<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 December 31, 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)
<TABLE>
<S> <C>
DELAWARE 95-4561623
-------- ----------
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
</TABLE>
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 13,314,505 shares of common stock, par value $.01 per
share, outstanding as of February 9, 2000.
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Form 10-Q
Index
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION (Unaudited) PAGE
----
<S> <C> <C>
Item 1 Financial statements
---------------------
Consolidated Balance Sheets as of
December 31, 1999 and March 31, 1999 1
Consolidated Statements of Earnings for the three and nine months
ended December 31, 1999 and 1998 2
Consolidated Statements of Comprehensive Earnings
for the three and nine months ended December 31, 1999 and 1998 3
Consolidated Statement of Stockholders' Equity
for the nine months ended December 31, 1999 4
Consolidated Statements of Cash Flows for the
nine months ended December 31, 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 10
Item 3 Qualitative and Quantitative disclosures about
Market Risk 23
PART II OTHER INFORMATION
Item 1 Legal Proceedings 24
Item 2 Changes in Securities 24
Item 3 Defaults Upon Senior Securities 24
Item 4 Submission of Matters to a Vote of Security Holders 24
Item 5 Other Information 24
Item 6 Exhibits and Reports on Form 8-K 25
SIGNATURES
</TABLE>
<PAGE>
PART 1 - FINANCIAL INFORMATION (Unaudited)
Item 1. Financial Statements.
PFF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
- ------------------------------------------------------------------------------------------------------------
Assets
<S> <C> <C>
Cash and cash equivalents $ 51,179 $ 63,790
Loans held for sale at lower of cost or fair value 7,237 3,531
Investment securities held-to-maturity (estimated fair value
of $701 at December 31, 1999 and $716 at March 31, 1999) 706 709
Investment securities available-for-sale, at fair value 176,201 185,087
Mortgage-backed securities held-to-maturity (estimated fair
value of $560 at March 31, 1999) - 556
Mortgage-backed securities available-for-sale, at fair value 401,381 525,560
Trading securities, at fair value 3,535 4,271
Investments in real estate 6,228 6,371
Loans receivable, net 2,270,523 2,026,081
Federal Home Loan Bank (FHLB) stock, at cost 43,950 50,323
Accrued interest receivable 17,822 17,118
Real estate acquired through foreclosure, net 1,650 5,318
Property and equipment, net 22,071 23,925
Prepaid expenses and other assets 26,274 23,340
- ------------------------------------------------------------------------------------------------------------
Total assets $3,028,757 $2,935,980
============================================================================================================
Liabilities and Stockholders' Equity
Liabilities:
Deposits $1,852,337 $1,843,538
FHLB advances and other borrowings 914,000 814,000
Accrued expenses and other liabilities 38,759 35,777
- ------------------------------------------------------------------------------------------------------------
Total liabilities 2,805,096 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 20,012,498 and 19,943,948;outstanding
13,739,031 and 15,445,481 at December 31, 1999 and 200 199
March 31, 1999, respectively
Additional paid-in capital 133,845 150,612
Retained earnings, substantially restricted 112,164 110,163
Unearned stock-based compensation (14,340) (17,169)
Treasury stock (6,273,467 at December 31,1999 and 4,498,467
at March 31, 1999) (63) (45)
Accumulated other comprehensive loss (8,145) (1,095)
- ------------------------------------------------------------------------------------------------------------
Total stockholders' equity 223,661 242,665
- ------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $3,028,757 $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 For the Nine Months Ended
December 31, December 31,
--------------------------------------------------------------------------------------
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Mortgage loans $ 39,253 $ 35,476 $ 112,705 $ 103,118
Non-mortgage loans 4,699 2,527 12,469 6,228
Mortgage-backed securities 6,700 9,590 21,534 28,942
Investment securities and deposits 4,039 5,628 11,855 17,076
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest income 54,691 53,221 158,563 155,364
- ---------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 19,725 20,351 58,414 60,105
Interest on borrowings 12,392 13,294 34,101 39,426
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest expense 32,117 33,645 92,515 99,531
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income 22,574 19,576 66,048 55,833
Provision for loan losses 1,000 1,000 3,000 3,020
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 21,574 18,576 63,048 52,813
- ---------------------------------------------------------------------------------------------------------------------------------
Non-interest income:
Deposit and related fees 2,233 2,127 6,953 6,454
Loan and servicing fees 1,152 769 2,615 2,119
Trust fees 541 487 1,578 1,415
Gain (loss) on sales of assets, net (173) 197 (75) 496
Gain on trading securities, net 777 617 905 258
Profit on real estate investments - 21 - 122
Gain on sale of branch 1,468 - 1,468 -
Other non-interest income 24 160 381 456
- ---------------------------------------------------------------------------------------------------------------------------------
Total non-interest income 6,022 4,378 13,825 11,320
- ---------------------------------------------------------------------------------------------------------------------------------
Non-interest expense:
General and administrative:
Compensation and benefits 7,360 6,955 21,744 20,755
Occupancy and equipment 2,889 3,087 8,646 8,983
Marketing and professional services 1,202 1,491 3,607 3,543
Other non-interest expense 2,472 2,445 6,939 7,589
- ---------------------------------------------------------------------------------------------------------------------------------
Total general and administrative 13,923 13,978 40,936 40,870
Foreclosed real estate operations, net (51) (90) (207) (126)
- ---------------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 13,872 13,888 40,729 40,744
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 13,724 9,066 36,144 23,389
Income taxes 5,880 3,850 15,580 10,001
- ---------------------------------------------------------------------------------------------------------------------------------
Net earnings $ 7,844 $ 5,216 $ 20,564 $ 13,388
=================================================================================================================================
Basic earnings per share $0.65 $0.38 $1.68 $0.95
=================================================================================================================================
Diluted earnings per share $0.59 $0.37 $1.54 $0.90
=================================================================================================================================
Cash dividends paid $0.06 $ - $0.12 $ -
=================================================================================================================================
Weighted average shares outstanding for basic
earnings per share calculation 12,095,794 13,645,040 12,256,535 14,152,139
=================================================================================================================================
Weighted average shares outstanding for diluted
earnings per share calculation 13,324,001 14,139,758 13,381,561 14,850,548
=================================================================================================================================
</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 For the Nine Months Ended
December 31, December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net earnings $7,844 $ 5,216 $20,564 $13,388
