<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-27404
PFF BANCORP, INC.
-----------------
(exact name of registrant as specified in its charter)
DELAWARE 95-4561623
-------- ----------
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
350 South Garey Avenue, Pomona, California 91766
-------------------------------------------------
(Address of principal executive offices)
(909) 623-2323
--------------
(Registrant's telephone number, including area code)
Not Applicable
--------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No_____
------
The registrant had 13,954,493 shares of common stock, par value $.01 per
share, outstanding as of August 12, 1999.
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARIES
Form 10-Q
Index
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION (Unaudited) PAGE
----
<S> <C>
Item 1 Financial statements
Consolidated Balance Sheets as of
June 30, 1999 and March 31, 1999 1
Consolidated Statements of Earnings for the
Three Months ended June 30, 1999 and 1998 2
Consolidated Statements of Comprehensive Earnings
for the Three Months ended June 30, 1999 and 1998 3
Consolidated Statement of Stockholders' Equity
for the Three Months Ended June 30, 1999 4
Consolidated Statements of Cash Flows for the
Three Months ended June 30, 1999 and 1998 5
Notes to Unaudited Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3 Qualitative and Quantitative disclosures about
Market Risk 19
PART II OTHER INFORMATION
Item 1 Legal Proceedings 20
Item 2 Changes in Securities 20
Item 3 Defaults Upon Senior Securities 20
Item 4 Submission of Matters to a Vote of Security Holders 20
Item 5 Other Information 20
Item 6 Reports on Form 8-K 20
SIGNATURES
</TABLE>
<PAGE>
PART 1 - FINANCIAL INFORMATION (Unaudited)
Item 1. Financial Statements.
PFF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
June 30, March 31,
1999 1999
- -----------------------------------------------------------------------------------------------------------
Assets
<S> <C> <C>
Cash and cash equivalents $ 40,943 $ 63,790
Loans held for sale at lower of cost or fair value 3,855 3,531
Investment securities held-to-maturity (estimated fair value
of $711 at June 30, 1999 and $716 at March 31, 1999) 708 709
Investment securities available-for-sale, at fair value 164,928 185,087
Mortgage-backed securities held-to-maturity (estimated fair
value of $413 at June 30, 1999 and $560 at March 31, 1999) 411 556
Mortgage-backed securities available-for-sale, at fair value 472,336 525,560
Trading securities, at fair value 4,560 4,271
Investments in real estate 6,203 6,371
Loans receivable, net 2,056,763 2,026,081
Federal Home Loan Bank (FHLB) stock, at cost 44,585 50,323
Accrued interest receivable 16,538 17,118
Real estate acquired through foreclosure, net 3,644 5,318
Property and equipment, net 23,252 23,925
Prepaid expenses and other assets 23,666 23,340
- -----------------------------------------------------------------------------------------------------------
Total assets $ 2,862,392 $ 2,935,980
===========================================================================================================
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 1,854,041 $ 1,843,538
FHLB advances and other borrowings 748,000 814,000
Accrued expenses and other liabilities 41,514 35,777
- -----------------------------------------------------------------------------------------------------------
Total liabilities 2,643,555 2,693,315
Commitments and contingencies - -
Stockholders' equity:
Preferred stock, $.01 par value. Authorized 2,000,000 - -
shares; none issued
Common stock, $.01 par value. Authorized 59,000,000
shares; issued 19,950,838; outstanding 13,952,371 at
June 30, 1999, and 15,445,481 March 31, 1999 199 199
Additional paid-in capital 136,005 150,612
Retained earnings, substantially restricted 102,793 110,163
Unearned stock-based compensation (16,418) (17,169)
Treasury stock (5,998,467 at June 30, 1999 and 4,498,467
at March 31, 1999) (60) (45)
Accumulated other comprehensive loss (3,682) (1,095)
- -----------------------------------------------------------------------------------------------------------
Total stockholders' equity 218,837 242,665
- -----------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $2,862,392 $2,935,980
===========================================================================================================
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
1
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
June 30,
- -----------------------------------------------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------------------------------------------
Interest income:
<S> <C> <C>
Mortgage loans $ 35,995 $ 33,656
Non-mortgage loans 3,634 1,637
Mortgage-backed securities 7,748 9,066
Investment securities and deposits 3,964 5,771
- -----------------------------------------------------------------------------------------------------------
Total interest income 51,341 50,130
- -----------------------------------------------------------------------------------------------------------
Interest Expense:
Interest on deposits 19,295 19,692
Interest on borrowings 10,819 12,479
- -----------------------------------------------------------------------------------------------------------
Total interest expense 30,114 32,171
- -----------------------------------------------------------------------------------------------------------
Net interest income 21,227 17,959
Provision for loan losses 1,000 1,020
- -----------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 20,227 16,939
- -----------------------------------------------------------------------------------------------------------
Non-interest income:
Deposit and related fees 2,412 2,167
Loan and servicing fees 778 734
Trust fees 520 476
Gain on sales of assets, net 53 138
Gain on trading securities, net 270 283
Other non-interest income 218 93
- -----------------------------------------------------------------------------------------------------------
Total non-interest income 4,251 3,891
- -----------------------------------------------------------------------------------------------------------
Non-interest expense:
General and administrative:
Compensation and benefits 6,960 6,970
Occupancy and equipment 2,808 2,934
Marketing and professional services 1,148 875
Other non-interest expense 2,268 2,430
- -----------------------------------------------------------------------------------------------------------
Total general and administrative 13,184 13,209
Foreclosed real estate operations, net 30 75
- -----------------------------------------------------------------------------------------------------------
Total non-interest expense 13,214 13,284
- -----------------------------------------------------------------------------------------------------------
Earnings before income taxes 11,264 7,546
Income taxes 4,860 3,219
- -----------------------------------------------------------------------------------------------------------
Net earnings $ 6,404 $ 4,327
===========================================================================================================
