The Bank generally originates construction
loans to real estate developers and individuals in Southern California. The Bank
has expanded, on a selective basis, construction lending to western states other
than California. Such expansion has been undertaken with developers with whom
the Bank has had long-term lending relationships. As of March 31, 1999, the Bank
had construction loans outstanding for development of residential properties
located in Colorado, Nevada, Arizona and Oregon totaling $15.6 million, $11.8
million of which was disbursed. As of March 31, 1999, the remainder
11
<PAGE>
of the Bank's construction loans were for development of real estate located in
California. The Bank's construction loans primarily are made to finance tract
construction of one-to-four family residential properties. These loans are all
adjustable-rate with maturities of one year or less and generally include
extension options of six to eighteen months upon payment of an additional fee.
The Bank's policies provide that construction loans may be made in amounts up to
75% of the appraised value of the property for construction of commercial
properties, up to 80% for multi-family properties and up to 85% for one-to-four
family residences. The Bank requires an independent appraisal of the property
and generally requires personal guarantees. Loan proceeds are disbursed as
construction progresses and as inspections warrant. The Bank's inspectors
generally visit projects on a weekly basis to monitor the progress of
construction. The largest credit exposure in the construction loan portfolio as
of March 31, 1999 consists of one loan for $16.7 million for the development of
a master planned community located in southeastern San Bernardino, California.
The aggregate disbursed balance of these loans at March 31, 1999 was $10.5
million. Repayment is to come from the sale of planning areas to merchant
builders. The second largest loan in the Bank's construction loan portfolio at
March 31, 1999 had a balance of $10.1 million, for the development of a 296 home
residential development in northern Los Angeles County. Repayment is to come
from home sales to individual home buyers. At March 31, 1999, the balance of the
Bank's construction and land loan portfolio was $349.1 million (15.7% of total
gross loans), $182.1 million of which was disbursed. At March 31, 1999 the
aggregate balances of loans for the construction of properties other than
one-to-four family residences was $30.5 million, $19.4 million of which was
disbursed.
Construction financing is generally considered to involve a higher degree
of credit risk than long-term financing on improved, owner-occupied real estate.
Mitigation of risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction or development compared to the estimated cost (including interest)
of construction. If the estimate of value proves to be inaccurate, the Bank may
be confronted with a project, when completed, having a value which is
insufficient to assure full repayment of the Bank's loan.
Consumer and Other Lending. The Bank's originated consumer loans consist
primarily of home equity lines of credit ($60.7 million) and secured and
unsecured personal loans and lines of credit ($10.0 million). At March 31, 1999,
the Bank's total consumer loan portfolio was $70.7 million or 3.2% of total
gross loans.
Commercial Lending. The Bank has expanded its operations to include
commercial business lending. The year ended March 31, 1997 was the Bank's first
full year of originating commercial business loans. Total term and revolving
line of credit loans in the portfolio as of March 31, 1999 were $113.9 million,
$74.5 million of which was outstanding. The largest loan in the commercial
portfolio is a $16.3 million term loan to a computer software manufacturer
specializing in modem and data transfer technology. This loan is secured by
equipment, inventory and accounts receivable and repayment is expected to come
from earnings. The second largest loan is a $5.0 million line of credit to an
equipment leasing company. This loan is secured by the equipment leases and
repayment is expected to come from earnings.
Commercial business lending is generally considered to involve a higher
degree of credit risk than the forms of secured real estate lending in which the
Bank has traditionally engaged. Commercial business loans may be originated on
an unsecured basis or may be secured by collateral that is not readily
marketable. The Bank generally requires personal guarantees on its commercial
business loans. The risk of default by a commercial business borrower may be
influenced by numerous factors which may include the strength of the worldwide,
regional or local economies or sectors thereof, changes in technology or demand
for particular goods and services and the ongoing ability of the commercial
business borrower to successfully manage the business. Because of these risks,
the Bank monitors the performance of its commercial business loans and the
underlying businesses and individuals with a different focus than is typical of
traditional one-to-four family residential mortgage lending. The monitoring of
commercial business loans typically involves the periodic review of the
financial statements and on-site visits to the businesses to which credit has
been extended.
12
<PAGE>
Loan Approval Procedures and Authority. The Board of Directors establishes
the lending policies of the Bank and delegates lending authority and
responsibility to the Loan Origination and Asset Review Committee (LOARC), the
Management Loan Committee and specified officers of the Bank. The LOARC includes
four of the six outside Directors of the Bank as well as selected senior
management staff. All loans must be approved by a majority of a quorum of the
designated committee, group of officers or the designated individual. The
following committees, groups of officers and individual officers are granted the
authority to approve and commit the Bank to the funding of the following
categories of loans: mortgage loans in amounts up to $299,999 and consumer loans
in amounts up to $199,999 may be approved by the Bank's staff underwriters;
mortgage loans in excess of $299,999 and up to $499,999 and consumer loans in
excess of $199,999 and up to $299,999 may be approved by certain department
managers; commercial business loans up to $499,999 may be approved by the
Commercial Credit Administrator or Chief Lending Officer; mortgage loans in
excess of $499,999 and up to $999,999 may be approved by the Major Loan Manager,
the Senior Executive Vice President or Chief Lending Officer; mortgage loans in
excess of $999,999 and up to $2,999,999, consumer loans in excess of $299,999
and up to $449,999 and commercial business loans in excess of $499,999 and up to
$1,999,999 must be approved by the Management Loan Committee; and mortgage loans
of $3.0 million or more, consumer loans in excess of $450,000 and commercial
business loans of $2.0 million or more require the approval of the LOARC. The
LOARC presently reviews all commercial business loans, post funding, for
consistency with the Bank's goals and objectives. Since March 31, 1998 the Bank
has also contracted with an independent credit review firm for the post funding
review of all commercial business loans in excess of $500,000. This credit
review firm is comprised of experienced former federal bank examiners. The Bank
will not make loans-to-one borrower that are in excess of regulatory limits.
Pursuant to OTS regulations, loans-to-one borrower cannot exceed 15% of the
Bank's unimpaired capital and surplus. At March 31, 1999 the Bank's limit on
loans-to-one borrower was $33.4 million.
Loan Servicing. The Bank also services mortgage loans for others. Loan
servicing includes collecting and remitting loan payments, accounting for
principal and interest, making inspections of mortgaged premises as required,
contacting delinquent mortgagors, supervising foreclosures and property
dispositions in the event of unremedied defaults, making certain borrower
insurance and tax payments are made and generally administering the loans. All
of the loans currently being serviced for others are loans that have been sold
by the Bank. At March 31, 1999, the Bank was servicing $325.7 million of loans
for others. The Bank currently does not purchase servicing rights related to
mortgage loans originated by other institutions.
Delinquencies and Classified Assets. The Board of Directors generally
performs a monthly review of all delinquent loans ninety days or more past due.
In addition, management reviews on an ongoing basis all loans 15 or more days
delinquent. The procedures taken by the Bank with respect to delinquencies vary
depending on the nature of the loan and period of delinquency. The Bank
generally sends the borrower a written notice of non-payment 15 days after the
loan is first past due. In the event payment is not then received, additional
letters and phone calls generally are made. If the loan is still not brought
current and it becomes necessary for the Bank to take legal action, which
typically occurs after a loan is delinquent at least 30 days or more, the Bank
will commence foreclosure proceedings against the real property that secures the
loan. If a foreclosure action is instituted and the loan is not brought current,
paid in full, or refinanced before the foreclosure sale, the Bank generally
takes possession of the real property securing the loan ("REO") and subsequently
sells the property.
Federal regulations and the Bank's Internal Asset Review Policy require
that the Bank utilize an internal asset classification system as a means of
reporting problem and potential problem assets. The Bank has incorporated the
OTS internal asset classifications as a part of its credit monitoring system.
The Bank currently classifies problem and potential problem assets as
"Substandard," "Doubtful," or "Loss". An asset is considered Substandard if it
is inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. Substandard assets include those
characterized by the "distinct possibility" that the Bank will sustain "some
loss" if the deficiencies are not corrected. Assets classified as Doubtful have
all of the weaknesses inherent in those classified Substandard with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts,
13
<PAGE>
conditions, and values, "highly questionable and improbable." Assets classified
as Loss are those considered "uncollectible" and of such little value that their
continuance as assets without the establishment of a specific loss allowance is
not warranted. Assets which do not currently expose the Bank to sufficient risk
to warrant classification in one of the aforementioned categories but possess
weaknesses are required to be designated "Special Mention."
When the Bank classifies one or more assets, or portions thereof, as
Substandard or Doubtful, under current OTS policy, the Bank is required to
consider establishing a valuation allowance in an amount deemed prudent by
management to recognize the inherent credit risk associated with the asset. When
the Bank classifies one or more assets, or portions thereof, as Loss, it is
required either to establish a valuation allowance equal to 100% of the amount
of the asset so classified or to charge off such amount. The Bank has adopted a
policy of charging off all amounts classified as Loss.
The Bank's determination as to the classification of its assets and the
amount of its valuation allowances is subject to review by the OTS who can order
the establishment of additional loss allowances. The OTS, in conjunction with
the other federal banking agencies, has adopted an interagency policy statement
on the allowance for loan and lease losses. The policy statement provides
guidance for financial institutions on both the responsibilities of management
for the assessment and establishment of adequate allowances and guidance for
banking agency examiners to use in determining the adequacy of valuation
allowances. Generally, the policy statement recommends that institutions have
effective systems and controls to identify, monitor and address asset quality
problems; that management analyze all significant factors that affect the
collectibility of the portfolio in a reasonable manner; and that management
establish acceptable allowance evaluation processes that meet the objectives set
forth in the policy statement. As a result of the declines in local and regional
real estate market values and the significant losses experienced by many
financial institutions in the past, there has been a greater level of scrutiny
by regulatory authorities of the loan portfolios of financial institutions
undertaken as part of the examination of institutions by the OTS and the FDIC.
While the Bank believes that it has established an adequate allowance for loan
losses, there can be no assurance that regulators, in reviewing the Bank's loan
portfolio, will not request the Bank to materially increase its allowance for
loan losses, thereby negatively affecting the Bank's financial condition and
earnings. Although management believes that an adequate allowance for loan
losses has been established, further additions to the level of allowance for
loan losses may become necessary.
The LOARC reviews and classifies the Bank's assets monthly and reports the
results of its review to the Board of Directors. The Bank classifies assets in
accordance with the management guidelines described above. REO is classified as
Substandard. The Bank utilizes an internal appraisal staff and Board approved
independent appraisers to conduct appraisals at the time of foreclosure and
subsequent appraisals on REO on a periodic basis. Qualified staff appraisers are
also utilized for annual property inspections on all income producing properties
with a loan balance over $1.0 million and other specified properties. Property
inspections are intended to provide updated information concerning occupancy,
maintenance, current rent levels, and changes in market conditions.
At March 31, 1999, the Bank had $17.2 million of assets classified as
Special Mention, on which there were no allowances compared to $15.3 million
classified as Special Mention, net of allowances of $248,000 at March 31, 1998.
The main component of assets classified as Special Mention at March 31, 1999
were: 45 loans totaling $5.7 million secured by one-to-four family residences;
and nine large non-homogeneous loans (defined as loans with unpaid principal
balances in excess of $500,000) which aggregated $9.7 million. At March 31,
1999, the Bank had $35.9 million of assets classified as Substandard, net of
allowances of $3.0 million, compared to $41.7 million classified as Substandard,
net of allowances of $5.1 million at March 31, 1998. The $5.8 million decrease
in assets classified as Substandard, net between March 31, 1998 and 1999 was
primarily attributable to improvement in commercial real estate loans classified
as Substandard which decreased from 10 loans totaling $10.2 million, before
allowances at March 31, 1998 to 9 loans totaling $5.8 million, before allowances
at March 31, 1999. Multi-family loans classified as Substandard decreased from
17 loans totaling $6.1 million, before allowances at March 31, 1998 to 12 loans
totaling $4.0 million, before allowances at March 31, 1999.
14
<PAGE>
The Bank's present policy is generally to continue to classify a troubled-
debt restructured (TDR) loan as Substandard until the asset has performed at
normal contract terms for a period of six to twelve months. Where there has been
a forgiveness of principal or interest or a submarket interest rate granted, the
loan is generally considered a TDR. Although the economy, in general, improved
during fiscal 1999, the Bank continued to utilize early intervention and
flexibility in restructuring some troubled loans with borrowers rather than
foreclosing on the underlying properties. See "Non-Accrual and Past-Due Loans".
At March 31, 1999 and 1998 there were no assets classified as Loss and only one
asset at March 31, 1998 classified as Doubtful for $17,000. The composition of
assets classified Substandard at March 31, 1999 and 1998 is set forth on the
following page.
15
<PAGE>
<TABLE>
<CAPTION>
At March 31, 1999
-----------------------------------------------------------------------------------------------------
Loans REO Total Substandard Assets
-----------------------------------------------------------------------------------------------------
Gross Net Number Gross Net Number Gross Net Number
Balance Balance(1) of Loans Balance Balance(1) of Loans Balance Balance(1) of Loans
-----------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
Residential:
One-to-four family $18,327 $17,179 144 $4,996 $4,974 56 $23,323 $22,153 200
Multi-family 4,038 3,249 12 - - - 4,038 3,249 12
Commercial real estate 5,769 5,427 9 - - - 5,769 5,427 9
Construction and land 2,448 2,213 4 767 344 1 3,215 2,557 5
-----------------------------------------------------------------------------------------------------
Sub Total 30,582 28,068 169 5,763 5,318 57 36,345 33,386 226
Commercial 2,504 2,504 9 - - - 2,504 2,504 9
-----------------------------------------------------------------------------------------------------
Grand Total $33,086 $30,572 178 $5,763 $5,318 57 $38,849 $35,890 235
=====================================================================================================
</TABLE>
<TABLE>
<CAPTION>
At March 31, 1998
-----------------------------------------------------------------------------------------------------
Loans REO Total Substandard Assets
-----------------------------------------------------------------------------------------------------
Gross NEt Number Gross Net Number Gross Net Number
Balance Balance(1) of Loans Balance Balance(1) of Loans Balance Balance(1) of Loans
-----------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
Residential:
One-to-four family $21,084 $18,537 172 $5,956 $5,956 74 $27,040 $24,493 246
Multi-family 6,102 4,725 17 414 414 2 6,516 5,139 19
Commercial real estate 10,197 9,644 10 512 512 1 10,709 10,156 11
Construction and land 996 996 2 1,316 713 5 2,312 1,709 7
-----------------------------------------------------------------------------------------------------
Sub Total 38,379 33,902 201 8,198 7,595 82 46,577 41,497 283
-----------------------------------------------------------------------------------------------------
Commercial 183 183 3 - - - 183 183 3
-----------------------------------------------------------------------------------------------------
Grand Total $38,562 $34,085 204 $8,198 $7,595 82 $46,760 $41,680 286
=====================================================================================================
</TABLE>
_________________________
(1) Net balances are reduced for loss allowances established against
Substandard loans and REO.
16
<PAGE>
Non-Accrual and Past-Due Loans. The following table sets forth information
regarding non-accrual loans, REO and TDR loans. There were 24 TDR loans and
57 REO properties at March 31, 1999. It is the policy of the Bank to cease
accruing and establish an allowance for all previously accrued but unpaid
interest on loans 90 days or more past due. For the years ended March 31,
1999, 1998, 1997, 1996, and 1995, the amount of interest income that would
have been recognized on non-accrual loans if such loans had continued to
perform in accordance with their contractual terms was $1.1 million, $1.7
million, $2.2 million, $858,000, and $987,000, respectively, none of which
was recognized. During the year ended March 31, 1999 and 1998, the
Company's average investment in impaired loans was $17,941 and $20,988,
respectively and interest income recorded during these periods was $916 and
$776, respectively of which $887 and $845, respectively was recorded
utilizing the cash basis method of accounting. For the same period, the
amount of interest income that would have been recognized on TDR loans if
such loans had continued to perform in accordance with their contractual
terms was $1.0 million, $1.2 million, $1.3 million, $1.2 million, and
$506,000, respectively; $887,000, $779,000, $942,000, $891,000, and
$326,000, of which was recognized. The decrease in TDR loans from $12.5
million at March 31, 1998 to $11.3 million at March 31, 1999 reflects a
decrease in the number of TDR loans from 32 at March 31, 1998 to 24 at
March 31, 1999.
During March 1999, the Bank entered into an agreement to sell for $1.8
million, 12 TDR loans with principal balances aggregating $2.3 million
before previously established specific allowances for losses aggregating
$860,000. Upon consummation of this sale during April 1999, the TDR loans
balance decreased by $2.3 million and the Bank's allowance for losses
decreased by $860,000. The consummation of this sale did not have a
material impact on earnings.
<TABLE>
<CAPTION>
At March 31,
-------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Residential real estate:
One-to-four family $ 10,061 13,834 19,258 17,794 14,418
Multi-family 122 467 790 1,558 4,331
Commercial real estate - 2,717 1,331 - -
Construction and land 647 131 1,447 3,254 4,521
Consumer 182 40 524 345 443
-------------------------------------------------------------------------------
Total 11,012 17,189 23,350 22,951 23,713
REO, net(1) 5,318 7,595 7,745 6,733 8,007
-------------------------------------------------------------------------------
Non-performing assets $ 16,330 24,784 31,095 29,684 31,720
===============================================================================
TDR loans $ 11,291 12,505 14,559 13,810 4,896
===============================================================================
Classified assets, gross $ 39,058 46,758 56,462 53,702 41,329
Allowance for loan losses as a
percent of gross loans 1.18% 1.33% 1.47% 1.21% 1.16%
receivable(2)
Allowance for loan losses as a
percent of total non-performing
loans(3) 237.56 151.27 118.72 86.01 81.36
Non-performing loans as a percent
of gross loans receivable(2)(3) 0.50 0.88 1.24 1.41 1.43
Non-performing assets as a percent
of total assets(3) 0.56 0.88 1.23 1.48 1.72
</TABLE>
________________________
(1) REO balances are shown net of related loss allowances.
(2) Gross loans include loans receivable held for investment and loans
receivable held for sale and excludes loans held for accelerated
disposition.
(3) Non-performing assets consist of non-performing loans and REO. Non-
performing loans consist of all loans 90 days or more past due and all
other non-accrual loans.
17
<PAGE>
The following table sets forth delinquencies in the Bank's loan portfolio as of
the dates indicated.
<TABLE>
<CAPTION>
At March 31, 1999 At March 31, 1998
----------------------------------------------------------------------------------------------------------
60-89 Days 90 days or more(1) 60-89 days 90 days or more(1)
Principal Principal Principal Principal
Number Balance Number Balance Number Balance Number Balance
of loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans
----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One-to-four family 22 $1,837 91 $10,061 38 $3,774 117 $13,834
Multi-family - - 1 122 - - 3 467
Commercial real estate - - - - - - 5 2,717
Construction and land - - - - - - 1 131
Commercial - - 1 647 - - - -
Consumer 2 41 14 182 5 46 16 40
----------------------------------------------------------------------------------------------------------
Total 24 $1,878 107 $11,012 43 $3,820 142 $17,189
==========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
At March 31, 1997
-------------------------------------------------------------
60-89 Days 90 Days or More(1)
-------------------------------------------------------------
Principal Principal
Number Balance Number Balance
of Loans of Loans of Loans of Loans
-------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
One-to-four family 46 $2,629 56 $19,258
Multi-family 1 118 2 790
Commercial real estate 2 675 2 1,331
Construction and land - - 1 1,447
Commercial - - - -
Consumer 188 283 215 524
------------------------------------------------------------
Total 237 $3,705 276 $23,350
=============================================================
</TABLE>
____________________
(1) Loans 90 days or more past due are included in non-accrual loans. See
"Non-Accrual and Past Due Loans."
18
<PAGE>
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risks inherent in the Bank's loan portfolio and the general economy. The Bank's
allowance evaluation methodology takes into account the changing composition of
the loan portfolio and the increased proportion of the portfolio comprised by
the Four C's. The allowance for loan losses is maintained at an amount
management considers adequate to cover losses on loans receivable, which are
deemed probable and estimable. The allowance is based upon a number of factors,
including current economic conditions, actual loss experience and industry
trends. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to make additional provisions for loan losses
based upon information available at the time of the examination. At March 31,
1999, the Bank's allowance for loan losses was $26.2 million or 1.18% of gross
loans and 237.56% of non-performing loans compared to $26.0 million or 1.33% of
gross loans and 151.27% of non-performing loans at March 31, 1998. At March 31,
1999, the Bank had non-accrual loans of $11.0 million or .50% of gross loans
compared to $17.2 million or .88% of gross loans at March 31, 1998. The Bank
will continue to monitor and modify its allowance for loan losses as economic
conditions, loss experience, changes in portfolio composition and other factors
dictate.
During the year ended March 31, 1994, in connection with a program for the
rapid reduction of problem loans, the Bank identified loans for accelerated
disposition with an aggregate principal balance of $33.3 million, which resulted
in a $10.7 million provision for loan losses and a charge-off of the same amount
for the year ended March 31, 1994. During the year ended March 31, 1995, and
prior to the consummation of the sale of the $33.3 million of loans, additional
loans with aggregate principal balances of $4.0 million were added to the
accelerated disposition program. The inclusion of this additional $4.0 million
in the accelerated disposition coupled with receipt of final pricing on the
entire $37.3 million of loans held for accelerated disposition resulted in a
$2.1 million charge to the provision for loan losses during the year ended March
31, 1995. The closing of the sale of the $37.3 million of loans held for
accelerated disposition occurred in September 1994. During the year ended March
31, 1996, the Bank identified loans for accelerated disposition with an
aggregate principal balance of $8.8 million, which resulted in a $2.7 million
provision for loan losses and a charge-off of the same amount for the year ended
March 31, 1996. The closing of the sale of the $8.8 million of loans held for
accelerated disposition occurred in December 1995.
The following table sets forth activity in the Bank's allowance for loan
losses for the periods set forth in the table.
<TABLE>
<CAPTION>
For the Year Ended March 31,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Beginning balance $26,002 27,721 19,741 19,294 11,723
Provision for loan losses 4,020 7,099 13,661 10,895 13,901
Charge-offs:
Real estate:
One-to-four family (3,361) (7,251) (4,190) (5,089) (3,493)
Multi-family (115) (316) (134) (1,635) (98)
Commercial real estate - (188) (842) - (420)
Construction and land (31) (1,012) (313) (589) (113)
Commercial
Consumer (372) (343) (303) (422) (121)
Loans held for accelerated
disposition - - - (2,716) (2,090)
----------------------------------------------------------------------------
Total (3,879) (9,110) (5,782) (10,451) (6,335)
Recoveries 17 292 101 3 5
----------------------------------------------------------------------------
Ending balance $26,160 26,002 27,721 19,741 19,294
===========================================================================
Net charge-offs to average gross
loans outstanding 0.17% 0.47% 0.31% 0.64% 0.38%
</TABLE>
19
<PAGE>
The following tables set forth the amount of the Bank's allowance for loan
losses, the percent of allowance for loan losses to total allowance and the
percent of gross loans to total gross loans in each of the categories listed at
the dates indicated.
<TABLE>
<CAPTION>
At March 31,
------------------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------------------------------------------------------------------------------------
Percent of Percent of Percent of
Gross Loans Gross Loans Gross Loans
Percent of in each Percent of in each Percent of in each
Allowance Category to Allowance Category to Allowance Category to
to Total Total Gross to Total Total Gross to Total Total Gross
Amount Allowance Loans Amount Allowance Loans Amount Allowance Loans
------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One-to-four $ 5,721 21.87% 66.75% $10,766 41.40% 75.28% $13,841 49.93% 79.39%
family
Multi-family 2,026 7.74 3.95 3,133 12.05 4.99 3,410 12.30 5.77
Commercial real 2,048 7.83 7.04 3,898 14.99 7.39 4,648 16.77 7.26
estate
Construction 8,911 34.06 15.72 4,454 17.13 9.50 4,103 14.80 5.99
and land
Commercial 2,761 10.56 3.36 3,024 11.63 0.64 56 0.20 0.16
Consumer 4,690 17.93 3.18 473 1.82 2.20 1,586 5.72 1.43
Unallocated 3 0.01 - 254 0.98 - 77 0.28 -
------------------------------------------------------------------------------------------------------------
Total allowance
for loan losses $26,160 100.0% 100.0% $26,002 100.00% 100.00% $27,721 100.00% 100.00%
============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
At March 31,
---------------------------------------------------------------------------
1996 1995
---------------------------------------------------------------------------
Percent of Percent of
Gross Loans Gross Loans
Percent of in each Percent of in each
Allowance Category to Allowance Category to
to Total Total Gross to Total Total Gross
Amount Allowance Loans Amount Allowance Loans
---------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
One-to-four $ 9,687 49.07% 77.85% $ 9,710 50.33% 77.96%
family
Multi-family 3,468 17.57 7.02 2,485 12.88 7.23
Commercial real 3,116 15.78 9.10 2,160 11.20 8.86
estate
Construction 2,413 12.22 4.69 3,826 19.83 4.59
Commercial - - - - - -
Consumer 730 3.70 1.34 653 3.38 1.36
Unallocated 327 1.66 - 460 2.38 -
---------------------------------------------------------------------------
Total allowance
for loan losses $19,741 100.00% 100.00% $19,294 100.00% 100.00%
===========================================================================
</TABLE>
20
<PAGE>
Real Estate
At March 31, 1999, the Company had $5.3 million of REO and $6.4 million of
real estate acquired for investment (REI), net of allowances. If the Bank
acquires any REO, it is initially recorded at fair value. If there is a further
deterioration in va value, the Bank provides for a specific valuation allowance
and charges operations for the diminution in value. It is the policy of the Bank
to obtain an appraisal on all REO at the time of possession.
Prior to fiscal 1999, REI consisted of a former branch facility and land
acquired for a new branch site, which the Bank subsequently decided to not
pursue, and a security interest in 26 lots held for development through the
Bank's service corporation. The former branch facility was disposed of during
the year ended March 31, 1996 and the security interest in the 26 lots paid in
full in February 1999. The Bank is currently exploring opportunities for sale of
the land originally acquired for the new branch site. During fiscal 1999, the
Bancorp provided "mezzanine" investment financing for three residential real
estate development projects. The three projects are being undertaken by
developers with whom the Bank has had a long history of successful construction
lending activities. The largest investment was $6.0 million on a project for lot
development and construction of 296 single-family homes in northern Los Angeles
County. At March 31, 1999, the balance of this investment was $3.96 million.
This investment is subordinated to $23.9 million in development and phased
construction loans made by the Bank on this project, $7.7 million of which has
been disbursed as of March 31, 1999. The Bancorp expects this investment to be
repaid along with the associated profits by December 2000. The second investment
was $1.7 million for a project for development of 56 lots in a new master-
planned community in southeastern San Bernardino County. This investment was
made in March 1999 and there have been no paydowns expected or made to date. The
developer of this project is not related to nor affiliated with the first
project noted. This investment is not subordinated to any loans of the Bank.
However, the Bank does have a loan commitment of $16.7 million outstanding to an
unrelated developer for infrastructure improvements (e.g. flood control
channels, etc.) in connection with this master-planned community. The Bancorp
expects this investment to be repaid, along with the associated profits by July
2000. The third investment was for $111,500 to provide a short term escrow
deposit on a property in Ventura County. All of these investments provide for a
preferential return to the Bancorp of between 11.00% and 29.25% per annum on the
outstanding balance of the Bancorp's investment. The Bancorp is accounting for
these investments as direct investments in real estate and as such is deferring
all profit in excess of its cost of capital until its investment is paid down by
funds received from third party buyers of finished lots or homes. During the
year ended March 31, 1999 the Company recognized $246,000 of profit on these
investments. The following table sets forth certain information with regard to
the Bank's REO and REI.
<TABLE>
<CAPTION>
At March 31,
------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
REO
- ---
Properties acquired in
settlement of loans(REO) $ 5,763 8,198 8,074 11,495 13,028
Allowance for losses (445) (603) (329) (4,762) (5,021)
------------------------------------------------------------------------------------
REO, net 5,318 7,595 7,745 6,733 8,007
------------------------------------------------------------------------------------
REI
- ---
Properties wholly owned 558 731 1,113 911 1,449
Mezzanine equity
investments in real estate 5,813 - - - -
Allowance for losses - - - - (419)
------------------------------------------------------------------------------------
REI, net 6,371 731 1,113 911 1,030
------------------------------------------------------------------------------------
Total real estate, net $11,689 8,326 8,858 7,644 9,037
====================================================================================
</TABLE>
21
<PAGE>
Investment Activities
Federally chartered savings institutions have the authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certificates of deposit of insured banks
and savings institutions, bankers' acceptances, repurchase agreements and
federal funds. Subject to various restrictions, federally chartered savings
institutions may also invest their assets in commercial paper, investment-grade
corporate debt securities and mutual funds whose assets conform to the
investments that a federally chartered savings institution is otherwise
authorized to make directly. Additionally, the Bank must maintain minimum levels
of investments that qualify as liquid assets under OTS regulations. See
"Regulation and Supervision - Federal Savings Institution Regulation -
Liquidity." Historically, the Bank has maintained liquid assets above the
minimum OTS requirements and at a level considered to be adequate to meet its
normal daily activities.
The investment policy of the Bank, as established by the Board of
Directors, attempts to provide and maintain liquidity, generate a favorable
return on investments without incurring undue interest rate or credit risk, and
complement the Bank's lending activities. Specifically, the Bank's policies
generally limit investments to government and federal agency-backed securities
and MBS and other non-government guaranteed securities, including corporate debt
obligations, that are investment grade. On November 4, 1998 the OTS issued
Thrift Bulletin 73 (TB73) "Trust Preferred Securities" which, among other
things, limits the aggregate investment in investment grade trust preferred
securities for OTS supervised institutions to 15 percent of total capital. At
the time TB73 was issued, the Bank's aggregate investment in such securities of
$52.4 million, exceeded the OTS limitation by $23.0 million. The Bank applied
for and was granted a waiver by the OTS permitting the Bank to continue to hold
its trust preferred securities. At March 31, 1999, the Bank's aggregate
investment in trust preferred securities is $44.7 million which represents
21.80% of the Bank's total capital.
The investment powers of the Bancorp are substantially broader than those
permitted for the Bank. The investment policy of the Bancorp as established by
its Board of Directors, while generally consistent with that of the Bank,
permits the investment by the Bancorp in equity securities and non-rated
corporate debt obligations. At March 31, 1999, the Bancorp had direct equity
investments (excluding REI) of $1.8 million, investments in equity mutual funds
of $5.4 million and investments in non-rated corporate debt obligations (trust
preferred debt securities) of $13.1 million. Given the non-rated nature of the
Bancorp's investments in trust preferred debt securities along with the longer-
term (typically 30 years) structure of the obligations, the Bancorp undertakes a
review of the historical and current financial condition and operating results
of the issuer prior to making an investment. These reviews are updated
periodically during the holding periods for the investments.
A portion of Bancorp's direct equity investments are managed by the Bank's
trust department on a no fee basis. The Bancorp's equity mutual fund investments
are placed with fund managers with whom the Bancorp's Senior Management is
familiar. The performance of the Bancorp's direct and mutual fund equity
investments is reviewed no less frequently than monthly by the Bancorp's Senior
Management and no less frequently than quarterly by the Bancorp's Board of
Directors.
