-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LOiuHbgFVBMPOgcS9rEZohyeNswUiiKfZPWGJDbTtB3uREWwvjo5+Ebot2wR4oFO CDC1ev7aX/az75Y5l9lHIg== 0000898430-99-002634.txt : 19990630 0000898430-99-002634.hdr.sgml : 19990630 ACCESSION NUMBER: 0000898430-99-002634 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990629 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PFF BANCORP INC CENTRAL INDEX KEY: 0001004969 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 954561623 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-27404 FILM NUMBER: 99654174 BUSINESS ADDRESS: STREET 1: 350 SOUTH GAREY AVENUE CITY: POMONA STATE: CA ZIP: 91766 BUSINESS PHONE: 9096232323 MAIL ADDRESS: STREET 1: 350 SOUTH GAREY AVENUE CITY: POMONA STATE: CA ZIP: 91766 10-K405 1 ANNUAL REPORT, FORM 10-K (DATED MARCH 31, 1999) SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K Annual report pursuant to Section 13 of the Securities Exchange Act of 1934, as amended For the fiscal year ended March 31, 1999 Commission File No.: 0-27404 PFF BANCORP, INC. (exact name of registrant as specified in its charter) DELAWARE 95-4561623 (State or other jurisdiction of (I.R.S. Employer I.D. No.) incorporation or organization) 350 South Garey Avenue, Pomona, California 91766 (Address of principal executive offices) Registrant's telephone number, including area code: (909) 623-2323 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 per share (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___. --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, i.e., persons other than the directors and executive officers of the registrant, was $242,389,738, based upon the last sales price as quoted on The NASDAQ National Market for June 17, 1999. The number of shares of Common Stock outstanding as of June 17, 1999: 13,952,370 Documents Incorporated by Reference Portions of the Registrant's Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Annual Meeting of Stockholders to be held September 22, 1999 are incorporated by reference in Part III hereof. INDEX
PART I PAGE ---- Item 1. Description of Business 3 Item 2. Properties 38 Item 3. Legal Proceedings 39 Item 4. Submission of Matters to a vote of Security Holders 39 PART II Item 5. Market for Registrant's Common Equity and Related Stockholders Matters 39 Item 6. Selected Financial Data 40 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 43 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 57 Item 8. Financial Statements and Supplementary Data 58 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 98 PART III Item 10. Directors and Executive Officers of the Registrant 98 Item 11. Executive Compensation 98 Item 12. Security Ownership of Certain Beneficial Owners and Management 98 Item 13. Certain Relationships and Related Transactions 98 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 99
2 PART I Forward-Looking Statements Except for historical information contained herein, the matters discussed in this report contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that involve substantial risks and uncertainties. When used in this report, or in the documents incorporated by reference herein, the words "anticipate," "believe," "estimate," "may," "intend," "expect" and similar expressions identify certain of such forward-looking statements. Actual results of PFF Bancorp, Inc. (the "Bancorp") and PFF Bank & Trust (the "Bank"), (collectively referred to as the "Company") could differ materially from such forward-looking statements contained herein. Factors that could cause future results to vary from current expectations include, but are not limited to, the following: changes in economic conditions (both generally and more specifically in the markets in which the Company operates); changes in interest rates, deposit flows, loan demand, real estate values and competition; changes in accounting principles, policies or guidelines and in government legislation and regulation (which change from time to time and over which the Company has no control); other factors affecting the Company's operations, markets, products and services, including but not limited to, Year 2000 compliance issues; and other risks detailed in this Form 10-K and in the Company's other Securities and Exchange Commission filings. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Item 1. Description of Business. - -------------------------------- General The Bancorp completed its initial public offering of 19,837,500 shares of common stock on March 28, 1996, in connection with the conversion of Pomona First Federal Savings and Loan Association from the mutual to stock form of ownership (the "conversion") and the change of the Association's name to PFF Bank & Trust. The Bancorp received $198.4 million from this initial public offering before offering expenses of $4.5 million. The Bancorp utilized $105.0 million of the net proceeds of the initial public offering to acquire all of the issued and outstanding stock of the Bank. The Bancorp is headquartered in Pomona, California and its principal business currently consists of the operations of its wholly owned subsidiary, the Bank. The Bancorp had no operations prior to March 28, 1996, and accordingly, the results of operations prior to that date reflect only those of the Bank and its subsidiaries. At March 31, 1999, on a consolidated basis, the Company had total assets of $2.9 billion, total deposits of $1.8 billion and total stockholders' equity of $242.7 million. The Bancorp, as a unitary savings and loan holding company, and the Bank, as a federal savings bank, are subject to regulation by the Office of Thrift Supervision (the "OTS"), the Federal Deposit Insurance Corporation (the "FDIC") and the Securities and Exchange Commission (the "SEC"). Prior to the conversion, the Bank's historical focus had been on attracting retail deposits from the general public in the areas surrounding its branch offices and investing those deposits, together with funds generated from operations and borrowings, primarily in one-to-four family residential mortgage loans. To a lesser extent, the Bank engaged and continues to engage in secondary market activities, the origination of multi-family mortgage loans and investment in mortgage-backed securities ("MBS") and other investment securities. The Bank's current emphasis is on attracting business deposit accounts and originating commercial, construction and land (primarily tract construction), commercial real estate and consumer loans. Loan sales come from loans held in the Bank's portfolio designated as being held for sale. The Bank generally retains all the servicing rights of loans sold. The Bank's revenues are derived principally from interest on its loans, and to a lesser extent, interest and dividends on its mortgage-backed (MBS) and other investment securities and to a significantly lesser extent income from deposit related and other fees and loan servicing. The Bank's primary sources of funds are deposits and Federal Home Loan Bank (FHLB) advances and other borrowings, principal and interest payments on loans, MBS and other investment securities. 3 Scheduled payments on loans, MBS and other investment securities are a relatively stable source of funds, while prepayments on loans, MBS and other investment securities and deposit flows are subject to significant fluctuation. The Bank engages in trust activities through its trust department and offers certain annuity and mutual fund non-deposit investment products through a subsidiary. As new technologies become more important to the success of businesses in general and financial institutions in particular, the Bank remains strongly committed to their effective use. The Bank has used the Year 2000 compliance project as a method to assist in evaluating the technologies currently used and to map out directions for new implementations. During fiscal 1999, personal computer operating systems and word processing and spreadsheet programs were upgraded throughout the Bank. Similarly, the Bank is in the final implementation stage of a new mortgage loan origination system, incorporating automated underwriting, tracking, pricing and workflow technology, that will significantly improve the efficiency and speed of mortgage loan approvals and fundings. During fiscal 2000 the Bank plans to implement new messaging and groupware technology to further enhance the efficiency of its employees. The Bank maintains a process of continuous evaluation and enhancement of technologies for file servers, networks and communications. Regular training for technical staff is also recognized as a key component of getting the most out of technologies being used. See Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a further discussion of Year 2000 activities and readiness. Market Area and Competition The Bank is a community-oriented savings institution whose lending, deposit gathering and trust activities are concentrated in eastern Los Angeles, San Bernardino, Riverside and central Orange counties. The Bank also originates loans on a wholesale basis throughout Southern California and has expanded its lending markets outside of Southern California on a limited basis. The Bank's deposit gathering is concentrated in the communities surrounding its offices. The Bank's primary market area is highly competitive for financial services and the Bank faces significant competition both in making loans and in attracting deposits. The Bank faces direct competition from a significant number of financial institutions operating in its market area, many with a state-wide, regional or national presence. Many of these financial institutions are significantly larger and have greater financial resources than the Bank. The Bank's competition for loans comes principally from savings and loan associations, mortgage banking companies, commercial banks, credit unions and insurance companies. Its most direct competition