- ---------------------------------------------------------------------------------------------------------------------------
Other comprehensive earnings (loss), net of
income taxes
Unrealized gains (losses) on securities
available-for-sale:
Investment securities available-for-sale (16) (404) (2,056) (2,906)
Mortgage-backed securities available-for-sale (966) (1,247) (5,113) (618)
Reclassification of realized (gains) losses included
in earnings 57 46 119 (8)
- ---------------------------------------------------------------------------------------------------------------------------
Other comprehensive (loss) (925) (1,605) (7,050) (3,532)
- ---------------------------------------------------------------------------------------------------------------------------
Comprehensive earnings $6,919 $ 3,611 $13,514 $ 9,856
===========================================================================================================================
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
3
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Retained
Additional Earnings, Unearned
Number of Common Paid-in Substantially Stock-based Treasury
Shares Stock Capital Restricted Compensation Stock
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1999 15,445,481 $199 $150,612 $110,163 $(17,169) $(45)
Net earnings - - - 20,564 - -
Purchase of treasury stock (1,775,000) - (17,732) (17,017) - (18)
Amortization of shares under
stock-based compensation plans - - 648 - 2,829 -
Stock options exercised 68,550 1 317 - - -
Cash dividends - - - (1,546) - -
Change in unrealized (loss) on
securities available for sale, net - - - - - -
- ------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 13,739,031 $200 $133,845 $112,164 $(14,340) $(63)
========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive
(Loss) Total
- ---------------------------------------------------------------------------------
<S> <C> <C>
Balance at March 31, 1999 $(1,095) $242,665
Net earnings - 20,564
Purchase of treasury stock - (34,767)
Amortization of shares under stock-based
compensation plans - 3,477
Stock options exercised - 318
Cash dividends - (1,546)
Change in unrealized (loss) on
securities available for sale, net (7,050) (7,050)
- ---------------------------------------------------------------------------------
Balance at December 31, 1999 $(8,145) $223,661
=================================================================================
</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>
Nine Months Ended
December 31,
- ---------------------------------------------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C>
Net earnings $ 20,564 $ 13,388
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Amortization of premiums net of discount accretion on loans
and securities 1,980 3,637
Amortization of deferred loan origination fees 526 (893)
Loan fees collected (2,120) (1,824)
Dividends on FHLB stock (1,841) (1,908)
Provisions for losses on loans 3,000 3,020
Gains on sales of loans, mortgage-backed securities
available-for-sale, real estate and property and equipment (1,380) (1,194)
Proceeds from sale of trading securities 1,700 1,500
Gains on trading securities (905) (280)
Depreciation and amortization of property and equipment 2,750 2,910
Loans originated for sale (29,692) (37,451)
Proceeds from sale of loans held-for-sale 22,578 33,837
Amortization of unearned stock-based compensation 3,477 3,338
Increase in accrued expenses and other liabilities 2,982 5,268
(Increase) decrease in:
Accrued interest receivable (704) 2,278
Prepaid expenses and other assets (2,934) 22,231
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 19,981 47,857
- ---------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Loans originated for investment (932,801) (636,413)
Increase in construction loans in process 56,103 30,049
Purchases of loans held for investment (50) (139,086)
Principal payments on loans 631,763 621,480
Principal payments on mortgage-backed securities
held-to-maturity 552 644
Principal payments on mortgage-backed securities
available-for-sale 118,582 205,222
Purchases of investment securities available-for-sale (28,066) (90,111)
Purchases of FHLB stock (1,974) (8,232)
Redemption of FHLB Stock 10,188 -
Purchases of mortgage-backed securities available-
for-sale - (317,988)
(Continued)
</TABLE>
5
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
-----------------------------------
1999 1998
------------- ------------
<S> <C> <C>
Proceeds from maturities of investment securities
available-for-sale $ 22,615 $ 113,256
Investment in real estate acquired through foreclosure 2 19
Proceeds from sale of investment securities available-for-sale 10,626 37,278
Proceeds from sale of real estate acquired through foreclosure 7,164 11,262
Investment in real estate held for investment 143 (5,267)
Purchases of property and equipment (1,176) (1,906)
Proceeds from sale of property and equipment 933 4
------------- ------------
Net cash used in investing activities (105,396) (179,789)
------------- ------------
Cash flows from financing activities:
Proceeds from FHLB advances and other borrowings 551,500 794,876
Repayment of FHLB advances and other borrowings (451,500) (708,762)
Net change in deposits 8,799 74,235
Proceeds from exercise of stock options 318 516
Purchase of treasury stock (34,767) (32,099)
Cash dividend (1,546) -
------------- ------------
Net cash provided by financing activities 72,804 128,766
------------- ------------
Net decrease in cash and cash equivalents (12,611) (3,166)
Cash and cash equivalents, beginning of period 63,790 46,021
------------- ------------
Cash and cash equivalents, end of period $ 51,179 $ 42,855
============= ============
Supplemental information:
Interest paid, including interest credited $ 94,044 $ 106,045
Income taxes paid 11,700 10,700
Non-cash investing and financing activities:
Change in unrealized (loss) on securities
available-for-sale (12,155) (6,159)
Net transfers from loans receivable to real estate acquired
through foreclosure 3,670 9,174
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 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 nine months ended December 31, 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
required implementation date 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
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 December 31,
----------------------------------------------------------------------------------------
1999(1) 1998(2)
----------------------------------------------------------------------------------------
Earnings Shares Per-Share Earnings Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands, except per share data)
Net Earnings $7,844 $5,216
Basic EPS
Earnings available to common stockholders 7,844 12,095,794 $0.65 5,216 13,645,040 $0.38
======= =======
Effect of Dilutive Securities
Options and Stock Awards - 1,228,207 - 494,718
--------- ----------- -------- ------------
Diluted EPS
Earnings available to common stockholders
and assumed conversions $7,844 13,324,001 $0.59 $5,216 14,139,758 $0.37
========= ============ ======= ======== ============ ======
</TABLE>
(1) Options to purchase 2,612 shares of common stock at a weighted average
price of $21.88 per share were outstanding during the three month period
ending December 31, 1999 but were not included in the computation of
diluted EPS because the options' exercise prices were greater than the
average market price of the common shares. The options, which expire on
November 23, 2004, were still outstanding at December 31, 1999.
(2) Options to purchase 43,009 shares of common stock at a weighted average
price of $17.13 per share were outstanding during the three month period
December 31, 1998 but were not included in the computation of diluted EPS
because the options' exercise prices were greater than the average market
price of the common shares. The options, which expire between February 27,
2002 and April 22, 2003, were still outstanding at December 31, 1998.