Basic earnings per share $ 0.51 $0.29
Weighted average shares outstanding for basic
earnings per share calculation 12,547,461 14,751,038
===========================================================================================================
Diluted earnings per share $ 0.47 $0.28
===========================================================================================================
Weighted average shares outstanding for diluted
earnings per share calculation 13,546,247 15,613,794
===========================================================================================================
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
2
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
June 30,
- -----------------------------------------------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net earnings $ 6,404 4,327
- -----------------------------------------------------------------------------------------------------------
Other comprehensive earnings(loss), net of income taxes
Unrealized gains (losses) on securities available-for-sale:
U.S. Treasury and agency securities and other investment
securities available-for-sale, at fair value (69) (87)
Reclassification of realized (gains)losses included in 60 (119)
earnings
Mortgage-backed securities available-for-sale, at fair value (2,578) 6
- -----------------------------------------------------------------------------------------------------------
Other comprehensive earnings (loss) (2,587) (200)
- -----------------------------------------------------------------------------------------------------------
Comprehensive earnings $ 3,817 4,127
===========================================================================================================
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
3
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Retained Accumulated
Additional Earnings, Unearned Other
Number of Common Paid-in Substantially Stock-based Treasury Comprehensive
Shares Stock Capital Restricted Compensation Stock Earnings(Loss)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1999 15,445,481 $199 $150,612 $110,163 $(17,169) $(45) $ (1,095)
Net earnings - - - 6,404 - - -
Purchase of treasury stock (1,500,000) - (14,985) (13,774) - (15) -
Amortization of shares under
stock-based compensation plans - - 321 - 751 - -
Stock options exercised 6,890 - 57 - - - -
Changes in unrealized gains on
securities available for sale, net - - - - - - (2,587)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 13,952,371 $199 $136,005 $102,793 $(16,418) $(60) $ (3,682)
=================================================================================================================================
<CAPTION>
Total
- -------------------------------------------------
<S> <C>
Balance at March 31, 1999 $ 242,665
Net earnings 6,404
Purchase of treasury stock (28,774)
Amortization of shares under
stock-based compensation plans 1,072
Stock options exercised 57
Changes in unrealized gains on
securities available for sale, net (2,587)
- -------------------------------------------------
Balance at June 30, 1999 $ 218,837
=================================================
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
4
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
- --------------------------------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 6,404 $ 4,327
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Amortization of premiums on loans,
investments and mortgage-backed securities 694 1,038
Amortization of deferred loan origination fees (91) (277)
Loan fees collected (665) (701)
Dividends on FHLB stock (655) (558)
Redemption of FHLB stock 6,393 -
Provisions for losses on:
Loans 1,000 1,020
Gains on sales of loans, mortgage-backed securities
available-for-sale, real estate and property and equipment (111) (378)
Proceeds from sale of trading securities - -
Gains on trading securities (270) (283)
Depreciation and amortization of property and equipment 952 974
Proceeds from sale of loans held-for-sale 18,760 11,765
Amortization of unearned stock-based compensation 1,072 1,274
Increase (decrease) in accrued expenses and other
liabilities 5,737 (2,690)
(Increase) decrease in:
Accrued interest receivable 580 964
Prepaid expenses and other assets (326) 30,990
- --------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 39,474 47,465
- --------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Loans originated for investment (254,683) (191,593)
Increase (decrease) in construction loans in process 3,650 6,270
Purchases of loans held for investment - (49,832)
Principal payments on loans 200,491 195,276
Principal payments on mortgage-backed securities
held-to-maturity 143 302
Principal payments on mortgage-backed securities
available-for-sale 49,720 63,813
Purchases of investment securities available-for-sale (3,066) (38,675)
Purchases of FHLB stock - (8,232)
Purchases of mortgage-backed securities available-
for-sale - (275,192)
</TABLE>
(Continued)
5
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
- ------------------------------------------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Proceeds from maturities of investment securities
available-for-sale $ 16,973 $ 27,255
Investment in real estate - 10
Proceeds from sale of investment securities available-for-sale 6,126 28,017
Proceeds from sale of real estate 2,652 3,530
Investment in real estate held for investment 168 -
Purchases of property and equipment (281) (905)
Proceeds from sale of property and equipment - 4
- ------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities 21,893 (239,952)
- ------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from FHLB advances and other borrowings 14,000 626,876
Repayment of FHLB advances and other borrowings (80,000) (423,876)
Net change in deposits 10,503 7,616
Proceeds from exercise of stock options 57 7
Purchase of treasury stock (28,774) (17,708)
- ------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (84,214) 192,915
- ------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (22,847) 428
Cash and cash equivalents, beginning of year 63,790 46,021
- ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 40,943 $ 46,449
============================================================================================================
Supplemental information:
Interest paid, including interest credited 31,039 34,549
Income taxes paid 600 3,700
Non-cash investing and financing activities:
Change in unrealized gain (loss) on securities
available-for-sale (4,461) (285)
Net transfers from loans receivable to real estate 1,128 3,324
Net transfer from loans receivable to loans held for sale 22,575 12,310
Net transfers from available-for-sale securities to
trading securities - 5,419
============================================================================================================
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
6
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to the Unaudited Consolidated Financial Statements.