for deposits has historically come from savings and loan associations and commercial banks. In addition, the Bank faces increasing competition for deposits and other financial products from non-bank institutions such as brokerage firms and insurance companies in such areas as short-term money market funds, mutual funds and annuities. Competition may also increase as a result of the lifting of restrictions on the interstate operations of financial institutions. Additionally, the Bank's operations are significantly influenced by general economic conditions, the monetary and fiscal policies of the federal government and the regulatory policies of governmental authorities. Deposit flows and the costs of interest-bearing liabilities to the Bank are influenced by interest rates on competing investments and general market interest rates. Similarly, the Bank's loan volume and yield on loans, MBS and other investment securities and the level of prepayments on loans, MBS and other investment securities are affected by market interest rates, as well as additional factors affecting the supply of and demand for housing and the availability of funds. Trust Activities In January 1995, the Bank acquired the trust operations of another bank for $3.5 million. As a result of the acquisition, the Bank now has additional fiduciary responsibilities acting as trustee, executor, administrator, guardian, custodian, record keeper, agent, registrar, advisor and manager. The trust assets are not the assets of the Bank and are not included in the balance sheet of the Bank. Trust fee income for the year ended March 31, 1999 and 1998 was $1.9 million. See Note 18 to the Consolidated Financial Statements. 4 Lending Activities Loan Portfolio Composition. The Bank's loan portfolio consists primarily of conventional first mortgage loans secured by one-to-four family residences. At March 31, 1999, the Bank had total gross loans outstanding of $2.22 billion, of which $1.48 billion were one-to-four family residential mortgage loans, or 66.8% of the Bank's total gross loans. The remainder of the portfolio consisted of $87.9 million of multi-family mortgage loans, or 4.0% of total gross loans; $156.5 million of commercial real estate loans, or 7.0% of total gross loans; $349.1 million of construction and land loans, or 15.7% of total gross loans; consumer loans of $70.7 million or 3.2% of total gross loans and commercial business loans of $74.5 million or 3.3% of total gross loans. At March 31, 1999, 89.6% of the Bank's total loans had adjustable interest rates of which 37.9% are indexed to the 11th FHLB District Cost of Funds Index (COFI). The types of loans that the Bank may originate are subject to federal and state laws and regulations. Interest rates charged by the Bank on loans are affected by the demand for such loans, the supply of money available for lending purposes and the rates offered by competitors. These factors are, in turn, affected by, among other things, economic conditions, monetary policies of the federal government, including the Federal Reserve Board, and legislative tax policies. 5 The following table sets forth the composition of the Bank's loan portfolio in dollar amounts and as a percentage of the portfolio at the dates indicated.
At March 31, --------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 --------------------------------------------------------------------------------------------- Percent Percent Percent Percent Percent of of of of of Amount Total Amount Total Amount Total Amount Total Amount Total --------------------------------------------------------------------------------------------- (Dollars in thousands) Real estate: Residential: One-to-four family $ 1,482,839 66.8% 1,467,857 75.3% 1,499,858 79.4% 1,269,099 77.9% 1,291,300 78.0% Multi-Family 87,856 4.0 97,350 5.0 108,896 5.8 114,477 7.0 119,802 7.2 Commercial real estate 156,474 7.0 144,035 7.4 137,169 7.2 148,300 9.1 146,746 8.9 Construction and land 349,119 15.7 185,225 9.5 113,188 6.0 76,529 4.7 76,007 4.6 Commercial 74,451 3.3 12,468 0.6 3,100 0.2 - - - - Consumer 70,686 3.2 42,826 2.2 26,931 1.4 21,853 1.3 22,606 1.3 --------------------------------------------------------------------------------------------- Total loans, gross 2,221,425 100.0% 1,949,761 100.0% 1,889,142 100.0% 1,630,258 100.0% 1,656,461 100.0% Undisbursed loan funds (167,042) (95,457) (38,485) (25,030) (25,934) Net premiums on loans 1,665 1,114 (1,629) (803) (1,158) Deferred loan origination fees, net (276) (1,101) (1,362) (3,384) (4,400) Allowance for loan losses (26,160) (26,002) (27,721) (19,741) (19,294) ------------ --------- --------- --------- --------- Total loans, net 2,029,612 1,828,315 1,819,945 1,581,300 1,605,675 Less: Loans held for sale (3,531) (701) (736) (6,365) - ----------- --------- --------- --------- --------- Loans receivable, net $ 2,026,081 1,827,614 1,819,209 1,574,935 1,605,675 =========== ========= ========= ========= =========