8
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements - Continued
<TABLE>
<CAPTION>
For the Nine Months Ended December 31
-----------------------------------------------------------------------------------
1999(1) 1998(2)
-----------------------------------------------------------------------------------
Earnings Shares Per-Share Earnings Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands, except per share data)
Net Earnings $20,564 $13,388
Basic EPS
Earnings available to common stockholders 20,564 12,256,535 $1.68 13,388 14,152,139 $0.95
========== ==========
Effect of Dilutive Securities
Options and Stock Awards - 1,125,026 - 698,409
-------------------------- -----------------------------
Diluted EPS
Earnings available to common stockholders
and assumed conversions $20,564 13,381,561 $1.54 $13,388 14,850,548 $0.90
====================================== ===========================================
</TABLE>
(1) Options to purchase 10,094 shares of common stock at a weighted average
price of $20.93 per share were outstanding during the nine month period
ending December 31, 1999 but were not included in the computation of
diluted EPS because the options' exercise prices were greater than the
average market price of the common shares. The options, which expire
between October 22, 2002 and November 23, 2004, were still outstanding at
December 31, 1999.
(2) Options to purchase 10,108 shares of common stock at a weighted average
price of $20.12 per share were outstanding during the nine month period
ending December 31, 1998 but were not included in the computation of
diluted EPS because the options' exercise prices were greater than the
average market price of the common shares. The options, which expire
between October 22, 2002 and April 22, 2003, were still outstanding at
December 31, 1998.
9
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Item 2: Management's Discussion and Analysis of Financial Condition and
Operation
Average Balance Sheets
The following table sets forth certain information relating to the Company for
the three months ended December 31, 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 December 31,
-----------------------------------------------------------------------
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 investments $ 28,989 $ 334 4.57% $ 50,385 $ 596 4.69%
Investment securities, net 188,808 3,153 6.68 277,017 4,302 6.21
Loans receivable, net 2,221,594 43,952 7.91 1,912,575 38,003 7.95
Mortgage-backed securities, net 416,946 6,700 6.43 613,758 9,590 6.25
FHLB stock 41,993 552 5.22 49,435 730 5.86
---------------------- ----------------------
Total interest-earning assets 2,898,330 54,691 7.55 2,903,170 53,221 7.33
Non-interest-earning assets 98,059 116,946
---------- ----------
Total assets $2,996,389 $3,020,116
========== ==========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Savings accounts $ 139,945 781 2.21 $ 144,940 837 2.29
Money market accounts 405,300 4,325 4.23 300,929 3,766 4.97
NOW and other demand deposit accounts 216,350 342 0.63 189,668 324 0.68
Certificate accounts 1,091,698 14,277 5.19 1,159,800 15,424 5.28
---------------------- ----------------------
Total 1,853,293 19,725 4.22 1,795,337 20,351 4.50
FHLB advances and other borrowings 867,582 12,392 5.67 946,500 13,228 5.54
Other 4,346 - - 3,544 66 7.37
---------------------- ----------------------
Total interest-bearing liabilities 2,725,221 32,117 4.68 2,745,381 33,645 4.86
------- -------
Non-interest-bearing liabilities 46,262 41,109
---------- ----------
Total liabilities 2,771,483 2,786,490
Stockholders' equity 224,906 233,626
---------- ----------
Total liabilities and stockholders' equity $2,996,389 $3,020,116
========== ==========
Net interest income before provision for loan losses $22,574 $19,576
======= =======
Net interest spread 2.87 2.47
Effective interest spread 3.12 2.70
Ratio of interest-earning assets to
interest-bearing liabilities 106.35% 105.75%
</TABLE>
10
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition and Operation
(Continued)
Average Balance Sheets
The following table sets forth certain information relating to the Company for
the nine months ended December 31, 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>
Nine Months Ended December 31,
-----------------------------------------------------------------------
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 investments $ 40,398 $ 1,376 4.52% $ 39,700 $ 1 ,460 4.88%
Investment securities, net 184,885 8,749 6.31 294,376 13,549 6.14
Loans receivable, net 2,117,229 125,174 7.88 1,873,749 109,346 7.78
Mortgage-backed securities, net 451,508 21,534 6.36 613,807 28,942 6.29
FHLB stock 43,579 1,730 5.27 46,991 2,067 5.84
---------------------- ----------------------
Total interest-earning assets 2,837,599 158,563 7.45 2,868,623 155,364 7.22
Non-interest-earning assets 108,333 105,707
---------- ----------
Total assets $2,945,932 $2,974,330
========== ==========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Savings accounts $ 142,998 2,412 2.24 $ 148,901 2,599 2.32
Money market accounts 409,552 13,345 4.32 264,440 8,960 4.50
NOW and other demand deposit accounts 211,436 1,023 0.64 184,818 966 0.69
Certificate accounts 1,087,882 41,634 5.08 1,167,586 47,580 5.41
---------------------- ----------------------
Total 1,851,868 58,414 4.19 1,765,745 60,105 4.52
FHLB advances and other borrowings 816,559 34,081 5.54 926,178 39,329 5.64
Other 3,504 20 0.76 3,021 97 4.26
---------------------- ----------------------
Total interest-bearing liabilities 2,671,931 92,515 4.60 2,694,944 99,531 4.90
-------- --------
Non-interest-bearing liabilities 49,310 39,660
---------- ----------
Total liabilities 2,721,241 2,734,604
Stockholders' equity 224,691 239,726
---------- ----------
Total liabilities and stockholders' equity $2,945,932 $2,974,330
========== ==========
Net interest income before provision for loan losses $ 66,048 $ 55,833
======== ========
Net interest spread 2.85 2.32
Effective interest spread 3.10 2.60
Ratio of interest-earning assets to
interest-bearing liabilities 106.20% 106.44%
</TABLE>
11
S
<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 December 31, 1999 Nine Months Ended December 31, 1999
Compared to Compared to
Three Months Ended December 31, 1998 Nine Months Ended December 31, 1998
----------------------------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
----------------------------------------------------------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
----------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-earning deposits and short-term
investments $ (253) (15) 6 (262) 26 (108) (2) (84)
Investment securities, net (1,359) 359 (149) (1,149) (5,039) 381 (142) (4,800)
Loans receivable, net 6,140 (165) (26) 5,949 14,209 1,433 186 15,828
Mortgage-backed securities, net (3,075) 273 (88) (2,890) (7,653) 333 (88) (7,408)
FHLB stock (110) (80) 12 (178) (150) (202) 15 (337)
----------------------------------------------------------------------------------
Total interest-earning assets 1,343 372 (245) 1,470 1,393 1,837 (31) 3,199
----------------------------------------------------------------------------------
Interest-bearing liabilities:
Savings accounts (29) (28) 1 (56) (103) (87) 3 (187)
Money market accounts 1,306 (555) (192) 559 4,917 (343) (189) 4,385
NOW and other demand deposit
accounts 46 (24) (4) 18 139 (72) (10) 57
Certificate accounts (906) (256) 15 (1,147) (3,248) (2,896) 198 (5,946)
FHLB advances and other borrowings (1,103) 291 (24) (836) (4,655) (673) 80 (5,248)
Other 15 (66) (15) (66) 16 (80) (13) (77)
----------------------------------------------------------------------------------
Total interest-bearing liabilities (671) (638) (219) (1,528) (2,934) (4,151) 69 (7,016)
----------------------------------------------------------------------------------
Change in net interest income $ 2,014 1,010 (26) 2,998 4,327 5,988 (100) 10,215
==================================================================================
</TABLE>
12
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Management's Discussion and Analysis
(Continued)
Forward-Looking Statements
Except for historical information contained herein, the matters discussed in
this report contain forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended (the "Securities Act"), and Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
that involve substantial risks and uncertainties. When used in this report, or
in the documents incorporated by reference herein, the words "anticipate,"
"believe," "estimate," "may," "intend," "expect" and similar expressions
identify certain of such forward-looking statements. Actual results could
differ materially from such forward-looking statements contained herein.