(1) Basis of Consolidation
The accompanying consolidated financial statements include the accounts of PFF
Bancorp, Inc. (the "Bancorp") 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 (collectively, "the
Bank"). Pomona Financial Services, Inc. includes the accounts of Diversified
Services, Inc. and PFF Financial Services, Inc. All material intercompany
balances and transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
principally of normal recurring accruals) necessary for a fair presentation have
been included. Certain reclassifications have been made to the consolidated
financial statements for 1998 to conform to the 1999 presentation.
The results of operations for the three months ended June 30, 1999 are not
necessarily indicative of results that may be expected for the entire fiscal
year ending March 31, 2000.
(2) 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 was to be effective for all quarters of fiscal years beginning
after June 15, 1999 however, the FASB issued SFAS No. 137 which has delayed the
implementation by one year. Management is in the process of determining the
impact of SFAS No. 133 on the Company's financial position and results of
operations.
7
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements - Continued
(3) Earnings per share
The Company adopted, effective December 31, 1997, Statement of Financial
Accounting Standards No. 128 "Earnings Per Share" ("SFAS No. 128"). SFAS No. 128
simplifies the standards for computing and presenting earnings per share ("EPS")
as previously prescribed by Accounting Principles Board Opinion No. 15 "Earnings
Per Share." SFAS No. 128 replaces primary EPS with basic EPS and fully diluted
EPS with diluted EPS. Basic EPS excludes dilution and is computed by dividing
earnings available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted from issuance of
common stock that then shared in earnings.
The following table is a reconciliation of the numerators and denominators of
the basic and diluted EPS computations for net earnings for PFF Bancorp, Inc.
<TABLE>
<CAPTION>
For the Three Months Ended June 30,
--------------------------------------------------------------------------------
1999(1) 1998
--------------------------------------------------------------------------------
Earnings Shares Per-Share Earnings Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
--------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Net Earnings $6,404 $4,327
Basic EPS
Earnings available to common stockholders 6,404 12,547,461 $0.51 4,327 14,751,038 $0.29
============ ============
Effect of Dilutive Securities
Options and Stock Awards - 998,786 - 862,756
--------------------------- -------------------------
Diluted EPS
Earnings available to common stockholders
and assumed conversions $6,404 13,546,247 $0.47 $4,327 15,613,794 $0.28
======================================= =====================================
</TABLE>
(1) Options to purchase 12,863 shares of common stock at a weighted average
price of $19.69 per share were outstanding during the three month period
ending June 30, 1999 but were not included in the computation of diluted
EPS because the options' exercise price was greater than the average market
price of the common shares. The options, which expire between October 22,
2002 and May 26, 2004, were still outstanding at June 30, 1999.
8
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Item 2: Management's Discussion and Analysis of Financial Condition and
Operation
Average Balance Sheets
The following table sets forth certain information relating to the Company for
the three months ended June 30, 1999 and 1998. The yields and costs are derived
by dividing income or expense by the average balance of assets or liabilities,
respectively, for the periods shown. Average balances are derived from average
daily balances. The yields and costs include fees that are considered
adjustments to yields.