6 Loan Maturity. The following table shows the contractual maturity of the Bank's gross loans at March 31, 1999.
At March 31, 1999 ------------------------------------------------------------------------------------------ One-to- Total Four Multi- Commercial Construction and Loans Family Family Real Estate Land Commercial Consumer Receivable ------------------------------------------------------------------------------------------ (Dollars in thousands) Amounts due: One year or less $ 4,941 697 7,492 193,944 18,745 11,009 236,828 After one year: More than one year to three years. 9,209 404 19,794 144,157 20,170 447 194,181 More than three years to five years 3,261 2,198 18,696 - 32,018 462 56,635 More than five years to ten years 23,200 6,778 38,845 - 3,518 3,388 75,729 More than ten years to twenty years 166,042 39,115 64,340 8,200 - 55,198 332,895 More than twenty years 1,276,186 38,664 7,307 2,818 - 182 1,325,157 ------------------------------------------------------------------------------------------ Total due after March 31, 2000 1,477,898 87,159 148,982 155,175 55,706 59,677 1,984,597 ------------------------------------------------------------------------------------------ Total amount due 1,482,839 87,856 156,474 349,119 74,451 70,686 2,221,425 Less: Undisbursed loan funds - - (167,042) - - (167,042) Net premiums on loans 1,645 20 - - - - 1,665 Deferred loan origination fees, net 2,624 (329) (598) (2,582) 310 299 (276) Allowance for loan losses (5,724) (2,026) (2,048) (8,911) (2,761) (4,690) (26,160) ------------------------------------------------------------------------------------------ Total loans, net 1,481,384 85,521 153,828 170,584 72,000 66,295 2,029,612 Loans held for sale (3,531) - - - - - (3,531) ------------------------------------------------------------------------------------------ Loans receivable, net $1,477,853 85,521 153,828 170,584 72,000 66,295 2,026,081 ==========================================================================================
7 The following table sets forth at March 31, 1999, the dollar amount of total gross loans receivable contractually due after March 31, 2000, and whether such loans have fixed interest rates or adjustable interest rates.
Due after March 31, 2000 ---------------------------------------------- Fixed Adjustable Total ---------------------------------------------- (Dollars in Thousands) Real estate loans: (1) Residential: One-to-four family $173,627 1,304,271 1,477,898 Multi-family 17,842 69,317 87,159 Commercial real estate 10,947 138,035 148,982 Construction and land 120 155,055 155,175 Commercial - 55,706 55,706 Consumer 28,930 30,747 59,677 ---------------------------------------------- Total gross loans receivable $231,466 1,753,131 1,984,597 ==============================================
(1) Includes loans held for sale. Origination, Sale, Servicing and Purchase of Loans. The Bank's lending activities are conducted primarily by loan representatives through its 24 banking branches, its loan origination center and wholesale brokers approved by the Bank. All loans originated by the Bank, either through internal sources or through wholesale brokers, are underwritten by the Bank pursuant to the Bank's policies and procedures. The Bank originates both adjustable-rate and fixed-rate loans. The Bank's ability to originate loans is influenced by general economic conditions affecting housing, business and consumer activities as well as the relative customer demand for fixed-rate or adjustable-rate loans, which is affected by the current and expected future levels of interest rates. Loan originations were $987.6 million for fiscal 1999 compared to $557.4 million for fiscal 1998. Beginning during fiscal 1997, the Bank began reducing its emphasis on the origination of one-to-four family residential mortgage loans with a corresponding increased emphasis on the origination of tract construction, commercial, commercial real estate and consumer loans as a means of enhancing the Bank's yield on interest-earning assets. Originations of tract construction, commercial, commercial real estate and consumer loans aggregated $577.8 million or 58.5% of total originations for fiscal 1999 compared to $306.5 million or 55.0% of total originations for fiscal 1998. The weighted average initial contract rate on total originations was 8.58% for fiscal 1999, compared to 8.75% for fiscal 1998. It is the general policy of the Bank to sell substantially all of the 15 and 30-year fixed-rate mortgage loans that it originates and retain substantially all of the adjustable-rate mortgage loans that it originates. The Bank generally utilizes 10-day Federal National Mortgage Association (FNMA) forward commitments in connection with the origination and funding of fixed-rate loans held for sale. The Bank generally retains servicing of the loans sold. At March 31, 1999, the Bank was servicing $325.7 million of loans for others. See "Loan Servicing". When loans are sold on a servicing retained basis, the Company records gains or losses from the sale based on the difference between the net sales proceeds and the allocated basis of the loans sold. The Company capitalizes mortgage servicing rights ("MSRs") through the sale of mortgage loans which are sold with servicing rights retained. The total cost of the mortgage loans designated for sale is allocated to the MSRs and the mortgage loans without the MSRs based on their relative fair values. MSRs are included in the financial statements in the category of "other assets." The Bank had $1.2 million and $1.6 million of MSRs as of March 31, 1999 and 1998, respectively. Impairment losses are recognized through a valuation allowance, with any associated provision recorded as a component of loan servicing fees. At March 31, 1999, there were $3.5 million of mortgage loans categorized as held for sale consisting of fixed-rate one-to-four family residential mortgage loans. 8 To supplement loan production, based upon the Bank's investment needs and market opportunities, the Bank engages in secondary marketing activities, including the purchase of whole or participating interests in loans originated by other institutions. The Bank intends to continue to purchase various types of loans originated by other institutions both in its primary market area and to a limited extent other geographic areas throughout the country depending on market opportunities. The Bank generally purchases loans with servicing retained by the seller. The following tables set forth the Bank's loan originations, purchases, sales and principal repayments for the periods indicated.