Factors that could cause future results to vary from current expectations
include, but are not limited to, the following: changes in economic conditions
(both generally and more specifically in the markets in which the Company
operates); changes in interest rates, deposit flows, loan demand, real estate
values and competition; changes in accounting principles, policies or guidelines
and in government legislation and regulation (which change from time to time and
over which the Company has no control); other factors affecting the Company's
operations, markets, products and services, including but not limited to, 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 December 31, 1999 and
- --------------------------------------------------------------------------------
1998
- ----
General
- -------
The Company recorded net earnings of $7.8 million or $0.59 per diluted share for
the three months ended December 31, 1999 compared to net earnings of $5.2
million or $0.37 per diluted share for the comparable period of 1998. Net
earnings for the three months ended December 31, 1999 include an after tax gain
of approximately $845,000 or $0.06 per diluted share from the Bank's sale of one
of its twenty-four full service banking branches along with $45.9 million of
deposits domiciled therein. The Company's core earnings (defined as net earnings
excluding the after tax impact of gain on branch sale, trading portfolio
activity and profit on real estate investments), improved to $6.6 million or
$0.49 per diluted share for the three months ended December 31, 1999 from $4.8
million or $0.34 per diluted share for the comparable period of 1998.
Net interest income was $22.6 million for the three months ended December 31,
1999 compared to $19.6 million for the comparable period of 1998. The increase
in net interest income was attributable to a 40 basis point expansion in net
interest spread from 2.47% for the three months ended December 31, 1998 to 2.87%
for the comparable period of 1999.
Provision for loan losses was $1.0 million for the three months ended December
31, 1999 and 1998.
Non-interest income excluding the gain on branch sale, trading portfolio
activity and profit on real estate investments, ("core non-interest income") was
$3.8 million for the quarter ended December 31, 1999 compared to $3.7 million
for the comparable period of 1998. Total non-interest expense was $13.9 million
for both the three months ended December 31 1998 and 1999.
13
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Management's Discussion and Analysis
(Continued)
Interest Income
- ---------------
Interest income was $54.7 million for the three months ended December 31, 1999
compared to $53.2 million for the comparable period of 1998. The $1.5 million
increase in interest income was attributable to a 22 basis point increase in
average yield on interest earning assets from 7.33% for the three months ended
December 31, 1998 to 7.55% for the comparable period of 1999. Average interest-
earning assets were $2.90 billion for both the three months ended December 31,
1998 and 1999. The average yield on loans receivable, net was 7.91% for the
three months ended December 31, 1999 compared to 7.95% for the comparable period
of 1998. The 4 basis point decrease was attributable in part to a shift in the
composition of the Bank's single family residential mortgage loan originations
away from hybrid adjustable rate mortgages (ARM's) toward fully adjustable rate
products. Hybrid ARM's such as 5/1 loans are originated at rates which remain
fixed for an initial term of generally three to five years after which the rates
adjust periodically based upon a specified index. Fully adjustable rate ARM's,
on the other hand, are originated at deep initial teaser rates which remain in
effect for only the first several months of the life of the loans after which
the rates adjust upward based upon a specified index. The Bank' decision to
shift its single family residential lending away from hybrid ARM's was based on
a desire to originate loans which have a greater degree of responsiveness to
changes in the general level of interest rates. As a result of this successful
shift, the weighted average initial interest rate on the $105.5 million of
single family residential mortgages originated during the current quarter was
4.31 percent compared to 6.02 percent for the $137.4 million of single family
residential mortgages originated during the previous quarter. Based on the rate
indices in effect at December 31, 1999, the weighted average fully indexed rate
on the single family residential mortgage loans originated during the quarter
ended December 31, 1999 would be 7.46 percent. Approximately 69 percent of the
current quarter's single family residential mortgage originations will fully
index within 3 months of origination.
Sixty-two percent of the Bank's total loans at December 31, 1999 are indexed to
either the one-year constant maturity Treasury (CMT) or the 11th District Cost
of Funds (COFI) index. The average adjustment frequency of these adjustable
rate loans is 7 months. As a result, for any given period, the yield on these
loans reflects a combination of the current as well as previous indices to which
they are tied. For the three months ended December 31, 1999, the one-year CMT
and COFI indices averaged 5.61% and 4.76%, respectively, compared to 4.39% and
4.70%, respectively for the comparable period of 1998. However, of greater
impact on loan yields was the fact that for the seven months preceding the three
months ended December 31, 1999, the one-year CMT and COFI indices averaged 4.99%
and 4.52%, respectively compared to 5.27% and 4.90%, respectively for the
comparable period of 1998.
The average yield on investment securities was 6.68% for the three months ended
December 31, 1999 compared to 6.21% for the comparable period of 1998. The
increase in the average yield on investment securities reflects the impact of a
generally higher interest rate environment. The one and three month London
Inter-Bank Offered Rate (LIBOR) to which approximately 41 percent of the
investment securities portfolio is indexed averaged 6.00% for the three months
ended December 31, 1999 compared to 5.25% for the three months ended December
31, 1998. Prime rate, to which approximately 27 percent of the investment
securities portfolio is indexed, averaged 8.42% for the three months ended
December 31, 1999 compared to 7.83% for the three months ended December 31,
1998.