<TABLE>
<CAPTION>
Three Months Ended June 30,
-----------------------------------------------------------------
1999 1998
-----------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
-----------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Interest-earning deposits and short-term $ 66,952 $ 741 4.44% $ 34,868 $ 423 4.87%
investments
Investment securities, net 178,357 2,655 5.95 296,216 4,778 6.47
Loans receivable, net 2,027,655 39,629 7.82 1,844,746 35,293 7.65
Mortgage-backed securities, net 490,503 7,748 6.32 572,535 9,066 6.33
FHLB stock 46,434 568 4.91 42,804 570 5.34
----------------------- ------------------------
Total interest-earning assets 2,809,901 51,341 7.31 2,791,169 50,130 7.18
Non-interest-earning assets 101,423 127,351
------------ -------------
Total assets $2,911,324 $2,918,520
============ =============
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Savings accounts $ 145,196 816 2.25 $ 152,427 891 2.34
Money market accounts 406,312 4,451 4.39 236,090 2,494 4.24
NOW and other demand deposit accounts 206,364 339 0.66 179,783 320 0.71
Certificate accounts 1,091,639 13,689 5.03 1,170,572 15,987 5.48
----------------------- ------------------------
Total 1,849,511 19,295 4.18 1,738,872 19,692 4.54
FHLB advances and other borrowings 793,600 10,807 5.46 874,952 12,464 5.71
Other 2,480 12 1.94 2,459 15 2.45
----------------------- ------------------------
Total interest-bearing liabilities 2,645,591 30,114 4.57 2,616,283 32,171 4.93
----------- -----------
Non-interest-bearing liabilities 38,355 54,440
------------ -------------
Total liabilities 2,683,946 2,670,723
Stockholders' Equity 227,378 247,797
------------ -------------
Total liabilities and stockholders' equity $2,911,324 $2,918,520
============ =============
Net interest income before provision for loan losses $21,227 $17,959
=========== ===========
Net interest spread 2.74 2.25
Effective interest spread 3.02 2.57
Ratio of interest-earning assets to interest-bearing 106.21% 106.68%
liabilities
</TABLE>
9
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Management's Discussion and Analysis
(Continued)
Rate/Volume Analysis
The following table presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to: (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume); (iii) changes attributable to changes in
rate/volume (change in rate multiplied by change in volume); and (iv) the net
change.
<TABLE>
<CAPTION>
Three Months Ended June 30, 1999
Compared to
Three Months Ended June 30, 1998
-------------------------------------------------------------------
Increase (Decrease)
Due to
-------------------------------------------------------------------
Volume Rate Rate/Volume Net
-------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest-earning assets:
Interest-earning deposits and short-term $ 389 (37) (34) 318
investments
Investment securities, net (1,906) (382) 165 (2,123)
Loans receivable, net 3,499 761 76 4,336
Mortgage-backed securities, net (1,299) (22) 3 (1,318)
FHLB stock 48 (46) (4) (2)
-------------------------------------------------------------------
Total interest-earning assets 731 274 206 1,211
-------------------------------------------------------------------
Interest-bearing liabilities:
Savings accounts (42) (34) 1 (75)
Money market accounts 1,798 92 67 1,957
NOW and other demand deposit accounts 47 (25) (3) 19
Certificate accounts (1,078) (1,308) 88 (2,298)
FHLB advances and other borrowings (1,159) (549) 51 (1,657)
Other - (3) - (3)
-------------------------------------------------------------------
Total interest-bearing liabilities (1) (434) (1,827) 204 (2,057)
-------------------------------------------------------------------
Change in net interest income $ 1,165 2,101 2 3,268
===================================================================
</TABLE>
_____________________
(1) The increase in net interest income arising from the change in volume of
interest-bearing liabilities was significantly influenced by the shift
in average balances from relatively higher cost FHLB advances and other
borrowings and certificate accounts to relatively lower cost money
market and NOW accounts.
10
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Management's Discussion and Analysis
(Continued)
Forward-Looking Statements
Except for historical information contained herein, the matters discussed in
this report contain forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended (the "Securities Act"), and Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
that involve substantial risks and uncertainties. When used in this report, or
in the documents incorporated by reference herein, the words "anticipate,"
"believe," "estimate," "may," "intend," "expect" and similar expressions
identify certain of such forward-looking statements. Actual results could differ
materially from such forward-looking statements contained herein. Factors that
could cause future results to vary from current expectations include, but are
not limited to, the following: changes in economic conditions (both generally
and more specifically in the markets in which the Company operates); changes in
interest rates, deposit flows, loan demand, real estate values and competition;
changes in accounting principles, policies or guidelines and in government
legislation and regulation (which change from time to time and over which the
Company has no control); other factors affecting the Company's operations,
markets, products and services, including but not limited to, year 2000
compliance issues; and other risks detailed in this Form 10-Q and in the
Company's other Securities and Exchange Commission filings. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's analysis only as of the date hereof. The Company undertakes
no obligation to publicly revise these forward-looking statements to reflect
events or circumstances that arise after the date hereof.
Comparison of Operating Results for the Three Months Ended June 30, 1999 and
- ----------------------------------------------------------------------------
1998
- ----
General
- -------
The Company recorded net earnings of $6.4 million or $0.47 per diluted share for
the three months ended June 30, 1999 compared to net earnings of $4.3 million or
$0.28 per diluted share for the comparable period of 1998.
Net interest income was $21.2 million for the three months ended June 30, 1999
compared to $18.0 million for the comparable period of 1998. The increase in
net interest income was attributable to a 49 basis point increase in net
interest spread from 2.25% for the three months ended June 30, 1998 to 2.74% for
the comparable period of 1999 coupled with an $18.7 million increase in average
interest-earning assets from $2.79 billion for the three months ended June 30,
1998 to $2.81 billion for the comparable period of 1999.
Provision for loan losses was $1.0 million for the three months ended June 30,
1999 and 1998.