For the Years Ended March 31, --------------------------------------------------- 1999 1998 1997 --------------------------------------------------- (Dollars in thousands) Beginning balance(1) $ 1,828,315 1,819,945 1,580,950 Loans originated: One-to-four family 406,445 248,224 354,391 Multi-family 3,371 2,721 4,844 Commercial real estate 27,465 16,693 2,656 Construction and land 384,991 226,321 109,747 Commercial 89,852 19,988 3,719 Consumer 75,480 43,481 24,310 --------------------------------------------------- Total loans originated 987,604 557,428 499,667 Loans purchased 168,395 163,045 28,417 --------------------------------------------------- Total 2,984,314 2,540,418 2,109,034 Less: Principal payments (831,468) (471,544) (225,996) Sales of loans (38,829) (163,035) (27,019) Transfer to foreclosed real estate owned (REO) (14,038) (25,274) (15,661) Change in undisbursed loan funds (71,585) (56,972) (13,695) Change in allowance for loan losses (158) 1,719 (7,980) Other(2) 1,376 3,003 1,262 --------------------------------------------------- Total loans 2,029,612 1,828,315 1,819,945 Loans held for sale, net (3,531) (701) (736) --------------------------------------------------- Ending balance loans receivable, Net $ 2,026,081 1,827,614 1,819,209 ===================================================
______________________ (1) Includes loans held for sale. (2) Includes net capitalization of fees and amortization of premium or accretion of discount on loans. 9 One-to-Four Family Residential Mortgage Lending. The Bank offers both fixed-rate and adjustable-rate mortgage loans with maturities up to 40 years secured by one-to-four family residences substantially all of which are located in the Bank's primary market area. Loan originations are obtained from the Bank's loan representatives and their contacts with the local real estate industry, existing or past customers, members of the local communities and wholesale brokers who are compensated on a fee basis. At March 31, 1999, the Bank's one-to-four family residential mortgage loans totaled $1.48 billion or 66.8% of total loans. Of the $1.48 billion, 29.2% were classified as loans secured by non-owner-occupied properties, which are generally considered to involve a higher degree of credit risk than loans secured by owner-occupied properties because repayment is generally dependent upon the property producing sufficient cash flow to cover debt service and other operating expenses. Of the one-to-four family residential mortgage loans outstanding at March 31, 1999, 88.3% were adjustable-rate loans. The Bank's one- to-four family residential adjustable-rate mortgage loans have historically been primarily indexed to COFI. The Bank has been increasing the origination of adjustable-rate mortgage loans tied to other indices, primarily the one-year CMT index. The Bank currently offers a number of adjustable-rate mortgage loan programs with interest rates that adjust monthly, semi-annually or annually. A portion of the Bank's adjustable-rate mortgage loans have introductory terms below the fully indexed rate. In underwriting such loans, the Bank qualifies the borrowers based upon the fully indexed rate. At the end of the introductory period, such loans will adjust either monthly, semi-annually or annually according to their terms. The Bank's adjustable-rate mortgage loans generally provide for periodic and overall caps on the increase or decrease in interest rate at any adjustment date and over the life of the loan. The Bank currently has a number of mortgage loan programs that may be subject to negative amortization. At March 31, 1999, the outstanding principal balances of these loans totaled $403.8 million (including $30.7 million of loans serviced by others in which the Bank has purchased a participating interest), or 27.3% of total one-to-four family residential mortgage loans. At March 31, 1999, the total outstanding negative amortization on these loans (excluding the $30.7 million of loans serviced by others) was $2.6 million. The negative amortization is generally capped at up to 110% of the original loan amount. Negative amortization involves a greater risk to the Bank because during a period of higher interest rates the loan principal may increase above the amount originally advanced, which may increase the risk of default. However, the Bank believes that the risk of default is reduced by negative amortization caps, underwriting criteria and the stability provided by payment schedules. The Bank's policy is to originate one-to-four family residential mortgage loans in amounts up to 85% of the lower of the appraised value or the selling price of the property securing the loan and up to 95% of the appraised value or selling price if private mortgage insurance is obtained. Mortgage loans originated by the Bank generally include due-on-sale clauses which provide the Bank with the contractual right to deem the loan immediately due and payable in the event the borrower transfers ownership of the property without the Bank's consent. Due-on-sale clauses are an important means of adjusting the rates on the Bank's fixed-rate mortgage loan portfolio and the Bank has generally exercised its rights under these clauses when it has been advantageous for the Bank to do so. Multi-Family Lending. The Bank originates multi-family mortgage loans generally secured by properties located in Southern California. As a result of declining economic