The average yield on mortgage-backed securities (MBS) was 6.43% for three months
ended December 31, 1999 compared to 6.25% for the comparable period of 1998.
Premium amortization, net of discount accretion on MBS was $252,000 (30 basis
points) for the three months ended December 31, 1999 compared to $793,000 (58
basis points) for the comparable period of 1998. The positive impact on average
yield on MBS of this reduction in premium amortization, net of discount
accretion was partially offset by the lagging impact of changes in the one-year
CMT on the 44% of the MBS portfolio that is tied to that index. The adjustment
frequency of the one-year
14
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Management's Discussion and Analysis
(Continued)
CMT MBS held by the Company is generally on an annual basis. Accordingly, for
any given period, the yield on the one-year CMT portion of the MBS portfolio is
reflective of a combination of the index in effect one year earlier as well as
the current level for the index. The one-year CMT averaged approximately 5.61%
for the three months ended December 31, 1999 compared to approximately 4.39% and
5.48% for the comparable periods of 1998 and 1997, respectively.
While total average interest-earning assets were virtually unchanged between the
three months ended December 31, 1998 and 1999, the average balance of loans
receivable increased $309.0 million to $2.22 billion for the three months ended
December 31, 1999. The aggregate average balance of MBS and investment
securities decreased $285.0 million between the three months ended December 31,
1998 and 1999 to $605.8 million for the three months ended December 31, 1999.
This shift in interest-earning assets from securities into loans reflects a
conscious decision by the Bank to emphasize the allocation of its interest-
earning assets toward loans. Additionally, the Bank has placed its lending
emphasis on construction, commercial business, commercial real estate and
consumer loans (the "Four-C's"). Reflecting this emphasis, the aggregate
average disbursed balance of the Four-C's was $614.1 million or 28% of average
total loans receivable, net for the three months ended December 31, 1999
compared to $499.1 million or 26% of average total loans receivable, net for the
comparable period of 1998. Originations of the Four-C's totaled $250.9 million
or 70% of total loan originations for the three months ended December 31, 1999
compared to $143.6 million or 57% of total originations for the comparable
period of 1998.
Interest Expense
- ----------------
Interest expense was $32.1 million for the three months ended December 31, 1999
compared to $33.6 million for the comparable period of 1998. The $1.5 million
decrease in interest expense was attributable to an 18 basis point decrease in
the average cost of interest-bearing liabilities coupled with a $20.2 million
decrease in average interest-bearing liabilities from $2.75 billion for the
three months ended December 31, 1998 to $2.73 billion for the comparable period
of 1999. The 18 basis point decrease in the average cost of interest-bearing
liabilities reflects a 28 basis point reduction in the average cost of deposits,
partially offset by a 13 basis point increase in the average cost of Federal
Home Loan Bank (FHLB) advances and other borrowings.
The decrease in the average cost of deposits from 4.50% for the three months
ended December 31, 1998 to 4.22% for the comparable period of 1999 reflects an
increase in the proportion of the total deposit base comprised by money market,
savings and NOW accounts (collectively, "core deposits") from 35% for the three
months ended December 31, 1998 to 41% for the comparable period of 1999. The
average balance of total deposits increased $58.0 million from $1.80 billion for
the three months ended December 31, 1998 to $1.85 billion for the comparable
period of 1999. The average balance of core deposits increased $126.1million
between the three months ended December 31, 1998 and 1999. Excluding the impact
on average balances from the sale of deposits during the three months ended
December 31, 1999, the average balances of total deposits and core deposits
would have increased $96.8 million and $133.0 million, respectively between the
three months ended December 31, 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
2.84% for the three months ended December 31, 1999 compared to 5.19% for
certificate accounts. The average cost figures for the comparable period of
1998 were 3.10% and 5.28%, respectively. The substantial decrease in the
average cost of core deposits between the three months ended December 31, 1998
and 1999, reflects a decrease in the average cost of money market savings
accounts from 4.97% for the three months ended December 31, 1998 to 4.23% for
the comparable period of 1999.
The average cost of FHLB advances and other borrowings was 5.67% for the three
months ended December 31, 1999 compared to 5.54% for the comparable period of
1998. The increase in the average cost of FHLB advances
15
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Management's Discussion and Analysis
(Continued)
and other borrowings was attributable, in part, to $125.0 million of putable
FHLB advances that were put back to the Bank during the three months ended
December 31, 1999. The weighted average rate on the advances put back to the
Bank during the three months ended December 31, 1999 was 5.33%. The weighted
average rate on the Bank's new advances during the three months ended December
31, 1999 was 6.02%. At December 31, 1999, the Bank has $375.0 million of putable
FHLB advances and other borrowings, $145.0 million and $290.0 million of which
are putable within the next three and twelve months, respectively.
Provision for Loan Losses
- -------------------------
Provision for loan losses was $1.0 million for the three months ended December
31, 1999 and 1998. See "Comparison of Financial Condition at December 31, 1999
and March 31, 1999".
Non-Interest Income
- -------------------
Excluding the $1.5 million pre-tax gain on branch sale, non-interest income was
$4.6 million or, on an annualized basis, .61% of average assets for the quarter
ended December 31, 1999 compared to $4.4 million or, on an annualized basis,
.58% of average assets for the comparable period of 1998. Core non-interest
income was $3.8 million or, on an annualized basis .50% of average assets for
the three months ended December 31, 1999, compared to $3.7 million or, on an
annualized basis, .50% of average assets for the comparable period of 1998. The
$383,000 increase in loan and servicing fees from $769,000 for the three months
ended December 31, 1998 to $1.2 million for the comparable period of 1999
includes a $446,000 prepayment fee received on a commercial loan payoff. Deposit
and related fees increased $106,000 from $2.1 million for the three months ended
December 31, 1998 to $2.2 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 $487,000 for the three months ended December 31, 1998 to
$541,000 for the comparable period of 1999 reflects the updating of fee
schedules coupled with growth in assets under custody or management from $214.5
million at December 31, 1998 to $261.6 million at December 31, 1999. The
$173,000 loss on sale of assets for the three months ended December 31, 1999
reflects the sale of investment securities to generate a portion of the cash
utilized by the Company to fund the repurchase of its common stock.
Non-Interest Expense
- --------------------
Non-interest expense was $13.9 million for the three months ended December 31,
1999 and 1998. General and administrative expense was $13.9 million or, on an
annualized basis, 1.86% of average assets for the three months ended December
31, 1999 compared to $14.0 or, on an annualized basis, 1.85% of average assets
for the comparable period in 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 $986,000 for the three months ended
December 31, 1999 compared to $945,000 for the comparable period of 1998.