Total non-interest income was $4.3 million for the three months ended June 30,
1999 compared to $3.9 million for the comparable period of 1998. Total non-
interest expense was $13.2 million for the three months ended June 30, 1999
compared to $13.3 million for the comparable period of 1998.
Interest Income
- ---------------
Interest income was $51.3 million for the three months ended June 30, 1999
compared to $50.1 million for the comparable period of 1998. The $1.2 million
increase in interest income was attributable to a 13 basis point increase in
average yield on interest-earning assets coupled with the $18.7 million increase
in average interest-earning assets noted above. The increase in average
interest-earnings assets was due principally to a $182.9 million increase in the
average balance of loans receivable from $1.84 billion for the three months
ended June 30, 1998 to $2.03 billion for the comparable period of 1999. The
average aggregate balance of Mortgage-backed securities (MBS) and investment
securities decreased $199.9 million from $868.8 million for the three months
ended June 30, 1998 to
11
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Management's Discussion and Analysis
(Continued)
$668.9 million for the comparable period of 1999 reflecting the Company's
strategy of utilizing paydowns and payoffs from MBS and investment securities to
repay FHLB advances and fund growth in loans receivable.
The average yield on loans receivable increased 17 basis points from 7.65% for
the three months ended June 30, 1998 to 7.82% for the comparable period of 1999.
The increase in the average yield on loans receivable was attributable
principally to a $211.3 million increase in the aggregate disbursed balance of
construction, commercial business, commercial real estate and consumer loans
(the Four-C's) from $317.2 million or 17 percent of loans receivable, net at
June 30, 1998 to $528.5 million or 26 percent of loans receivable, net at June
30, 1999. Originations of the Four-C's continues to be an area of focus for the
Bank with such loans accounting for 53% and 55% of total loan originations for
the three months ended June 30, 1999 and 1998, respectively.
The Bank has also increased the proportion of its total loan portfolio comprised
by hybrid adjustable rate mortgages (ARM's) from 19.2% at June 30, 1998 to 27.8%
at June 30, 1999. Hybrid ARM's provide for fixed rates of interest for an
initial term (typically 3 to 5 years) after which the rates on the loans become
adjustable based upon a specified index (typically the one year Constant
Maturity Treasury(CMT) index). The initial rates on hybrid ARM's are generally
above the initial "teaser" rates at which non-hybrid adjustable rate ARM's are
originated.
The average yield on investment securities was 5.95% for the three months ended
June 30, 1999 compared to 6.47% for the comparable period of 1998. The decrease
in the average yield on investment securities reflects the impact of the
decrease in the general level of interest rates. The one-year CMT and one month
London Inter-Bank Offered Rate averaged approximately 4.88% and 5.02%,
respectively for the three months ended June 30, 1999 compared to approximately
5.41% and 5.71%, respectively for the comparable period of 1998. Amortization
of premiums, net of accretion of discounts was $45,000 (12 basis points) for the
three months ended June 30, 1999 compared to $142,000 (19 basis points) for the
comparable period of 1998.
The average yield on MBS was 6.32% for three months ended June 30, 1999 compared
to 6.33% for the comparable period of 1998. The impact on the yield on MBS from
a reduction in the general level of interest rates was offset by a reduction in
amortization of premiums, net of accretion of discounts from $901,000 (65 basis
points) for the three months ended June 30, 1998 to $457,000 (39 basis points)
for the comparable period of 1999.
Interest Expense
- ----------------
Interest expense was $30.1 million for the three months ended June 30, 1999
compared to $32.2 million for the comparable period of 1998. The $2.1 million
decrease in interest expense was attributable to a 36 basis point decrease in
the average cost of interest-bearing liabilities. The balance of average
interest-bearing liabilities was $2.65 billion for the three months ended June
30, 1999 compared to $2.62 billion for the comparable period of 1998. The 36
basis point decrease in the average cost of interest-bearing liabilities
reflects a 36 basis reduction in the average cost of deposits, a 25 basis point
reduction in the cost of FHLB advances and other borrowings and an increase in
the proportion of total interest-bearing liabilities comprised by deposits from
66.5% for the three months ended June 30, 1998 to 69.9% for the comparable
period of 1999 as FHLB advances were repaid using a portion of the cash flow
arising from payoffs and paydowns on MBS and investment securities.
The decrease in the average cost of deposits from 4.54% for the three months
ended June 30, 1998 to 4.18% for the comparable period of 1999 reflects a
decrease in the general level of interest rates coupled with an increase in the
proportion of the total deposit base comprised by money market, savings and NOW
accounts (collectively, "core deposits") from 32.7% for the three months ended
June 30, 1998 to 41.0% for the comparable period of 1999. The average balance of
total deposits increased $110.6 million from $1.74 billion for the three months
ended June 30, 1998 to $1.85 billion for the comparable period of 1999. The
average balance of core deposits increased $189.6
12
<PAGE>
million or 33.4% between the three months ended June 30, 1998 and 1999. The
increase in the proportion of the deposit portfolio comprised by core deposits
reflects the Bank's emphasis on this segment of the deposit portfolio. The
average cost of core deposits was 2.96% for the three months ended June 30, 1999
compared to 5.03% for certificate accounts.