conditions in its primary market area during the period of 1990 to 1995, the Bank de-emphasized the origination of multi-family loans through fiscal 1996. The University of California at Los Angeles Economic Forecast has reported an improvement in the Southern California economy which began during fiscal 1997. With that improvement, the Bank has selectively increased loan originations in this type of product. In reaching its decision on whether to make a multi-family loan, the Bank considers a number of factors including: the net operating income of the mortgaged premises before debt service and depreciation; the debt service ratio (the ratio of net operating income to debt service); and the ratio of loan amount to appraised value. Pursuant to the Bank's current underwriting policies, a multi-family mortgage loan may only be made in an amount up to 80% of the appraised value of the underlying property. In addition, the Bank generally requires a debt service ratio of at least 120-125%. Properties securing these loans are appraised and title insurance is required on all loans. Declines in the real estate values in the Bank's primary market area as a result of 10 adverse economic conditions over the past several years, have resulted in an increase in the loan-to-value ratios on some mortgage loans subsequent to origination. However, most segments of the Bank's primary market area are presently experiencing strong economic conditions and real estate value appreciation. When evaluating a multi-family loan, the Bank also considers the financial resources and income level of the borrower, the borrower's experience in owning or managing similar properties, and the Bank's lending experience with the borrower. The Bank's underwriting policies require that the borrower be able to demonstrate strong management skills and the ability to maintain the property from current rental income. The borrower is required to present evidence of the ability to repay the mortgage and a history of making mortgage payments on a timely basis. In making its assessment of the creditworthiness of the borrower, the Bank generally reviews the financial statements, employment and credit history of the borrower, as well as other related documentation. Loans secured by multi-family residential properties generally involve a greater degree of risk than one-to-four family residential mortgage loans. Because payments on loans secured by multi-family properties are often dependent on successful operation or management of the properties, repayment of such loans may be subject to a greater extent to adverse conditions in the real estate market or the economy. The Bank seeks to minimize these risks through its underwriting policies, which require such loans to be qualified at origination on the basis of the property's income and debt service ratio. The Bank's multi-family loan portfolio at March 31, 1999 totaled $87.9 million or 4.0% of total gross loans. At March 31, 1999, 80.0% of the Bank's multi-family loans were adjustable-rate indexed to COFI. The Bank's largest multi-family loan at March 31, 1999, had an outstanding balance of $3.0 million and is secured by a 51-unit apartment complex. Commercial Real Estate Lending. The Bank originates commercial real estate loans that are generally secured by properties such as small office buildings or retail facilities located in Southern California. The Bank's underwriting policies provide that commercial real estate loans may be made in amounts up to 75% of the appraised value of the property. These loans may be made with terms up to thirty years and have generally been indexed to COFI. However, the Bank has begun to originate loans of this type which are indexed to either the one- year CMT or six-month London Interbank Offered Rate (LIBOR) in an effort to diversify away from COFI indexed loan products. Terms on such loans are generally 5 to 7 years with 25 to 30 year amortization. The Bank's underwriting standards and procedures are similar to those applicable to its multi-family loans, whereby the Bank considers the net operating income of the property and the borrower's expertise, credit history and profitability. The Bank has generally required that the properties securing commercial real estate loans have debt service ratios of at least 120%. The largest commercial real estate loan in the Bank's portfolio at March 31, 1999 was $3.4 million and is secured by a gas station in Ontario, California. At March 31, 1999, the Bank's commercial real estate loan portfolio was $156.5 million, or 7.0% of total gross loans. Loans secured by commercial real estate properties, like multi-family loans, are generally larger and involve a greater degree of risk than one-to- four family residential mortgage loans. Because payments on loans secured by commercial real estate properties are often dependent upon the successful operation or management of the properties, repayment of such loans may be influenced to a great extent by conditions in the real estate market or the economy. The Bank seeks to minimize these risks through its underwriting standards, which require such loans to be qualified on the basis of the property's income and debt service ratio. Land loans are underwritten on an individual basis, but generally do not exceed 65% of the actual cost or current appraised value of the property, whichever is less. Construction and Land Lending. The Bank generally originates construction