The $289,000 decrease in marketing and professional services expense from $1.5
million for the three months ended December 31, 1998 to $1.2 million for the
comparable period of 1999 is primarily comprised of a $211,000 reduction in
advertising expense.
16
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Management's Discussion and Analysis
(Continued)
Income Taxes
- ------------
Income taxes were $5.9 million for the three months ended December 31, 1999
compared to $3.9 million for the comparable period of 1998. The effective tax
rate was 42.8% for the three months ended December 31, 1999 and 1998.
Comparison of Operating Results for the Nine Months Ended December 31, 1999 and
- -------------------------------------------------------------------------------
1998
- ----
General
- -------
The Company recorded net earnings of $20.6 million or $1.54 per diluted share
for the nine months ended December 31, 1999 compared to net earnings of $13.4
million or $0.90 per diluted share for the comparable period of 1998. Net
earnings for the nine months ended December 31, 1999 include the after tax gain
of approximately $845,000 or $0.06 per diluted share from the branch sale
discussed earlier. The Company's core earnings improved to $19.2 million or
$1.44 per diluted share for the nine months ended December 31, 1999 from $13.2
million or $0.89 per diluted share for the comparable period of 1998.
Net interest income was $66.0 million for the nine months ended December 31,
1999 compared to $55.8 million for the comparable period of 1998. The increase
in net interest income was attributable to a 53 basis point increase in net
interest spread from 2.32% for the nine months ended December 31, 1998 to 2.85%
for the comparable period of 1999.
Provision for loan losses was $3.0 million for the nine months ended December
31, 1999 and 1998.
Total non-interest income was $13.8 million for the nine months ended December
31, 1999 compared to $11.3 million for the comparable period of 1998. Total
non-interest expense was $40.7 million for the nine months ended December 31,
1999 and 1998.
Interest Income
- ---------------
Interest income was $158.6 million for the nine months ended December 31, 1999
compared to $155.4 million for the comparable period of 1998. The $3.2 million
increase in interest income was attributable to a 23 basis point increase in
average yield on interest-earning assets, partially offset by a $31.0 million
decrease in average interest-earning assets. The average balance of loans
receivable, net increased $243.5 million from $1.87 billion for the nine months
ended December 31, 1998 to $2.12 billion for the comparable period of 1999. The
aggregate average disbursed balance of the Four-C's was $551.3 million or 26% of
average total loans receivable, net for the nine months ended December 31, 1999
compared to $470.3 million or 25% average total loans receivable, net for the
comparable period of 1998. The average aggregate balance of MBS and investment
securities decreased $271.8 million from $908.2 million for the nine months
ended December 31, 1998 to $636.4 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 10 basis points from 7.78% for
the nine months ended December 31, 1998 to 7.88% for the comparable period of
1999. The increase in the average yield on loans receivable was attributable in
part, to the increase in the aggregate disbursed balance of the Four-C's. The
increase in average yield on loans receivable was also positively influenced by
an increase in hybrid ARM's between December 31, 1998 and 1999. Although the
Bank de-emphasized the origination of hybrid ARM's during the latter stages of
calendar
17
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Management's Discussion and Analysis
(Continued)
year 1999, originations of hybrid ARM's during the earlier stages of calendar
year 1999 served to increase the proportion of the loan portfolio comprised by
hybrid ARM loans from 21% at December 31, 1998 to 25% at December 31, 1999.
Because hybrid ARM's are not originated at initial teaser rates, their yields
generally exceed those of fully adjustable rate ARM's during the early stages of
the loan term.
The average yield on investment securities was 6.31% for the nine months ended
December 31, 1999 compared to 6.14% for the comparable period of 1998. The
increase in the average yield on investment securities reflects the impact of a
decrease in premium amortization, net of discount accretion. Premium
amortization, net of discount accretion on investment securities was $53,000 (11
basis points) for the nine months ended December 31, 1999 compared to $555,000
(31 basis points) for the comparable period of 1998. One-month LIBOR averaged
approximately 5.42% for the nine months ended December 31, 1999 compared to
approximately 5.51% for the comparable period of 1998.
The average yield on MBS was 6.36% for nine months ended December 31, 1999
compared to 6.29% for the comparable period of 1998. Premium amortization, net
of discount accretion, on MBS was $1.1 million (38 basis points), for the nine
months ended December 31, 1999 compared to $2.5 million (61 basis points), for
the comparable period of 1998. As discussed in the comparison of interest
income for the three months ended December 31, 1999 and 1998, the yield on the
MBS portfolio is influenced in a lagging fashion by changes in the one year CMT
index. The decrease in the average yield on MBS between 1998 and 1999, after
excluding the impact of premium amortization, net of discount accretion reflects
the fact that the one year CMT averaged approximately 5.22% for the nine months
ended December 31, 1999 compared to approximately 4.96% and 5.62% for the
comparable periods of 1998 and 1997, respectively.
Interest Expense
- ----------------
Interest expense was $92.5 million for the nine months ended December 31, 1999
compared to $99.5 million for the comparable period of 1998. The $7.0 million
decrease in interest expense was attributable to a 30 basis point decrease in
the average cost of interest-bearing liabilities coupled with a $23.0 million
decrease in average interest-bearing liabilities from $2.69 billion for the nine
months ended December 31, 1998 to $2.67 billion for the comparable period of
1999. The 30 basis point decrease in the average cost of interest-bearing
liabilities reflects a 33 basis point reduction in the average cost of deposits,
a 10 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% for the nine months ended December 31, 1998 to 69% for the
comparable period of 1999.
The decrease in the average cost of deposits from 4.52% for the nine months
ended December 31, 1998 to 4.19% for the comparable period of 1999 reflects an
increase in the proportion of the total deposit base comprised by core deposits
from 34% for the nine months ended December 31, 1998 to 41% for the comparable
period of 1999. The average balance of total deposits increased $86.1 million
from $1.77 billion for the nine months ended December 31, 1998 to $1.85 billion
for the comparable period of 1999. The average balance of core deposits
increased $165.8 million between the nine months ended December 31, 1998 and
1999. Excluding the impact on average balances from the sale of deposits during
the nine months ended December 31, 1999, the average balances of total deposits
and core deposits would have increased $103.8 million and $165.8 million,
respectively between the nine months ended December 31, 1998 and 1999. The
average cost of core deposits was 2.91% for the nine months ended December 31,
1999 compared to 5.08% for certificate accounts. The average cost figures for
the comparable period of 1998 were 2.78% and 5.41%, respectively.