The average cost of FHLB advances and other borrowings decreased from 5.71% for
the three months ended June 30, 1998 to 5.46% for the comparable period of 1999
reflecting a decrease in the general level of interest rates and the Bank's
increased utilization of putable fixed rate FHLB advances. Under the putable
advance program, in exchange for a favorable interest rate on the borrowing, the
Bank grants to the FHLB an option to "put" the advance back to the Bank at
specified "put" dates prior to maturity but after the conclusion of a specified
lock out period. Under the putable advance program, the Bank obtains funds below
the cost of non-putable FHLB advances of comparable final maturity. In exchange
for this favorable funding rate, the Bank is exposed to the risk that the
advance is put back to the Bank following an increase in the general level of
interest rates causing the Bank to initiate a borrowing at a less advantageous
cost. At June 30, 1999 and June 30, 1998 the Bank's putable borrowings totaled
$515.0 million.
Provision for Loan Losses
- -------------------------
Provision for loan losses was $1.0 million for the three months ended June 30,
1999 and 1998. See "Comparison of Financial Condition at June 30, 1999 and
March 31, 1999".
Non-Interest Income
- -------------------
Non-interest income was $4.3 million or .58%, on an annualized basis, of average
assets for the quarter ended June 30, 1999 compared to $3.9 million or .53%, on
an annualized basis, of average assets for the comparable period of 1998.
Deposit and related fees increased $245,000 from $2.2 million for the three
months ended June 30, 1998 to $2.4 million for the comparable period of 1999.
The increase in deposit and related fees reflects the increase in fee income
opportunities created by the growth in core deposits coupled with the Bank's
increased emphasis on collecting rather than waiving fees. The increase in trust
fees from $476,000 for the three months ended June 30, 1998 to $520,000 for the
comparable period of 1999 reflects the updating of fee schedules coupled with
growth in assets under custody or management from $232.8 million at June 30,
1998 to $238.1 million at June 30, 1999.
Non-Interest Expense
- --------------------
Non-interest expense was $13.2 million for the three months ended June 30, 1999
compared to $13.3 million for the comparable period of 1998. General and
administrative expense was $13.2 million or 1.81%, of average assets for the
three months ended June 30, 1999 and 1998. Compensation and benefits expense
was $7.0 million for both the three month periods ended June 30, 1999 and 1998.
Included in compensation and benefits expense are non-cash charges associated
with the amortization of shares under the Company's Employee Stock Ownership
Plan (ESOP) and 1996 Incentive Plan of $751,000 for the three months ended June
30, 1999 compared to $929,000 for the comparable period of 1998.
Occupancy and equipment expense decreased $126,000 from $2.9 million for the
three months ended June 30, 1998 to $2.8 million for the comparable period of
1999 due primarily to a reduction in computer software and supplies expense.
The $273,000 increase in marketing and professional services expense from
$875,000 for the three months ended June 30, 1998 to $1.1 million for the
comparable period of 1999 reflects the Bank's expenditures to capitalize
13
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Management's Discussion and Analysis
(Continued)
on its presence as the largest locally based financial institution in the Inland
Empire of Southern California by establishing the brand theme of "as big as you
need as small as you like."
Income Taxes
- ------------
Income taxes were $4.9 million for the three months ended June 30, 1999 compared
to $3.2 million for the comparable period of 1998. The increase in income taxes
was primarily the result of an increase in earnings before income taxes from
$7.5 million for the three months ended June 30, 1998 to $11.3 million for the
comparable period of 1999.
Comparison of Financial Condition at June 30, 1999 and March 31, 1999
- ---------------------------------------------------------------------
Total assets decreased $73.6 million or 2.5% from $2.94 billion at March 31,
1999 to $2.86 billion at June 30, 1999. Loans receivable, net increased $30.7
million from $2.03 billion at March 31, 1999 to $2.06 billion at June 30, 1999.
MBS decreased $53.4 million from $526.1 million at March 31, 1999 to $472.7
million at June 30, 1999 and investment securities decreased $20.2 million from
$185.8 million at March 31, 1999 to $165.6 million at June 30, 1998 reflecting
the strategy discussed above of utilizing paydowns on securities to fund loans
and repay FHLB advances.
Loan originations for the three months ended June 30, 1999 were $254.7 million,
compared to $191.6 million for the comparable period of 1998. Loan principal
payoffs and paydowns were $200.5 million for the three months ended June 30,
1999 compared to $196.5 million for the comparable period of 1998. Reflecting
very favorable economic conditions in the Bank's market area, non-accrual loans
declined from $11.0 million or 0.56% of gross loans at March 31, 1999 to $8.3
million or 0.37% of gross loans at June 30, 1999. Non-performing assets, which
includes non-accrual loans, and foreclosed real estate, net of specific
allowances, declined from $16.3 million or .56% of total assets at March 31,
1999 to $11.9 million or .42% of total assets at June 30, 1999.