Unlike the securities comprising the Bank's investment portfolio, which by
their nature present little to no risk of loss of principal or interest, the
trust preferred debt securities and equity investments of the Bancorp are
subject to partial or complete diminution in market value upon the occurrence of
adverse economic events affecting the issuers of the securities.
At March 31, 1999, the Company had $190.1 million in investment securities
consisting primarily of investment grade corporate and U.S. agency securities
including $17.5 million of U.S. agency securities that are callable at par by
the issuers at specified dates prior to maturity. The Company invests in such
callable securities when the yields to each call date and to final maturity
exceed those available from comparable term and credit quality non-callable
securities by amounts which management deems sufficient to compensate the
Company for the call options inherent in the securities. The Company's MBS
portfolio
22
<PAGE>
consists of adjustable-rate securities tied to the one-year CMT (43.40% of the
portfolio), or six-month LIBOR (1.00% of the portfolio), seasoned fixed-rate
securities (13.39% of the portfolio) and five and seven year balloon securities
(42.21% of the portfolio). At March 31, 1999, the carrying value of the
Company's MBS portfolio totaled $526.1 million, $525.6 million or 99.90% of
which was classified as available-for-sale. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Comparison of
Financial Condition at March 31, 1999 and March 31, 1998." All of the Company's
MBS were insured or guaranteed by either the Government National Mortgage
Association (GNMA), FNMA or the Federal Home Loan Mortgage Corporation (FHLMC).
Investments in MBS involve a risk that actual prepayments will vary from
the estimated prepayments over the life of the security. This may require
adjustments to the amortization of any premium or accretion of any discount
relating to such instruments, thereby reducing the net yield on such securities.
There is also reinvestment risk associated with the cash flows from such
securities. In addition, the market value of such securities may be adversely
affected by changes in interest rates.
The Company's Collateralized Mortgage Obligations (CMO) portfolio consists
principally of adjustable rate securities tied to the one or three month LIBOR
or the Prime rate. The adjustment intervals for these securities are generally
monthly. All of the Company's $102.7 million CMO portfolio is backed by
mortgages insured by FNMA or FHLMC. As with MBS, CMOs involve a risk that actual
levels of prepayments will require an adjustment to the amortization of any
premium or accretion of any discounts on the security with an adverse impact on
the yield on the security. Additionally, the structure of many CMOs is such that
their cash flows exhibit greater sensitivity to changes in prepayments than do
traditional MBS.
The following table sets forth certain information regarding the carrying
and fair values of the Company's mortgage-backed securities at the dates
indicated.
<TABLE>
<CAPTION>
At March 31,
------------------------------------------------------------------------------------
1999 1998 1997
------------------------------------------------------------------------------------
Carrying Fair Carrying Fair Carrying Fair
Value Value Value Value Value Value
------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Held-to-maturity:
FHLMC $ 556 560 1,373 1,375 5,490 5,509
------------------------------------------------------------------------------------
Total held-to-maturity 556 560 1,373 1,375 5,490 5,509
------------------------------------------------------------------------------------
Available-for-sale:
GNMA 19,650 19,650 35,094 35,094 56,682 56,682
FHLMC 158,475 158,475 137,706 137,706 149,788 149,788
FNMA 347,435 347,435 308,820 308,820 279,539 279,539
------------------------------------------------------------------------------------
Total available-for-sale 525,560 525,560 481,620 481,620 486,009 486,009
------------------------------------------------------------------------------------
Total mortgage-backed securities $526,116 526,120 482,993 482,995 491,499 491,518
====================================================================================
</TABLE>
23
<PAGE>
The following table sets forth certain information regarding the carrying
and fair values of the Company's investment securities at the dates indicated.
<TABLE>
<CAPTION>
At March 31,
--------------------------------------------------------------------------------------------------
1999 1998 1997
--------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair Carrying Fair
Value Value Value Value Value Value
--------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Held-to-maturity
Domestic corporate $ - - - - 15,000 15,000
Collateralized mortgage
obligations - - - - 472 474
U.S. government and
federal agency
obligations 709 716 714 725 718 739
--------------------------------------------------------------------------------------------------
Total held-to-maturity 709 716 714 725 16,190 16,213
--------------------------------------------------------------------------------------------------
Available-for-sale:
Collateralized mortgage
obligations 102,700 102,700 223,502 223,502 24,437 24,437
FHLMC non-cumulative
preferred stock - - 5,768 5,768 5,600 5,600
Corporate debt
securities 57,765 57,765 17,359 17,359 - -
Equity securities
Direct 5,370 5,370 6,239 6,239 - -
Mutual funds 1,780 1,780 7,490 7,490 - -
U.S. government and
federal agency
obligations 17,472 17,472 56,052 56,052 57,610 57,610
--------------------------------------------------------------------------------------------------
Total available-for-sale 185,087 185,087 316,410 316,410 87,647 87,647
--------------------------------------------------------------------------------------------------
Total $185,796 185,803 317,124 317,135 103,837 103,860
==================================================================================================
</TABLE>
24
<PAGE>
The table below sets forth certain information regarding the carrying
value, weighted average yields and maturities of the Company's investment
securities and mortgage-backed securities as of March 31, 1999.
<TABLE>
<CAPTION>
AT March 31, 1999
-----------------------------------------------------------------
More than ONE More than FIVE
One Year or less Year to Five Years Years to Ten Years
-----------------------------------------------------------------
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Mortgage-backed securities
Held-to-maturity:
FHLMC $ 560 6.59% $ - -% $ - -%
FNMA - - - - - -
GNMA - - - - - -
-----------------------------------------------------------------
Total held-to-maturity 560 - - - - -
Available-for-sale
FHLMC - - 53,568 6.08 20,927 5.97
FNMA 1,735 6.65 74,966 6.36 79,036 6.14
GNMA - - - - 91 9.00
-----------------------------------------------------------------
Total available-for-sale 1,735 6.65 128,534 6.24 100,054 6.11
-----------------------------------------------------------------
Total mortgage-backed securities $ 2,295 6.64% $128,534 6.24% $100,054 6.11%
=================================================================
Investment securities:
Held-to-maturity:
U.S. government and Federal agency obligations $ 716 7.16% - - - -
-----------------------------------------------------------------
Total held-to-maturity 716 7.16 - - - -
-----------------------------------------------------------------
Available-for-sale:
Collateralized mortgage obligations - - - - - -
FHLMC non-cumulative preferred stock - - - - - -
Corporate debt securities - - - - - -
Equity securities Direct (1) - - - - - -
Mutual funds (1) - - - - - -
U.S. government and federal agency obligations 17,472 6.03 - - - -
-----------------------------------------------------------------
Total available-for-sale 17,472 6.03 - - - -
-----------------------------------------------------------------
Total investment securities $18,188 6.08% - - - -
=================================================================
<CAPTION>
---------------------------------------
More than Ten
Years Total
---------------------------------------
Weighted Weighted
Carrying Average Carrying Average
Value Yield Value Yield
---------------------------------------
<S> <C> <C> <C> <C>
Mortgage-backed securities
Held-to-maturity:
FHLMC - -% $ 560 6.59%
FNMA - - - -
GNMA - - - -
---------------------------------------
Total held-to-maturity - - 560 6.59
Available-for-sale
FHLMC 83,980 6.18 158,475 6.12
FNMA 191,698 6.45 347,435 6.36
GNMA 19,559 7.02 19,650 7.03
---------------------------------------
Total available-for-sale 295,237 6.41 525,560 6.31
---------------------------------------
Total mortgage-backed securities $295,237 6.41% $526,120 6.31%
=======================================
Investment securities:
Held-to-maturity:
U.S. government and Federal agency obligations $ - -% 716 7.16%
Total held-to-maturity ---------------------------------------
- - 716 7.16
Available-for-sale: ---------------------------------------
Collateralized mortgage obligations 102,700 5.94 102,700 5.94
FHLMC non-cumulative preferred stock - - - -
Corporate debt securities 57,765 6.51 57,765 6.51
Equity securities Direct (1) 5,370 -3.56 5,370 -3.56
Mutual funds (1) 1,780 -9.73 1,780 -9.73
U.S. government and federal agency obligations - - 17,472 -
---------------------------------------
Total available-for-sale 167,615 5.88 185,087 6.29
---------------------------------------
Total investment securities $167,615 5.88% $185,803 6.29%
=======================================
</TABLE>
__________________________
(1) "Yield" derived from unrealized change in market value of equity securities
is not included in totals for purposes of the calculation of weighted
average yield on the portfolio here or on average balance sheets in Item 7
- "Management's Discussion and Analysis of Financial Condition and Results
of Operations".
25
<PAGE>
Sources of Funds
General. Deposits, loan repayments and prepayments, proceeds from sales of
loans, cash flows generated from operations and FHLB advances and other
borrowings are the primary sources of the Bank's funds for lending, investing
and other general purposes.
Deposits. The Bank offers a variety of deposit accounts with a range of
interest rates and terms. The Bank's deposits consist of passbook accounts, NOW
and other demand accounts, money market savings accounts and certificate
accounts. The terms of the fixed-rate certificate accounts offered by the Bank
vary from 90 days to five years and the offering rates are established by the
Bank on a weekly basis. Once an account is established, no additional amounts
are permitted to be deposited in fixed-rate accounts. The Bank's 12-month and
step-up certificates permit additions to the account and the ability to increase
the interest rate one time if the offering rate increases during the term of the
account. Variable-rate certificates offer rates that change each month relative
to COFI and additions to the account are permitted. Specific terms of an
individual account vary according to the type of account, the minimum balance
required, the time period funds must remain on deposit and the interest rate,
among other factors. The flow of deposits is influenced significantly by
general economic conditions, changes in money market rates, prevailing interest
rates and competition. At March 31, 1999, the Bank had $1.01 billion of
certificate accounts maturing in less than one year. The Bank expects to retain
a substantial portion of these maturing dollars. The Bank's deposits are
obtained predominantly from the areas in which its branch offices are located.
The Bank relies primarily on customer service and long-standing relationships
with customers to attract and retain these deposits. However, market interest
rates and rates offered by competing financial institutions significantly affect
the Bank's ability to attract and retain deposits.
During the fourth quarter of fiscal 1998, the Bank opened a wholesale
deposit operation (Money Desk) through its Telebanking Center. The Bank's Money
Desk solicits deposits directly from individual and institutional investors. At
March 31, 1999 the Bank's certificate accounts include $18.5 million generated
through the Money Desk. The weighted average interest rate on these deposits
was 4.97% at March 31, 1999. During the fourth quarter of fiscal 1999, the Bank
made the decision to discontinue its Money Desk effective April 6, 1999 due to
the availability of alternative, cost-effective sources of funds, including
retail deposit growth and FHLB advances. The Bank does not expect to retain any
significant portion of the Money Desk deposits upon their maturity dates, which
are all within on year.
The following table presents the deposit activity of the Bank for the
periods indicated.
<TABLE>
<CAPTION>
For the Year Ended March 31,
1999 1998 1997
----------------------------------------------------
<S> <C> <C> <C>
(Dollars in thousands)
Net deposits (withdrawals) $ 24,561 (49,543) (42,601)
Interest credited on deposit accounts 78,153 79,318 71,577
----------------------------------------------------
Total increase in deposit accounts $102,714 29,775 28,976
====================================================
</TABLE>
At March 31, 1999, the Bank had $247.9 million in certificate accounts in
amounts of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
Weighted
Maturity Period Amount Average Rate
-----------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Three months or less $ 79,348 5.14%
Over three through six months 89,079 5.39
Over six through 12 months 66,241 5.06
Over 12 months 13,185 5.65
------------------------------
Total $247,853 5.24%
==============================
</TABLE>
26
<PAGE>
The following table sets forth the distribution of the Bank's average deposit
accounts for the periods indicated and the weighted average interest rates on
each category of deposits presented.
<TABLE>
<CAPTION>
For the Year Ended March 31,
---------------------------------------------------------------------------------
1999 1998
---------------------------------------------------------------------------------
Percent Percent
of Total Weighted of Total Weighted
Average Average Average Average Average Average Average
Balance Deposits Yield Balance Deposits Yield Balance
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Passbook accounts $ 147,702 8.30% 2.31% $ 162,874 9.48% 2.58% $ 192,520
Money market savings accounts 290,917 16.34 4.51 193,146 11.25 4.13 111,793
NOW accounts 133,102 7.48 0.96 126,244 7.35 0.96 106,355
Non-interest bearing accounts 55,028 3.09 - 33,054 1.92 - 27,292
---------------------------------------------------------------------------------
Total 626,749 35.21 2.84% 515,318 30.00 2.60% 437,960
Certificate accounts:
Variable-rate certificates of deposit 31,788 1.79 4.98 26,852 1.56 5.03 45,395
Step-up certificates of deposit 76,681 4.31 5.12 126,123 7.35 5.50 303,595
Less than 6 months 47,040 2.64 4.61 49,145 2.86 4.60 171,594
6 through 11 months 290,462 16.32 5.22 234,850 13.68 5.41 184,274
12 though 23 months 533,774 29.99 5.43 581,927 33.89 5.66 304,984
24 months through 47 months 83,834 4.71 5.67 76,129 4.43 5.68 85,515
48 months or greater 85,498 4.80 5.84 96,835 5.64 5.82 111,648
Jumbo 3,970 0.22 6.27 9,800 .57 5.99 31,021
Acquired certificates of deposit(1) 152 .01 3.99 328 .02 4.14 1,484
---------------------------------------------------------------------------------
Total certificate accounts 1,153,199 64.79 5.35% 1,201,989 70.00 5.55% 1,239,510
---------------------------------------------------------------------------------
Total average deposits $1,779,948 100.00% 4.47% $1,717,307 100.00% 4.67% $1,677,470
=================================================================================
<CAPTION>
--------------------
1997
--------------------
Percent
of Total Weighted
Average Average
Deposits Yield
--------------------
<S> <C> <C>
Passbook accounts 11.48% 2.87%
Money market savings accounts 6.66 3.52
NOW accounts 6.34 0.91
Non-interest bearing accounts 1.63 -
--------------------
Total 26.11 2.38%
Certificate accounts:
Variable-rate certificates of deposit 2.71 4.88
Step-up certificates of deposit 18.10 5.77
Less than 6 months 10.23 4.94
6 through 11 months 10.98 5.09
12 though 23 months 18.18 5.35
24 months through 47 months 5.10 5.64
48 months or greater 6.65 5.78
Jumbo 1.85 5.39
Acquired certificates of deposit(1) 0.09 4.28
--------------------
Total certificate accounts 73.89 5.55%
--------------------
Total average deposits 100.00% 4.72%
====================
</TABLE>
________________________
(1) These certificates of deposit were acquired in connection with various
acquisitions of branch offices from other institutions.
27
<PAGE>
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at March 31, 1999.
<TABLE>
<CAPTION>
Period to Maturity from March 31, 1999 At March 31,
---------------------------------------------------------------------------------------------------------
Three to
Less than One to Two to Four Four to More than
One Year Two Years Three Years Years Five Years Five Years 1999 1998 1997
---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0.00 to 4.00% $ 499 2 - - - - 501 702 828
4.01 to 5.00% 478,858 12,141 2,492 623 4,652 135 498,901 60,740 116,684
5.01 to 6.00% 513,058 27,818 14,430 11,067 5,210 261 571,844 1,035,511 1,034,377
6.01 to 7.00% 19,754 6,873 732 1,232 99 - 28,690 81,086 87,082
7.01 to 8.00% 138 - 23 - - - 161 349 1,006
8.01 to 9.00% - - - - - - - - -
Over 9.01% 127 - - - - - 127 127 254
---------------------------------------------------------------------------------------------------------
Total $1,012,434 46,834 17,677 12,922 9,961 396 1,100,224 1,178,515 1,240,231
=========================================================================================================
</TABLE>
28
<PAGE>
FHLB Advances and Other Borrowings. The Bank utilizes FHLB advances and
reverse repurchase agreements as alternative sources of funds to retail
deposits. These borrowings are collateralized by MBS and other investment
securities and, in the case of certain FHLB advances, certain of the Bank's
mortgage loans and secondarily by the Bank's investment in the capital stock of
the FHLB. See "Regulation and Supervision-Federal Home Loan Bank System". The
FHLB provides advances pursuant to several different credit programs, each of
which has its own interest rate, range of maturities and collateralization
requirements. The maximum amount that the FHLB will advance to member
institutions, including the Bank fluctuates from time to time in accordance with
the policies of the OTS and FHLB.
At March 31, 1999, the Bank had outstanding FHLB advances and other
borrowings of $814.0 million at a weighted average cost of 5.74% secured by
GNMA, FNMA and FHLMC MBS and other investment securities. The original terms of
the FHLB advances and other borrowings outstanding at March 31, 1999, range from
1 year to 10 years. The Bank expects to continue to utilize FHLB advances and
other borrowings including reverse repurchase agreements as secondary sources of
funds to deposit liabilities. FHLB advances and other borrowings are utilized
to balance the differential net cash flows arising from loan and deposit
activities and as a primary funding vehicle for the Bank's investment in MBS and
other investment securities. Reverse repurchase agreements take the form of
sales of securities under agreements to repurchase the identical securities at a
later date. These transactions are accounted for as financing arrangements with
the obligations to repurchase securities sold reflected as a liability while the
securities underlying the agreements remain in the respective asset account.
During fiscal 1998, the Bank began making increased use of putable
borrowings (primarily FHLB advances). Under the putable advance program, in
exchange for a favorable interest rate on the borrowing, the Bank grants to the
FHLB an option to "put" the advance back to the Bank at specified quarterly
"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 which have fixed maturities between the first
"put" date and the final maturity date of the putable advance. 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 new 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 MBS products. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Asset/Liability
Management".
The use of reverse repurchase agreements involves the risk that between the
dates of "sale" and subsequent repurchase, a decline in the market value of the
underlying security may require the sale of additional securities to the
counterparty to the reverse repurchase agreement. See "Sources of Funds - FHLB
Advances and Other Borrowings".
29
<PAGE>
The following table sets forth certain information regarding the Bank's borrowed
funds at or for the periods ended on the dates indicated.
<TABLE>
<CAPTION>
At or For the Years Ended March 31,
-------------------------------------------------------
1999 1998 1997
-------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
FHLB advances:
Average balance outstanding $855,197 $601,078 $335,188
Maximum amount outstanding at any
month-end during the year 949,000 790,086 545,400
Balance outstanding at end of year (1) 764,000 735,886 480,000
Weighted average interest rate during
the year 5.57% 5.87% 5.78%
Weighted average interest rate end
of year 5.37% 5.70% 5.78%
Reverse repurchase agreements:
Average balance outstanding $ 50,000 $ 50,000 $ 10,129
Maximum amount outstanding at any
month-end during the year 50,000 50,000 50,000
Balance outstanding at end of year (1) 50,000 50,000 50,000
Weighted average interest rate during
the year 5.87% 5.87% 5.96%
Weighted average interest rate end
of year 5.87% 5.87% 5.87%
</TABLE>
_______________
(1) Included in the balances of FHLB advances and reverse repurchase agreements
outstanding at March 31, 1999 are putable borrowings of $465.0 million and
$50.0 million, respectively, with initial put dates ranging from April 1999
to February 2003 and May 1999 to December 1999, respectively. The weighted
average term to maturity for these putable borrowings are 40 and 34 months,
respectively, and the weighted average terms to first put dates are 14 and 5
months, respectively.
Subsidiary Activities
Pomona Financial Services, Inc. ("PFS"), a California corporation, is a
wholly owned subsidiary of the Bank. PFS acts as a holding company for the
service corporations described below and acts as trustee under deeds of trusts.
For the year ended March 31, 1999, PFS had net earnings of $132,000.
PFF Financial Services, Inc. ("PFFFS"), a California corporation, is a
wholly owned subsidiary of PFS. Prior to July 1994, PFFFS operated as an agency
selling various personal and business insurance policies strictly as an adjunct
to the Bank's traditional thrift business. As part of the Bank's strategy to
diversify the products and services it offers and restructure its balance sheet,
a decision was made to expand the role of PFFFS. In July 1994, PFFFS was
authorized to sell fixed annuities to the Bank's customers through the Bank's
branches. In August 1995, PFFFS was further authorized to offer variable
annuities and mutual funds through a relationship with a third party marketer of
annuity and mutual fund non-deposit investment products. In addition, PFFFS is
working with vendors of other insurance products, such as auto, home and life
insurance, to further expand the products and services offered to the Bank's
customers and members of the local community. For the year ended March 31,
1999, PFFFS had net earnings of $50,000.
Diversified Services, Inc. ("DSI"), a California corporation, is a wholly
owned subsidiary of PFS. DSI had historically participated as an investor in
residential real estate projects. DSI may consider additional real estate
activities as market conditions warrant. For the year ended March 31, 1999, DSI
had net earnings of $41,000.
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Personnel
As of March 31, 1999, the Bank had 474 full-time employees and 130 part-
time employees. The employees are not represented by a collective bargaining
unit and the Bank considers its relationship with its employees to be good. See
Item 11 "Executive Compensation" for a description of certain compensation and
benefit programs offered to the Bank's employees.
REGULATION AND SUPERVISION
General
The Bancorp, as a savings and loan holding company, is required to file
certain reports with, and otherwise comply with the rules and regulations of the
OTS under the Home Owners' Loan Act, as amended (the "HOLA"). In addition, the
activities of savings institutions, such as the Bank, are governed by the HOLA
and the Federal Deposit Insurance Act ("FDI Act").
The Bank is subject to extensive regulation, examination and supervision by
the OTS, as its primary federal regulator, and the FDIC, as the deposit insurer.
The Bank is a member of the Federal Home Loan Bank ("FHLB") System and its
deposit accounts are insured up to applicable limits by the Savings Association
Insurance Fund ("SAIF") managed by the FDIC. The Bank must file reports with
the OTS and the FDIC concerning its activities and financial condition in
addition to obtaining regulatory approvals prior to entering into certain
transactions such as mergers with, or acquisitions of, other savings
institutions. The OTS and/or the FDIC conduct periodic examinations to test the
Bank's safety and soundness and compliance with various regulatory requirements.
This regulation and supervision establishes a comprehensive framework of
activities in which an institution can engage and is intended primarily for the
protection of the insurance fund and depositors. The regulatory structure also
gives the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss allowances for regulatory purposes. Any change in such
regulatory requirements and policies, whether by the OTS, the FDIC or the
Congress, could have a material adverse impact on the Bancorp, the Bank and
their operations. Certain of the regulatory requirements applicable to the Bank
and to the Bancorp are referred to below or elsewhere herein. The description
of statutory provisions and regulations applicable to savings institutions and
their holding companies set forth in this Form 10-K does not purport to be a
complete description of such statutes and regulations and their effects on the
Bank and the Bancorp.
Holding Company Regulation
The Bancorp is a non diversified unitary savings and loan holding company
within the meaning of the HOLA. As a unitary savings and loan holding company,
the Bancorp generally is not restricted under existing laws as to the types of
business activities in which it may engage, provided that the Bank continues to
be a qualified thrift lender ("QTL"). See "Federal Savings Institution
Regulation - QTL Test." Upon any non-supervisory acquisition by the Bancorp of
another savings institution or savings bank that meets the QTL test and is
deemed to be a savings institution by the OTS, the Bancorp would become a
multiple savings and loan holding company (if the acquired institution is held
as a separate subsidiary) and would be subject to extensive limitations on the
types of business activities in which it could engage. The HOLA limits the
activities of a multiple savings and loan holding company and its non-insured
institution subsidiaries primarily to activities permissible for bank holding
companies under Section 4(c)(8) of the Bank Holding Company Act ("BHC Act"),
subject to the prior approval of the OTS, and certain activities authorized by
OTS regulation, and no multiple savings and loan holding company may acquire
more than 5% of the voting stock of a company engaged in impermissible
activities.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution or holding
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<PAGE>
company thereof, without prior written approval of the OTS or acquiring or
retaining control of a depository institution that is not insured by the FDIC.
In evaluating applications by holding companies to acquire savings institutions,
the OTS must consider the financial and managerial resources and future
prospects of the company and institution involved, the effect of the acquisition
on the risk to the insurance funds, the convenience and needs of the community
and competitive factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies and (ii) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions. The
states vary in the extent to which they permit interstate savings and loan
holding company acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, HOLA does prescribe such restrictions on subsidiary
savings institutions as described below. The Bank must notify the OTS 30 days
before declaring any dividend to the Bancorp. In addition, the financial impact
of a holding company on its subsidiary institution is a matter that is evaluated
by the OTS and the agency has authority to order cessation of activities or
divestiture of subsidiaries deemed to pose a threat to the safety and soundness
of the institution.
Federal Savings Institution Regulation
Business Activities. The activities of federal savings institutions are
governed by federal law and regulations. These laws and regulations delineate
the nature and extent of the activities in which federal associations may
engage. In particular, many types of lending authority for federal associations
are limited to a specified percentage of the institution's capital or assets.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 3% leverage (core) capital ratio and an 8% risk-based capital ratio.
Effective April 1, 1999, however, the minimum leverage ratio increased to 4% for
all institutions except those with the highest rating on the CAMELS financial
institution rating system. In addition, the prompt corrective action standards
discussed below also establish, in effect, a minimum 2% tangible capital
standard, a 4% leverage (core) capital ratio (3% for institutions receiving the
highest rating on the CAMELS financial institution rating system), and, together
with the risk-based capital standard itself, a 4% Tier I risk-based capital
standard. Core capital is defined as common stockholders' equity (including
retained earnings), certain noncumulative perpetual preferred stock and related
surplus, and minority interests in equity accounts of consolidated subsidiaries
less intangibles other than certain mortgage servicing rights and credit card
relationships. The OTS regulations also require that, in meeting the tangible,
leverage (core) and risk-based capital standards, institutions must generally
deduct investments in and loans to subsidiaries engaged in activities as
principal that are not permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier I (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, as assigned by the OTS capital regulation based on the
risks OTS believes are inherent in the type of asset. The components of Tier I
(core) capital are equivalent to those discussed earlier. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock and the allowance for loan and lease losses
limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of
supplementary capital included as part of total capital cannot exceed 100% of
core capital.
The OTS regulatory capital requirements also incorporate an interest rate
risk component. Savings institutions with "above normal" interest rate risk
exposure are subject to a deduction from total capital for
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<PAGE>
purposes of calculating their risk-based capital requirements. A savings
institution's interest rate risk is measured by the decline in the net portfolio
value of its assets (i.e., the difference between incoming and outgoing
discounted cash flows from assets, liabilities and off-balance sheet contracts)
that would result from a hypothetical 200 basis point increase or decrease in
market interest rates divided by the estimated economic value of the
institution's assets. In calculating its total capital under the risk-based
capital rule, a savings institution whose measured interest rate risk exposure
exceeds 2% must deduct an amount equal to one-half of the difference between the
institution's measured interest rate risk and 2%, multiplied by the estimated
economic value of the institution's assets. The Director of the OTS may waive or
defer a savings institution's interest rate risk component on a case-by-case
basis. A savings institution with assets of less than $300 million and risk-
based capital ratios in excess of 12% is not subject to the interest rate risk
component, unless the OTS determines otherwise. For the present time, the OTS
has deferred implementation of the interest rate risk component. At March 31,
1999, the Bank met each of its capital requirements and it is anticipated that
the Bank would not be subject to the interest rate risk component.
The following table presents the Bank's capital position at March 31, 1999.
<TABLE>
<CAPTION>
Actual Required
Actual Required Excess Percentage Percentage
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
Tangible $201,210 46,429 154,781 6.95% 1.50%
Core (Leverage) 201,210 86,859 114,351 6.95 3.00
Risk-based 222,915 142,403 80,512 12.52 8.00
</TABLE>
Prompt Corrective Regulatory Action. Under the OTS prompt corrective
action regulations, the OTS is required to take certain supervisory actions
against undercapitalized institutions, the severity of which depends upon the
institution's degree of under capitalization. Generally, a savings institution
is considered "well capitalized" if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of Tier I (core) capital to risk-weighted
assets is at least 6%, its ratio of core capital to total assets is at least 5%,
and it is not subject to any order or directive by the OTS to meet a specific
capital level. A savings institution generally is considered "adequately
capitalized" if its ratio of total capital to risk-weighted assets is at least
8%, its ratio of Tier I (core) capital to risk-weighted assets is at least 4%,
and its ratio of core capital to total assets is at least 4% (3% if the
institution receives the highest CAMELS rating). A savings institution that has
a ratio of total capital to risk weighted assets of less than 8%, a ratio of
Tier I (core) capital to risk-weighted assets of less than 4% or a ratio of core
capital to total assets of less than 4% (3% or less for institutions with the
highest examination rating) is considered to be "undercapitalized." A savings
institution that has a total risk-based capital ratio less than 6%, a capital
Tier 1 to risk-weighted assets ratio of less than 3% or a Tier 1 capital to
total assets ratio that is less than 3% is considered to be "significantly
undercapitalized" and a savings institution that has a Tier 1 capital to assets
ratio equal to or less than 2% is deemed to be "critically undercapitalized."
Subject to a narrow exception, the banking regulator is required to appoint a
receiver or conservator for an institution that is "critically
undercapitalized." The regulation also provides that a capital restoration plan
must be filed with the OTS within 45 days of the date a savings institution
receives notice that it is "undercapitalized," "significantly undercapitalized"
or "critically undercapitalized." Compliance with the plan must be guaranteed
by any parent holding company. In addition, numerous mandatory supervisory
actions become immediately applicable to an undercapitalized institution,
including, but not limited to, increased monitoring by regulators and
restrictions on growth, capital distributions and expansion. The OTS could also
take any one of a number of discretionary supervisory actions, including the
issuance of a capital directive and the replacement of senior executive officers
and directors.
Insurance of Deposit Accounts. Deposits of the Bank are presently insured by
the SAIF. The FDIC maintains a risk-based assessment system by which
institutions are assigned to one of three categories based on their
capitalization and one of three subcategories based on examination ratings and
other supervisory information. An institution's assessment rate depends upon
the categories to which it is assigned.
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Assessment rates for SAIF member institutions are determined semiannually by the
FDIC and currently range from zero basis points for the healthiest institutions
to 27 basis points for the riskiest.
In addition to the assessment for deposit insurance, institutions are
required to pay on bonds issued in the late 1980s by the Financing Corporation
to recapitalize the predecessor to the SAIF. During 1998, Financing Corporation
payments for SAIF members approximated 6.10 basis points, while BIF members paid
1.22 basis points. By law, there will be equal sharing of Financing Corporation
payments between the members of both insurance funds on the earlier of January
1, 2000 or the date the two insurance funds are merged.
The Bank's assessment rate for fiscal 1999 ranged from 5.8 to 6.1 basis
points and the premium paid for this period was $1.0 million all of which was
paid towards the Financing Corporation bonds. The FDIC has authority to increase
insurance assessments. A significant increase in SAIF insurance premiums would
have an adverse effect on the operating expenses and results of operations of
the Bank. Management cannot predict what the insurance assessment rate will be
in the future.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
Thrift Rechartering Legislation. Legislation enacted in 1996 provided that
the BIF and the SAIF were to have merged on January 1, 1999 if there were no
more savings associations as of that date. Various proposals to eliminate the
federal savings association charter, create a uniform financial institutions
charter, abolish the OTS and restrict savings and loan holding company
activities have been introduced in Congress. The Bank is unable to predict
whether any of this legislation will be enacted or the extent to which
legislation might restrict or disrupt its operations.
Loans to One Borrower. Under the HOLA, savings institutions are generally
subject to the limits on loans to one borrower applicable to national banks.