18
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Management's Discussion and Analysis
(Continued)
The average cost of FHLB advances and other borrowings decreased from 5.64% for
the nine months ended December 31, 1998 to 5.54% for the comparable period of
1999.
Provision for Loan Losses
- -------------------------
Provision for loan losses was $3.0 million for the nine months ended December
31, 1999 and 1998. See "Comparison of Financial Condition at December 31, 1999
and March 31, 1999."
Non-Interest Income
- -------------------
Excluding the $1.5 million pre-tax gain on branch sale, non-interest income was
$12.4 million or, on an annualized basis, .56% of average assets for the nine
months ended December 31, 1999 compared to $11.3 million or, on an annualized
basis, .51% of average assets for the comparable period of 1998. Core non-
interest income was $11.5 million or, on an annualized basis, .52% of average
assets for the nine months ended December 31, 1999, compared to $10.9 million
or, on an annualized basis .49% of average assets for the comparable period of
1998. Deposit and related fees increased $499,000 from $6.5 million for the
nine months ended December 31, 1998 to $7.0 million for the comparable period of
1999. The $496,000 increase in loan and servicing fees from $2.1 million for
the nine months ended December 31, 1998 to $2.6 million for the comparable
period of 1999 includes the $446,000 prepayment fee received on a commercial
loan payoff.
Non-Interest Expense
- --------------------
Non-interest expense was $40.7 million for the nine months ended December 31,
1999 and 1998. General and administrative expense was $40.9 million for the
nine months ended December 31, 1999 and 1998 or, on an annualized basis, 1.85%
of average assets for the nine months ended December 31, 1999 compared to 1.83%
for the comparable period of 1998. Compensation and benefits expense was $21.7
million for the nine months ended December 31, 1999 compared to $20.8 million
for the comparable period in 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 $3.5 million and $3.3 million for the
nine months ended December 31, 1999 and December 31, 1998, respectively.
The $337,000 decrease in occupancy and equipment expense from $9.0 million for
the nine months ended December 31, 1998 to $8.6 million for the comparable
period of 1999 is primarily attributable to a $160,000 decrease in computer
software and supplies expense as the result of a decline in Y2K related
expenses. The $650,000 decrease in other non-interest expense from $7.6 million
for the nine months ended December 31, 1998 to $6.9 million for the comparable
period of 1999 was primarily attributable to a reduction in office supplies and
expenses of $347,000 resulting from renegotiation and consolidation of
telecommunications services.
Income Taxes
- ------------
Income taxes were $15.6 million for the nine months ended December 31, 1999
compared to $10.0 million for the comparable period of 1998. The effective tax
rates were 43.1% and 42.8% for the nine months ended December 31, 1999 and 1998.
19
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Management's Discussion and Analysis
(Continued)
Comparison of Financial Condition at December 31, 1999 and March 31, 1999
- -------------------------------------------------------------------------
Total assets increased $92.8 million from $2.94 billion at March 31, 1999 to
$3.03 billion at December 31, 1999. Loans receivable, net increased $244.4
million from $2.03 billion at March 31, 1999 to $2.27 billion at December 31,
1999. MBS decreased $124.7 million from $526.1 million at March 31, 1999 to
$401.4 million at December 31, 1999 and investment securities decreased $8.9
million from $185.8 million at March 31, 1999 to $176.9 million at December 31,
1999 reflecting the strategy of utilizing paydowns on securities to fund loans
and repay FHLB advances.
Loan originations for the nine months ended December 31, 1999 were $962.5
million, compared to $673.9 million for the comparable period of 1998.
Originations of the Four-C's totaled $597.8 million or 62% of total loan
originations for the nine months ended December 31, 1999 compared to $391.3
million or 58% of total loan originations for the comparable period of 1998.
Loan principal payoffs and paydowns were $631.8 million for the nine months
ended December 31, 1999 compared to $621.5 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 0.50% of gross loans at March
31, 1999 to $6.6 million or 0.26% of gross loans at December 31, 1999. Non-
performing assets, which includes non-accrual loans, and foreclosed real estate,
net of specific allowances, declined from $16.3 million or 0.56% of total assets
at March 31, 1999 to $8.2 million or 0.27% of total assets at December 31, 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 December 31, 1999, the Bank's allowance for loan
losses was $27.1 million or 1.07% of gross loans and 412.78% 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 and nine
months ended December 31, 1999.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------------------------
<S> <C> <C>
Beginning balance $26,535 $26,160
Provision for loan losses 1,000 3,000
Charge-offs (476) (2,156)
Recoveries 7 62
--------------------------------------------------------------------------
Ending balance $27,066 $27,066
==========================================================================
</TABLE>
Included in charge-offs for the nine months ended December 31, 1999 is $473,000
applicable to the sale of 12 loans aggregating $2.3 million, which were
restructured in previous fiscal years. While these loans were all on full
accrual status in accordance with their workout agreements, the sale was
consummated to strengthen the Bank's overall asset quality position in the
current as well as future credit cycles.
Total liabilities increased $111.8 million to $2.81 billion at December 31, 1999
from $2.69 billion at March 31, 1999. Deposits increased $8.8 million from
$1.84 billion at March 31, 1999 to $1.85 billion at December 31, 1999.
20
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Management's Discussion and Analysis
(Continued)
Core deposits decreased $22.2 million from $745.4 million at March 31, 1999 to
$723.1 million at December 31, 1999. Excluding the impact on deposit balances
from the sale of deposits during October 1999, total deposits would have
increased $68.2 million and core deposits would have decreased $6.1 million
between March 31 and December 31, 1999. In response to the additional need for
funding arising from the strong level of loan originations, and to replace the
$45.9 million of deposits sold, FHLB advances and other borrowings increased
$100.0 million from $814.0 million at March 31, 1999 to $914.0 million at
December 31, 1999. At December 31, 1999 and March 31, 1999 the Bank had putable
borrowings totaling $375.0 million and $515.0 million, respectively. Under
putable borrowings programs, in exchange for a favorable interest rate on the
borrowing, the Bank grants to the creditor an option to "put" the borrowing back
to the Bank at specified "put" dates prior to maturity but after the conclusion
of a specified lock out period. Under the putable borrowings programs the Bank
obtains funds below the cost of non-putable borrowings of comparable final
maturity. In exchange for this favorable funding rate, the Bank is exposed to
the risk that the borrowing 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. See "Comparison of Operating Results for the Three
Months Ended December 31, 1999 and 1998."