The allowance for loan losses is maintained at an amount management considers
adequate to cover future losses on loans receivable which are deemed probable
and estimable. The allowance is based upon a number of factors, including
current economic conditions, actual loss experience, industry trends and the
composition of the loan portfolio by type. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowance for loan losses. Such agencies may require the Bank to make
additional provisions for loan losses based upon information available at the
time of the review. At June 30, 1999, the Bank's allowance for loan losses was
$26.1 million or 1.16% of gross loans and 314.81% of non-accrual loans compared
to $26.2 million or 1.18% of gross loans and 237.56% of non-accrual loans at
March 31, 1999. 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. The following table sets forth activity
in the Bank's allowance for loan losses for the three months ended June 30,
1999.
<TABLE>
<S> <C>
Balance at March 31, 1999 $26,160
Provision for loan losses 1,000
Charge-offs (1,098)
Recoveries 51
---------------------------------------------------------------------
Balance at June 30, 1998 $26,113
=====================================================================
</TABLE>
Total liabilities decreased $49.8 million or 1.9% to $2.64 billion at June 30,
1999 from $2.69 billion at March 31, 1999. Deposits increased $10.5 million
from $1.84 billion at March 31, 1999 to $1.85 billion at June 30, 1999. Core
deposits increased $27.6 million from $743.3 million at March 31, 1999 to $771.3
million at June 30, 1999.
14
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Management's Discussion and Analysis
(Continued)
FHLB advances and other borrowings decreased $66.0 million from $814.0 million
at March 31, 1999 to $748.0 million at June 30, 1999.
Total stockholders' equity was $218.8 million at June 30, 1999 compared to
$242.7 million at March 31, 1999. The $23.8 million decrease in total
stockholders' equity is comprised principally of a $14.6 million decrease in
additional paid-in-capital, a $7.4 million decrease in retained earnings,
substantially restricted, a $751,000 decrease in unearned stock-based
compensation and a $2.6 million increase in accumulated other comprehensive
loss.
During the three months ended June 30, 1999, the Company repurchased 1,500,000
shares of its common stock at a weighted average price of $19.18 per share. The
$14.6 million decrease in additional paid-in-capital was attributable
principally to the removal from additional paid-in-capital of the original
amount of additional paid-in-capital recorded upon the March 1996 initial
issuance of the 1,500,000 shares repurchased ($9.99 per share, net of the $.01
per share credited to common stock). The $7.4 million decrease in retained
earnings, substantially restricted reflects the $13.8 million difference between
the $10.00 per share original issuance price of the 1,500,000 shares repurchased
and the $19.18 per share price paid to repurchase the shares, partially offset
by the $6.4 million of net earnings for the three months ended June 30, 1999.
The $751,000 decrease in unearned stock-based compensation reflects the
amortization of shares under the Company's ESOP ($397,000) and 1996 Incentive
Plan ($354,000). The $2.6 million increase in accumulated other comprehensive
loss was attributable principally to the change in the unrealized loss, net of
tax on MBS and investment securities available-for-sale.
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 and securities. 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 ratio was 5.76% for the three months ended June 30, 1999.
Management attempts to maintain a liquidity ratio no higher than 1% above the
regulatory requirement. This reflects management's strategy of investing excess
liquidity in higher yielding interest-earning assets,, such as loans or other
investments, depending on market conditions. The Bank invests in corporate
securities when the yields thereon are 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 Bancorp has invested and will from time to time continue to
invest in "non-rated" corporate debt and equity securities. Investments held at
the Bancorp are not subject to the OTS regulatory restrictions applicable to the
Bank.
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 $39.5 million and $47.5 million
for the three months ended June 30, 1999 and 1998, respectively. Net cash
provided by (used in) investing activities consisted primarily of disbursements
for loan originations and purchases of mortgage-backed
15
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Management's Discussion and Analysis
(Continued)
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 $200.5 million and $195.3 million
for the three months ended June 30, 1999 and 1998, respectively. Disbursements
on loans originated and purchased were $251.0 million and $235.2 million for the
three months ended June 30, 1999 and 1998, respectively. Disbursements for
purchases of mortgage-backed and other investment securities were $3.1 million
and $313.9 million for the three months ended June 30, 1999 and 1998,
respectively. Proceeds from the maturation of investment securities and paydowns
of mortgage-backed securities were $66.8 million and $91.4 million for the three
months ended June 30, 1999 and 1998, 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 $10.5
million and $7.6 million for the three months ended June 30, 1999 and 1998,
respectively. FHLB advances and other borrowings decreased $66.0 million and
increased $203.0 million for the three months ended June 30, 1999 and 1998,
respectively.
At June 30, 1999, the Bank exceeded all of its regulatory capital requirements
with a tangible capital level of $188.1 million, or 6.64% of adjusted total
assets, which is above the required level of $42.5 million, or 1.5%; core
capital of $188.1 million, or 6.64 % of adjusted total assets, which is above
the required level of $85.0 million, or 3.0%, and total risk-based capital of
$209.8 million, or 11.8% of risk-weighted assets, which is above the required
level of $142.4 million, or 8%.