Generally, savings institutions may not make a loan or extend credit to a single
or related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if such loan is secured by readily marketable collateral, which is
defined to include certain financial instruments and bullion. At March 31,
1999, the Bank's limit on loans to one borrower was $33.4 million. At March 31,
1999, the Bank's largest aggregate outstanding balance of loans was $29.9
million to a single family tract developer.
QTL Test. The HOLA requires savings institutions to meet a QTL test. Under
the QTL test, a savings and loan association must either qualify as a "domestic
building and loan association" as defined in the Internal Revenue Code or
maintain at least 65% of its "portfolio assets" (total assets less: (i)
specified liquid assets up to 20% of total assets; (ii) intangibles, including
goodwill; and (iii) the value of property used to conduct business) in certain
"qualified thrift investments" (primarily residential mortgages and related
investments, including certain mortgage-backed securities) in at least 9 months
out of each 12 month period.
A savings institution that fails the QTL test is subject to certain
operating restrictions and may be required to convert to a bank charter. As of
March 31, 1999, the Bank maintained 81.4% of its portfolio assets in qualified
thrift investments and, therefore, met the QTL test. Recent legislation has
expanded the extent to which education loans, credit card loans and small
business loans may be considered "qualified thrift investments."
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions
34
<PAGE>
charged against capital. The rule effective in fiscal 1999 established three
tiers of institutions, which are based primarily on an institution's capital
level. An institution that exceeded all fully phased-in capital requirements
before and after a proposed capital distribution ("Tier 1 Bank") and had not
been advised by the OTS that it was in need of more than normal supervision,
could, after prior notice but without obtaining approval of the OTS, make
capital distributions during a calendar year equal to the greater of (i) 100% of
its net earnings to date during the calendar year plus the amount that would
reduce by one-half its "surplus capital ratio" (the excess capital over its
fully phased-in capital requirements) at the beginning of the calendar year or
(ii) 75% of its net income for the previous four quarters. Effective April 1,
1999, the OTS's capital distribution regulation changed. Under the new
regulation, an application to and the prior approval of the OTS is required
before any capital distribution if the institution does not meet the criteria
for "expedited treatment" of applications under OTS regulations, the total
capital distributions for the calendar year exceed net income for that year plus
the amount of retained net income for the preceding two years, the institution
would be undercapitalized following the distribution, or the distribution would
otherwise be contrary to a statute, regulation or agreement with the OTS. If an
application is not required, institutions in a holding company structure must
still give advance notice to the OTS of the capital distribution. If the Bank's
capital fell below its regulatory requirements or if the OTS notified it that it
was in need of more than normal supervision, the Bank's ability to make capital
distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution, which would otherwise be permitted by the
regulation, if the OTS determined that the distribution would be an unsafe or
unsound practice. At March 31, 1999, the Bank was a Tier 1 Bank.
Liquidity. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage of its net withdrawal deposit accounts plus short-term borrowings.
This liquidity requirement was 4% at March 31, 1999, but is subject to change
from time to time by the OTS to any amount within the range of 4% to 10%
depending upon economic conditions and the savings flows of member institutions.
Monetary penalties may be imposed for failure to meet these liquidity
requirements. The Bank's liquidity ratio for March 31, 1999 was 5.7%, which
exceeded the applicable requirement. The Bank has never been subject to
monetary penalties for failure to meet its liquidity requirements.
Assessments. Savings institutions are required to pay assessments to the
OTS to fund the agency's operations. The general assessments, paid on a semi-
annual basis, are computed upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the Bank's latest quarterly
thrift financial report. The assessments paid by the Bank for the fiscal year
ended March 31, 1999 totaled $439,000.
Branching. OTS regulations permit nationwide branching by federally
chartered savings institutions to the extent allowed by federal statute. This
permits federal savings institutions to establish interstate networks and to
geographically diversify their loan portfolios and lines of business. The OTS
authority preempts any state law purporting to regulate branching by federal
savings institutions.
Transactions with Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates" (e.g., any company that
controls or is under common control with an institution, including the Bancorp
and its non-savings institution subsidiaries) is limited by Sections 23A and 23B
of the Federal Reserve Act ("FRA"). Section 23A limits the aggregate amount of
covered transactions with any individual affiliate to 10% of the capital and
surplus of the savings institution. The aggregate amount of covered
transactions with all affiliates is limited to 20% of the savings institution's
capital and surplus. Certain transactions with affiliates are required to be
secured by collateral in an amount and of a type described in Section 23A and
the purchase of low quality assets from affiliates is generally prohibited.
Section 23B generally provides that certain transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the institution as those prevailing at the time for comparable
transactions with non-affiliated companies. In addition, savings institutions
are prohibited from lending to any affiliate that is engaged in activities that
are not permissible for bank holding companies and no savings institution may
purchase the securities of any affiliate other than a subsidiary.
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<PAGE>
The Bank's authority to extend credit to executive officers, directors and
10% shareholders ("insiders"), as well as entities such persons control, is
governed by Sections 22(g) and 22(h) of the FRA and Regulation O thereunder.
Among other things, such loans are required to be made on terms substantially
the same as those offered to unaffiliated individuals and to not involve more
than the normal risk of repayment. Recent legislation created an exception for
loans made pursuant to a benefit or compensation program that is widely
available to all employees of the institution and does not give preference to
insiders over other employees. Regulation O also places individual and aggregate
limits on the amount of loans the Bank may make to insiders based, in part, on
the Bank's capital position and requires certain board approval procedures to be
followed.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring actions
against the institution and all institution-affiliated parties, including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors to institution of receivership, conservatorship or termination of
deposit insurance. Civil penalties cover a wide range of violations and can
amount to $25,000 per day, or even $1 million per day in especially egregious
cases. Under the FDI Act, the FDIC has the authority to recommend to the
Director of the OTS enforcement action to be taken with respect to a particular
savings institution. If action is not taken by the Director, the FDIC has
authority to take such action under certain circumstances. Federal law also
establishes criminal penalties for certain violations.
Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") and a final rule to implement safety and soundness standards
required under the FDI Act. The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes impaired. The
standards set forth in the Guidelines address internal controls and information
systems; internal audit system; credit underwriting; loan documentation;
interest rate risk exposure; asset growth; asset quality; earnings; and
compensation, fees and benefits. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
Guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard, as required by the FDI
Act. The final rule establishes deadlines for the submission and review of such
safety and soundness compliance plans when such plans are required.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for accounts aggregating $46.5 million or less
(subject to adjustment by the Federal Reserve Board) the reserve requirement was
3%; and for accounts aggregating greater than $46.5 million, the reserve
requirement was $1.40 million plus 10% (subject to adjustment by the Federal
Reserve Board between 8% and 14%) against that portion of total transaction
accounts in excess of $46.5 million. The first $4.9 million of otherwise
reservable balances (subject to adjustments by the Federal Reserve Board) were
exempted from the reserve requirements. The Bank maintained compliance with the
foregoing requirements. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve Board may be used to satisfy liquidity
requirements imposed by the OTS.
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<PAGE>
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company reports its income on a calendar year basis using the
accrual method of accounting and is subject to federal income taxation in the
same manner as other corporations with some exceptions, including particularly
the Bank's reserve for bad debts discussed below. The Company files federal
income tax returns on a consolidated basis. The Bank has been audited by the
IRS through the 1990 tax year and the California Franchise Tax Board through the
1985 tax year and for the 1993 tax year. The statute of limitations has closed
for all tax years for both IRS and California Franchise Tax Board purposes
through the 1992 tax year. The following discussion of tax matters is intended
only as a summary and does not purport to be a comprehensive description of the
tax rules applicable to the Company.
Tax Bad Debt Reserve. Formerly, savings institutions such as the Bank
which met certain definitional tests primarily relating to their assets and the
nature of their business ("qualifying thrifts") were permitted to establish a
reserve for bad debts and to make annual additions , which additions could,
within specified formula limits, be deducted in arriving at taxable income. The
Bank's deduction with respect to "qualifying loans," ( generally loans secured
by certain interests in real property), could be computed using a percentage
based on the Bank's actual loss experience, (the "experience method"), or a
percentage equal to eight percent of the Bank's taxable income before such
deduction (the "percentage of taxable income method"). Each year the Bank
selected the more favorable way to calculate the deduction attributable to an
addition to the bad debt reserve.
Pursuant to the Small Business Job Protection Act of 1996 (the "Act"),
Congress repealed the reserve method of accounting for bad debts for savings
institutions, effective for taxable years beginning after 1995. The Bank
changed its method of accounting for bad debts from the reserve method formerly
permitted under section 593 of the Internal Revenue Code of 1986, as amended
(the "Code") to the "specific charge-off" method. Under the specific charge-off
method, which is governed by section 166 of the Code and the regulations
thereunder, tax deductions may be taken for bad debts only if loans become
wholly or partially worthless. Although the Act requires that qualifying
thrifts recapture (i.e., include in taxable income) over a six-year period a
portion of their existing bad debt reserves equal to their "applicable excess
reserves," the Bank does not have applicable excess reserves subject to
recapture. However, the Bank's tax bad debt reserve balance of approximately
$25.3 million (as of March 31, 1999) will, in future years, be subject to
recapture in whole or in part upon the occurrence of certain events, such as a
distribution to shareholders in excess of the Bank's current and accumulated
earnings and profits, a redemption of shares, or upon a partial or complete
liquidation of the Bank. The Bank does not intend to make distributions to
shareholders that would result in recapture of any portion of its bad debt
reserves. These reserves would also be subject to recapture if the Bank fails
to qualify as a "bank" for federal income tax purposes.
Corporate Alternative Minimum Tax. The Internal Revenue Code of 1986, as
amended (the "Code") imposes a tax on alternative minimum taxable income
("AMTI") at a rate of 20%. The excess of the bad debt reserve deduction using
the percentage of taxable income method over the deduction that would have been
allowable under the experience method is treated as a preference item for
purposes of computing the AMTI. Only 90% of AMTI can be offset by net operating
loss carryovers of which the Company currently has none. AMTI is increased by
an amount equal to 75% of the amount by which the Company's adjusted current
earnings exceeds its AMTI (determined without regard to this preference and
prior to reduction for net operating losses). In addition, for taxable years
beginning after December 31, 1996 and before January 1, 1996, an environmental
tax of .12% of the excess of AMTI (with certain modifications) over $2.0 million
is imposed on corporations, including the Company, whether or not an Alternative
Minimum Tax ("AMT") is paid. The Company does not expect to be subject to the
AMT, but may be subject to the environmental tax liability.
Dividends Received Deduction and Other Matters. The Company may exclude
from its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction is
generally 70% in the case of dividends received from unaffiliated
37
<PAGE>
corporations with which the Company will not file a consolidated tax return,
except that if the Company owns more than 20% of the stock of a corporation
distributing a dividend then 80% of any dividends received may be deducted.
State and Local Taxation
State of California. The California franchise tax rate applicable to the
Company equals the franchise tax rate applicable to corporations generally, plus
an "in lieu" rate approximately equal to personal property taxes and business
license taxes paid by such corporations (but not generally paid by banks or
financial corporations such as the Company); however, the total tax rate cannot
exceed 10.84%. Under California regulations, bad debt deductions are available
in computing California franchise taxes using a three or six-year weighted
average loss experience method. The Bancorp and its California subsidiary file
California state franchise tax returns on a combined basis. Assuming that the
holding company form of organization is continued to be utilized, the Bancorp,
as a savings and loan holding company commercially domiciled in California, will
generally be treated as a financial corporation and subject to the general
corporate tax rate plus the "in lieu" rate as discussed previously.
Delaware Taxation. As a Delaware holding company not earning income in
Delaware, the Bancorp is exempted from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
Item 2. Properties.
- ------------------
PFF Bank & Trust, as of March 31, 1999, conducted its business through
twenty-four banking branches, two separate trust offices, a regional loan
center, a human resource and training center, plus one executive administrative
building and one records center.
The executive offices for the Bank and the Bancorp are located at 350 South
Garey Avenue, Pomona, California.
Of the twenty-four bank branches, seventeen of the buildings and the land
on which they are located are owned, one building is owned on leased land, and
six buildings and the land on which they are located are leased. The two
separate trust offices and the administrative offices and land on which they are
located are leased, and the human resources and training center and the records
center and land occupied by them are owned.
As of March 31, 1999, the net book value of owned real estate including the
branch located on leased land totaled $15.8 million. The net book value of
leased branch offices was $2.0 million. The net book value of furniture,
fixtures and electronic data processing equipment was $6.0 million.
38
<PAGE>
Item 3. Legal Proceedings.
- --------------------------
The Bancorp and subsidiaries have been named as defendants in various
lawsuits arising in the normal course of business. The outcome of these
lawsuits cannot be predicted, but the Bancorp intends to vigorously defend the
actions and is of the opinion that the lawsuits will not have a material effect
on the Bancorp.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------------------------------------------------------------
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
- -------------------------------------------------------------------------------
The Common Stock of PFF Bancorp, Inc. is traded over-the-counter on the
NASDAQ National Market under the symbol "PFFB." The stock began trading on
March 29, 1996. The table below sets forth for the periods indicated the high,
low and closing sale prices of PFF Bancorp, Inc. common stock. To date, the
Bancorp has not paid a dividend to its stockholders. In the future, the Board
of Directors may consider a policy of paying cash dividends on the Common Stock.
As of March 31, 1999, there were approximately 6,898 holders of the Common Stock
of the Company, which includes the approximate number of shares held in street
name.
<TABLE>
<CAPTION>
High Low Closing
-----------------------------------------
<S> <C> <C> <C>
Year Ended March 31, 1999
First Quarter $21.38 17.75 18.63
Second Quarter 19.63 11.50 15.25
Third Quarter 16.13 10.75 16.00
Fourth Quarter 18.63 15.25 17.50
Year Ended March 31, 1998
First Quarter $19.00 13.25 18.75
Second Quarter 20.13 17.75 19.38
Third Quarter 22.19 17.94 19.88
Fourth Quarter 21.13 16.88 20.63
</TABLE>
39
<PAGE>
Item 6. Selected Financial Data.
- ---------------------------------
The selected consolidated financial and other data of the Company set forth
below is derived in part from, and should be read in conjunction with the
consolidated financial statements of the Company and notes thereto - See Item 8
- - "Financial Statements and Supplementary Data".
<TABLE>
<CAPTION>
At March 31,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Selected Balance Sheet Data:
Total assets $2,935,980 2,812,384 2,535,767 2,008,139 1,842,877
Investment securities held-to-
maturity 709 714 16,190 28,026 40,059
Investment securities
available-for- 185,087 316,410 87,647 9,932 6,881
sale
Mortgage-backed securities held-
to-maturity 556 1,373 5,490 7,134 80,778
Mortgage-backed securities
available-for-sale 525,560 481,620 486,009 125,588 -
Trading securities 4,271 - - - -
Investment in real estate 6,371 731 1,113 911 1,449
Loans held for sale 3,531 701 736 6,015 -
Loans receivable, net(1) 2,026,081 1,827,614 1,819,209 1,574,935 1,605,675
Deposits 1,843,538 1,740,824 1,711,049 1,682,073 1,669,416
FHLB advances and other
borrowings 814,000 785,886 530,000 19,722 49,095
Stockholders' equity, substantially
restricted 242,665 254,278 265,526 289,071 108,053
</TABLE>
(continued on next page)
40
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended March 31,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands, except per share amounts)
Selected Operating Data:
Interest income $206,955 191,368 168,515 136,173 108,009
Interest expense 130,356 118,517 99,306 87,556 62,066
----------------------------------------------------------------------
Net interest income 76,599 72,851 69,209 48,617 45,943
Provision for loan losses 4,020 7,099 13,661 10,895 13,901
----------------------------------------------------------------------
Net interest income after
provision for loan losses 72,579 65,752 55,548 37,722 32,042
Non-interest income 15,548 14,280 10,227 8,139 4,912
Non-interest expense:
General and administrative
expense 54,960 51,560 49,381 40,475 39,534
SAIF recapitalization assessment - - 10,900 - -
Foreclosed real estate operations,
net (45) 473 (325) 1,670 4,691
----------------------------------------------------------------------
Total non-interest expense 54,915 52,033 59,956 42,145 44,225
----------------------------------------------------------------------
Earnings (loss) before income
taxes 33,212 27,999 5,819 3,716 (7,271)
Income taxes (benefit) 14,208 12,019 3,087 1,651 (3,112)
----------------------------------------------------------------------
Net earnings (loss) $ 19,004 15,980 2,732 2,065 (4,159)
======================================================================
Basic earnings per share (2) $ 1.37 1.00 0.15 N/A N/A
======================================================================
Diluted earnings per share (2) $ 1.29 .95 0.15 N/A N/A
======================================================================
</TABLE>
(continued on next page)
41
<PAGE>
<TABLE>
<CAPTION>
At or for the Year Ended March 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Performance Ratios (3):
Return on average assets 0.64% 0.60 0.12 0.11 (0.24)
Return on average equity 7.92 6.07 0.96 1.86 (3.68)
Average equity to average assets 8.08 9.87 12.10 5.88 6.60
Equity to total assets at end of period 8.27 9.04 10.47 14.39 5.86
Net interest spread (4) 2.47 2.41 2.52 2.51 2.63
Effective interest spread (5) 2.71 2.82 3.05 2.66 2.80
Average interest-earning assets to
average interest-bearing liabilities 105.16 108.98 112.04 103.17 104.52
Efficiency ratio (6) 59.64 59.18 62.16 71.31 77.74
General and administrative
expense to average assets 1.85 1.93 2.10 2.14 2.31
Regulatory Capital Ratios (3)(7):
Tangible capital 6.95 7.10 8.46 10.53 5.67
Core capital 6.95 7.10 8.46 10.53 5.67
Risk-based capital 12.52 14.17 16.54 20.93 10.56
Asset Quality Ratios (3):
Non-performing loans as a percent of
gross loans receivable (8)(9) 0.50 0.88 1.24 1.41 1.43
Non-performing assets as a percent
of total assets (9) 0.56 0.88 1.80 2.17 1.99
Allowance for loan losses as a
percent of gross loans receivable (8) 1.18 1.33 1.47 1.21 1.16
Allowance for loan losses as a
percent of non-performing loans (9) 237.56 151.27 118.72 86.01 81.36
Number of full-service customer
facilities 24 23 23 22 22
Loan originations $987,604 557,428 499,667 265,210 403,073
</TABLE>
____________________________
(1) The allowances for loan losses at March 31, 1999, 1998, 1997, 1996, and 1995
were $26.2 million, $26.0 million, $27.7 million, $19.7 million, and $19.3
million, respectively.
(2) Earnings per share have been restated to reflect the adoption of Statement
of Financial Accounting Standards No. 128, "Earnings Per Share."
(3) Asset Quality Ratios and Regulatory Capital Ratios are end of period ratios.
Performance Ratios are based on average daily balances during the indicated
periods.
(4) Net interest spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of interest-
bearing liabilities.
(5) Effective interest spread represents net interest income as a percent of
average interest-earning assets.
(6) The efficiency ratio represents general and administrative expense as a
percent of net interest income plus non-interest income.
(7) For definitions and further information relating to the Bank's regulatory
capital requirements, see "Regulation - Federal Savings Institution
Regulation - Capital Requirements."
(8) Gross loans receivable includes loans receivable held for investment and
loans held for sale and excludes loans held for accelerated disposition.
(9) Non-performing assets consist of non-performing loans and REO. Non-
performing loans consist of all loans 90 days or more past due and all
other non-accrual loans. It is the Bank's policy to cease accruing interest
on loans 90 days or more past due. See "Business of the Bank - Non-Accrual
and Past Due Loans" and "Real Estate."
42
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations.
-------------
Asset/Liability Management
The Company's earnings depend primarily on its net interest income. Net
interest income is affected by net interest spread. Changes in net interest
spread ("interest rate risk") are influenced to a significant degree by the
repricing characteristics of assets and liabilities ("timing risk"), the
relationship between various rates ("basis risk"), customer options, and changes
in the shape of the yield curve.
The Company's Asset/Liability Committee ("ALCO") is responsible for
implementing the interest rate risk policies designed to manage its interest
rate risk exposure. The Board of Directors approves acceptable interest rate
risk levels designed to provide sufficient net interest income and market value
of shareholder equity (NPV) assuming specified changes in interest rates. NPV
is defined as the present value of expected net cash flows from existing assets
minus the present value of expected net cash flows from existing liabilities.
One measure of the Company's exposure to interest rate risk is shown in the
following table which sets forth the repricing frequency of its major assets and
liabilities as of March 31, 1999. Repricing frequencies of assets are based
upon contractual maturities, repricing opportunities, and the scheduled
principal payments and estimated prepayments. Repricing of liabilities are
based upon the contractual maturities, estimated decay rates for passbook, NOW
and other demand accounts and money market savings accounts ("core deposits"),
and the earliest repricing opportunity for variable and floating rate
instruments. The Company also had $515.0 million of putable borrowings on the
balance sheet as of March 31, 1999 that are assumed to reprice at their
contractual final maturity. The interest rate sensitivity of the Company's
assets and liabilities illustrated in the following table would vary
substantially if different assumptions were used, or if actual experience
differed from that assumed.
43
<PAGE>
<TABLE>
<CAPTION>
March 31, 1999
---------------------------------------------------------
More than 3 More than 6 More than 12
3 Months Months to 6 Months to 12 Months to 3
or Less Months Months Years
---------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest-earning assets:
Cash, investment securities and FHLB stock (1) $ 178,176 1,175 2,743 5,253
Loans and mortgage-backed securities: (1)
Mortgage-backed securities 47,987 40,613 78,426 167,186
Loans receivable, net 944,568 332,103 180,971 364,474
--------------------------------------------------------
Total loans and mortgage-backed securities 992,555 372,716 259,397 531,660
--------------------------------------------------------
Total interest-earning assets 1,170,731 373,891 262,140 536,913
Non-interest earning assets - - - -
---------------------------------------------------------
Total assets $1,170,731 373,891 262,140 536,913
========================================================
Interest-bearing liabilities:
Fixed maturity deposits $ 364,695 355,174 289,854 63,776
Core deposits (2) 48,905 48,905 97,812 391,246
--------------------------------------------------------
Total deposits 413,600 404,079 387,666 455,022
Borrowings (3) 65,000 70,000 45,000 224,000
--------------------------------------------------------
Total interest-bearing liabilities 478,600 474,079 432,666 679,022
Non-interest bearing liabilities - - - -
Equity - - - -
--------------------------------------------------------
Total liabilities and stockholders' equity $ 478,600 474,079 432,666 679,022
========================================================
Interest sensitivity gap $ 692,131 (100,188) (170,526) (142,109)
Cumulative interest sensitivity gap $ 692,131 591,943 421,417 279,308
Cumulative interest sensitivity gap as a
percentage of total assets 23.57% 20.16 14.35 9.51
Cumulative interest-earning assets as a
percentage of cumulative interest-
bearing liabilities 244.62% 162.13 130.42 113.53
<CAPTION>
March 31, 1999
--------------------------------------------------------
More than 3
Years to 5 More than 5 Fair
Years Years Total Value
--------------------------------------------------------
<S> <C> <C> <C> <C>
Interest-earning assets:
Cash, investment securities and FHLB stock (1) 30,325 49,803 267,475 267,482
Loans and mortgage-backed securities: (1)
Mortgage-backed securities 106,275 85,629 526,116 526,120
Loans receivable, net 70,325 137,171 2,029,612 2,034,596
--------------------------------------------------------
Total loans and mortgage-backed securities 176,600 222,800 2,555,728 2,034,596
---------------------------------------------------------
Total interest-earning assets 206,925 272,603 2,823,203 2,828,198
Non-interest earning assets - 112,777 112,777 112,777
--------------------------------------------------------
Total assets 206,925 385,380 2,935,980 2,940,975
========================================================
Interest-bearing liabilities:
Fixed maturity deposits 21,094 364 1,094,957 1,098,802
Core deposits (2) 142,554 19,159 748,581 748,581
--------------------------------------------------------
Total deposits 163,648 19,523 1,843,538 1,847,383
Borrowings (3) 345,000 65,000 814,000 737,083
--------------------------------------------------------
Total interest-bearing liabilities 508,648 84,523 2,657,538 2,584,466
Non-interest bearing liabilities - 35,777 35,777 35,777
Equity - 242,665 242,665 242,665
--------------------------------------------------------
Total liabilities and stockholders' equity 508,648 362,965 2,935,980 2,862,908
========================================================
Interest sensitivity gap (301,723) 188,080 165,665
Cumulative interest sensitivity gap (22,415) 165,665
Cumulative interest sensitivity gap as a
percentage of total assets (0.76) 5.64
Cumulative interest-earning assets as a
percentage of cumulative interest-
bearing liabilities 99.13 106.23
</TABLE>
______________
(1) Based upon contractual maturities, repricing date, and forecasted principal
payments assuming normal amortization and, where applicable prepayments.
(2) Assumes annual decay rates ranging from 17%-35%.
(3) Putable borrowings are presented based upon contractual final maturities.
44
<PAGE>
The Company's one year GAP at March 31, 1999, was 14.35% (i.e., more interest
earning assets reprice within one year than interest-bearing liabilities); this
compares with 11.07% at March 31, 1998. The increase in the Company's one-year
repricing GAP between March 31, 1998 and 1999 is attributable, in part, to an
acceleration in the assumed level of principal prepayments on loans and MBS
between the two years. The Company's continuing strategy to limit its interest
rate risk exposure is emphasizing the origination of adjustable rate loans
indexed to more responsive indices such as the one year CMT and the Prime rate
and attempting to more closely match the sensitivity of liabilities to the
anticipated repricing characteristics of assets through the use of putable
borrowings and growth in core deposits.
Although the table indicates the Company is better protected against rising
interest rates, a GAP table is limited to measuring the timing risk and does not
reflect the impact of customer options or basis risk. To better measure the
Company's exposure to these and other components of interest rate risk,
management relies on an internally maintained, externally supported
asset/liability simulation model.
The Company forecasts its net interest income for the next twelve months, and
its NPV, assuming there are no changes in interest rates or the balance sheet
structure from the current period end. Once this "base case" has been
established, the Company subjects its balance sheet to instantaneous and
sustained rate changes of 100, 200, 300 and 400 basis points to the treasury
yield curve. Prepayment speeds and the responsiveness of the various indices are
estimated for each rate change level. The model then re-forecasts net interest
income and NPV. The table below indicates the results of the Company's internal
modeling of its balance sheet as of March 31, 1999. Once again, it should be
noted that the internal calculation of the Company's sensitivity to interest
rate changes would vary substantially if different assumptions were used, or if
the Company's response to changes in interest rates included changes in the
structure of its balance sheet.
Percentage Change
------------------------------------------------
Change in Interest Rates
(in basis points) Net Interest Income(1) Net Portfolio Value(2)
---------------------------------------------------------------------------
200 (2.1)% (14.5)%
100 (0.2) (6.3)
(100) (1.3) 2.7
(200) (2.6) 3.7
_________________
(1) This percentage change represents the impact to net interest income
for the period from April 1, 1999 through March 31, 2000 assuming the
Company does not change the structure of its balance sheet.
(2) This percentage represents the NPV of the Company assuming no changes
to the balance sheet.
Although the GAP table indicates the Company's net interest income would
perform better in a rising rate environment, results from the asset/liability
simulation model indicate that yield compression would occur decreasing net
interest income over the next twelve months. These results reflect the impact
rising rates would have in decreasing prepayments, assets encountering periodic
and lifetime caps, certain borrowings being "put" back to the Bank, and other
factors that are not included in the GAP table.
The OTS produces an analysis of the Bank's interest rate risk using its own
model, based upon data submitted on the Bank's quarterly Thrift Financial
Reports. The results of the OTS model may vary from the Bank's internal model
primarily due to differences between assumptions utilized in the Bank's internal
model and the OTS model, including estimated loan market rates, prepayment
rates, reinvestment rates and deposit decay rates. As of March 31, 1999, the
Bank's sensitivity measure, as calculated by the OTS, was a negative 1.52%.
This represents an increase in sensitivity of 30 basis points from the March 31,
1998 results.
45
<PAGE>
Average Balance Sheets
The following table sets forth certain information relating to the Company for
the years ended March 31, 1999, 1998, and 1997. The yields and costs are
derived by dividing income or expense by the average balances of assets or
liabilities, respectively, for the periods shown. Average balances are derived
from average daily balances. The yields include fees that are considered
adjustments to yields.
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------------------------------
1999 1998
--------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets: (Dollars in Thousands)
Interest-earning assets:
Interest-earning deposits and short-term investments 40,037 $ 1,921 4.80% $ 30,158 $ 1,590 5.27%
Investment securities, net 270,164 16,842 6.23 179,895 11,931 6.63
Mortgage-backed securities, net 596,185 37,471 6.29 489,562 33,167 6.77
Loans receivable, net 1,872,869 148,013 7.90 1,853,686 142,815 7.70
FHLB stock 47,778 2,708 5.67 30,911 1,865 6.03
--------------------------- -------------------------
Total interest-earning assets 2,827,033 206,955 7.32 2,584,212 191,368 7.41
Non-interest-earning assets 139,799 85,842
--------------- --------------
Total assets $2,966,832 $2,670,054
=============== ==============
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Passbook accounts $ 147,702 3,405 2.31 $ 162,874 4,205 2.58
Money market savings accounts 290,917 13,131 4.51 193,146 7,981 4.13
NOW and other demand deposit accounts 188,130 1,293 0.69 159,298 1,214 0.76
Certificate accounts 1,153,199 61,705 5.35 1,201,989 66,755 5.55
------------------------- ------------------------
Total 1,779,948 79,534 4.47 1,717,307 80,155 4.67
FHLB advances and other borrowings 905,197 50,711 5.60 651,078 38,233 5.87
Other 3,101 111 3.58 2,910 129 4.43
------------------------- -------------------------
Total interest-bearing liabilities 2,688,246 130,356 4.85 2,371,295 118,517 5.00
----------- ------------
Non-interest-bearing liabilities 38,729 35,318
-------------- --------------
Total liabilities 2,726,975 2,406,613
Stockholders' equity 239,857 263,441
-------------- --------------
Total liabilities and stockholders' equity $2,966,832 $2,670,054
============== ==============
Net interest income $ 76,599 $ 72,851
================= ================
Net interest spread 2.47 2.41
Effective interest spread 2.71% 2.82%
Ratio of interest-earning assets to interest-
bearing liabilities 105.16% 108.98%
<CAPTION>
--------------------------------------
1997
--------------------------------------
Average
Average Yield/
Balance Interest Cost
-------------------------------------
<S> <C> <C> <C>
Assets:
Interest-earning assets:
Interest-earning deposits and short-term investments $ 35,676 $ 2,005 5.62%
Investment securities, net 62,671 4,292 6.85
Mortgage-backed securities, net 406,703 27,723 6.82
Loans receivable, net 1,743,487 133,116 7.64
FHLB stock 21,383 1,379 6.45
--------------------------
Total interest-earning assets 2,269,920 168,515 7.42
Non-interest-earning assets 78,368
--------------
Total assets $2,348,288
==============
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Passbook accounts $ 192,520 5,525 2.87
Money market savings accounts 111,793 3,935 3.52
NOW and other demand deposit accounts 133,647 1,096 0.82
Certificate accounts 1,239,510 68,690 5.55
--------------------------
Total 1,677,470 79,246 4.72
FHLB advances and other borrowings 345,317 19,981 5.79
Other 3,223 79 2.45
--------------------------
Total interest-bearing liabilities 2,026,010 99,306 4.90
----------
Non-interest-bearing liabilities 38,143
--------------
Total liabilities 2,064,153
Stockholders' equity 284,135
--------------
Total liabilities and stockholders' equity $2,348,288
==============
Net interest income $ 69,209
==========
Net interest spread 2.52
Effective interest spread 3.05%
Ratio of interest-earning assets to interest-
bearing liabilities 112.04%
</TABLE>
46
<PAGE>
Rate/Volume Analysis
The following table presents the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to: (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume); (iii) changes attributable to changes in
rate volume (change in rate multiplied by change in volume); and (iv) the net
change.