Total stockholders' equity was $223.7 million at December 31, 1999 compared to
$242.7 million at March 31, 1999. The $19.0 million decrease in total
stockholders' equity is comprised principally of a $16.8 million decrease in
additional paid-in-capital, a $2.0 million increase in retained earnings,
substantially restricted, a $2.8 million decrease in unearned stock-based
compensation and a $7.1 million increase in accumulated other comprehensive
loss.
During the nine months ended December 31, 1999, the Company repurchased
1,775,000 shares of its common stock at a weighted average price of $19.59 per
share. The $16.8 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 1,775,000 shares repurchased ($9.99 per share, net of
the $.01 per share credited to common stock). The $2.0 million increase in
retained earnings, substantially restricted reflects the $20.6 million of net
earnings for the nine months ended December 31, 1999 partially offset by the
$17.0 million difference between the $10.00 per share original issuance price of
the 1,775,000 shares repurchased and the weighted average price per share of
$19.59 paid to repurchase the shares. The decrease in retained earnings,
substantially restricted also reflects the Company's August 25, and November 23,
1999 declarations of quarterly cash dividends of $0.06 per common share paid on
September and December 30, 1999 to stockholders of record September and December
1999. The $2.8 million decrease in unearned stock-based compensation reflects
the amortization of shares under the Company's ESOP ($1.3 million) and 1996
Incentive Plan ($1.5 million). The $7.1 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 5.15% for the nine months ended December
21
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Management's Discussion and Analysis
(Continued)
31, 1999. Management attempts to maintain a liquidity ratio no higher than
approximately 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 $20.0 million and $47.9 million
for the nine months ended December 31, 1999 and 1998, respectively. Net cash
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 $631.8 million and $621.5 million for the nine months ended December
31, 1999 and 1998, respectively. Loans originated and purchased were $962.5
million and $813.0 million for the nine months ended December 31, 1999 and 1998,
respectively. Disbursements for purchases of mortgage-backed and other
investment securities were $28.1 million and $408.1 million for the nine months
ended December 31, 1999 and 1998, respectively. Proceeds from the maturation of
investment securities and paydowns of mortgage-backed securities were $141.7
million and $319.1 million for the nine months ended December 31, 1999 and 1998,
respectively. Net cash provided by financing activities consisted primarily of
net activity in deposit accounts and FHLB advances and other borrowings. The net
increases in deposits were $8.8 million and $74.2 million for the nine months
ended December 31, 1999 and 1998, respectively. FHLB advances and other
borrowings increased $100.0 million and $86.1 million for the nine months ended
December 31, 1999 and 1998, respectively.
At December 31, 1999, the Bank exceeded all of its regulatory capital
requirements with a tangible capital level of $198.1 million, or 6.58% of
adjusted total assets, which is above the required level of $45.1 million, or
1.5%; core capital of $198.1 million, or 6.58 % of adjusted total assets, which
is above the required level of $90.2 million, or 3.0%, and total risk-based
capital of $222.2 million, or 11.27% of risk-weighted assets, which is above the
required level of $157.7 million, or 8.0%.
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 December 31, 1999
cash and short-term investments totaled $51.2 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 December 31,
1999, the Bank has $864.0 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 December 31, 1999, the Bank had outstanding
commitments to originate and purchase loans of $390.6 million and zero,
respectively, compared to $17.7 million and zero, respectively, at December 31,
1998. At December 31, 1999, and 1998 the Company had no outstanding commitments
to purchase mortgage-backed securities and other
22
<PAGE>
PFF BANCORP, INC. AND SUBSIDIARY
Management's Discussion and Analysis
(Continued)
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 December 31, 1999 totaled $965.0
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.
Year 2000 Readiness Disclosure
The Company undertook actions intended to permit its computer systems and other
equipment to properly process and function on and after January 1, 2000. These
actions were generally described in the Company's 10-Q report for the quarter
ended September 30, 1999. As of February 9, 2000, neither the Company nor its
major suppliers have experienced any material Year 2000 systems or equipment
failures. However, Year 2000 compliance has many elements and potential
consequences, some of which may not be foreseeable or may be realized in future
periods. Therefore, there can be no assurance that unforeseen circumstances may
not arise, or that in the future equipment or systems which are not Year 2000
compliant may not become apparent.
The Company expended approximately $3.0 million in connection with its Year 2000
compliance efforts. Of this $3.0 million, approximately $2.1 million was for
capital expenditures and approximately $900,000 was charged to expense.
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 nine months ended
December 31, 1999.
23
<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
24
<PAGE>
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.
25
<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: February 9, 2000 BY:/s/ LARRY M. RINEHART
-------------------------------
Larry M. Rinehart
President, Chief Executive Officer
and Director
DATED: February 9, 2000 BY:/s/ GREGORY C. TALBOTT
--------------------------------
Gregory C. Talbott
Executive Vice President, Chief
Financial Officer and Treasurer
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 37,122
<INT-BEARING-DEPOSITS> 14,057
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 3,535
<INVESTMENTS-HELD-FOR-SALE> 577,582
<INVESTMENTS-CARRYING> 706
<INVESTMENTS-MARKET> 701
<LOANS> 2,304,826
<ALLOWANCE> 27,066
<TOTAL-ASSETS> 3,028,757
<DEPOSITS> 1,852,337
<SHORT-TERM> 300,000
<LIABILITIES-OTHER> 652,759
<LONG-TERM> 0
0
0
<COMMON> 200
<OTHER-SE> 223,461
<TOTAL-LIABILITIES-AND-EQUITY> 3,028,757
<INTEREST-LOAN> 125,174
<INTEREST-INVEST> 33,389
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 158,563
<INTEREST-DEPOSIT> 58,414
<INTEREST-EXPENSE> 34,101
<INTEREST-INCOME-NET> 66,048
<LOAN-LOSSES> 3,000
<SECURITIES-GAINS> 905
<EXPENSE-OTHER> 40,936
<INCOME-PRETAX> 36,144
<INCOME-PRE-EXTRAORDINARY> 36,144
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,564
<EPS-BASIC> 1.68
<EPS-DILUTED> 1.54
<YIELD-ACTUAL> 7.45
<LOANS-NON> 6,557
<LOANS-PAST> 0
<LOANS-TROUBLED> 4,644
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 26,160
<CHARGE-OFFS> 2,156
<RECOVERIES> 62
<ALLOWANCE-CLOSE> 27,066
<ALLOWANCE-DOMESTIC> 27,066
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