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 June 30, 1999 cash and short-
term investments totaled $40.9 million. The Company has other sources of
liquidity if a need for additional funds arises, including the utilization of
reverse repurchase agreements and FHLB advances. At June 30, 1999, the Bank has
$698.0 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. At June 30, 1999, the Bank had outstanding commitments to
originate and purchase loans of $366.6 million and zero, respectively, compared
to $226.4 million and zero, respectively, at June 30, 1999 and 1998. At June 30,
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. Certificate
accounts that are scheduled to mature in less than one year from June 30, 1999
totaled $989.6 million. The Bank expects that a substantial portion of the
maturing certificate accounts will be retained by the Bank at maturity.
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.
16
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Management's Discussion and Analysis
(Continued)
Year 2000 Readiness Disclosure
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 operations, 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. 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 phase 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 was 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 third calendar quarter of 1999. A third system, for internal
Human Resource 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
17
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Management's Discussion and Analysis
(Continued)
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 was 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.
Costs to Address the Year 2000 Issue
Currently the Company estimates that Year 2000 project costs will approximate
$3.1 million although there can be no assurance that costs will not exceed that
amount. 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. The Company estimates that approximately 50% 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 $2.2 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.
Fiscal Year
- ----------------------------------------------------------------------
(In Millions) 1998 1999 2000 Total
- ----------------------------------------------------------------------
Capital $ - 1.1 .4 1.5
Operating .3 .7 .6 1.6
- ----------------------------------------------------------------------
Estimated Year 2000 expenditures $ .3 1.8 1.0 3.1
======================================================================
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 has
finalized and tested contingency plans, including manual procedures, for systems
classified as mission critical and high risk. These contingency plans provide
various alternatives based upon the different possible failures a system might
encounter in the Year 2000. 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.
18
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Management's Discussion and Analysis
(Continued)
Item 3. Qualitative and Quantitative Disclosures about Market Risk
- ------------------------------------------------------------------
Readers should refer to the qualitative disclosures (consisting primarily of
interest rate risk) in the Company's March 31, 1999 Form 10-K, as there has been
no significant changes in these disclosures during the three months ended June
30, 1999.
19
<PAGE>
PART II - OTHER INFORMATION
PFF BANCORP, INC. AND SUBSIDIARY
Item 1. Legal Proceedings
The Company and subsidiary have been named as defendants in various
lawsuits arising in the normal course of business. The outcome of the lawsuits
cannot be predicted, but the Company intends to vigorously defend the actions
and is of the opinion that the lawsuits will not have a material adverse effect
on the Company.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matter to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 3(I) - Certificate of Incorporation of PFF Bancorp, Inc. *
Exhibit 3(ii) - Bylaws of PFF Bancorp, Inc. *
Exhibit 27.0 - Financial Data Schedule (filed herewith)
(b) Reports on form 8-K
None
_________________________
*Incorporated herein by reference to Form S-1, Registration Statement, as
amended, filed on December 8, 1995, SEC Registration Number 33-94860.
20
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
PFF BANCORP, INC.
DATED: August 12, 1999 BY:/s/ LARRY M. RINEHART
-------------------------------
Larry M. Rinehart
President, Chief Executive Officer
and Director
DATED: August 12, 1999 BY:/s/ GREGORY C. TALBOTT
--------------------------------
Gregory C. Talbott
Executive Vice President, Chief
Financial Officer and Treasurer
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JUNE 30,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> JUN-30-1999
<CASH> 35,472
<INT-BEARING-DEPOSITS> 5,471
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 4,560
<INVESTMENTS-HELD-FOR-SALE> 637,264
<INVESTMENTS-CARRYING> 1,119
<INVESTMENTS-MARKET> 1,124
<LOANS> 2,086,731
<ALLOWANCE> 26,113
<TOTAL-ASSETS> 2,862,392
<DEPOSITS> 1,854,041
<SHORT-TERM> 94,000
<LIABILITIES-OTHER> 695,514
<LONG-TERM> 0
0
0
<COMMON> 199
<OTHER-SE> 218,638
<TOTAL-LIABILITIES-AND-EQUITY> 2,862,392
<INTEREST-LOAN> 39,629
<INTEREST-INVEST> 11,712
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 51,341
<INTEREST-DEPOSIT> 19,295
<INTEREST-EXPENSE> 10,819
<INTEREST-INCOME-NET> 21,227
<LOAN-LOSSES> 1,000
<SECURITIES-GAINS> 270
<EXPENSE-OTHER> 13,184
<INCOME-PRETAX> 11,264
<INCOME-PRE-EXTRAORDINARY> 11,264
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,404
<EPS-BASIC> .51
<EPS-DILUTED> .47
<YIELD-ACTUAL> 7.31
<LOANS-NON> 8,295
<LOANS-PAST> 0
<LOANS-TROUBLED> 7,021
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 26,160
<CHARGE-OFFS> 1,119
<RECOVERIES> 51
<ALLOWANCE-CLOSE> 26,113
<ALLOWANCE-DOMESTIC> 26,113
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