<TABLE>
<CAPTION>
Year Ended March 31, 1999 Year Ended March 31, 1998
Compared To Compared To
Year Ended March 31, 1998 Year Ended March 31, 1997
------------------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
------------------------------------------------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars In Thousands)
Interest-earning Assets:
Interest-earning deposits and short-term investments $ 521 (143) (47) 331 (310) (125) 20 (415)
Investment securities, net (1) 5,987 (716) (360) 4,911 8,030 (138) (253) 7,639
Mortgage-backed securities, net (1) - - - - 5,651 (203) (4) 5,444
Loans held for sale 1,478 3,682 38 5,198 - - - -
Loans receivable, net (2) 7,224 (2,397) (523) 4,304 8,419 1,046 234 9,699
FHLB stock 1,018 (113) (62) 843 615 (90) (39) 486
------------------------------------------------------------------------
Total interest-earning assets $16,228 313 (954) 15,587 22,405 490 (42) 22,853
------------------------------------------------------------------------
Interest-bearing Liabilities:
Passbook accounts $ (392) (450) 42 (800) (851) (558) 89 (1,320)
Money market savings accounts 4,040 737 373 5,150 2,864 682 500 4,046
NOW and other demand deposit accounts 220 (119) (22) 79 210 (80) (12) 118
Certificate accounts (2,710) (2,439) 99 (5,050) (2,082) - 147 (1,935)
FHLB advances and other borrowings 14,923 (1,758) (687) 12,478 17,704 276 272 18,252
Other 8 (25) (1) (18) (8) 64 (6) 50
------------------------------------------------------------------------
Total interest-bearing liabilities 16,089 (4,054) (196) 11,839 17,837 384 990 19,211
------------------------------------------------------------------------
Change in net interest income $ 139 4,367 (758) 3,748 4,568 106 (1,032) 3,642
========================================================================
</TABLE>
_________________________
(1) Includes assets available-for-sale.
(2) Included in the increases/(decreases) in interest income on loans
receivable, net for the year ended March 31, 1999 compared to 1998, the
year ended March 31, 1998 compared to 1997 are increases/(decreases) in
interest income on loans held for sale attributable to volume and rate
of $(3.4 million) and $(267,000); $3.2 million and $82,000,
respectively.
47
<PAGE>
Comparison of Operating Results for the Years Ended March 31, 1999 and March 31,
1998
General
- -------
The Company reported net earnings of $19.0 million for fiscal 1999 compared
to net earnings of $16.0 million for fiscal 1998. The improvement in operating
resul ts between fiscal 1999 and fiscal 1998 was attributable to three factors:
(i) an increase in net interest income from $72.9 million for fiscal 1998 to
$76.6 million for fiscal 1999 attributable to growth in average interest-earning
assets (ii) a decrease in the provision for loan losses from $7.1 million for
fiscal 1998 to $4.0 million for fiscal 1999 arising from an improvement in asset
quality and (iii) an increase in non-interest income from $14.3 million for
fiscal 1998 to $15.5 million for fiscal 1999 driven principally by increases in
deposit and related fees from $8.2 million for fiscal 1998 to $8.6 million for
fiscal 1999 and the gain on trading securities of $569,000 for fiscal 1999
compared to zero for fiscal 1998.
Interest Income
- ---------------
Interest income for fiscal 1999 was $207.0 million compared to $191.4
million for fiscal 1998, an increase of $15.6 million or 8.2%. The increase in
interest income between fiscal 1998 and fiscal 1999 was attributable to a $242.8
million increase in average interest-earning assets from $2.58 billion for
fiscal 1998 to $2.83 billion for fiscal 1999. The yield on average interest-
earning assets was 7.32% for fiscal 1999 compared to 7.41% for fiscal 1998.
The increase in average interest-earning assets between fiscal 1998 and
fiscal 1999 was comprised principally of a $90.3 million increase in the average
balance of investment securities from $179.9 million for fiscal 1998 to $270.2
million for fiscal 1999, a $19.2 million increase in the average balance of
loans receivable, net from $1.85 billion for fiscal 1998 to $1.87 billion for
fiscal 1999 and $106.6 million increase in the average balance of mortgage-
backed securities (MBS) from $489.6 million for fiscal 1998 to $596.2 million
for fiscal 1999. The increases in the average balances of MBS and investment
securities between fiscal 1998 and 1999 reflect activity during fiscal 1998 and
early fiscal 1999.
During mid-fiscal 1999, the Company undertook a strategy of reducing its
wholesale leverage (MBS and investment securities funded with FHLB advances and
other borrowings). This strategy was undertaken in connection with an increased
focus by the Company on enhancing its net interest spread and achieving an
earnings stream and balance sheet comprised to a greater extent by commercial
business, construction and land, commercial real estate and consumer loans
(collectively, the "Four-C's") on the asset side and money market savings,
passbook, NOW and other demand deposits (core deposits) on the liability side.
Strong loan origination volumes of the Four-C's have provided an investment
alternative for the Company which is preferential over MBS or investment
securities and is consistent with its long term strategic objectives.
Additionally, having passed the three year anniversary of the Bank's March 28,
1996 mutual to stock conversion, the Company has alternative avenues for capital
management available to it (e.g. stock repurchases) which did not exist prior to
March 28, 1999. The average yield on loans receivable, net increased 20 basis
points from 7.70% for fiscal 1998 to 7.90% for fiscal 1999 reflecting the Bank's
increased emphasis on the origination of the Four-C's. The disbursed balance of
the Four-C's averaged $370.0 million or 19.76% of average total loans
receivable, net during fiscal 1999 compared to $259.2 million or 13.98% for
fiscal 1998.
The Bank also increased the proportion of its loan portfolio comprised by
single-family residential mortgage loans which provide for a 36 to 84 month
fixed-rate of interest before transitioning to an adjustable-rate loan tied to
the one-year constant maturity treasury (CMT) index (hybrid ARMs). During fiscal
1999, the Bank's portfolio of hybrid ARM loans averaged $418.0 million at an
average yield of 7.08% compared to $318.9 million at an average yield of 7.22%
during fiscal 1998. Unlike the typical COFI based adjustable-rate loans
originated by the Bank, these hybrid ARM loans are not originated with lower
introductory rates.
48
<PAGE>
The increase in yield on loans receivable, net attributable to the change
in the composition of the loan portfolio was partially offset by a decrease in
the general level of interest rates and an increase in the level of prepayments
of higher yielding residential mortgage loans. These prepayments also resulted
in an increase in the amortization of premiums paid on loans purchased. This
premium amortization amounted to $2.4 million for fiscal 1999 compared to
$784,000 for fiscal 1998. At March 31, 1999, the Bank's weighted average
carrying value of loans purchased from others as a percentage of outstanding
principal balance was 101.6%.
The average yield on investment securities decreased from 6.63% for fiscal
1998 to 6.23% for fiscal 1999 as lower-yielding adjustable rate collateralized
mortgage obligations (CMOs) indexed primarily to the one-month London Interbank
Offered Rate (LIBOR) were added to the portfolio during the first half of fiscal
1999 prior to the Company's decision during mid-fiscal year to begin de-
emphasizing wholesale leverage. The decrease in the yield on investment
securities between fiscal 1998 and fiscal 1999 was attributable in part to a
decrease in one month LIBOR. One month LIBOR decreased from 5.63% at March 31,
1998 to 4.93% at March 31, 1999. Premium amortization on investment securities
of $780,000 for fiscal 1999 and $131,000 for fiscal 1998 decreased the yield on
investment securities by 29 basis points and 8 basis points for fiscal 1999 and
1998, respectively. The average yield on MBS decreased from 6.77% for fiscal
1998 to 6.29% for fiscal 1999. This decrease in the yield on MBS was
attributable in part to a decrease in the general level of interest rates during
fiscal 1999, particularly the one year CMT index to which 43.3% of the Company's
MBS portfolio is tied. The CMT index decreased from 5.41% at March 31, 1998 to
3.86% on October 16, 1998 before increasing to 4.72% at March 31, 1999.
Premium amortization on MBS of $3.3 million for fiscal 1999 and $2.0 million for
fiscal 1998 decreased the yield on MBS by 55 basis points and 41 basis points
for fiscal 1999 and 1998, respectively. The weighted average cost basis of the
MBS and other investment securities held by the Company at March 31, 1999 was
100.9 percent of par value.
Interest Expense
- ----------------
Interest expense for fiscal 1999 was $130.4 million compared to $118.5
million for fiscal 1998, an increase of $11.8 million or 10.0%. The increase in
interest expense between fiscal 1998 and fiscal 1999, was due to a $317.0
million increase in average interest-bearing liabilities from $2.37 billion for
fiscal 1998 to $2.69 billion for fiscal 1999 partially offset by a decrease in
the average cost of interest-bearing liabilities from 5.00% for fiscal 1998 to
4.85% for fiscal 1999. The increase in the average balance of interest-bearing
liabilities was principally attributable to a $254.1 million increase in the
average balance of FHLB advances and other borrowings from $651.1 million for
fiscal 1998 to $905.2 million for fiscal 1999. The average balance of deposits
increased $62.6 million from $1.72 billion for fiscal 1998 to $1.78 billion for
fiscal 1999. During fiscal 1999, the Bank utilized FHLB advances and other
borrowings as its primary funding source for its investments in MBS and other
investment securities and as a means of managing the difference in cash flows
between retail loan and deposit activity in a manner complementary to the
overall interest rate risk and profitability objectives of the Bank. The average
cost of deposits decreased from 4.67% for fiscal 1998 to 4.47% for fiscal 1999.
Contributing to the decrease in the average cost of deposits was a $111.4
million increase in the average balance of core deposits from $515.3 million for
fiscal 1998 to $626.7 million for fiscal 1999. The average cost of FHLB advances
and other borrowings decreased from 5.87% for fiscal 1998 to 5.60% for fiscal
1999. This decrease reflects the decrease in the general level of interest rates
during fiscal 1999.
Provision for Loan Losses
- --------------------------
Provision for loan losses was $4.0 million for fiscal 1999 compared to $7.1
million for fiscal 1998. The decrease in provision for losses between fiscal
1998 and 1999 reflects an improvement in the Bank's overall level of asset
quality as well as an assessment by the Bank of an improvement in general
economic conditions and property valuations in its market area. Non-accrual
loans were $11.0 million or 0.50%, of gross loans receivable at March 31, 1999
compared to $17.2 million or 0.88% of gross loans receivable at March 31, 1998.
The allowance for loan losses was $26.2 million or 1.18% of gross loans
receivable at March 31, 1999 compared to $26.0 million or 1.33% of gross loans
receivable at March 31, 1998.
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<PAGE>
Non-interest Income
- -------------------
Non-interest income was $15.5 million for fiscal 1999 compared to $14.3
million for fiscal 1998, an increase of $1.3 million or 8.9%. The increase
between fiscal 1998 and fiscal 1999 was attributable principally to an increase
in deposit and related fees from $8.2 million for fiscal 1998 to $8.6 million
for fiscal 1999 due to a combination of higher volumes of core deposit activity
and an increased emphasis on the assessment and collection of fees. The income
from the sale of non-deposit investments decreased from $1.6 million for fiscal
1998 to $1.1 million for fiscal 1999. Trust fees were $1.9 million for fiscal
1998 and 1999. Gain on sales of loans and securities was $698,000 for fiscal
1999 compared to $1.6 million for fiscal 1998. The $698,000 for fiscal 1999 is
comprised of gains on sales of loans of $672,000 and gain on sales of securities
of $26,000. During fiscal 1999, the Bancorp established a trading portfolio
comprised principally by readily marketable equity securities. This portfolio
is managed by the Bank's Trust Department with the objective of enhancing the
overall returns to the Bancorp. The net gain from trading activity was $569,000
for fiscal 1999.
Non-interest Expense
- --------------------
Non-interest expense was $54.9 million for fiscal 1999 compared to $52.0
million for fiscal 1998, a increase of $2.9 million or 5.5%. The $1.5 million
increase in marketing and professional services expense between fiscal 1999 and
fiscal 1998 is attributable principally to the costs associated with the Bank's
image branding campaign which carries the theme, "As big as you need, as small
as you like."
General and administrative expense was $55.0 million or 1.9% of average
assets for fiscal 1999 compared to $51.6 million or 1.9% of average assets for
fiscal 1998, an increase of $3.4 million or 6.6%. Compensation and benefits
expense increased $1.2 million from $26.8 million for fiscal 1998 to $28.0
million for fiscal 1999. Included in compensation and benefits expense are non-
cash charges of $2.7 million and $1.9 million associated with the Bank's ESOP
and 1996 Incentive Plan. Occupancy and equipment expense was $12.1 million for
fiscal 1999 compared to $11.6 million for fiscal 1998. The $519,000 increase in
occupancy and equipment expense between fiscal 1998 and fiscal 1999 is
attributable principally to depreciation on computer equipment related to
upgrades to the Bank's wide area networked personal computers and service bureau
charges. Foreclosed real estate operations, net generated income of $45,000 for
fiscal 1999 compared to expense of $473,000 for fiscal 1998 reflecting an
improved regional economy and real estate market.
Income Taxes
- ------------
Income taxes were $14.2 million for fiscal 1999 compared to $12.0 million
for fiscal 1998. The effective income tax rate for fiscal 1999 was 42.8%
compared to an effective rate of 42.9% for fiscal 1998.
Comparison of Financial Condition at March 31, 1999 and March 31, 1998
- ----------------------------------------------------------------------
Total assets at March 31, 1999 were $2.94 billion compared to $2.81 billion
at March 31, 1998 an increase of $123.6 million or 4.4%. Loans receivable, net
increased $198.5 million from $1.83 billion at March 31, 1998 to $2.03 billion
at March 31, 1999. Loan originations were $987.6 million for fiscal 1999
compared to $557.4 million for fiscal 1998. The increase in originations between
fiscal 1998 and 1999 reflects the impact of a very favorable interest rate
environment for re-finance activity combined with an increase in real estate
values and sales volume in the Bank's market areas. The weighted average initial
contract rate for total loan originations was 8.58% for fiscal 1999, compared to
8.75% for fiscal 1998. Originations of the Four-C's totaled $577.8 million for
fiscal 1999 compared to $308.4 million for fiscal 1998 reflecting the Bank's
emphasis on these areas of lending. Investment securities available-for-sale
decreased $131.3 million from $316.4 million at March 31, 1998 to $185.1 million
at March 31, 1999. MBS available-for-sale increased $43.9 million from $481.6
million at March 31, 1998 to $525.6 million at March 31, 1999. The increase in
FHLB stock from $39.5 million at March 31, 1998 to $50.3 million at March 31,
1999 reflects the additional stock the Bank is required to hold based upon its
level of outstanding FHLB
50
<PAGE>
advances. Prepaid expenses and other assets were $23.3 million at March 31, 1999
compared to $47.2 million at March 31, 1998 due to MBS sold but not yet settled
as of March 31, 1998.
Total liabilities at March 31, 1999 were $2.69 billion compared to $2.56
billion at March 31, 1998, an increase of $135.2 million or 5.3%. Total
deposits of the Bank were $1.84 billion at March 31, 1999 compared to $1.74
billion at March 31, 1998. FHLB advances and other borrowings were $814.0
million at March 31, 1999 compared to $785.9 million at March 31, 1998. The
increase in FHLB advances and other borrowings between March 31, 1998 and 1999
was attributable to the Bank's use of FHLB advances and other borrowings to
supplement deposits in funding the growth in loans receivable during fiscal
1999. As noted above in the discussion of interest income, during mid-fiscal
1999 the Company began reducing its level of wholesale leverage.
Total stockholders' equity decreased $11.6 million from $254.3 million at
March 31, 1998 to $242.7 million at March 31, 1999. The $11.6 million decrease
is comprised principally of a $15.3 million decrease in additional paid-in-
capital partially offset by a $3.7 million decrease in unearned stock-based
compensation and a $3.6 million decrease in accumulated other comprehensive
earnings (loss) on securities available-for-sale. The $15.3 million decrease in
additional paid-in-capital was attributable principally to the Company's
repurchase during fiscal 1999 of 1,664,144 shares of its outstanding common
stock, at a weighted average price of $19.29 per share. The $3.5 million
increase in retained earnings from $106.6 million at March 31, 1998 to $110.2
million at March 31, 1999 reflects $15.5 million attributable to the amount paid
by the Company to repurchase its common stock in excess of the issuance price of
the stock, partially offset by the Company's net earnings of $19.0 million for
fiscal 1999. The $3.7 million decrease in unearned stock-based compensation was
attributable to the amortization of shares under the Company's ESOP and 1996
Incentive Plan.
Comparison of Operating Results for the Years Ended March 31, 1998 and March 31,
1997
General
- -------
The Company reported net earnings of $16.0 million for fiscal 1998 compared
to net earnings of $2.7 million for fiscal 1997. The improvement in operating
results between fiscal 1998 and fiscal 1997 was attributable to four factors:
(i) an increase in net interest income from $69.2 million for fiscal 1997 to
$72.9 million for fiscal 1998 attributable to growth in average interest-earning
assets (ii) a decrease in the provision for loan losses from $13.7 million for
fiscal 1997 to $7.1 million for fiscal 1998 arising from an improvement in asset
quality (iii) an increase in non-interest income from $10.2 million for fiscal
1997 to $14.3 million for fiscal 1998 driven principally by an increase in
deposit and related fees from $9.0 million for fiscal 1997 to $11.7 million for
fiscal 1998 and (iv) the impact on fiscal 1997 of the Bank's $10.9 million share
of the SAIF recapitalization assessment.
Interest Income
- ---------------
Interest income for fiscal 1998 was $191.4 million compared to $168.5
million for fiscal 1997, an increase of $22.9 million or 13.6%. The increase in
interest income between fiscal 1997 and fiscal 1998 was attributable to a $314.3
million increase in average interest-earning assets from $2.27 billion for
fiscal 1997 to $2.58 billion for fiscal 1998. The yield on average interest-
earning assets was 7.41% for fiscal 1998 compared to 7.42% for fiscal 1997.
The increase in average interest-earning assets between fiscal 1997 and
fiscal 1998 was comprised principally of a $117.2 million increase in the
average balance of investment securities from $62.7 million for fiscal 1997 to
$179.9 million for fiscal 1998, a $110.2 million increase in the average balance
of loans receivable, net from $1.74 billion for fiscal 1997 to $1.85 billion for
fiscal 1998 and $82.9 million increase in the average balance of MBS from $406.7
million for fiscal 1997 to $489.6 million for fiscal 1998. The average yield on
loans receivable, net increased 6 basis points from 7.64% for fiscal 1997 to
7.70% for fiscal 1998 reflecting the Bank's increased emphasis on the
origination of mortgages which provide higher yields than those earned on
single-family residential FHLB and COFI based loan products. The disbursed
balance
51
<PAGE>
of the Bank's portfolio of construction loans totaled $90.3 million at an
average yield of 10.02% during fiscal 1998 compared to $74.7 million at an
average yield of 11.49% during fiscal 1997.
The Bank has also increased the proportion of its loan portfolio comprised
by hybrid ARM loans. During fiscal 1998, the Bank's portfolio of hybrid ARM
loans averaged $318.9 million at an average yield of 7.22% compared to $193.9
million at an average yield of 7.12% during fiscal 1997. Unlike the typical
COFI based adjustable-rate loans originated by the Bank, these hybrid ARM loans
are not originated with lower introductory rates.
The increase in yield on loans receivable, net attributable to the change
in the composition of the loan portfolio was partially offset by an increase in
the level of prepayments of higher yielding residential mortgage loans. These
prepayments also resulted in an increase in the amortization of premiums paid on
loans purchased. This premium amortization amounted to $784,000 for fiscal 1998
compared to $38,000 for fiscal 1997. At March 31, 1998, the Bank's weighted
average carrying value of loans purchased from others as a percentage of the
outstanding principal balance of $165.0 million was 101.8 percent of par value.
The yield on investment securities decreased from 6.85% for fiscal 1997 to
6.63% for fiscal 1998 as lower-yielding adjustable rate CMOs indexed primarily
to the one-month LIBOR were added to the portfolio in connection with the Bank's
strategy of supplementing growth in loans and deposits with MBS and other
securities funded primarily with FHLB advances and other borrowings. The yield
on MBS decreased from 6.82% for fiscal 1997 to 6.77% for fiscal 1998. This
decrease in the yield on MBS was attributable to a decrease in the general level
of interest rates during fiscal 1998, particularly the one year CMT index to
which 26.02% of the Company's MBS portfolio is tied. The CMT index decreased
from 6.02% at March 31, 1997 to 5.08% on January 9, 1998 before increasing
slightly to 5.41% at March 31, 1998. The decrease in the general level of
interest rates also resulted in an acceleration in the level of prepayments of
the higher yielding fixed and adjustable rate MBS in the Company's portfolio
with a resulting increase in premium amortization. This premium amortization
was $2.0 million for fiscal 1998 compared to $1.1 million for fiscal 1997. The
weighted average cost basis of the MBS and other investment securities held by
the Company at March 31, 1998 was 100.8 percent of par value.
Interest Expense
- ----------------
Interest expense for fiscal 1998 was $118.5 million compared to $99.3
million for fiscal 1997, an increase of $19.2 million or 19.3%. The increase in
interest expense between fiscal 1997 and fiscal 1998, was due to a $345.3
million increase in average interest-bearing liabilities from $2.03 billion for
fiscal 1997 to $2.37 billion for fiscal 1998 coupled with an increase in the
average cost of interest-bearing liabilities from 4.90% for fiscal 1997 to 5.00%
for fiscal 1998. The increase in the average balance of interest-bearing
liabilities was attributable to a $305.8 million increase in the average balance
of FHLB advances and other borrowings from $345.3 million for fiscal 1997 to
$651.1 million for fiscal 1998. The average balance of deposits increased $39.8
million from $1.68 billion for fiscal 1997 to $1.72 billion for fiscal 1998.
During fiscal 1998, the Bank utilized FHLB advances and other borrowings as
its primary funding source for its additional investments in MBS and other
investment securities and as a means of managing the difference in cash flows
between retail loan and deposit activity in a manner complementary to the
overall interest rate risk and profitability objectives of the Bank.
The average cost of deposits decreased from 4.72% for fiscal 1997 to 4.67%
for fiscal 1998. Contributing to the decrease in the average cost of deposits
was a $77.4 million increase in the average balance of core deposits from $438.0
million for fiscal 1997 to $515.3 million for fiscal 1998.
The average cost of FHLB advances and other borrowings increased from 5.79%
for fiscal 1997 to 5.87% for fiscal 1998. This increase reflects the Bank's
lengthening of the term to repricing of its FHLB advances in order to achieve
greater correlation between the repricing of its interest-earning assets and
interest-bearing liabilities. At March 31, 1998, the weighted average maturity
for the Bank's FHLB advances and other borrowings was 15 months compared to 9
months at March 31, 1997. In calculating
52
<PAGE>
these weighted average terms to repricing, putable borrowings have been assumed
to reprice at their first put date.
Provision for Loan Losses
- --------------------------
Provision for loan losses was $7.1 million for fiscal 1998 compared to
$13.7 million for fiscal 1997. The provision for loan losses for fiscal 1997
includes $2.5 million applicable to the establishment of specific allowances on
several loans based upon updated reviews in June 1996. Non-accrual loans were
$17.2 million or 0.88%, of gross loans receivable at March 31, 1998 compared to
$23.4 million or 1.24% of gross loans receivable at March 31, 1997. The
allowance for loan losses was $26.0 million or 1.33% of gross loans receivable
at March 31, 1998 compared to $27.7 million or 1.47% of gross loans receivable
at March 31, 1997.
Non-Interest Income
- -------------------
Non-interest income was $14.3 million for fiscal 1998 compared to $10.2
million for fiscal 1997, an increase of $4.1 million or 39.6%. The increase
between fiscal 1997 and fiscal 1998 was attributable principally to an increase
in deposit and related fees from $6.3 million for fiscal 1997 to $8.2 million
for fiscal 1998 due to a combination of higher volumes of core deposit activity
and an increased emphasis on the assessment and collection of fees. The income
from the sale of non-deposit investments increased from $1.4 million for fiscal
1997 to $1.6 million for fiscal 1998 as the Bank continued to expand its
offerings of non-proprietary annuity and mutual fund products. Trust fees
increased from $1.4 million for fiscal 1997 to $1.9 million for fiscal 1998
reflecting, in part, growth in assets under custody from $211.0 million at March
31, 1997 to $238.6 million at March 31, 1998. Gain on sale of loans and
securities was $1.6 million for fiscal 1998 compared to $150,000 for fiscal
1997. The $1.6 million for fiscal 1998 is comprised of gains on sales of loans
of $992,000 and gains on sales of securities of $624,000. The gains on sales of
loans include $701,000 applicable to the sale of $149.6 million of single family
loans indexed to COFI. These loans were sold and a similar amount of loans
indexed to the one year CMT were purchased during the year in connection with
the Bank's efforts to diversify the repricing characteristics of its loan
portfolio.
Non-Interest Expense
- --------------------
Non-interest expense was $52.0 million for fiscal 1998 compared to $60.0
million for fiscal 1997, a decrease of $7.9 million or 13.2%. Non-interest
expense for fiscal 1997 includes a pre-tax charge of $10.9 million representing
the Bank's share of an industry-wide special assessment levied against the March
31, 1995 deposit bases of all savings institutions in the country with deposits
insured by the SAIF. Excluding the impact of the SAIF assessment, non-interest
expense increased $3.0 million or 6.1% between fiscal 1997 and fiscal 1998.
General and administrative expense was $51.6 million or 1.93% of average
assets for fiscal 1998 compared to $49.4 million or 2.11% of average assets for
fiscal 1997, an increase of $2.2 million or 4.4%. Compensation and benefits
expense increased $3.8 million from $23.0 million for fiscal 1997 to $26.8
million for fiscal 1998. The increase between fiscal 1997 and fiscal 1998 was
attributable principally to a $875,000 increase in ESOP expense arising from an
increase in the market value of the Company's common stock and $1.1 million of
expense associated with the Company's 1996 Incentive Plan which became effective
in October 1996. Other non-interest expense decreased $2.9 million from $12.8
million for fiscal 1997 to $9.9 million for fiscal 1998. The decrease was due
principally to the inclusion in fiscal 1997 of approximately $2.1 million of
expenses associated with the Bank's transition of its EDP systems to a new
third-party service provider in October 1996. Other non-interest expense for
fiscal 1997 also includes a $350,000 legal judgment and a $420,000 accrual for
the interest portion of a probable adverse California franchise tax settlement.
Occupancy and equipment expense was $11.6 million for fiscal 1998 compared to
$10.3 million for fiscal 1997. The $1.3 million increase in occupancy and
equipment expense between fiscal 1997 and fiscal 1998 is attributable
principally to depreciation on computer equipment related to upgrades to the
Bank's wide area networked personal computers and service bureau charges. Real
estate operations, net reflects expense of $473,000 for fiscal 1998 compared to
income of $325,000 for fiscal 1997.
53
<PAGE>
The results for fiscal 1997 reflect a $1.4 million reduction in the allowance
for real estate losses based upon updated property valuations.
Income Taxes
- ------------
Income taxes were $12.0 million for fiscal 1998 compared to $3.1 million
for fiscal 1997. The effective income tax rate for fiscal 1998 was 42.9%
compared to an effective rate of 43.2% for fiscal 1997.
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 and
security prepayments are greatly influenced by the general level of interest
rates, economic conditions and competition. The Bank has maintained the
required minimum levels of liquid assets as defined by OTS regulations. This
requirement, which may be varied at the direction of the OTS depending upon
economic conditions and deposit flows, is based upon a percentage of deposits
and short-term borrowings. Effective with the quarter ended December 31, 1997
the required ratio is 4%. Prior to that the requirement was 5%. The Bank's
average liquidity ratios were 4.85%, 4.90%, and 5.30% for the years ended March
31, 1999, 1998 and 1997, respectively. Management attempts to maintain a
liquidity ratio no higher than 1% above the regulatory requirement. This
reflects management's strategy to invest excess liquidity in higher yielding
interest-earning assets, such as loans or other investments, depending on market
conditions. The Bank has invested in corporate securities when the yields
thereon have been more attractive than U.S. government and federal agency
securities of similar maturity. While corporate securities are not backed by
any government agency, the maturity structure and credit quality of all
corporate securities owned by the Bank meet the minimum standards set forth by
the OTS for regulatory liquidity-qualifying investments. The Bank invests in
callable debt issued by Federal agencies of the U.S. government when the yields
thereon to call date(s) and maturity exceed the yields on comparable term and
credit quality non-callable investments by amounts which management deems
sufficient to compensate the Bank for the call options inherent in the
securities.
The 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 $97.7 million,
$152.1 million, and $40.5 million, for the years ended March 31, 1999, 1998 and
1997, respectively. Net cash provided by (used in) investing activities
consisted primarily of disbursements for loan originations and purchases of
mortgage-backed and other investment securities, offset by principal collections
on loans and proceeds from maturation of investments and paydowns on mortgage-
backed securities. Principal payments on loans were $831.5 million, $471.5
million, and $226.0 million for the years ended March 31, 1999, 1998 and 1997,
respectively. Disbursements on loans originated and purchased, excluding loans
originated for sale, were $1.08 billion, $659.6 million, and $492.8 million for
the years ended March 31, 1999, 1998 and 1997, respectively. Disbursements for
purchases of mortgage-backed and other investment securities were $416.3
million, $480.8 million, and $563.1 million for the years ended March 31, 1999,
1998 and 1997, respectively. Proceeds from the maturation of investment
securities and paydowns of mortgage-backed securities were $419.8 million,
$207.4 million and $101.8 million for the years ended March 31, 1999, 1998 and
1997, respectively. Net cash provided by (used in) financing activities
consisted primarily of net activity in deposit accounts and FHLB advances and
other borrowings. The net increases in deposits were $102.7 million, $29.8
million, and $29.0 million for the years ended March 31, 1999, 1998 and 1997,
respectively. The net increases in FHLB advances and other borrowings were
$28.1 million, $255.9 million, and $510.3 million for the years ended March 31,
1999, 1998 and 1997, respectively.
At March 31, 1999, the Bank exceeded all of its regulatory capital requirements
with a tangible capital level of $201.2 million, or 6.95% of adjusted total
assets, which is above the required level of $46.4 million, or 1.5%; core
capital of $201.2 million, or 6.95 % of adjusted total assets, which is above
the required level of $86.9 million, or 3.0%, and total risk-based capital of
$222.9 million, or 12.52% of risk-weighted assets,
54
<PAGE>
which is above the required level of $142.4 million, or 8%. See
"Item 1 -Description of Business - Regulation and Supervision - Federal Savings
Institution Regulation."
The Company's most liquid assets are cash and short-term investments. The
levels of these assets are dependent on the Company's operating, financing,
lending and investing activities during any given period. At March 31, 1999
cash and short-term investments totaled $63.8 million. The Company has other
sources of liquidity if a need for additional funds arises, including the
utilization of reverse repurchase agreements and FHLB advances. At March 31,
1999, the Bank has $764.0 million of FHLB advances and $50.0 million of reverse
repurchase agreements outstanding. Other sources of liquidity include
investment securities maturing within one year.
The Company currently has no material contractual obligations or
commitments for capital expenditures. See "Item 1 - Description of Business -
General." At March 31, 1999, the Bank had outstanding commitments to originate
and purchase loans of $28.8 million and zero, respectively, compared to $15.2
million and zero, respectively, at March 31, 1998. At March 31, 1999, and 1998
the Company had no outstanding commitments to purchase mortgage-backed
securities and other investment securities. The Company anticipates that it
will have sufficient funds available to meet these commitments. See "Item 1 -
Description of Business - General." Certificate accounts that are scheduled to
mature in less than one year from March 31, 1999 totaled $1.0 billion. The Bank
expects that a substantial portion of the maturing certificate accounts will be
retained by the Bank at maturity.
Impact of Inflation
- -------------------
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with GAAP, which require the measurement of
financial position and operating results in terms of historical dollar amounts
or market value without considering the changes in the relative purchasing power
of money over time due to inflation. The impact of inflation is reflected in
the increased cost of the Company's operations. Unlike industrial companies,
nearly all of the assets and liabilities of the Company are monetary in nature.
As a result, interest rates have a greater impact on the Company's performance
than do the effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the price of
goods and services.
Segment Reporting
- -----------------
The Company, through the branch network of the Bank, provides a broad range
of financial services to individuals and companies located primarily in Southern
California. These services include demand, time, and savings deposits; real
estate, business and consumer lending; ATM processing; cash management; and
trust services. While the Company's chief decision makers monitor the revenue
streams of the various Company products and services, operations are managed and
financial performance is evaluated on a Company-wide basis. Accordingly, all of
the Company's banking operations are considered by management to be aggregated
in one reportable operating segment.
Year 2000
- ---------
Risks of the Year 2000 Issue
The Year 2000 issue is the result of computer programs being written using
two digits rather than four digits to represent the calendar year (e.g. "98" for
"1998"). Software so developed, and not corrected, could produce inaccurate or
unpredictable results or system failures commencing January 1, 2000, when dates
present a lower two digit year number than dates in the prior century. Such
occurrences may have a material adverse effect on the Company's financial
condition, results of operation, business or business prospects, as the Company,
like most financial organizations, is significantly subject to the potential
impact of the Year 2000 issue due to the nature of financial information.
Potential impacts to the Company may arise from software, computer hardware, and
other equipment both within the Company's direct control and outside the
Company's ownership, yet with which the Company electronically or operationally
interfaces.
55
<PAGE>
Financial institution regulators have intensively focused upon Year 2000
exposures, issuing guidance concerning the responsibilities of management and
the board of directors. Year 2000 testing and certification is being addressed
as a key safety and soundness issue in conjunction with regulatory exams and the
Office of Thrift Supervision has authority to bring enforcement actions against
any institution under its supervision which it believes is not properly
addressing Year 2000 issues.
State of Readiness
The Company has established a five-phase process to address the Year 2000
issue and pursuant to its plans, for both information technology and non-
information technology related systems, the majority of effort remaining is in
the fifth and final phases of the project. The Company's Board of Directors
oversees the Year 2000 compliance project's progress through monthly status
reports provided by the Year 2000 Project Office, which indicate that the
Company expects to be ready for Year 2000. The Company expects to be
substantially ready by June 30, 1999.
Phase one of the project consisted of developing a Company-wide awareness
of the Year 2000 issue and included establishment of a Year 2000 Project Office
for the Company. As part of the second phase, the Company completed an
inventory of all data systems to determine which are most critical to support
customer transaction processing and provide customer services. This inventory
not only included in-house systems, but those provided by third party vendors as
well. Project plans were developed which place priority emphasis on those
systems requiring change and classified as mission critical. Third party
vendors were contacted during this phase to determine their processes and
timelines for correcting any Year 2000 compliance issues. The Company has in
place a process to monitor the progress of mission critical third party vendors
toward making required Year 2000 corrections. In addition, significant real
estate and commercial loan borrowers of the Company were also contacted to
determine the extent of their preparations for Year 2000 and any potential
impact Year 2000 may have on their businesses and ability to repay loan
obligations to the Company. The first two phases are completed.
Phase three of the process consists of making appropriate Year 2000
programming changes to the Company's in-house and vendor-provided core
processing systems, as well as replacement of other vendor-provided PC-based
systems. Phase four consists of acceptance testing and sign-off of both the
Company's in-house and vendor-provided systems. The fifth and final phase of
the Year 2000 compliance project includes installation of the system
modifications. The Company has completed renovation, validation and
installation of one of the two major applications currently maintained on its
internally maintained mid-range computer, and replacement of another major
application is scheduled to be completed in the second calendar quarter of 1999.
A third system, for internal Human Resources and payroll processing, will be
converted from a PC-based, outsourced solution to the mid-range computer, with
installation scheduled for the third calendar quarter. The application this
will be replacing is not Y2K ready, but could be with an upgrade that would
require minimal effort for the Company. However, due to business reasons, the
Company has decided to convert to a new system rather than upgrade the existing
system. This brings it under the Y2K umbrella and is being tracked accordingly.
The Company's core processing systems vendors have installed Year 2000 compliant
code for all systems and remaining validation testing scheduled to be
substantially completed by June 30, 1999. Two external vendors provide core
processing. The Y2K project office has closely monitored the renovation,
testing and implementation phases of the two processors' Y2K projects and is
satisfied with the progress. The timing of Year 2000 acceptance testing and
installation of all third party vendor changes is dependent upon when such
systems become available to the Company.
In addition to the computer systems utilized by the Company, the Company
has also inventoried other essential services that may be impacted by Year 2000
issues, such as telecommunications and utilities. The Company is monitoring such
essential service providers to determine their progress and how they are
addressing Year 2000 issues. To date, no information exists to suggest such
essential services will not be Year 2000 compliant.
56
<PAGE>
Costs to Address the Year 2000 Issue
Currently the Company estimates that Year 2000 project costs will
approximate $3.1 million. This cost is in addition to existing personnel who
may participate in the project. Included in the estimate are costs for hardware
and software renovation or replacement, as well as existing staff who are
specifically devoted to the project. Approximately 60% of the cost represents
expenditures to replace certain older hardware and software which the Company
might otherwise have replaced during the period, notwithstanding the Year 2000
issue, the costs of which will be depreciated over its anticipated useful life.
Of the estimated total cost, approximately $2.1 million has been incurred on the
project year-to-date. The table below summarizes by year the estimated amount
and anticipated timing of the planned Year 2000 expenditures.
<TABLE>
<CAPTION>
Fiscal Year
- ----------------------------------------------------------------------------------------------
(In Millions) 1998 1999 2000 Total
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Capital $ - 1.1 .5 1.6
Operating .3 .7 .5 1.5
- ----------------------------------------------------------------------------------------------
Estimated Year 2000 expenditures $ .3 1.8 1.0 3.1
==============================================================================================
</TABLE>
The total amount reflects the costs for inclusion of an internally
maintained mid range computer system recently added to the Y2K compliance
process. As the Company progresses in addressing the Year 2000 compliance
project and additional information becomes available estimates of costs could
change. At this time, no significant data system projects have been delayed as
a result of the Company's Year 2000 compliance effort.
Contingency Plans
The Company believes its Year 2000 compliance process should enable it to
be successful in modifying its computer systems to be Year 2000 compliant. In
addition to Year 2000 compliance system modification plans, the Company is in
the process of finalizing and testing contingency plans, including manual
procedures, for systems classified as mission critical and high risk. These
contingency plans provide timetables to pursue various alternatives based upon
the failure of a system to be adequately modified and/or sufficiently tested and
validated to ensure Year 2000 compliance. However, there can be no assurance
that either the compliance process or contingency plans will avoid partial or
total system interruptions (particularly for disruptions caused by systems
outside of the Company's control), nor that the costs necessary to update
hardware and software would not have a material adverse effect upon the
Company's financial condition, results of operation, business or business
prospects.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------
Disclosure related to market risk is included in "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Asset/Liability
Management" contained at Item 7 of this Form 10-K.
57
<PAGE>
ITEM 8. Financial Statements and Supplementary Data
- -----------------------------------------------------
Index to Financial Statements
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Balance Sheets - March 31, 1999 and 1998............................ 59
Consolidated Statements of Earnings - Years ended March 31, 1999,
1998 and 1997................................................................ 60
Consolidated Statements of Comprehensive Earnings - Years ended March 31, 1999,
1998 and 1997................................................................ 61
Consolidated Statements of Stockholders' Equity - Years ended March 31, 1999,
1998 and 1997................................................................ 62
Consolidated Statements of Cash Flows - Years ended March 31, 1999, 1998
and 1997..................................................................... 63
Notes to Consolidated Financial Statements....................................... 65
Independent Auditors' Report..................................................... 97
</TABLE>
58
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
MARCH 31,
-----------------------------------------
1999 1998
-----------------------------------------
<S> <C> <C>
Assets
Cash and equivalents $ 63,790 46,021
Loans held for sale (note 19) 3,531 701
Investment securities held-to-maturity (estimated fair value
of $716 and $725 at March 31, 1999 and 1998)
(notes 2, 9 and 11) 709 714
Investment securities available-for-sale, at fair value
(notes 2, 9 and 11) 185,087 316,410
Mortgage-backed securities held-to-maturity (estimated fair
value of $560 and $1,375 at March 31, 1999 and 1998)
(notes 3, 9,10 and 11) 556 1,373
Mortgage-backed securities available-for-sale, at fair value
(notes 3, 9,10 and 11) 525,560 481,620
Trading securities, at fair value 4,271 -
Investment in real estate (note 5) 6,371 731
Loans receivable, net (notes 4, 6, 9 and 11) 2,026,081 1,827,614
Federal Home Loan Bank (FHLB) stock, at cost (note 11) 50,323 39,504
Accrued interest receivable (note 7) 17,118 17,320
Real estate acquired through foreclosure, net (notes 5 and 6) 5,318 7,595
Property and equipment, net (note 8) 23,925 25,567
Prepaid expenses and other assets (notes 12 and 18) 23,340 47,214
-----------------------------------------
Total assets $2,935,980 2,812,384
=========================================
Liabilities and Stockholders' Equity
Liabilities:
Deposits (note 9) $1,843,538 1,740,824
FHLB advances and other borrowings (notes 10 and 11) 814,000 785,886
Deferred income taxes payable (note 13) 5,921 3,396
Accrued expenses and other liabilities (notes 9 and 12) 29,856 28,000
-----------------------------------------
Total liabilities 2,693,315 2,558,106
Commitments and contingencies (notes 12, 16, 17 and 18) - -
Stockholders' equity (notes 12, 13, 14, 21 and 22):
Preferred stock, $.01 par value. Authorized 2,000,000 - -
shares; none issued
Common stock, $. 01 par value. Authorized 59,000,000
shares; issued 19,943,948 and 19,901,422; outstanding
15,445,481 and 17,067,099 at March 31, 1999 and 1998,
respectively 199 199
Additional paid-in capital 150,612 165,912
Retained earnings, substantially restricted 110,163 106,617
Unearned stock-based compensation (17,169) (20,895)
Treasury stock (4,498,467 and 2,834,323 in 1999 and 1998,
respectively) (45) (28)
Accumulated other comprehensive earnings (loss) (1,095) 2,473
-----------------------------------------
Total stockholders' equity 242,665 254,278
-----------------------------------------
Total liabilities and stockholders' equity $2,935,980 2,812,384
=========================================
</TABLE>
See accompanying notes to consolidated financial statements.
59
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Earnings
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year EndeD March 31,
-----------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Mortgage loans $ 138,639 138,480 130,788
Non-mortgage loans 9,374 4,335 2,328
Mortgage-backed securities 37,471 33,167 27,723
Investment securities and deposits 21,471 15,386 7,676
-----------------------------------------------------------
Total interest income 206,955 191,368 168,515
-----------------------------------------------------------
Interest on deposits (note 9) 79,534 80,155 79,246
Interest on borrowings (note 10) 50,822 38,362 20,060
-----------------------------------------------------------
Total interest expense 130,356 118,517 99,306
-----------------------------------------------------------
Net interest income 76,599 72,851 69,209
Provision for loan losses (note 6) 4,020 7,099 13,661
-----------------------------------------------------------
Net interest income after provision for loan losses 72,579 65,752 55,548
-----------------------------------------------------------
Non-interest income:
Deposit and related fees 8,637 8,220 6,255
Trust fees 1,891 1,852 1,390
Loan and servicing fees (note 19) 2,780 2,494 2,307
Gain on sale of loans and securities, net (note 19) 698 1,615 150
Gain on trading securities, net 569 - -
Profit on real estate investments (note 5) 246 - -
Other non-interest income 727 99 125
-----------------------------------------------------------
Total non-interest income 15,548 14,280 10,227
-----------------------------------------------------------
Non-interest expense:
General and administrative:
Compensation and benefits (note 12) 27,997 26,803 23,003
Occupancy and equipment 12,098 11,579 10,305
Marketing and professional services 4,708 3,248 3,238
Other non-interest expense (note 15) 10,157 9,930 12,835
-----------------------------------------------------------
Total general and administrative 54,960 51,560 49,381
SAIF recapitalization assessment - - 10,900
Foreclosed real estate operations, net (note 5) (45) 473 (325)
-----------------------------------------------------------
Total non-interest expense 54,915 52,033 59,956
-----------------------------------------------------------
Earnings before income taxes 33,212 27,999 5,819
Income taxes (note 13) 14,208 12,019 3,087
-----------------------------------------------------------
Net earnings $ 19,004 15,980 2,732
===========================================================
Basic earnings per share $ 1.37 1.00 0.15
===========================================================
Weighted average shares outstanding for basic
earnings per share 13,876,440 16,055,127 17,819,870
===========================================================
Diluted earnings per share $ 1.29 0.95 0.15
===========================================================
Weighted average shares outstanding for diluted
earnings per share 14,716,682 16,795,096 17,959,561
===========================================================
</TABLE>
See accompanying notes to consolidated financial statements.
60
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Earnings
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Year Ended
March 31,
----------------------------------------------------------
1999 1998 1997
----------------------------------------------------------
<S> <C> <C> <C>
Net earnings $ 19,004 15,980 2,732
----------------------------------------------------------
Other comprehensive earnings (losses), 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 (2,454) 787 (261)
Reclassification of realized (gains) losses
included in earnings (312) 57 -
Mortgage-backed securities available-for-sale,
at fair value (802) 2,120 (1,109)
----------------------------------------------------------
Other comprehensive earnings (3,568) 2,964 (1,370)
----------------------------------------------------------
Comprehensive earnings $ 15,436 18,944 1,362
==========================================================
</TABLE>
See accompanying notes to consolidated financial statements.
61
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
(Dollars in thousands)
<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, 1996 19,837,500 $198 $193,677 $110,187 $(15,870) $
Net earnings - - - 2,732 - -
Purchase of treasury stock (991,875) - (9,909) (4,898) - (10)
Purchase of 793,500 shares for the
Company's 1996 incentive plan - - - - (11,262) -
Amortization of shares under
stock-based compensation plans - - (1,249) - 2,421 -
Changes in unrealized losses on
securities available for sale, net - - - - - -
-----------------------------------------------------------------------------
Balance at March 31, 1997 18,845,625 198 182,519 108,021 (24,711) (10)
Net earnings - - - 15,980 - -
Purchase of treasury stock (1,842,448) - (18,406) (17,384) - (18)
Amortization of shares under
stock-based compensation plans - - 1,118 - 3,816 -
Stock options exercised 63,922 1 681 - - -
Changes in unrealized gains on
securities available for sale, net - - - - - -
-----------------------------------------------------------------------------
Balance at March 31, 1998 17,067,099 199 165,912 106,617 (20,895) (28)
Net earnings - - - 19,004 - -
Purchase of treasury stock (1,664,144) - (16,624) (15,458) - (17)
Change in deferred compensation - - (313) - 229 -
market value
Amortization of shares under
stock-based compensation plans - - 1,106 - 3,497 -
Stock options exercised 42,526 - 531 - - -
Changes in unrealized gains on
securities available for sale, net - - - - - -
-----------------------------------------------------------------------------
Balance at March 31, 1999 15,445,481 $199 $150,612 $110,163 $(17,169) $ (45)
=============================================================================
<CAPTION>
Accumulated
Other
Comprehensive
Earnings (Loss) Total
----------------------------------------
<S> <C> <C>
Balance at March 31, 1996 $ 879 $289,071
Net earnings - 2,732
Purchase of treasury stock - (14,817)
Purchase of 793,500 shares for the
Company's 1996 incentive plan - (11,262)
Amortization of shares under
stock-based compensation plans - 1,172
Changes in unrealized losses on
securities available for sale, net (1,370) (1,370)
----------------------------------------
Balance at March 31, 1997 (491) 265,526
Net earnings - 15,980
Purchase of treasury stock - [35,808)
Amortization of shares under
stock-based compensation plans - 4,934
Stock options exercised - 682
Changes in unrealized gains on
securities available for sale, net 2,964 2,964
----------------------------------------
Balance at March 31, 1998 2,473 254,278
Net earnings - 19,004
Purchase of treasury stock - [32,099)
Change in deferred compensation - (84)
market value
Amortization of shares under
stock-based
compensation plans - 4,603
Stock options exercised - 531
Changes in unrealized gains on
securities available for sale, net (3,568) (3,568)
----------------------------------------
Balance at March 31, 1999 $ (1,095) $242,665
========================================
</TABLE>
See accompanying notes to consolidated financial statements.
62
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------------------------------------
1999 1998 1997
---------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net earnings $ 19,004 15,980 2,732
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Amortization of premiums on loans,
investments and mortgage-backed securities 4,560 1,415 331
Amortization of deferred loan origination fees (460) (261) (1,666)
Loan fees collected (2,400) (3,487) (212)
Dividends on FHLB stock (2,587) (1,716) (1,150)
Provisions for losses on:
Loans 4,020 7,099 13,661
Real estate 41 416 (970)
Gains on sales of loans, mortgage-backed
securities
available-for-sale, real estate and property (1,777) (1,792) (764)
and equipment
Proceeds from sale of trading securities 1,500 - -
Gains on trading securities (569) - -
Depreciation and amortization of property and
equipment 3,855 5,051 3,134
Loans originated for sale - (3,893) (21,590)
Proceeds from sale of loans held-for-sale 39,407 166,989 26,869
Amortization of unearned stock-based
compensation 4,603 4,934 1,172
Increase (decrease) in:
Deferred income taxes 2,525 (5,141) (2,415)
Accrued expenses and other liabilities 1,856 5,702 15,395
(Increase) decrease in:
Accrued interest receivable 202 (1,441) (5,060)
Prepaid expenses and other assets 23,874 (37,751) 11,061
---------------------------------------------------------
Net cash provided by operating activities 97,654 152,104 40,528
---------------------------------------------------------
Cash flows from investing activities:
Net maturities of long-term certificates of deposit - - 190
Loans originated for investment (987,604) (553,535) (478,077)
Increase in construction loans in process 71,585 56,972 13,695
Purchases of loans held for investment (168,395) (163,045) (28,417)
Principal payments on loans 831,468 471,544 225,996
Principal payments on mortgage-backed securities
held-to-maturity 804 3,325 1,644
Principal payments on mortgage-backed securities
available-for-sale 272,546 144,920 70,040
Purchases of investment securities held-to-maturity - - (15,000)
Purchases of investment securities (90,111) (279,762) (86,515)
available-for-sale
Purchases of FHLB stock (8,232) (10,518) (10,228)
</TABLE>
63
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows, continued
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------------------------
1999 1998 1997
--------------------------------------------------------
<S> <C> <C> <C>
Purchases of mortgage-backed securities available-
for-sale $(317,988) (190,539) (451,322)
Proceeds from maturities of investment securities
held-to-maturity - 15,475 26,899
Proceeds from maturities of investment securities
available-for-sale 146,449 43,687 3,197
Proceeds from maturities of mortgage-backed
securities available-for-sale - 793 -
Proceeds from sale of investment securities
available-for-sale 64,668 8,934 5,000
Proceeds from sale of mortgage-backed securities
available-for-sale - 52,789 19,542
Principal payments on real estate held for investment 599
Proceeds from sale of real estate 13,611 14,214 10,853
Investment in real estate held for investment (5,704) - (555)
Purchases of property and equipment (2,247) (4,172) (5,045)
Proceeds from sale of property and equipment 5 69 129
---------------------------------------------------------
Net cash used in investing activities (179,145) (388,250) (697,974)
---------------------------------------------------------
Cash flows from financing activities:
Proceeds from FHLB advances and other borrowings 804,876 1,342,886 1,215,600
Repayment of FHLB advances and other borrowings (776,762) (1,087,000) (705,323)
Net change in deposits 102,714 29,775 28,976
Proceeds from exercise of stock options 531 682 -
Purchase of stock for unearned stock-based
compensation plans - - (11,262)
Purchase of treasury stock (32,099) (35,808) (14,817)
---------------------------------------------------------
Net cash provided by financing activities 99,260 250,535 513,174
---------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 17,769 14,389 (144,272)
Cash and cash equivalents, beginning of year 46,021 31,632 175,904
---------------------------------------------------------
Cash and cash equivalents, end of year $ 63,790 46,021 31,632
=========================================================
Supplemental information:
Interest paid, including interest credited $ 136,165 $ 116,991 $ 90,298
Income taxes paid 10,700 16,608 1,838
Non-cash investing and financing activities:
Change in unrealized gain (loss) on securities
available-for-sale (6,185) 5,145 (2,431)
Net transfers from loans receivable to real estate 14,038 12,563 9,979
Net transfer from loans receivable to loans
held for sale 41,659 163,000 -
Loans originated for the sale of real estate
acquired in settlement of loans 444 617 1,187
Net transfers from available-for-sale securities
to trading securities 5,419 - -
</TABLE>
See accompanying notes to consolidated financial statements.
64
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
(1) Summary Of Significant Accounting Policies
Effective March 28, 1996, pursuant to a plan of conversion, Pomona First Federal
Savings and Loan Association (the Association) reorganized from a federally
chartered mutual savings and loan association to PFF Bank & Trust (the "Bank"),
a federally chartered stock savings bank. PFF Bancorp, Inc. (the "Bancorp") was
incorporated under Delaware law in March 1996 for the purpose of acquiring and
holding all of the outstanding capital stock of the Bank as part of the Bank's
conversion. Any references to financial information for periods before March
28, 1996, refer to the Association prior to the conversion (see note 21 for
further discussion).
The following accounting policies, together with those disclosed elsewhere in
the consolidated financial statements, represent the significant accounting
policies used in presenting the accompanying consolidated financial statements.
Basis Of Consolidation
The accompanying consolidated financial statements include the accounts of PFF
Bancorp, Inc. and its subsidiary, PFF Bank & Trust (collectively, the Company).
The Company's business is conducted primarily through PFF Bank & Trust and its
subsidiary, Pomona Financial Services, Inc. The accounts of Diversified
Services, Inc. and PFF Financial Services, Inc. are included in Pomona Financial
Services, Inc. All material intercompany balances and transactions have been
eliminated in consolidation. Certain reclassifications have been made to the
prior years' consolidated financial statements to conform to the current year's
presentation.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets, liabilities and contingent
liabilities as of the dates of the consolidated balance sheets, and revenues and
expenses reflected in the consolidated statements of earnings. Actual results
could differ from those estimates.
Cash And Cash Equivalents
Cash and cash equivalents consist of cash on hand and in banks of $38,419 and
$33,560 and short-term deposits in banks of $25,371 and $12,461 at March 31,
1999 and 1998, respectively. The Company considers all highly liquid debt
instruments with maturities at the date of acquisition of three months or less
to be cash equivalents.
Investment And Mortgage-Backed Securities
At the time of purchase of an investment security or a mortgage-backed security,
the Company designates the security as either held-to-maturity, available-for-
sale or trading based on the Company's investment objectives, operational needs
and intent. The Company then monitors its investment activities to ensure that
those activities are consistent with the established guidelines and objectives.
65
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
Held-to-Maturity
Securities held-to-maturity are carried at cost, adjusted for amortization of
premiums and accretion of discounts which are recognized in interest income
using the interest method. Mortgage-backed securities represent participating
interests in pools of long-term first mortgage loans originated and serviced by
the issuers of the securities. Mortgage-backed securities held-to-maturity are
carried at unpaid principal balances, adjusted for unamortized premiums and
unearned discounts. Premiums and discounts on mortgage-backed securities are
amortized or accreted using the interest method over the remaining period to
contractual maturity, adjusted for anticipated prepayments. It is the intent of
the Company and the Company has the ability, to hold these securities until
maturity as part of its portfolio of long-term interest earning assets. If the
security is determined to be other than temporarily impaired, the amount of the
impairment is charged to operations.
Available-for-Sale
Securities available-for-sale are carried at fair value. Unrealized holding
gains and losses are excluded from earnings and reported as a separate component
of stockholders' equity, net of income taxes, unless the security is deemed to
be other than temporarily impaired. If the security is determined to be other
than temporarily impaired, the amount of the impairment is charged to
operations.
Realized gains and losses on the sale of securities available-for-sale are
determined using the specific identification method and recorded in earnings.
Trading
Trading securities are comprised principally of equity securities which are
carried at fair value, based upon the quoted market prices of those investments.
Accordingly, the net realized gains and losses on trading securities are
included in net earnings.
Loans Held for Sale
Loans designated as held for sale in the secondary market are carried at the
lower of cost or market value in the aggregate, as determined by outstanding
commitments from investors or current investor requirements. Loan fees and costs
are deferred and recognized as a component of gain or loss on sale of loans when
the loans are sold. Net unrealized losses are recognized through a valuation
allowance established by charges to operations.
Gains or Losses on Sales of Loans
Gains or losses on sales of loans are recognized at the time of sale and are
determined by the difference between the net sales proceeds and the allocated
basis of the loans sold. The Company capitalizes mortgage servicing rights
("MSRs") through the sale of mortgage loans which are sold with servicing rights
retained. At the time of sale the total cost of the mortgage loans is allocated
to the MSRs and the mortgage loans without the MSRs based upon their relative
fair values. The MSRs are included in other assets and as a component of the
gain on the sale of loans. The MSRs are amortized in proportion to and over the
estimated period of the net servicing income. This amortization is reflected as
a component of loan servicing fees.
The MSRs are periodically reviewed for impairment based upon their fair value.
The fair value of the MSRs, for the purposes of impairment, is measured using a
discounted cash flow analysis using market prepayment rates, the Company's net
servicing income and market-adjusted discount rates. Impairment losses are
recognized through a valuation allowance, with any associated provision recorded
as a component of loan servicing fees.
66
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
Loans Receivable
Loans receivable are stated at unpaid principal balances less the undisbursed
portion of construction loans, unearned discounts, net deferred loan origination
fees and allowances for losses. Premiums/discounts are amortized/accreted using
the interest method over the remaining term to maturity.
Uncollected interest on loans contractually delinquent more than ninety days or
on loans for which collection of interest appears doubtful is excluded from
interest income and accrued interest receivable. Payments received on
nonaccrual receivables are recorded as a reduction of principal or as interest
income depending on management's assessment of the ultimate collectibility of
the loan principal. Such loans are restored to an accrual status only if the
loan is brought contractually current and the borrower has demonstrated the
ability to make future payments of principal and interest.
Loan Origination, Commitment Fees and Related Costs
Loan fees and certain direct loan origination costs are deferred, with the net
fee or cost being accreted or amortized to interest income over the remaining
term to maturity of the related loan using the interest method. Accretion or
amortization is discontinued in the event the loan becomes contractually
delinquent by more than ninety days. Accretion or amortization resumes in the
period all delinquent interest and principal is paid. When a loan is paid in
full, any unamortized net loan origination fee or cost is recognized in interest
income. When a loan is sold any net loan origination fee or cost is recognized
in the calculation of the gain (loss) on sale of loans. Commitment fees and
costs related to commitments where the likelihood of exercise is remote are
recognized over the commitment period on a straight-line basis. If the
commitment is subsequently exercised during the commitment period, the remaining
net unamortized commitment fees at the time of exercise are recognized over the
life of the loan using the interest method.
Valuation Allowances for Loans Receivable and Real Estate
Valuation allowances for loan losses are provided on both a specific and non-
specific basis. Specific allowances are provided when an identified significant
decline in the value of the underlying collateral occurs or an identified
adverse situation occurs that may affect the borrower's ability to repay. Non-
specific allowances are provided based on a number of factors, including the
Company's past loan loss experience, current and prospective economic conditions
and management's ongoing evaluation of the credit risk inherent in the
portfolio.
Valuation allowances for losses on real estate are established when a decline in
value reduces the fair value less estimated disposal costs to less than the
carrying value.
Management believes that allowances for loan losses and real estate are
adequate. While management uses available information to recognize losses on
loans and real estate, future additions to the allowances may be necessary based
on changes in economic conditions. In addition, various regulatory agencies, as
an integral part of their examination process, periodically review the Company's
allowances for loan and real estate losses. Such agencies may require the
Company to recognize additions to the allowances based on their judgments of the
information available to them at the time of their examinations.
Management considers loans with a principal balance of $500 or more, including
loans to one borrower that exceed $500, as non-homogeneous for purposes of
evaluation for impairment. A loan is considered impaired if it is probable that
the creditor will be unable to collect all contractual amounts due (principal
and interest) as scheduled in the loan agreement. Impaired loans are measured
based on either an estimate of the present value of expected future cash flows
discounted at the loan's effective interest rate or the loan's market value or
the fair value of collateral if the loan is collateral dependent. The amount by
which the recorded investment in the loan exceeds the measure of the impaired
loan is recognized by recording a valuation
67
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
allowance with a corresponding charge to operations. The Company will charge-off
a portion of an impaired loan against the valuation allowance when it is
probable that there is no possibility of recovering the full amount of the
impaired loan.
All non-homogeneous loans designated by the Company as impaired are either
placed on nonaccrual status or are designated as restructured loans. Only
nonaccrual loans and restructured loans not performing in accordance with their
restructured terms are included in nonperforming loans. Loans are generally
placed on nonaccrual status when the payment of interest is 90 days or more
delinquent, or if the loan is in the process of foreclosure, or earlier if the
timely collection of interest and/or principal appears doubtful. The Company's
policy allows for loans to be designated as impaired and placed on nonaccrual
status even though the loan may be current as to the principal and interest
payments and may continue to perform in accordance with its contractual terms.
Payments received on impaired loans are recorded as a reduction of principal or
as interest income depending on management's assessment of the ultimate
collectibility of the loan principal. The amount of interest income recognized
is limited to the amount of interest that would have accrued at the loan's
contractual rate applied to the recorded loan balance, with any difference
recorded as a loan loss recovery. Generally, interest income on an impaired
loan is recorded on a cash basis when the outstanding principal is brought
current.
Real Estate Acquired Through Foreclosure
Real estate properties acquired through loan foreclosure are initially recorded
at fair value at the date of foreclosure. Once real estate properties are
acquired, evaluations are periodically performed by management and an allowance
for losses is established by a charge to operations if the carrying value of a
property exceeds its fair value. Real estate properties held for sale or
development are carried at the lower of cost, including cost of improvements and
amenities incurred subsequent to acquisition, or net realizable value. Costs
related to development and improvement of properties are capitalized, whereas
costs relating to holding the properties are expensed. During the development
period, the portion of interest costs related to development of real estate are
capitalized.
Property and Equipment
Land is carried at cost. Buildings and improvements, furniture, fixtures and
equipment, and leasehold improvements are carried at cost, less accumulated
depreciation or amortization. Depreciation and amortization are recorded using
the straight-line method over the estimated useful lives of the assets or the
terms of the related leases, if shorter.
The Company capitalizes interest on all construction in progress based on the
cost of funds in effect during the construction period.
Intangibles
In January 1995, the Company acquired the trust operations of another bank for
$3,470. The excess cost over net assets acquired was capitalized and is being
amortized on a straight-line basis over the estimated average life of the trust
relationships acquired of 11 years.
On a periodic basis, the Company reviews its intangible assets for events or
changes in circumstances that may indicate the carrying amounts of the assets
may not be recoverable. Recoverability of an asset to be held and used is
measured by a comparison of the carrying amount of the asset to future net cash
flows expected to be generated by the asset. If such asset is considered to be
impaired, the impairment is measured by the amount by which the carrying amount
exceeds the fair value of the asset.
68
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
Reverse Repurchase Agreements
The Company enters into sales of securities under agreements to repurchase the
same securities. Reverse repurchase agreements are accounted for as financing
arrangements, with the obligation to repurchase securities sold reflected as a
liability in the consolidated balance sheets. The dollar amount of securities
underlying the agreements remains in the respective asset account.
Interest on Deposits
Accrued interest is either paid to the depositor or added to the deposit account
on a periodic basis. On term accounts, the forfeiture of interest (because of
withdrawal prior to maturity) is offset as of the date of withdrawal against
interest expense in the consolidated statements of operations.
Income Taxes
The Company files consolidated Federal income and combined state franchise tax
returns.
Deferred income taxes are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred taxes of a change in tax rates
is recognized in income in the period that includes the enactment date.
Employee Stock Ownership Plan
The Company accounted for the original issuance of the Employee Stock Ownership
Plan (ESOP) as a component of equity recorded in a contra-equity account. When
the issuance occurs, compensation expense is recognized over the allocation
period based upon the fair value of the shares committed to be released to
employees. This may result in fluctuations in compensation expense as a result
of changes in the fair value of the Company's common stock. However, any such
compensation expense fluctuations result in an equal and offsetting adjustment
to additional paid-in capital.
Stock Option Plan
On October 23, 1996, the Company granted stock options and adopted Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123), which permits entities to recognize as expense
over the vesting period the fair value of all stock-based compensation on the
date of grant. Alternatively, SFAS No. 123 allows entities to apply the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25), and related interpretations, and provide pro
forma net earnings and pro forma earnings per share disclosures for employee
stock option grants made in 1996 and future years as if the fair-value-based
method defined in SFAS No. 123 had been applied. As such, compensation expense
would be recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. The Company has elected to apply
the provisions of APB 25 and provide the pro forma disclosure provisions of SFAS
No. 123.
SEGMENT REPORTING
The Company, through the branch network of the Bank, provides a broad range of
financial services to individuals and companies located primarily in Southern
California. These services include demand, time, and savings deposits; real
estate, business and consumer lending; ATM processing; cash management; and
trust services. While the Company's chief decision makers monitor the revenue
streams of the various Company products and services, operations are managed and
financial performance is evaluated on a
69
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
Company-wide basis. Accordingly, all of the Company's banking operations are
considered by management to be aggregated in one reportable operating segment.
New Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at fair
value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a foreign-
currency-denominated forecasted transaction.
Under SFAS No. 133, an entity that elects to apply hedge accounting is required
to establish at the inception of the hedge the method it will use for assessing
the effectiveness of the hedging derivative and the measurement approach of
determining the ineffective aspect of the hedge. Those methods must be
consistent with the entity's approach to managing risk.
This statement is effective for all quarters of fiscal years beginning after
June 15, 1999 however, the FASB has issued an exposure draft which would delay
the implementation by one year if approved. Management is in the process of
determining the impact of SFAS No. 133 on the Company's financial position and
results of operations.
(2) Investment Securities
The amortized cost and estimated fair values of investment securities are
summarized as follows:
<TABLE>
<CAPTION>
March 31, 1999
------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held-to-maturity:
Bonds, notes and debentures at amortized cost:
U.S. Government and federal agency obligations $ 709 7 - 716
------------------------------------------------------------------
Total $ 709 7 - 716
==================================================================
Available-for-sale:
Collateralized mortgage obligations $104,338 126 (1,764) 102,700
U.S. Government and federal agency obligations 17,491 12 (31) 17,472
Corporate debt securities 58,879 224 (1,338) 57,765
Equity securities 8,108 - (958) 7,150
------------------------------------------------------------------
Total $188,816 362 (4,091) 185,087
==================================================================
</TABLE>
70
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
During the years ended March 31, 1999, 1998 and 1997, the Company realized net
gains on sales of securities available-for-sale of $26, $114 and $23,
respectively.
<TABLE>
<CAPTION>
March 31, 1998
---------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Held-to-maturity:
Bonds, notes and debentures at amortized cost:
U.S. Government and federal agency $ 714 11 - 725
obligations
---------------------------------------------------------------
Total $ 714 11 - 725
===============================================================
Available-for-sale:
Collateralized mortgage obligations $223,514 839 (851) 223,502
U.S. Government and federal agency 56,007 50 (5) 56,052
obligations
FHLMC non-cumulative preferred stock 5,600 168 - 5,768
Corporate debt securities 17,309 130 (80) 17,359
Equity securities 13,112 617 - 13,729
---------------------------------------------------------------
Total $315,542 1,804 (936) 316,410
=================================================================
</TABLE>
Maturities of investment securities at March 31, 1999 are summarized as follows:
<TABLE>
<CAPTION>
Available-
Held-to-maturity for-sale
---------------------------------------------
Estimated Estimated
Amortized Fair Fair
Maturity Cost Value Value
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Within one year $709 716 -
After one to five years - - 17,472
After five to ten years - - -
After ten years - - 167,615
---------------------------------------------
$709 716 185,087
=============================================
</TABLE>
(3) Mortgage-Backed Securities
The amortized cost and estimated fair values of mortgage-backed securities are
summarized as follows:
<TABLE>
<CAPTION>
March 31, 1999
-------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held-to-maturity
FHLMC $ 556 4 - 560
=========================================================================
Available-for-sale
GNMA $ 19,334 316 - 19,650
FHLMC 158,494 538 (557) 158,475
FNMA 345,892 2,516 (973) 347,435
-------------------------------------------------------------------------
Total $ 523,720 3,370 (1,530) 525,560
=========================================================================
</TABLE>
71
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31, 1998
-----------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held-to-maturity
FHLMC $ 1,373 2 - 1,375
=======================================================================
Available-for-sale
GNMA $ 34,399 695 - 35,094
FHLMC 137,504 525 (323) 137,706
FNMA 306,287 2,892 (359) 308,820
-----------------------------------------------------------------------
Total $ 478,190 4,112 (682) 481,620
=======================================================================
</TABLE>
The mortgage-backed securities have original maturities of up to 30 years.
(4) Loans Receivable
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
March 31,
----------------------------------
1999 1998
----------------------------------
<S> <C> <C>
Mortgage loans:
Residential:
One-to-four family $ 1,479,308 1,467,156
Multi-family 87,856 97,350
Commercial real estate 156,474 144,035
Construction and land 349,119 185,225
----------------------------------
Total mortgage loans 2,072,757 1,893,766
Commercial 74,451 12,468
Consumer 70,686 42,826
----------------------------------
2,217,894 1,949,060
Less:
Undisbursed portion of construction loans (167,042) (95,457)
Net premium on loans 1,665 1,114
Net deferred loan origination fees (276) (1,101)
Allowance for loan losses (note 6) (26,160) (26,002)
----------------------------------
$ 2,026,081 1,827,614
==================================
Weighted average yield 7.66% 7.70%
==================================
</TABLE>
72
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
Loans receivable from officers and directors of the Company were as follows:
<TABLE>
<CAPTION>
March 31,
----------------------------------
1999 1998
----------------------------------
<S> <C> <C>
Beginning balance $ 2,070 1,897
Additions 1,346 288
Repayments (971) (115)
----------------------------------
Ending balance $ 2,445 2,070
==================================
</TABLE>
The following table provides information with respect to the Company's
nonaccrual loans and troubled debt restructured (TDR) loans at the dates
indicated.
<TABLE>
<CAPTION>
March 31,
---------------------------------------------------
1999 1998 1997
---------------------------------------------------
<S> <C> <C> <C>
Nonaccrual loans $ 11,012 17,189 23,350
TDR loans 11,291 12,505 14,559
---------------------------------------------------
Total nonaccrual and TDR loans $ 22,303 29,694 37,909
===================================================
</TABLE>
The following table identifies the Company's total recorded investment in
impaired loans by type at the dates indicated.
<TABLE>
<CAPTION>
March 31,
----------------------------------------------------------------------
1999 1998
----------------------------------------------------------------------
Recorded Specific Recorded Specific
Investment Allowances Investment Allowances
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Non accrual loans:
Residential:
One-to-four family $ 547 33 504 202
Multi-family 1,252 195 2,214 436
Commercial real estate 3,142 - 4,872 -
Construction and land - - 865 -
TDR loans 11,291 1,694 12,505 1,922
----------------------------------------------------------------------
Total $ 16,232 1,922 20,960 2,560
======================================================================
</TABLE>
During the year ended March 31, 1999, 1998 and 1997, the Company's average
investment in impaired loans was $17,941, $20,988 and $24,940, respectively and
interest income recorded during these periods was $916, $776 and $764,
respectively of which $887, $845 and $784, respectively was recorded utilizing
the cash basis method of accounting.
73
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
The effect of nonaccrual and TDR loans on interest income is presented below.
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------------------------
1999 1998 1997
------------------------------------------------------------
<S> <C> <C> <C>
Contractual interest due:
Nonaccrual loans $ 1,144 1,749 2,226
TDR loans 1,032 1,186 1,312
------------------------------------------------------------
2,176 2,935 3,538
Interest income recognized on
TDR loans on a cash basis 887 779 942
------------------------------------------------------------
Interest income not recognized $ 1,289 2,156 2,596
============================================================
</TABLE>
(5) Real Estate
Real estate acquired through foreclosure is summarized as follows:
<TABLE>
<CAPTION>
March 31,
-------------------------------------
1999 1998
-------------------------------------
<S> <C> <C>
Properties acquired in settlement of loans $ 5,763 8,198
Allowance for losses (note 6) (445) (603)
-------------------------------------
Total $ 5,318 7,595
=====================================
</TABLE>
(Gain) loss from foreclosed real estate operations, net is summarized as
follows:
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------------
1999 1998 1997
--------------------------------------------
<S> <C> <C> <C>
(Gain)loss on sale of foreclosed real estate, net $(1,356) (1,692) (519)
Real estate expense 1,270 1,749 1,164
Provision for (recoveries of) losses on real estate 41 416 (970)
--------------------------------------------
Total $ (45) 473 (325)
============================================
</TABLE>
Real estate held for sale or development is summarized as follows:
<TABLE>
<CAPTION>
March 31,
----------------------------------
1999 1998
----------------------------------
<S> <C> <C>
Properties wholly owned $ 558 731
Mezzanine equity investments
in real estate 5,813 -
----------------------------------
Total $ 6,371 731
==================================
</TABLE>
During the years ended March 31, 1999, 1998, and 1997, the Company recognized
net gains of $36, zero and zero, respectively from the sale of properties wholly
owned by the Company and profit of $246, zero and zero respectively from equity
investments in real estate developments. Profit from equity investments takes
the form of a preferential fixed return on the Company's outstanding investment
balances and is recognized as and to the extent the Company's investment is paid
down. The funds for such paydowns have been provided to the project through
proceeds from sales to independent third parties. The investment balance at
March 31, 1999 of $5,813 is net of $32 deferred income representing preferential
return payments made to the Company by the developer of the project in excess of
funds received by the project from sales to third parties.
74
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
(6) Allowances For Losses On Loans Receivable And Real Estate
Activity in the allowances for losses on loans and real estate is summarized as
follows:
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------------------------
1999 1998 1997
-----------------------------------------------------
<S> <C> <C> <C>
Loans receivable:
Beginning balance $ 26,002 27,721 19,741
Provision 4,020 7,099 13,661
Charge-offs (3,879) (9,110) (5,782)
Recoveries 17 292 101
-----------------------------------------------------
Ending balance 26,160 26,002 27,721
-----------------------------------------------------
Foreclosed real estate:
Beginning balance 603 329 4,762
Provision (recoveries) 41 416 (970)
Charge-offs (199) (142) (3,463)
-----------------------------------------------------
Ending balance 445 603 329
-----------------------------------------------------
Total loans receivable and real estate:
Beginning balance 26,605 28,050 24,503
Provision 4,061 7,515 12,691
Charge-offs (4,078) (9,252) (9,245)
Recoveries 17 292 101
-----------------------------------------------------
Ending balance $ 26,605 26,605 28,050
=====================================================
</TABLE>
(7) Accrued Interest Receivable
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
March 31,
------------------------------------
1999 1998
------------------------------------
<S> <C> <C>
Investment securities $ 1,783 2,963
Mortgage-backed securities 3,421 3,596
Loans receivable 11,914 10,761
------------------------------------
Total $17,118 17,320
====================================
</TABLE>
75
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
(8) Property and Equipment, net
Property and equipment, net is summarized as follows:
<TABLE>
<CAPTION>
March 31,
-----------------------------------
1999 1998 Estimated Life
-----------------------------------------------------
<S> <C> <C> <C>
Land $ 5,254 5,254 -
Buildings and improvements 21,688 21,299 40
Leasehold improvements 2,040 1,939 10
Furniture, fixtures and equipment 24,285 23,017 7
Automobiles 156 159 3
Construction in progress 23 92 -
-----------------------------------
53,446 51,760
Accumulated depreciation and
amortization (29,521) (26,193)
-----------------------------------
Total $ 23,925 25,567
===================================
</TABLE>
(9) Deposits
Deposits and their respective weighted average interest rates are
summarized as follows:
<TABLE>
<CAPTION>
March 31,
------------------------------------------------------------------
1999 1998
------------------------------------------------------------------
Weighted Weighted
Average Average
Rate Amount Rate Amount
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Regular passbook 2.27% $ 143,827 2.55% $ 152,649
NOW and other demand
deposit accounts 0.67 197,936 0.76 176,060
Fixed and variable-rate
certificate accounts 5.10 1,100,224 5.40 1,178,515
Money market checking
and savings 4.44 401,551 4.05 233,600
----------------- -----------------
Total 4.26% $1,843,538 4.50% $1,740,824
================= =================
</TABLE>
Certificate accounts maturing subsequent to March 31, 1999 are summarized as
follows:
<TABLE>
<CAPTION>
Year Ending March 31, Amount
------------------------------------------------------------
<S> <C>
2000 $1,012,434
2001 46,834
2002 17,677
2003 12,922
2004 9,961
thereafter 396
--------------
$1,100,224
==============
</TABLE>
76
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------------------
1999 1998 1997
------------------------------------------------------
<S> <C> <C> <C>
Regular passbook $ 3,405 4,205 5,525
NOW and other demand deposit
accounts 1,291 1,214 1,096
Money market checking and savings 13,133 7,981 3,935
Certificates of deposit 61,705 66,755 68,690
------------------------------------------------------
Total $ 79,534 80,155 79,246
======================================================
</TABLE>
At March 31, 1999 and 1998, the Company had accrued interest payable on deposits
of $1,389 and $811, respectively, which is included in other liabilities in the
accompanying consolidated balance sheets.
At March 31, 1999 and 1998, $6,988 and $7,637 of public funds on deposit were
secured by loans receivable, mortgage-backed securities and investment
securities with aggregate carrying values of $19,346 and $23,575, respectively.
Accounts which are greater than $100 at March 31, 1999 and 1998 total $247,853
and $306,187, respectively. Deposit accounts greater than $100 are not
federally insured.
(10) FHLB Advances And Other Borrowings
The Company utilizes FHLB advances and reverse repurchase agreements as sources
of funds. The advances and repurchase agreements are collateralized by
mortgage-backed securities, investment securities and/or loans. The Company
only transacts business with the FHLB or brokerage firms that are recognized as
primary dealers in U.S. government securities. FHLB advances and reverse
repurchase agreements were $764,000 and $50,000 and $735,886 and $50,000 at
March 31, 1999 and March 31, 1998, respectively. See Note 11.
The original terms to maturity for reverse repurchase agreements outstanding at
March 31, 1999 were 5 years. Under these agreements, the debt may be put back
to the Company by the creditor beginning May 1999 and quarterly thereafter,
continuing to final maturity in February 2002. These agreements are
collateralized by FHLMC and FNMA mortgage-backed and other investment securities
with a historical cost basis and fair value of $52,361 and $52,756 and $55,780
and $56,033 at March 31, 1999 and March 31, 1998, respectively. The underlying
collateral for reverse repurchase agreements is held by and under the control of
Morgan Stanley, Inc.
77
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31,
-----------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------
<S> <C> <C> <C>
FHLB advances:
Average amount outstanding during the year $ 855,197 601,078 335,188
Maximum amount outstanding at any month end 949,000 790,086 545,400
Amount outstanding at year end (1) 764,000 735,886 480,000
Average interest rate:
For the year 5.57% 5.87% 5.78%
At year end 5.37% 5.70% 5.78%
Reverse repurchase agreements:
Average amount outstanding during the year 50,000 50,000 10,129
Maximum amount outstanding at any month end 50,000 50,000 50,000
Amount outstanding at year end (1) 50,000 50,000 50,000
Average interest rate:
For the year 5.87% 5.87% 5.96%
At year end 5.87% 5.87% 5.87%
</TABLE>
______________________
(1) Included in the balance of FHLB advances and reverse repurchase agreements
outstanding at March 31, 1999 are putable borrowings of $465,000 and $50,000
respectively with original terms to maturity of 24 to 120 months, and 36 to 60
months, respectively with final maturity dates ranging from December 1999 to
February 2008 and December 2001 to February 2002, respectively, and initial put
dates ranging from April 1999 to February 2003 and May 1999 to December 1999,
respectively. The underlying collateral for reverse repurchase agreements is
held by and under the control of Morgan Stanley, Inc.
FHLB advances have the following final maturities at March 31, 1999.
<TABLE>
<CAPTION>
Amount
---------------
<S> <C>
2000 $180,000
2001 174,000
2002 75,000
2003 270,000
2004 50,000
thereafter 15,000
---------------
Total $764,000
===============
</TABLE>
Interest expense on borrowings is summarized as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------------------------------------
1999 1998 1997
---------------------------------------------------------
<S> <C> <C> <C>
FHLB advances $ 47,735 35,273 19,378
Reverse repurchase agreements 2,976 2,959 604
Other interest expense 111 130 78
---------------------------------------------------------
Total $ 50,822 38,362 20,060
=========================================================
</TABLE>
78
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
(11) LINES OF CREDIT
At March 31, 1999 and 1998, the Company had maximum borrowing capacity from the
FHLB of San Francisco in the approximate amount of $724,696 and $690,108,
respectively. Based upon pledged collateral in place, the Company had available
borrowing capacity of $278,613 and $192,386 as of March 31, 1999 and 1998,
respectively. Pledged collateral consists of certain loans receivable,
mortgage-backed securities and investment securities aggregating $1,136,876 and
$1,045,522 and the Company's required investment in one hundred dollar par value
capital stock of the FHLB of San Francisco. At March 31, 1999 and 1998, the
cost of this FHLB capital stock was $50,323 and $39,504, respectively.
(12) EMPLOYEE BENEFIT PLANS
The Company maintains a defined benefit Pension Plan ("Pension Plan") covering
substantially all of its employees. The benefits are based on each employee's
years of service and final average earnings determined over the five-year period
prior to the benefit determination date. Employees became fully vested upon
completion of five years of qualifying service. The Company also maintains a
Retirement Plan for all directors and a Supplemental Plan for all senior
officers of the Company. Effective December 31, 1995, the Company elected to
freeze the Pension Plan, Directors' Retirement and Supplemental Plan.
Accordingly, no new accruals for future years of service have occurred since
December 31, 1995. The following table sets forth the plans' change in benefit
obligation and change in plan assets at the plans' most recent measurement dates
of December 31, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
---------------------------------------------------------------------------------
Directors' Directors'
Retirement and Retirement and
Pension Supplemental Pension Supplemental
Plan Plans Plan Plans
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in benefit obligation
Projected benefit obligation,
beginning of year $20,792 2,536 18,038 2,561
Interest cost 1,411 171 1,360 187
Benefits paid (1,362) (210) (1,187) (189)
Actuarial loss (gain) 929 206 2,581 (23)
---------------------------------------------------------------------------------
Projected benefit obligation, end
of year $21,770 2,703 20,792 2,536
---------------------------------------------------------------------------------
Change in plan assets
Plan assets, beginning of year $21,964 - 20,090 -
Actual return on plan assets 3,051 - 3,061 -
Employer contribution - 210 - 189
Benefits paid (1,362) (210) (1,187) (189)
---------------------------------------------------------------------------------
Plan assets, end of year $23,653 - 21,964 -
---------------------------------------------------------------------------------
Funded status 1,883 (2,703) 1,172 (2,536)
Unrecognized transition obligation - 99 - 132
Unrecognized prior service cost 152 - 222 (11)
Unrecognized (gain)/loss (62) 594 514 -
---------------------------------------------------------------------------------
Prepaid (accrued) benefit cost $ 1,973 (2,010) 1,908 (2,415)
=================================================================================
</TABLE>
79
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
Net periodic pension costs for 1998, 1997 and 1996 included the following
components:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------------------------
Directors'
Directors' Directors' Retirement
Retirement Retirement and Supple-
Pension and Supple- Pension and Supple- Pension mental
Plan mental Plans Plan mental Plans Plan Plans(1)
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic
benefit cost
Interest Cost $ 1,411 - 1,360 187 1,357 188
Expected return on plan assets (1,546) 171 (3,061) - (1,917) -
Amortization of unrecognized
transition obligation - 33 - 33 - 33
Amortization of unrecognized
prior service cost 70 (11) 1,856 (11) 780 (11)
Amortization of unrecognized
(gain) / loss - 29 - 36 - 36
-----------------------------------------------------------------------------
Net periodic pension (income)
expense $ (65) 222 155 245 220 246
=============================================================================
</TABLE>
(1) The total pension expense for the Directors' Retirement and Supplemental
Plans (including amortization of prior service cost over 15 years) was $1,773
for the year ended March 31, 1997. The $1,527 difference between total pension
expense and net periodic pension expense for the Directors' Retirement and
Supplemental Plans for the year ended March 31, 1997, results from the
curtailment of these plans.
The assumptions used in determining the actuarial present value of the
accumulated benefit obligation and the expected return on plan assets for 1998
and 1997 are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------
1998 1997
-------------------------------------------------------------------------
Directors' Directors'
Retirement Retirement
Pension and Supple- Pension and Supple-
Plan mental Plans Plan mental Plans
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted-average assumptions
Discount rate 6.25% 6.25 7.00 7.00
Expected long-term rate of return
on plan assets 7.25 - 7.25 -
</TABLE>
In 1985, the Company established a capital accumulation plan (401(k) Plan) which
is available to all full-time employees over 21 years of age with more than six
months of service. Under the 401(k) Plan, the Company contributes funds in an
amount equal to a percentage of employee contributions. In 1999, 1998 and 1997,
the total 401(k) Plan expense was $393, $348, and $290, respectively.
The Company provides a non-qualified Directors' Deferred Compensation Plan and a
non-qualified Employees' Deferred Compensation Plan that offer directors and
senior officers of the Company, respectively, the opportunity to defer
compensation through a reduction in salary and then receipt of a benefit upon
retirement. The benefit from the Directors' Deferred Compensation Plan is
payable upon the occurrence of the first Board of Directors' meeting held in the
fiscal year following the participant attaining age 73. The benefit from the
Employees' Deferred Compensation Plan is payable at normal retirement (age 65)
or actual retirement but no later than age 70, or alternatively upon termination
if termination occurs earlier due to disability. The primary form of benefit is
120 monthly installment payments of the account balance. Such balance shall
equal the amount of the deferrals and interest thereon. Other actuarially
80
<PAGE>
equivalent payout schedules, including a lump sum payout, are available with
certain restrictions. Deferrals are currently credited with an interest rate
equal to the highest interest rate paid on a designated date to depositors of
the Company or, at the Participants' election, investment earnings or losses
equivalent to that of the Company's common stock. At March 31, 1999, the
liability for these plans is included in accrued expenses and other liabilities.
The Company currently provides post retirement medical coverage to eligible
employees. At March 31, 1999 and 1998, the expected cost associated with this
coverage was $17 and is included in accrued expenses and other liabilities.
As part of the reorganization to the stock form of ownership, the ESOP purchased
1,587,000 shares of the Company's common stock at $10 per share, or $15,870,
which was funded by a loan from the Company. The loan will be repaid from the
Company's or the Bank's discretionary contributions over a period of 10 years.
The loan is secured by the common stock owned by the ESOP. Shares purchased
with the loan proceeds are held in a suspense account for allocation among
participants as the loan is repaid. ESOP shares are allocated to the eligible
participants based on compensation as described in the ESOP plan. In each of
the fiscal years ending March 31, 1999 and 1998 158,700 shares were allocated to
the eligible participants. At March 31, 1999 and 1998, the unearned balance of
the ESOP shares is included in unearned stock-based compensation as a reduction
of total stockholders' equity in the accompanying consolidated financial
statements. The value of ESOP shares committed to be released is included in
compensation expense based upon the fair value of the shares on the dates they
were committed. At March 31, 1999, the fair value of the unearned ESOP shares
is $19,441. Compensation expense associated with the ESOP was $2,694, $2,921
and zero for the years ended March 31, 1999, 1998 and 1997.
During October, 1996, the stockholders of the Company approved the PFF Bancorp,
Inc. 1996 Incentive Plan (the "1996 Plan"). The 1996 Plan authorizes the
granting of options to purchase the Company's common stock, option related
awards, and grants of common stock (collectively "Awards"). Concurrent with the
approval of the 1996 Plan, the Company adopted SFAS No. 123, Accounting for
Stock-Based Compensation, which permits a company to account for stock options
granted under either the fair-value-based or the intrinsic-value-based (as
described in APB No. 25) method of accounting. If the Company elects to account
for options granted under the intrinsic-value-based method, it must make certain
disclosures with respect thereto. The Company has elected to account for stock
options granted under the intrinsic-value-based method of accounting.
The maximum number of shares reserved for Awards under the 1996 Plan is
2,777,250 shares, with 1,983,750 shares reserved for purchase pursuant to
options and option-related awards and 793,500 shares reserved for grants of the
Company's common stock. The exercise price of all options and option-related
awards must be 100% of the fair value of the Company's common stock at the time
of grant and the term of the options may not exceed 10 years. Of the 793,500
shares reserved for stock grants, 746,745 shares with a fair value of $11,263
were granted to directors and executive officers during the year ended March 31,
1997. 532,500 of the 746,745 shares represented grants to employees with the
remaining shares granted to directors of the Company. An additional 23,800
shares with a fair value of $369 at the time of grant, were granted to the
directors of the Company during the year ended March 31, 1999. All shares
granted are eligible to vest in five equal annual installments. With respect to
shares of the Company's common stock granted to executive officers, the 1996
Plan provides that the vesting of 75% of the third, fourth and fifth annual
installments is subject to the attainment of certain performance goals.
Compensation expense, associated with the stock grants recognized based upon the
market price of the common stock at the time of grant, was $1,910 , $1,904 and
$834 for the years ended March 31, 1999, 1998 and 1997. The unamortized balance
of the grants is included in unearned stock-based compensation in the
accompanying consolidated financial statements. At March 31, 1999 and 1998 the
unamortized balance of the stock awards was $6,100 and $8,900, respectively.
81
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
The following table contains certain information with respect to the stock
options granted under the 1996 Plan.
<TABLE>
<CAPTION>
Options Granted During the Year Ended March 31, 1999 Assumptions Used in Determining Options' Values
- ------------------------------------------------------------------------------------------------------------
Calculated
Expected Value of
Number Exercise Term in Risk-Free Expected Each
Grant Date Granted Price Years Rate(1) Volatility Option
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
April 22, 1998 1,328 $20.50 8.00 5.20% 38.44% $10.97
September 23, 1998 15,214 14.50 8.00 5.20 38.44 7.76
October 28, 1998 1,427 14.31 8.00 5.20 38.44 7.66
March 24, 1999 7,273 17.94 8.00 5.20 38.44 9.60
<CAPTION>
Options Granted During the Year Ended March 31, 1998 Assumptions Used in Determining Options' Values
- ------------------------------------------------------------------------------------------------------------
Calculated
Expected Value of
Number Exercise Term in Risk-Free Expected Each
Grant Date Granted Price Years Rate(1) Volatility Option
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
April 23, 1997 1,660 $14.25 8.00 5.70% 30.00% $ 6.93
May 7, 1997 1,229 14.50 8.00 5.70 30.00 7.05
October 22, 1997 6,154 20.63 8.00 5.70 30.00 10.03
February 25, 1998 2,626 18.75 8.00 5.70 30.00 9.12
<CAPTION>
Options Granted During the Year Ended March 31, 1997 Assumptions Used in Determining Options' Values
- ------------------------------------------------------------------------------------------------------------
Calculated
Expected Value of
Number Exercise Term in Risk-Free Expected Each
Grant Date Granted Price Years Rate(1) Volatility Option
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
October 23, 1996 1,900,611 $12.75 8.00 6.92% 25.00% $ 7.64
December 19, 1996 1,031 13.75 8.00 6.92 25.00 7.23
February 27, 1997 1,446 16.25 8.00 6.92 25.00 6.30
March 1, 1997 96,000 16.25 8.00 6.92 25.00 6.30
March 26, 1997 62,162 15.50 8.00 6.92 25.00 6.57
</TABLE>
(1) The risk-free rate is the market rate for U.S. Government securities with
the same maturities as the options, as of March 31, 1999.
The Company applies APB No. 25 in accounting for its Plan and, accordingly, no
compensation cost has been recognized for its stock options in the consolidated
financial statements. Had the Company determined compensation cost based on the
fair value at the grant date for its stock options exercisable under SFAS No.
123, the Company's results of operations would have been adjusted to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------------------------------------------
<S> <C> <C> <C>
Net earnings:
As reported $19,004 15,980 2,732
Pro forma 17,533 14,463 1,000
Earnings per share - Basic
As reported 1.37 1.00 0.15
Pro forma 1.26 0.90 0.06
Earnings per share - Diluted
As reported 1.29 0.95 0.15
Pro forma 1.19 0.86 0.06
</TABLE>
82
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
The table below reflects, for the periods indicated, the activity in the
Company's stock options issued under the 1996 Plan.
<TABLE>
<CAPTION>
For the Year Ended March 31,
1999 1998 1997
------------------------------------
<S> <C> <C> <C>
Balance at beginning of period 1,876,471 1,960,069 -
Granted 25,242 11,669 2,061,250
Canceled or expired (19,764) (31,345) (101,181)
Exercised (42,526) (63,922) -
------------------------------------
Balance at end of period 1,839,423 1,876,471 1,960,069
====================================
Options exercisable 707,762 381,083 2,452
Options available for grant 29,969 26,813 23,681
Weighted average option price per share:
Under option $ 13.10 13.05 13.01
Exercisable 13.07 13.06 12.75
Exercised 18.83 19.26 -
</TABLE>
The following table summarizes information with respect to the Company's stock
options outstanding as of March 31, 1999.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------------------------------------------------------------
Weighted-Average
Range of Number Remaining Weighted- Number Weighted-
Exercise Outstanding Contractual Life Average Outstanding Average
Prices at March 31, 1999 (Years) Exercise Price at March 31, 1999 Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 12 to 14 1,647,378 7.4 $12.7500 637,740 $12.7500
14 to 16 79,724 7.3 15.2588 30,293 15.4782
16 to 18 102,213 8.1 16.3701 37,975 16.2500
18 to 20 2,626 8.9 18.7500 525 18.7500
20 to 22 7,482 8.7 20.6028 1,229 20.6250
</TABLE>
83
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
(13) Income Taxes
Income taxes (benefit) is summarized as follows:
<TABLE>
<CAPTION>
Current Deferred Total
-------------------------------------------
<S> <C> <C> <C>
Year Ended March 31, 1999
Federal $ 7,987 2,641 10,628
State 2,695 885 3,580
-------------------------------------------
Total $10,682 3,526 14,208
===========================================
Year Ended March 31, 1998
Federal $14,448 (4,399) 10,049
State 2,508 (538) 1,970
-------------------------------------------
Total $16,956 (4,937) 12,019
===========================================
Year Ended March 31, 1997
Federal $ 3,289 (1,867) 1,422
State 1,935 (270) 1,665
-------------------------------------------
Total $ 5,224 (2,137) 3,087
===========================================
</TABLE>
A reconciliation of total income taxes and the amount computed by applying the
applicable Federal income tax rate to earnings before income taxes follows:
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------------------------------------------------------------------
1999 1998 1997
---------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Computed "expected" taxes $11,624 35% $ 9,800 35% $2,037 35%
Increase (reduction) in
taxes resulting from:
California franchise tax,
net of Federal tax benefit 2,327 7 1,281 7 433 7
California franchise tax
examination assessment,
net of Federal tax benefit - - - - 649 10
Other items 257 1 938 1 (32) 1
---------------------------------------------------------------------------------------
Total $14,208 43% $12,019 43% $3,087 53%
=======================================================================================
</TABLE>
84
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities and the related income
taxes (benefits) are presented below:
<TABLE>
<CAPTION>
March 31, Taxes March 31, Taxes March 31,
1999 (Benefit) 1998 (Benefit) 1997
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Deferred tax assets:
Allowance for real estate
loan losses $(10,037) (2,487) (7,550) 453 (8,003)
California franchise tax (1,796) (98) (1,698) (672) (1,026)
Accrued expenses (1,479) 776 (2,255) (679) (1,576)
Core deposit intangibles
amortization (181) 196 (377) (106) (271)
Nonaccrual interest (484) (337) (147) 886 (1,033)
Unrealized gains (loss) on
securities 793 (1,001) 1,794 1,439 356
available-for-sale, net
Other (1,885) (364) (1,521) (434) (1,088)
------------------------------------------------------------------------------------
(15,069) (3,315) (11,754) 887 (12,641)
------------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred loan origination 13,616 5,000 8,616 (4,758) 13,374
fees
Unredeemed FHLB stock
dividends 6,077 1,241 4,836 796 4,040
Pension plan liability 189 (137) 326 (4) 330
Accumulated depreciation (157) (337) 180 (294) 474
Customer early withdrawl
penalty 133 (41) 174 (44) 218
depreciation
Accrued interest on pre-
1985 loans 69 104 (35) (58) 23
Excess servicing rights
amortization 80 10 70 (25) 95
Other 983 - 983 2 981
------------------------------------------------------------------------------------
20,990 5,840 15,150 (4,385) 19,535
------------------------------------------------------------------------------------
Net deferred tax liability $ 5,921 2,525 3,396 (3,498) 6,894
====================================================================================
</TABLE>
In determining the possible future realization of deferred tax assets, the
future taxable income from the following sources is taken into account: (a) the
reversal of taxable temporary differences, (b) future operations exclusive of
reversing temporary differences and (c) tax planning strategies that, if
necessary, would be implemented to accelerate taxable income into years in which
net operating losses might otherwise expire. Deferred tax assets as of March
31, 1999 and 1998 have been recognized to the extent of the expected reversal of
taxable temporary differences.
Based on the Company's current and historical pretax earnings, adjusted for
significant items, management believes it is more likely than not that the
Company will realize the benefit of the deferred tax asset at March 31, 1999.
Management believes the existing net deductible temporary differences will
reverse during periods in which the Company generates net taxable income.
However, there can be no assurance that the Company will generate any earnings
or any specific level of continuing earnings in future years.
On August 20, 1996, the President signed the Small Business Job Protection Act
(the Act) into law. The Act repealed the reserve method of accounting for bad
debts for savings institutions effective for taxable years beginning after 1995.
The Company, therefore, is required to use the specific charge-off method on its
1996 and subsequent Federal income tax returns. Prior to 1996, savings
institutions that met certain definitional tests and other conditions prescribed
by the Internal Revenue Code were allowed to deduct, within
85
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
limitations, a bad debt deduction. The deduction percentage was 8% for the years
ended March 31, 1996 and 1995. Alternately, a qualified savings institution
could compute its bad debt deduction based upon actual loan loss experience (the
Experience Method). Retained earnings at March 31, 1999 and 1998 includes
approximately $25,300 for which no deferred income tax liability has been
recognized.
(14) Regulatory Capital
Savings institutions are subject to the provisions of the Federal Deposit
Insurance Corporation Improvement Act of 1991 (FDICIA), which was signed into
law on December 19, 1991. Regulations implementing the prompt corrective action
provisions of FDICIA became effective on December 19, 1992. In addition to the
prompt corrective action requirements, FDICIA includes significant changes to
the legal and regulatory environment for insured depository institutions,
including reductions in insurance coverage for certain kinds of deposits,
increased supervision by the federal regulatory agencies, increased reporting
requirements for insured institutions, and new regulations concerning internal
controls, accounting and operations.
To be considered "well capitalized," a savings institution must generally have a
core capital of at least 5%, a Tier 1 risk-based capital ratio of at least 6%,
and a total risk-based capital of at least 10%. An institution is deemed to be
"critically undercapitalized" if it has a tangible equity ratio of 2% or less.
Management believes that at March 31, 1999, the Bank met the definition of "well
capitalized."
The following is a reconciliation of the Bank's GAAP capital to regulatory
capital as of March 31, 1999:
<TABLE>
<CAPTION>
PFF Bank & Trust's
Regulatory Capital Requirement
--------------------------------------------------------------
Tangible Core Risk-based
Capital Capital Capital
--------------------------------------------------------------
<S> <C> <C> <C>
Capital of the Bank presented on a GAAP
Basis $204,956 204,956 204,956
Adjustments to GAAP capital to arrive
at regulatory capital:
Unrealized loss on securities
available-for-sale, net 293 293 293
Investments in and advances to
non-includable consolidated subsidiaries (504) (504) (504)
Goodwill and other intangible assets (3,535) (3,535) (3,535)
General loan valuation allowance (1) - - 22,263
Real estate held for sale or development - - (558)
--------------------------------------------------------------
Regulatory capital 201,210 201,210 222,915
Regulatory capital requirement 115,812 115,812 142,403
--------------------------------------------------------------
Amount by which regulatory capital
exceeds requirement $ 85,398 85,398 80,512
==============================================================
</TABLE>
(1) Limited to 1.25% of risk-weighted assets.
86
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
The following table summarizes the Bank's actual capital and required capital
under prompt corrective action provisions of FDICIA as of March 31, 1999 and
1998.
<TABLE>
<CAPTION>
To be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------------------------------------------------------------------
March 31, 1999 Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk-weighted $222,915 12.52% $142,403 *8.00% $178,004 *10.00%
assets)
Core (Tier 1) capital (to total 201,210 6.95 86,859 *3.00% 144,765 *5.00
assets)
Tier 1 capital (to risk-weighted 201,210 11.30 - - (1) 173,718 *6.00
assets)
Tangible capital (to total assets) 201,210 6.95 46,429 *1.50% - - (1)
</TABLE>
* greater than or equal to
<TABLE>
<CAPTION>
To be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------------------------------------------------------------------
March 31, 1998 Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk-weighted $213,617 14.17% $120,481 *8.00% $150,782 *10.00%
assets)
Core (Tier 1) capital (to total 195,298 7.10 82,559 *3.00 137,598 *5.00
assets)
Tier 1 capital (to risk-weighted 195,298 12.95 - - (1) 90,469 *6.00
assets)
Tangible capital (to total assets) 195,298 7.10 41,280 *1.50 - - (1)
</TABLE>
* greater than or equal to
(1) Ratio is not specified under capital regulations.
At periodic intervals, both the OTS and the FDIC routinely examine the Bank's
financial statements as part of their legally prescribed oversight of the thrift
industry. Based on these examinations, the regulators can direct that the
Bank's financial statements be adjusted in accordance with their findings.
(15) Other Non-Interest Expense
Other non-interest expense amounts are summarized as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
1999 1998 1997
------------------------------------------------
<S> <C> <C> <C>
SAIF insurance premiums (1) $ 1,573 1,470 3,270
Office supplies and expense 3,406 2,883 2,803
Savings and NOW account expenses 1,134 1,382 947
Loan expenses 581 438 221
EDP system conversion expenses - - 2,117
Other 3,463 3,757 3,477
------------------------------------------------
$10,157 9,930 12,835
================================================
</TABLE>
(1) The 1997 SAIF recapitalization assessment of $10,900 is recorded as a
separate line item on the statements of earnings.
87
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
(16) commitments and Contingencies
The Company and subsidiaries have various outstanding commitments and contingent
liabilities in the ordinary course of business that are not reflected in the
accompanying consolidated financial statements as follows:
Litigation
The Company and subsidiaries have been named as defendants in various lawsuits
arising in the normal course of business. The outcome of these lawsuits cannot
be predicted, but the Company intends to vigorously defend the actions and is of
the opinion that the lawsuits will not have a material effect on the Company.
Leases
The Company leases various office facilities under noncancellable operating
leases that expire through the year 2044. Net rent expense under operating
leases, included in occupancy and equipment expense for the years ended March
31, 1999, 1998 and 1997, was $743, $590, and $512, respectively. A summary of
future minimum lease payments under these agreements follows at March 31, 1999.
<TABLE>
<CAPTION>
Amount
--------------------
Year ending March 31,
<S> <C>
2000 $ 711
2001 556
2002 494
2003 370
2004 307
thereafter 608
--------------------
Total $3,046
====================
</TABLE>
(17) Off-Balance Sheet Risk
Concentrations of Operations and Assets
The Company's operations are located entirely within Southern California. At
both March 31, 1999 and 1998, approximately 94.6% of the Company's mortgage
loans were secured by real estate in Southern California. In addition,
substantially all of the Company's real estate is located in Southern
California.
Off-Balance-Sheet Credit Risk/Interest-Rate Risk
In the normal course of meeting the financing needs of its customers and
reducing exposure to fluctuating interest rates, the Company is a party to
financial instruments with off-balance sheet risk. These financial instruments
(commitments to originate loans and commitments to purchase loans) include
elements of credit risk in excess of the amount recognized in the accompanying
consolidated financial statements. The contractual amounts of those instruments
reflect the extent of the Company's involvement in these particular classes of
financial instruments.
88
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
The Company's exposure to off-balance sheet credit risk (i.e., losses resulting
from the other party's nonperformance of financial guarantees) and interest rate
risk (for fixed-rate mortgage loans) in excess of the amount recognized in the
accompanying consolidated financial statements is represented by the following
contractual amounts.
<TABLE>
<CAPTION>
March 31,
------------------------------------------------
1999 1998
------------------------------------------------
<S> <C> <C>
Commitments to originate loans:
Variable-rate $ 24,287 12,857
Fixed-rate 4,523 2,319
------------------------------------------------
Total $ 28,810 15,176
================================================
Interest rate range for fixed-rate loans 6.25%-15.75% 6.88%-18.00%
</TABLE>
Commitments to originate fixed and variable-rate loans represent commitments to
lend to a customer, provided there are no violations of conditions specified in
the agreement. Commitments to purchase variable-rate loans represent
commitments to purchase loans originated by other financial institutions. These
commitments generally have fixed expiration dates or other termination clauses
and may require the payment of a fee. Since some of the commitments may expire
without being drawn upon, the total commitment amounts above do not necessarily
represent future cash requirements. The Company uses the same credit policies
in making commitments to originate and purchase loans as it does for on-balance
sheet instruments. The Company controls credit risk by evaluating each
customer's creditworthiness on a case-by-case basis and by using systems of
credit approval, loan limitation, and various underwriting and monitoring
procedures.
The Company does not require collateral or other security to support off-balance
sheet financial instruments with credit risk. However, when the commitment is
funded, the Company receives collateral to the extent collateral is deemed
necessary, with the most significant category of collateral being real property
underlying mortgage loans.
(18) Trust Operations
Included in prepaid expenses and other assets is the net unamortized trust
acquisition cost of $2,263 and $2,599 at March 31, 1999 and 1998, respectively.
As a result of the acquisition, the Company now has certain additional fiduciary
responsibilities which include acting as trustee, executor, administrator,
guardian, custodian, record keeper, agent, registrar, advisor and manager. In
addition, the Company's Trust department holds assets for the benefit of others.
These assets are not the assets of the Company and are not included in the
consolidated balance sheets of the Company at March 31, 1999 and 1998.
89
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
(19) Loan Servicing and Sale Activities
Loan servicing and sale activities are summarized as follows:
<TABLE>
<CAPTION>
As of and for the Year Ended March 31,
--------------------------------------------------------------
1999 1998 1997
--------------------------------------------------------------
<S> <C> <C> <C>
Balance sheet information:
Loans held for sale $ 3,531 701 736
==============================================================
Statement of earnings information:
Loan servicing fees $ 850 887 945
Amortization of servicing asset (109) (42) (42)
--------------------------------------------------------------
Loan servicing fees, net $ 741 845 903
==============================================================
Gain on sale of loans $ 661 992 9
==============================================================
Statement of cash flows information:
Loans originated for sale $ - 3,893 21,590
==============================================================
Proceeds from sale of loans $39,407 166,989 26,869
==============================================================
</TABLE>
The Company originates mortgage loans, which depending upon whether the loans
meet the Company's investment objectives may be sold in the secondary market or
to other private investors. The servicing of these loans may or may not be
retained by the Company. Indirect non-deferrable costs associated with
origination, servicing and sale activities cannot be presented as these
operations are integrated with and not separable from the origination and
servicing of portfolio loans, and as a result, cannot be accurately estimated.
At March 31, 1999, 1998 and 1997, the Company was servicing loans and
participations in loans owned by others of $325,730, $390,159, and $252,057,
respectively.
(20) Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments" (SFAS
107). The estimated fair value amounts have been determined using available
market information and appropriate valuation methodologies. However,
considerable judgment is necessarily required to interpret market data to
develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts that could be realized in a
current market exchange. The use of different market assumptions or estimation
methodologies may have a material impact on the estimated fair value amounts.
90
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
March 31, 1999 March 31, 1998
-------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents and
certificates of deposit $ 63,790 63,790 46,021 46,021
Investment securities 185,796 185,803 317,124 317,135
Mortgage-backed securities 526,116 526,120 482,993 482,995
Loans held for sale 3,531 3,531 701 703
Loans receivable, net 2,026,081 2,031,065 1,827,614 1,835,033
Financial liabilities
Deposits 1,843,538 1,847,383 1,740,824 1,737,923
FHLB advances and other borrowings 814,000 737,083 785,886 789,444
Off-balance sheet instruments:
Commitments to originate loans 28,810 28,810 15,176 15,176
</TABLE>
The following methods and assumptions were used in estimating the Company's fair
value disclosures for financial instruments.
Cash, Cash Equivalents and Certificates of Deposit: The fair values of cash and
cash equivalents, and certificates of deposit approximate the carrying values
reported in the consolidated balance sheet.
Investment Securities: The fair values of investment securities are based on
quoted market prices.
Mortgage-Backed Securities: The fair values of mortgage-backed securities are
based on quoted market prices or dealer quotations obtained from market sources.
Loans Receivable: For purposes of calculating the fair value of loans
receivable, loans were segregated by payment type, such as those with fixed
interest rates and those with adjustable interest rates as well as by prepayment
and repricing frequency. For all mortgage loans, fair value is estimated using
discounted cash flow analysis. Discount rates are based on current loan rates
for similar loan types adjusted for differences in credit and servicing
characteristics. The fair values of significant nonperforming loans are based on
recent appraisals, or if not available, on estimated cash flows, discounted
using a rate commensurate with the risk associated with the specific properties.
Deposits: The fair values of passbook accounts, demand deposits and certain
money market deposits are assumed to be the carrying values at the reporting
date. The fair value of term accounts is based on projected contractual cash
flows discounted at rates currently offered for deposits of similar maturities.
FHLB Advances and Other Borrowings: The fair value of FHLB advances and other
borrowings is based on discounted cash flows using contractual rates currently
offered for similar borrowings of similar final maturities.
91
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
Off-Balance Sheet Financial Instruments: The fair value of commitments to
purchase loans, mortgage-backed securities and investment securities is based
upon bid quotations received from securities dealers. Commitments to fund loans
outstanding at March 31, 1999 and 1998 would be offered at substantially the
same rates and terms as commitments offered on March 31, 1999 and 1998 to
parties of similar credit worthiness. Therefore, the carrying value of the
commitments approximates their estimated fair value.
(21) Conversion to Capital Stock Form of Ownership
The Bancorp was incorporated under Delaware law in March 1996 for the purpose of
acquiring and holding all of the outstanding capital stock of the Bank as part
of the Bank's conversion from a federally chartered mutual savings and loan
association to a federal stock savings bank. On March 28, 1996, the Bank became
a wholly owned subsidiary of the Bancorp. In connection with the conversion,
the Bancorp issued and sold to the public 19,837,500 shares of its common stock
(par value $.01 per share) at a price of $10 per share. The proceeds, net of
$4,500 in conversion costs, received by the Bancorp from the conversion (before
deduction of $15,870 to fund the Employee Stock Ownership Plan) amounted to
$193,875. The Bancorp used $105.000 of the net proceeds to purchase the capital
stock of the Bank.
At the time of the conversion, the Bank established a liquidation account in the
amount of $109,347, which is equal to its total retained earnings as of
September 30, 1995. The liquidation account will be maintained for the benefit
of eligible account holders who continue to maintain their accounts at the Bank
after the conversion. The liquidation account will be reduced annually to the
extent that eligible account holders have reduced their qualifying deposits.
Subsequent increases will not restore an eligible account holder's interest in
the liquidation account. In the event of a complete liquidation, each eligible
account holder will be entitled to receive a distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying balances
for accounts then held. The balance in the liquidation account at March 31, 1999
is $38,549.
The Company may not declare or pay cash dividends on or repurchase any of its
shares of common stock, if the effect would cause stockholders' equity to be
reduced below applicable regulatory capital maintenance requirements or if such
declaration and payment would otherwise violate regulatory requirements.
92
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
(22) Parent Company Condensed Financial Information
This information should be read in conjunction with the other notes to the
consolidated financial statements. Following are the condensed parent company
only financial statements for PFF Bancorp, Inc.
Condensed Balance Sheets
------------------------
<TABLE>
<CAPTION>
March 31,
-------------------------------
1999 1998
-------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 4,757 4,122
Mortgage-backed securities available-for-sale,
at fair value - 11,286
Equity securities available-for-sale 7,879 13,729
Trust preferred securities available-for-sale 13,303 17,360
Trading securities, at fair value 4,271 -
Investment in real estate 5,813 -
Investment in Bank subsidiary 204,956 202,763
Other assets 2,306 5,724
-------------------------------
Total assets $ 243,285 254,984
===============================
Liabilities and stockholders' equity
Other liabilities $ 620 706
Stockholders' equity 242,665 254,278
-------------------------------
Total liabilities and stockholders' equity $ 243,285 254,984
===============================
</TABLE>
Condensed Statements of Earnings
--------------------------------
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------------------
1999 1998 1997
-----------------------------------------------
<S> <C> <C> <C>
Interest and other income $ 3,916 4,474 7,002
General and administrative expense 2,798 2,653 1,548
-----------------------------------------------
Earnings before equity in undistributed earnings
of subsidiary before income taxes 1,118 1,821 5,454
Dividend from Bank subsidiary 15,000 30,000 -
Equity in earnings of subsidiary before income taxes 17,094 (3,822) 365
-----------------------------------------------
Earnings before income taxes 33,212 27,999 5,819
Income taxes 14,208 12,019 3,087
-----------------------------------------------
Net earnings $ 19,004 15,980 2,732
===============================================
</TABLE>
93
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
Condensed Statements of Cash Flows
----------------------------------
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------------------
1999 1998 1997
----------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 19,004 15,980 2,732
Adjustments to reconcile net earnings to cash used by
operating activities:
Amortization of premiums on investments and
mortgage-backed securities 29 262 -
Gain on trading securities (569) - -
Increase in trading securities (3,924) - -
Amortization of unearned stock-based compensation 3,531 3,491 4,133
(Gains) losses on sale of mortgage-backed securities and
investments available-for-sale 191 (438) -
Undistributed earnings of subsidiary (3,474) 14,968 (365)
(Increase) decrease in other assets 3,418 (1,307) (560)
Increase (decrease) in other liabilities (86) (696) 1,025
---------------------------------------------------
Net cash provided by operating activities 18,120 32,260 6,965
---------------------------------------------------
Cash flow from investing activities:
Increase in real estate held for investment (5,813) - -
Increase in investment securities available-for-sale - (25,568) (42,411)
(Increase) decrease in mortgage-backed securities
available-for-sale 11,110 27,707 (4,919)
Decrease in equity securities available-for-sale 5,004 - -
Decrease in trust preferred securities 3,782 - -
Note receivable from the Bank - - 73,005
---------------------------------------------------
Net cash provided by investing activities 14,083 2,139 25,675
---------------------------------------------------
Cash flows from financing activities:
Proceeds from exercise of stock options 531 682 -
Purchase of treasury stock (32,099) (35,808) (14,817)
Purchase of stock for unearned stock-based
compensation plans - - (12,974)
---------------------------------------------------
Net cash used in financing activities (31,568) (35,126) (27,791)
---------------------------------------------------
Net (decrease)increase in cash during the year 635 (727) 4,849
Cash and cash equivalents, beginning of year 4,122 4,849 -
---------------------------------------------------
Cash and cash equivalents, end of year $ 4,757 4,122 4,849
===================================================
</TABLE>
94
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
(23) Earnings Per Share
A reconciliation of the components used to derive basic and diluted earnings per
share for March 31, 1999, 1998 and 1997 follows:
<TABLE>
<CAPTION>
Net Weighted Average Per Share
Earnings Shares Outstanding Amount
--------------------------------------------------
<S> <C> <C> <C>
1999:
Basic earnings per share $ 19,004 13,876,440 $ 1.37
Effect of dilutive stock options and awards - 840,242 .08
--------------------------------------------------
Diluted earnings per share $ 19,004 14,716,682 $ 1.29
==================================================
1998:
Basic earnings per share $ 15,980 16,055,127 $ 1.00
Effect of dilutive stock options and awards - 739,969 0.05
--------------------------------------------------
Diluted earnings per share $ 15,980 16,795,096 $ 0.95
==================================================
1997:
Basic earnings per share $ 2,732 17,819,870 $ 0.15
Effect of dilutive stock options and awards - 139,691 -
--------------------------------------------------
Diluted earnings per share $ 2,732 17,959,561 $ 0.15
==================================================
</TABLE>
(24) Quarterly Results of Operations (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------------
June 30, September 30, December 31, March 31, Total
1998 1998 1998 1999 1999
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $ 17,959 18,298 19,576 20,766 76,599
Provision for loan losses (1,020) (1,000) (1,000) (1,000) (4,020)
Other income 3,891 3,051 4,378 4,228 15,548
Other expenses (13,284) (13,573) (13,888) (14,170) (54,915)
-----------------------------------------------------------------------------------
Earnings before income taxes 7,546 6,776 9,066 9,824 33,212
Income taxes 3,219 2,932 3,850 4,207 14,208
-----------------------------------------------------------------------------------
Net earnings $ 4,327 3,844 5,216 5,617 19,004
===================================================================================
Basic earnings per share $ 0.29 0.27 0.38 0.43 1.37
===================================================================================
Diluted earnings per share $ 0.28 0.26 0.37 0.38 1.29
===================================================================================
<CAPTION>
Three Months Ended
------------------------------------------------------------------
June 30, September 30, December 31, March 31, Total
1997 1997 1997 1998 1998
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $ 18,315 17,929 18,547 18,060 72,851
Provision for loan losses (2,250) (2,249) (1,300) (1,300) (7,099)
Other income 3,207 3,226 4,283 3,564 14,280
Other expenses (12,805) (13,082) (13,232) (12,914) (52,033)
-----------------------------------------------------------------------------------
Earnings before income taxes 6,467 5,824 8,298 7,410 27,999
Income taxes 2,784 2,538 3,546 3,151 12,019
-----------------------------------------------------------------------------------
Net earnings $ 3,683 3,286 4,752 4,259 15,980
===================================================================================
Basic earnings per share $ 0.22 0.20 0.30 0.28 1.00
===================================================================================
Diluted earnings per share $ 0.22 0.19 0.28 0.26 0.95
===================================================================================
</TABLE>
95
<PAGE>
PFF BANCORP, INC. AND SUSSIDIARY
Notes to consolidated Financial Statements, Continued
(Dollars in Thousands)
(25) Subsequent Event
Between April 26 and 28, 1999, the Company repurchased 1,500,000 shares of its
common stock at a weighted average price of $19.18 per share. A portion of the
funding for this repurchase was provided through a $20,000 dividend declared and
paid by the Bank to the Bancorp during April 1999.
96
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
PFF Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of PFF Bancorp,
Inc. and subsidiary (the Company) as of March 31, 1999 and 1998 and the related
consolidated statements of earnings, comprehensive earnings, stockholders'
equity and cash flows for each of the years in the three-year period ended March
31, 1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of PFF Bancorp, Inc.
and subsidiary as of March 31, 1999 and 1998 and the results of their operations
and their cash flows for each of the years in the three-year period ended March
31, 1999 in conformity with generally accepted accounting principles.
KPMG LLP
April 21, 1999, except as to note 25
to the consolidated financial statements
which is as of April 28, 1999.
97
<PAGE>
Item 9. Change in and Disagreements with Accountants on Accounting and
- -----------------------------------------------------------------------
Financial Disclosure.
- --------------------
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
- ------------------------------------------------------------
The information appearing in the definitive Proxy Statement to be filed
with the Securities and Exchange Commission pursuant to Regulation 14 A in
connection with PFF Bancorp Inc.'s Annual Meeting of Stockholders to be held on
September 22, 1999 (the "Proxy Statement") under the captions "Election of
Directors" and "Executive Officers Who Are Not Directors" is incorporated herein
by reference.
Item 11. Executive Compensation
- --------------------------------
The information appearing in the Proxy Statement under the caption
"Executive Compensation" is incorporated herein by reference, excluding the
Stock Performance Graph and Compensation Committee Report.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- ------------------------------------------------------------------------
The information relating to security ownership of certain beneficial owners
and management is incorporated herein by reference to the Proxy Statement.
ITEM 13. Certain Relationships and related Transactions.
- --------------------------------------------------------
The information relating to certain relationships and related transactions
is incorporated herein by reference to the Proxy Statement.
98
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
- -------------------------------------------------------------------------
(a)(3) Exhibits
(a) The following exhibits are filed as part of this report:
3.1 Certificate of Incorporation of PFF Bancorp, Inc. (1)
3.2 Bylaws of PFF Bancorp, Inc. (1)
4.0 Stock Certificate of PFF Bancorp, Inc. (1)
10.1 Form of Employment Agreement between PFF Bank & Trust and PFF
Bancorp, Inc. and certain executive officers (1)
10.2 Form of Change in Control Agreement between PFF Bank & Trust
and PFF Bancorp, Inc. and certain executive officers (1)
10.3 Form of PFF Bank & Trust Employee Severance Compensation Plan
(1)
10.4 Capital Accumulation Plan for Employees of Pomona First
Federal Savings and Loan Association (1)
10.5 PFF Bancorp, Inc. 1996 Incentive Plan (2)
10.6 Form of Non-Statutory Stock Option Agreement for officer and
employees of PFF Bancorp, Inc. (3)
10.7 Form of Incentive Stock Option Agreement for officers and
employees of PFF Bancorp, Inc. (3)
10.8 Form of Stock Award Agreement for officers and employees of
PFF Bancorp, Inc. (3)
10.9 Form of Stock Award and Stock Option Agreement for Outside
Directors of PFF Bancorp, Inc. (3)
10.10 The Pomona First Federal Bank & Trust Restated Supplemental
Executive Retirement Plan (3)
10.11 The Pomona First Federal Bank & Trust Directors' Deferred
Compensation Plan (3)
21 Subsidiary information is incorporated herein by reference to
"Part I- Subsidiary Activities."
23 Consent of KPMG LLP
27 Financial Data Schedule
99.1 Annual Report on Form 11-K for Capital Accumulation Plan for
employees of PFF Bank & Trust
(b) Reports on Form 8-K
None
The Registrant did not file any reports on Form 8-K during the last
quarter of the fiscal year ended March 31, 1999.
--------------------
(1) Incorporated herein by reference from the Exhibits to the
Registration Statement on Form S-1, as amended, filed on
December 8, 1995, Registration No. 33-80259.
(2) Incorporated herein by reference from the Proxy Statement for
the 1996 Annual Meeting of Stockholders dated September 16,
1996.
(3) Incorporated herein by reference from the Form 10-K filed on
June 20, 1997.
99
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
PFF BANCORP, INC.
BY: /s/ LARRY M. RINEHART
-------------------------------------
Larry M. Rinehart
DATED: June 23, 1999 President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
/s/ LARRY M. RINEHART June 23, 1999
- ---------------------------------
Larry M. Rinehart President, Chief Executive
Officer and Director
(Principal Executive Officer)
/s/ GREGORY C. TALBOTT June 23, 1999
- ---------------------------------
Gregory C. Talbott Executive Vice President, Chief
Financial Officer and Treasurer
(Principal Financial and
Accounting Officer)
/s/ DONALD R. DESCOMBES June 23, 1999
- ---------------------------------
Donald R. DesCombes Director
/s/ ROBERT W. BURWELL June 23, 1999
- ---------------------------------
Robert W. Burwell Director
/s/ WILLIAM T. DINGLE June 23, 1999
- ---------------------------------
William T. Dingle Director
/s/ CURTIS W. MORRIS June 23, 1999
- ---------------------------------
Curtis W. Morris Director
/s/ ROBERT D. NICHOLS June 23, 1999
- ---------------------------------
Robert D. Nichols Director
/s/ JIL H. STARK June 23, 1999
- ---------------------------------
Jil H. Stark Director
</TABLE>
100
<PAGE>
EXHIBIT 23
Independent Auditors' Consent
The Board of Directors
PFF Bancorp, Inc.:
We consent to incorporation by reference in the registration statement (No. 33-
20337) on Form S-8 of PFF Bancorp, Inc. of our report dated April 23, 1999,
except as to note 25 to the consolidated financial statements, which is as of
April 28, 1999, relating to the consolidated balance sheets of PFF Bancorp, Inc.
and subsidiary as of March 31, 1999 and 1998, and the related consolidated
statements of earnings, comprehensive earnings, stockholders' equity and cash
flows for each of the years in the three-year period ended March 31, 1999, which
report appears in the March 31, 1999, annual report on Form 10-K of PFF Bancorp,
Inc.
KPMG LLP
Orange County, California
June 28, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from March 31,
1999 and is qualified in its entirety by reference to such financial statements
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 40,572
<INT-BEARING-DEPOSITS> 3,218
<FED-FUNDS-SOLD> 20,000
<TRADING-ASSETS> 4,271
<INVESTMENTS-HELD-FOR-SALE> 710,647
<INVESTMENTS-CARRYING> 1,265
<INVESTMENTS-MARKET> 1,276
<LOANS> 2,055,772
<ALLOWANCE> 26,160
<TOTAL-ASSETS> 2,935,980
<DEPOSITS> 1,843,538
<SHORT-TERM> 0
<LIABILITIES-OTHER> 849,777
<LONG-TERM> 0
0
0
<COMMON> 199
<OTHER-SE> 242,466
<TOTAL-LIABILITIES-AND-EQUITY> 2,935,980
<INTEREST-LOAN> 148,013
<INTEREST-INVEST> 58,942
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 206,955
<INTEREST-DEPOSIT> 79,534
<INTEREST-EXPENSE> 50,822
<INTEREST-INCOME-NET> 76,599
<LOAN-LOSSES> 4,020
<SECURITIES-GAINS> 569
<EXPENSE-OTHER> 54,960
<INCOME-PRETAX> 33,212
<INCOME-PRE-EXTRAORDINARY> 33,212
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,004
<EPS-BASIC> 1.37
<EPS-DILUTED> 1.29
<YIELD-ACTUAL> 7.32
<LOANS-NON> 11,012
<LOANS-PAST> 0
<LOANS-TROUBLED> 11,291
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 26,002
<CHARGE-OFFS> 4,078
<RECOVERIES> 17
<ALLOWANCE-CLOSE> 26,160
<ALLOWANCE-DOMESTIC> 26,160
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE>
EXHIBIT 99.1
CAPITAL ACCUMULATION PLAN FOR
EMPLOYEES OF PFF BANK & TRUST
Financial Statements and Supplemental Schedules
December 31, 1998 and 1997
(With Independent Auditors' Report Thereon)
<PAGE>
CAPITAL ACCUMULATION PLAN FOR
EMPLOYEES OF PFF BANK & TRUST
Index to Financial Statements and Supplemental Schedules
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report 1
Statements of Net Assets Available for Benefits, with Fund Information
December 31, 1998 and 1997 2-3
Statements of Changes in Net Assets Available for Benefits, with Fund
Information Years ended December 31, 1998 and 1997 4-7
Notes to Financial Statements 8
Schedule
1 Line 27a - Schedule of Assets Held for Investment Purposes -
December 31, 1998 12
2 Line 27d - Schedule of Reportable Transactions - Year ended
December 31, 1998 13
</TABLE>
<PAGE>
Independent Auditors' Report
The Plan Administrator
Capital Accumulation Plan
for Employees of PFF Bank & Trust:
We have audited the accompanying statements of Net Assets Available for Benefits
with Fund Information of the Capital Accumulation Plan for Employees of PFF Bank
& Trust (the Plan), formerly the Capital Accumulation Plan for Employees of
Pomona First Federal Savings and Loan Association, as of December 31, 1998 and
1997 and the related Statements of Changes in Net Assets Available for Benefits
with Fund Information for the years then ended. These financial statements are
the responsibility of the Plan's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the net assets available for benefits with fund
information of the Plan as of December 31, 1998 and 1997 and the changes in net
assets available for benefits with fund information for the years then ended in
conformity with generally accepted accounting principles.
Our audits were performed for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedules of assets
held for investment purposes and reportable transactions are presented for the
purpose of additional analysis and are not a required part of the basic
financial statements but are supplementary information required by the
Department of Labor's Rules and Regulations for Reporting and Disclosure under
the Employee Retirement Income Security Act of 1974. The fund information in
the Statements of Net Assets Available for Benefits with Fund Information and
the Statement of Changes in Net Assets Available for Benefits with Fund
Information is presented for purposes of additional analysis rather than to
present the net assets available for benefits and changes in net assets
available for benefits of each fund. The supplemental schedules and fund
information have been subjected to the auditing procedures applied in the audits
of the basic financial statements and, in our opinion, are fairly stated in all
material respects in relation to the basic financial statements taken as a
whole.
June 14, 1999
Orange County, California
<PAGE>
CAPITAL ACCUMULATION PLAN FOR
EMPLOYEES OF PFF BANK & TRUST
Statement of Net Assets Available
for Benefits with Fund Information
December 31, 1998
<TABLE>
<CAPTION>
Certificates of Franklin T. Rowe Price Vanguard PFF
Deposit - Small Cap International Wellington Bancorp, Inc.
Fixed Growth Fund Stock Fund Fund Stock Fund
--------------- ----------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Investments:
Cash and cash equivalents $ - - - - (579)
Certificates of deposit 2,041,509 - - - -
Mutual funds - 1,552,226 610,115 1,803,418 -
Common stock - - - - 3,446,688
Loans to participants - - - - -
----------- --------- ------- --------- ---------
Total investments at fair value 2,041,509 1,552,226 610,115 1,803,418 3,446,109
Receivables:
Employer contribution - - - - -
Participants' contributions - - - - -
----------- --------- ------- --------- ---------
Net assets available for plan benefits $ 2,041,509 1,552,226 610,115 1,803,418 3,446,109
=========== ========= ======= ========= =========
<CAPTION>
Highmark
Diversified
Money Participant
Market Loans Other Total
------------ ----------- --------- ------------
<S> <C> <C> <C> <C>
Investments:
Cash and cash equivalents $ 3,744,547 - - 3,743,968
Certificates of deposit - - - 2,041,509
Mutual funds - - - 3,965,759
Common stock - - - 3,446,688
Loans to participants - 530,603 - 530,603
----------- ------- ------- ----------
Total investments at fair value 3,744,547 530,603 - 13,728,527
Receivables:
Employer contribution - - 384,371 384,371
Participants' contributions - - 25,087 25,087
----------- ------- ------- ----------
Net assets available for plan benefits $ 3,744,547 530,603 409,458 14,137,985
=========== ======= ======= ==========
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
CAPITAL ACCUMULATION PLAN FOR
EMPLOYEES OF PFF BANK & TRUST
Statement of Net Assets Available
for Benefits with Fund Information
December 31, 1997
<TABLE>
<CAPTION>
Certificates of Franklin T. Rowe Price Vanguard Vanguard
Deposit - Small Cap International Index Trust Wellington
Fixed Growth Fund Stock Fund 500 Portfolio Fund
--------------- ----------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Investments:
Cash and cash equivalents $ - - - - -
Certificates of deposit 2,136,902 - - - -
Mutual funds - 1,528,008 566,554 2,577,910 1,761,350
Common stock - - - - -
Loans to participants - - - - -
----------- --------- ------- --------- ---------
Total investment at fair value 2,136,902 1,528,008 566,554 2,577,910 1,761,350
Receivables - employer contribution - - - - -
----------- --------- ------- --------- ---------
Net assets available for plan benefits $ 2,136,902 1,528,008 566,554 2,577,910 1,761,350
=========== ========= ======= ========= =========
<CAPTION>
Vanguard
Total Bond PFF
Market Bancorp, Inc. Participant
Portfolio Stock Fund Loans Other Total
------------ ------------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C>
Investments:
Cash and cash equivalents $ - (13) - - (13)
Certificates of deposit - - - - 2,136,902
Mutual funds 286,133 - - - 6,719,955
Common stock - 3,929,155 - - 3,929,155
Loans to participants - - 566,672 - 566,672
---------- --------- ------- ------- ----------
Total investments at fair value 286,133 3,929,142 566,672 - 13,352,671
Receivables - employer contribution - - - 368,484 368,484
---------- --------- ------- ------- ----------
Net assets available for plan benefits $ 286,133 3,929,142 566,672 368,484 13,721,155
========== ========= ======= ======= ==========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
CAPITAL ACCUMULATION PLAN FOR
EMPLOYEES OF PFF BANK & TRUST
Statement of Changes in Net Assets Available
for Benefits with Fund Information
Year ended December 31, 1998
<TABLE>
<CAPTION>
Franklin T. Rowe Price Vanguard Vanguard
Small Cap International Index Trust 500 Wellington
Growth Fund Stock Fund Portfolio Fund
------------ ------------- --------------- ------------
<S> <C> <C> <C> <C>
Contributions:
Employer (note 1) $ -- -- -- --
Participants 158,259 52,468 225,386 147,567
------------ ------------ ------------- ------------
158,259 52,468 225,386 147,567
------------ ------------ ------------- ------------
Investment income:
Interest and dividends earned on investments 42,026 35,621 56,056 80,402
Realized and unrealized gains and (losses) 31,715 94,504 723,993 92,634
------------ ------------ ------------- ------------
73,741 130,125 780,049 173,036
------------ ------------ ------------- ------------
Total additions 232,000 182,593 1,005,435 320,603
Deductions from net assets attributed to
benefits paid to participants (95,756) (35,246) (177,187) (90,630)
Transfers into (out of) funds (112,026) (103,786) (3,406,158) (187,905)
------------ ------------ ------------- ------------
Increase (decrease) in net assets
available for benefits 24,218 43,561 (2,577,910) 42,068
Net assets available for benefits:
Beginning of year 1,528,008 566,554 2,577,910 1,761,350
------------ ------------ ------------- ------------
End of year $ 1,552,226 610,115 -- 1,803,418
============ ============ ============= ============
<CAPTION>
Vanguard
Total Bond Certificates PFF
Market of Deposit - Bancorp, Inc.
Portfolio Fixed Stock Fund Subtotal
------------ ------------- --------------- ------------
<S> <C> <C> <C> <C>
Contributions:
Employer (note 1) -- (90) 368,484 368,394
Participants 24,116 47,706 135,581 791,083
------------ ----------- ------------- ------------
Investment income: 24,116 47,616 504,065 1,159,477
------------ ----------- ------------- ------------
Interest and dividends earned on investments 23,735 113,866 9,234 360,940
Realized and unrealized gains and (losses) 4,665 74 (816,658) 130,927
------------ ----------- ------------- ------------
28,400 113,940 (807,424) 491,867
------------ ----------- ------------- ------------
Total additions 52,516 161,556 (303,359) 1,651,344
Deductions from net assets attributed to
benefits paid to participants (8,889) (655,820) (175,891) (1,239,419)
Transfers into (out of) funds (329,760) 398,871 (3,783) (3,744,547)
------------ ----------- ------------- ------------
Increase (decrease) in net assets
available for benefits (286,133) (95,393) (483,033) (3,332,622)
Net assets available for benefits:
Beginning of year 286,133 2,136,902 3,929,142 12,785,999
------------ ----------- ------------- ------------
End of year -- 2,041,509 3,446,109 9,453,377
============ =========== ============= ============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
CAPITAL ACCUMULATION PLAN FOR
EMPLOYEES OF PFF BANK & TRUST
Statement of Changes in Net Assets Available
for Benefits with Fund Information
Year ended December 31, 1998
<TABLE>
<CAPTION>
Highmark
Diversified
Money Participant
Market Loans Other Subtotal Total
----------- ----------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Contributions:
Employer (note 1) $ - - 15,887 15,887 384,281
Participants - - 25,087 25,087 816,170
---------- --------- -------- --------- ----------
- - 40,974 40,974 1,200,451
---------- --------- -------- --------- ----------
Investment income:
Interest and dividends earned on investments - - - - 360,940
Realized and unrealized gains and (losses) - - - - 130,927
---------- --------- -------- --------- ----------
- - - - 491,867
---------- --------- -------- --------- ----------
Total additions - - 40,974 40,974 1,692,318
Deductions from net assets attributed to benefits
paid to participants - (36,069) - (36,069) (1,275,488)
Transfers into (out of) funds 3,744,547 - - 3,744,547 -
---------- --------- -------- --------- ----------
Increase (decrease) in net assets available
for benefits 3,744,547 (36,069) 40,974 3,749,452 416,830
Net assets available for benefits:
Beginning of year - 566,672 368,484 935,156 13,721,155
---------- --------- -------- --------- ----------
End of year $3,744,547 530,603 409,458 4,684,608 14,137,985
========== ========= ======== ========= ==========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
CAPITAL ACCUMULATION PLAN FOR
EMPLOYEES OF PFF BANK & TRUST
Statement of Changes in Net Assets Available
for Benefits with Fund Information
Year ended December 31, 1997
<TABLE>
<CAPTION>
Franklin T. Rowe Price Vanguard Vanguard
Small Cap International Index Trust 500 Wellington
Growth Fund Stock Fund Portfolio Fund
----------- ------------- --------------- -----------
<S> <C> <C> <C> <C>
Contributions:
Employer (note 1) $ - - - -
Participants 186,720 87,028 209,134 170,871
---------- ------- --------- ---------
186,720 87,028 209,134 170,871
---------- ------- --------- ---------
Investment income:
Interest and dividends earned on investments 9,616 2,904 24,210 41,623
Realized and unrealized gains and (losses) 131,495 (2,031) 539,819 173,888
---------- ------- --------- ---------
141,111 873 564,029 215,511
---------- ------- --------- ---------
Total additions 327,831 87,901 773,163 386,382
Deductions from net assets attributed to benefits paid
to participants (154,102) (97,091) (215,228) (130,445)
Transfers into (out of) funds 1,354,279 575,744 2,019,975 1,505,413
---------- ------- --------- ---------
Increase (decrease) in net assets
available for benefits 1,528,008 566,554 2,577,910 1,761,350
Net assets available for benefits:
Beginning of year - - - -
---------- ------- --------- ---------
End of year $1,528,008 566,554 2,577,910 1,761,350
========== ======= ========= =========
<CAPTION>
Vanguard
Total Bond Certificates PFF
Market of Deposit - Bancorp, Inc.
Portfolio Fixed Stock Fund Subtotal
---------- ------------ ------------- ---------
<S> <C> <C> <C> <C>
Contributions:
Employer (note 1) - - 281,632 281,632
Participants 25,446 62,039 166,938 908,176
---------- ---------- --------- ----------
25,446 62,039 448,570 1,189,808
---------- ---------- --------- ----------
Investment income:
Interest and dividends earned on investments 16,530 130,470 9,499 234,852
Realized and unrealized gains and (losses) 8,237 1,860 1,008,379 1,861,647
---------- ---------- --------- ----------
24,767 132,330 1,017,878 2,096,499
---------- ---------- --------- ----------
Total additions 50,213 194,369 1,466,448 3,286,307
Deductions from net assets attributed to benefits paid
to participants (10,268) (520,088) (142,622) (1,269,844)
Transfers into (out of) funds 246,188 756,835 (146,997) 6,311,437
---------- ---------- --------- ----------
Increase (decrease) in net assets
available for benefits 286,133 431,116 1,176,829 8,327,900
Net assets available for benefits:
Beginning of year - 1,705,786 2,752,313 4,458,099
---------- --------- --------- ----------
End of year 286,133 2,136,902 3,929,142 12,785,999
========== ========= ========= ==========
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
CAPITAL ACCUMULATION PLAN FOR
EMPLOYEES OF PFF BANK & TRUST
Statement of Changes in Net Assets Available
for Benefits with Fund Information
Year ended December 31, 1997
<TABLE>
<CAPTION>
Keystone
Custodian Value Certificates
Fund Series Balanced Momentum of Deposit
S-3 Portfolio Portfolio Variable
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Contributions:
Employer (note 1) $ -- -- -- --
Participants -- -- -- --
----------- ----------- ----------- -----------
-- -- -- --
----------- ----------- ----------- -----------
Investment income:
Interest and dividends earned on investments -- -- -- 6,713
Realized and unrealized gains and (losses) (7,684) (10,145) (26,725) --
----------- ----------- ----------- -----------
(7,684) (10,145) (26,725) 6,713
----------- ----------- ----------- -----------
Total additions (7,684) (10,145) (26,725) 6,713
Deductions from net assets attributed to
benefits paid to participants -- -- -- --
Transfers into (out of) funds (946,201) (1,229,275) (2,721,889) (1,571,649)
----------- ----------- ----------- -----------
Increase (decrease) in net assets
available for benefits (953,885) (1,239,420) (2,748,614) (1,564,936)
Net assets available for benefits:
Beginning of year 953,885 1,239,420 2,748,614 1,564,936
----------- ----------- ----------- -----------
End of year $ -- -- -- --
=========== =========== =========== ===========
<CAPTION>
Participant
Loans Other Subtotal Total
------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Contributions:
Employer (note 1) $ -- 86,852 86,852 368,484
Participants -- (35,075) (35,075) 873,101
----------- ----------- ----------- -----------
-- 51,777 51,777 1,241,585
----------- ----------- ----------- -----------
Investment income:
Interest and dividends earned on investments -- -- 6,713 241,565
Realized and unrealized gains and (losses) -- -- (44,554) 1,817,093
----------- ----------- ----------- -----------
-- -- (37,841) 2,058,658
----------- ----------- ----------- -----------
Total additions -- 51,777 13,936 3,300,243
Deductions from net assets attributed to
benefits paid to participants (11,090) -- (11,090) (1,280,934)
Transfers into (out of) funds 157,577 -- (6,311,437) --
----------- ----------- ----------- -----------
Increase (decrease) in net assets
available for benefits 146,487 51,777 (6,308,591) 2,019,309
Net assets available for benefits:
Beginning of year 420,185 316,707 7,243,747 11,701,846
----------- ----------- ----------- -----------
End of year $ 566,672 368,484 935,156 13,721,155
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
CAPITAL ACCUMULATION PLAN FOR
EMPLOYEES OF PFF BANK & TRUST
Notes to Financial Statements
December 31, 1998 and 1997
(1) Description of Plan
The following description of the Capital Accumulation Plan for Employees of
PFF Bank & Trust (the Plan), formerly Pomona First Federal Savings and Loan
Association Capital Accumulation Plan, provides only general information.
Participants should refer to the Plan agreement for a more complete
description of the Plan's provisions.
(a) General
The Plan is a defined contribution plan covering all eligible
employees of PFF Bank & Trust (the Bank or Plan Sponsor). Employees
become eligible for participation in the Plan upon 6 months of
employment. Participants must complete 501 hours of service to share
in the employer's matching contribution. In order to become a
participant, each eligible employee authorizes contributions by filing
a 401(k) enrollment/change of status election. The Plan is subject to
the provisions of the Employee Retirement Income Security Act of 1974
(ERISA).
In December 1994, the Bank amended and restated the Plan by adopting
the Union Bank Non-Standardized 401(k) Profit Sharing Adoption
Agreement.
(b) Contributions
No contribution is required by the Bank; however, at the discretion of
its Board of Directors, the Bank may contribute out of its income
and/or accumulated earned surplus an amount equal to a specified
percentage of the tax-deferred contribution of the participants or a
profit sharing contribution with the amount to be determined by the
Board of Directors. From inception of the Plan through July 3, 1997,
the maximum annual participant contribution was 15% of the
participant's annual salary, as defined within the Plan. Beginning
July 4, 1997 and thereafter, to avoid violating IRS regulations, the
maximum annual contribution is 8%, 7% and 5% for "non-highly"
compensated employees, "highly compensated" employees and
"executives," respectively. For 1998 and 1997, the Bank chose to match
the participants' contributions at a rate of 100% of the first 1% and
50% of the next 6% of contributions. For "highly compensated"
participants and "executives", the Bank chose to match 50% of the
participants contributions up to 7% and 5%, respectively, for 1998 and
1997. Forfeitures of matching contributions are used to reduce the
Bank's matching contributions. For the years ended December 31, 1998
and 1997, participant forfeitures totaled $18,539 and $2,159,
respectively.
(c) Participant Accounts
Each participant's account is credited with the participant's
contribution and allocation of (a) the Bank's contribution and (b)
Plan earnings. Allocations are based on participant earnings or
account balances, as defined. The benefit to which a participant is
entitled is the benefit that can be provided from the participant's
account.
(Continued)
8
<PAGE>
CAPITAL ACCUMULATION PLAN FOR
EMPLOYEES OF PFF BANK & TRUST
Notes to Financial Statements
December 31, 1998 and 1997
(d) Participants Loans
Participants may borrow from their fund accounts a minimum of $1,000 up
to a maximum equal to the lesser of $50,000 or 50% of their vested
account balance. Loan repayments are to be made over a period not to
exceed 5 years except loans for the purchase of a primary residence in
which case payment may exceed 5 years. The loans are secured by the
balance in the participant's account and bear interest at a rate of
prime plus 1%.
(e) Vesting
Participation in the Plan is voluntary. Employee contributions and the
earnings as a result of each participant's contributions are 100%
vested and nonforfeitable. The Bank's contributions vest to
participants in accordance with a specified schedule with 100% vesting
occurring after 5 years of service, on the participant's attaining age
65, or on the participant's death or total and permanent disablement.
(f) Payment of Benefits
On termination of service, a participant may elect to receive either a
lump-sum amount equal to the vested balance of his or her account or
annual (or more frequent) installments over a period not to exceed the
life expectancy of the participant.
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying financial statements have been prepared on the accrual
basis of accounting.
(b) Trust Fund Managed by Investment Advisory Committee
Under the terms of the Plan, the assets of the Plan are placed in trust
(the Trust), and are held under the trusteeship of Union Bank of
California, N.A. (Union Bank). Assets are managed under the direction
of Employee Compensation and Benefits Committee of the Bank's Board of
Directors (the Committee). The Committee has delegated certain of its
ordinary management and investment responsibilities to certain members
of the Bank's Executive Committee and the Human Resources Director.
Committee members are appointed for an indefinite term by the Bank's
Board of Directors. The Committee has full discretionary authority to
administer the Plan and the trust agreement.
The investments and changes therein of these trust funds have been
reported by Union Bank as having been determined through the use of
fair market values based upon quotations obtained from national
securities exchanges or latest bid prices. Security transactions are
accounted for on a trade-date basis. Realized gains and losses on the
sale of investments are computed using the average cost method.
(c) Disclosure about Fair Value of Financial Instruments
Substantially all of the Plan's financial instruments are carried at
fair value or amounts approximating fair value.
(d) Use of Estimates
Certain estimates and assumptions have been made relating to the
reporting of Plan assets and liabilities to prepare the financial
statements in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
(Continued)
9
<PAGE>
CAPITAL ACCUMULATION PLAN FOR
EMPLOYEES OF PFF BANK & TRUST
Notes to Financial Statements
December 31, 1998 and 1997
(e) Reclassifications
Certain reclassifications have been made to the prior year financial
statements to conform with the current year presentation.
(f) Administrative Expenses
All administrative expenses of the Plan were paid directly by the Bank
in 1998 and 1997.
(3) Investments
The following table presents the cost and fair values of those investments
at December 31, that represent 5% or more of the Plan's net assets.
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
---------------------------------------------- ----------------------------------------------
Identity of party and
description of asset Cost Fair value Cost Fair value
- ----------------------------- -------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
PFF Bank & Trust
Certificates of Deposit:
Fixed rate $ 2,041,509 2,041,509 2,136,902 2,136,902
Highmark Diversified Money
Market 3,744,547 3,744,547 -- --
Mutual funds:
Vanguard Wellington Fund 1,696,776 1,803,418 1,613,761 1,761,350
Vanguard Index Trust 500
Portfolio -- -- 2,097,799 2,577,910
Franklin Small Cap Growth
Fund 1,476,557 1,552,226 1,423,950 1,528,008
PFF Bancorp, Inc.
Stock Fund 2,872,662 3,446,688 2,401,110 3,929,155
-------------- -------------- -------------- --------------
Total $ 11,832,051 12,588,388 9,673,522 11,933,325
============== ============== ============== ==============
</TABLE>
Allocation of Plan Assets
Employee contributions are allocated to various funds based on the election
made by each participant. Net income or loss of each fund is allocated on
the basis of the proportionate asset balance of each participant as of the
previous valuation date after adjustment for withdrawals, distributions and
other additions or subtractions that may be appropriate. Under the daily
valuation record-keeping system, earnings are allocated on the basis of
current shares held in each participant's account and the accounts are valued
daily.
A description of each investment fund follows:
. Franklin Small Cap Growth Fund The fund seeks long-term capital
appreciation by investing in equity securities of companies with a market
capitalization of less than $1 billion.
. T. Rowe Price International Stock Fund The fund seeks total return from
long-term growth of capital and income by investing primarily in common
stocks of established foreign issuers.
(Continued)
10
<PAGE>
CAPITAL ACCUMULATION PLAN FOR
EMPLOYEES OF PFF BANK & TRUST
Notes to Financial Statements
December 31, 1998 and 1997
. Vanguard Index Trust 500 Portfolio - The fund seeks to track, as
closely as possible, the investment performance of the S&P 500 Index by
investing in each of the Index's 500 stocks according to each stock's
weighting in the index.
. Vanguard Wellington Fund - The fund seeks to provide conservative
investors with conservation of principal and reasonable current income
and profits without undue risk, by investing in common stocks and
bonds.
. Vanguard Total Bond Market Portfolio - The fund seeks to replicate the
total return of the Lehman Brothers Aggregate Bond Index by investing
primarily in securities listed in the index.
. Certificates of Deposit - Fixed - The Fixed Rate Certificate of Deposit
pays a market rate of return for a fixed term of one year.
. PFF Bancorp, Inc. Stock Fund - Stock fund assets are invested in PFF
Bancorp, Inc. common stock and cash and cash equivalents. PFF Bancorp,
Inc., is the holding company of the Plan's sponsor, the Bank.
. Highmark Diversified Money Market - Proceeds from the liquidation of
mutual funds are invested at a market rate of return temporarily until
the assets are reinvested.
(4) Plan Termination
Although the Bank has not expressed any intent to terminate the Plan, it
may do so at any time subject to the provisions of ERISA. In the event the
Plan is terminated, all participants become 100% vested in their account
balances.
(5) Federal Income Taxes
The Internal Revenue Service has determined and informed the Bank by a
letter dated July 24, 1995, that the Plan is designed in accordance with
applicable sections of the Internal Revenue Code (IRC). The Bank and the
Plan's tax counsel believe that the Plan is designed and is currently
being operated in compliance with the applicable requirements of the IRC.
(6) Related Party Transactions
The Plan had $2.04 million and $2.14 million on deposit at December 31,
1998 and 1997, respectively, in certificates of deposit at the Bank, the
employer. In addition, the Plan held 215,418 and 197,693 shares of common
stock of PFF Bancorp, Inc. at December 31, 1998 and 1997, respectively.
(7) Subsequent Events
On January 1, 1999, the Plan was amended whereby new investment options
are offered to the Plan participants and the assets of the Plan are held
under the trusteeship of the Bank.
11
<PAGE>
Schedule 1
CAPITAL ACCUMULATION PLAN FOR
EMPLOYEES OF PFF BANK & TRUST
Line 27a - Schedule of Assets Held for Investment Purposes
December 31, 1998
<TABLE>
<CAPTION>
Description of investment
including maturity date, rate of
Identity of issue, borrower, interest, collateral, par, or Current
lessor or similar party maturity value Cost value
- ---------------------------- -------------------------------- ------------ ------------
<S> <C> <C> <C>
*PFF Bank & Trust Fixed rate certificate of
deposit; 5.45% $ 2,041,509 2,041,509
*PFF Bancorp, Inc. Common Stock 215,418 shares 2,872,662 3,446,688
*PFF Bancorp, Inc. Stock Liquidity Fund (579) (579)
Franklin Small Cap Growth
Fund Mutual Fund 68,774 units 1,476,557 1,552,226
T. Rowe Price International
Stock Fund Mutual Fund 40,701 units 566,699 610,115
Vanguard Wellington Fund Mutual Fund 61,445 units 1,696,776 1,803,418
Highmark Money Market 3,744,547 3,744,547
*Participants loans - 530,603
----------- ----------
Total $12,398,171 13,728,527
=========== ==========
</TABLE>
* Denotes a party in interest.
See accompanying independent auditors' report.
12
<PAGE>
Schedule 2
CAPITAL ACCUMULATION PLAN FOR
EMPLOYEES OF PFF BANK & TRUST
Line 27d - Schedule of Reportable Transactions
Year ended December 31, 1998
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e) (f)
Description of asset (include Expense
interest rate and maturity in Purchase incurred with
Identity of party involved price case of a loan) price Selling Lease rental transaction
- ------------------------------------ -------------------------------- ----------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C>
PFF Bancorp, Inc. Stock Common stock purchases $2,006,684 - - -
PFF Bancorp, Inc. Stock Common stock sales - 1,672,020 - -
Franklin Small Cap Growth Fund Mutual fund purchases 462,455 - - -
Franklin Small Cap Growth Fund Mutual fund sales - 408,496 - -
Participant Loan Fund Loans 148,720 - - -
Participant Loan Fund Loan repayments - 715,392 - -
Vanguard Index Trust 500 Portfolio Mutual fund purchases 664,444 - - -
Vanguard Index Trust 500 Portfolio Mutual fund sales - 3,949,937 - -
Vanguard Wellington Fund Mutual fund purchases 456,742 - - -
Vanguard Wellington Fund Mutual fund sales - 413,668 - -
Vanguard Total Bond Market Portfolio Mutual fund purchases 290,776 - - -
Vanguard Total Bond Market Portfolio Mutual fund sales - 582,548 - -
PFF Bank & Trust - Fixed CD Certificate of deposit purchases 687,706 - - -
PFF Bank & Trust - Fixed CD Certificate of deposit sales - 783,098 - -
Highmark Money Market purchases 3,744,547 - - -
========== ========== ========== ==========
<CAPTION>
(a) (b) (g) (h) (i)
Current
Description of asset (include value of asset
interest rate and maturity in on transaction Net gain or
Identity of party involved price case of a loan) Cost of asset date (loss)
- ------------------------------------ -------------------------------- ------------- -------------- -----------
<S> <C> <C> <C> <C>
PFF Bancorp, Inc. Stock Common stock purchases 2,006,684 2,006,684 -
PFF Bancorp, Inc. Stock Common stock sales 1,535,441 1,672,020 136,579
Franklin Small Cap Growth Fund Mutual fund purchases 462,455 462,455 -
Franklin Small Cap Growth Fund Mutual fund sales 409,848 408,496 (1,352)
Participant Loan Fund Loans 148,720 148,720 -
Participant Loan Fund Loan repayments 715,392 715,392 -
Vanguard Index Trust 500 Portfolio Mutual fund purchases 664,444 664,444 -
Vanguard Index Trust 500 Portfolio Mutual fund sales 2,762,050 3,949,937 1,187,887
Vanguard Wellington Fund Mutual fund purchases 456,742 456,742 -
Vanguard Wellington Fund Mutual fund sales 373,725 413,668 39,943
Vanguard Total Bond Market Portfolio Mutual fund purchases 290,776 290,776 -
Vanguard Total Bond Market Portfolio Mutual fund sales 569,117 582,548 13,431
PFF Bank & Trust - Fixed CD Certificate of deposit purchases 687,706 687,706 -
PFF Bank & Trust - Fixed CD Certificate of deposit sales 783,098 783,098 -
Highmark Money Market purchases 3,744,547 3,744,547 -
========= ========= =========
</TABLE>
See accompanying independent auditors' report.