loans to real estate developers and individuals in Southern California. The Bank has expanded, on a selective basis, construction lending to western states other than California. Such expansion has been undertaken with developers with whom the Bank has had long-term lending relationships. As of March 31, 1999, the Bank had construction loans outstanding for development of residential properties located in Colorado, Nevada, Arizona and Oregon totaling $15.6 million, $11.8 million of which was disbursed. As of March 31, 1999, the remainder 11 of the Bank's construction loans were for development of real estate located in California. The Bank's construction loans primarily are made to finance tract construction of one-to-four family residential properties. These loans are all adjustable-rate with maturities of one year or less and generally include extension options of six to eighteen months upon payment of an additional fee. The Bank's policies provide that construction loans may be made in amounts up to 75% of the appraised value of the property for construction of commercial properties, up to 80% for multi-family properties and up to 85% for one-to-four family residences. The Bank requires an independent appraisal of the property and generally requires personal guarantees. Loan proceeds are disbursed as construction progresses and as inspections warrant. The Bank's inspectors generally visit projects on a weekly basis to monitor the progress of construction. The largest credit exposure in the construction loan portfolio as of March 31, 1999 consists of one loan for $16.7 million for the development of a master planned community located in southeastern San Bernardino, California. The aggregate disbursed balance of these loans at March 31, 1999 was $10.5 million. Repayment is to come from the sale of planning areas to merchant builders. The second largest loan in the Bank's construction loan portfolio at March 31, 1999 had a balance of $10.1 million, for the development of a 296 home residential development in northern Los Angeles County. Repayment is to come from home sales to individual home buyers. At March 31, 1999, the balance of the Bank's construction and land loan portfolio was $349.1 million (15.7% of total gross loans), $182.1 million of which was disbursed. At March 31, 1999 the aggregate balances of loans for the construction of properties other than one-to-four family residences was $30.5 million, $19.4 million of which was disbursed. Construction financing is generally considered to involve a higher degree of credit risk than long-term financing on improved, owner-occupied real estate. Mitigation of risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property's value at completion of construction or development compared to the estimated cost (including interest) of construction. If the estimate of value proves to be inaccurate, the Bank may be confronted with a project, when completed, having a value which is insufficient to assure full repayment of the Bank's loan. Consumer and Other Lending. The Bank's originated consumer loans consist primarily of home equity lines of credit ($60.7 million) and secured and unsecured personal loans and lines of credit ($10.0 million). At March 31, 1999, the Bank's total consumer loan portfolio was $70.7 million or 3.2% of total gross loans. Commercial Lending. The Bank has expanded its operations to include commercial business lending. The year ended March 31, 1997 was the Bank's first full year of originating commercial business loans. Total term and revolving line of credit loans in the portfolio as of March 31, 1999 were $113.9 million, $74.5 million of which was outstanding. The largest loan in the commercial portfolio is a $16.3 million term loan to a computer software manufacturer specializing in modem and data transfer technology. This loan is secured by equipment, inventory and accounts receivable and repayment is expected to come from earnings. The second largest loan is a $5.0 million line of credit to an equipment leasing company. This loan is secured by the equipment leases and repayment is expected to come from earnings. Commercial business lending is generally considered to involve a higher degree of credit risk than the forms of secured real estate lending in which the Bank has traditionally engaged. Commercial business loans may be originated on an unsecured basis or may be secured by collateral that is not readily marketable. The Bank generally requires personal guarantees on its commercial business loans. The risk of default by a commercial business borrower may be influenced by numerous factors which may include the strength of the worldwide, regional or local economies or sectors thereof, changes in technology or demand for particular goods and services and the ongoing ability of the commercial business borrower to successfully manage the business. Because of these risks, the Bank monitors the performance of its commercial business loans and the underlying businesses and individuals with a different focus than is typical of traditional one-to-four family residential mortgage lending. The monitoring of commercial business loans typically involves the periodic review of the financial statements and on-site visits to the businesses to which credit has been extended. 12 Loan Approval Procedures and Authority. The Board of Directors establishes the lending policies of the Bank and delegates lending authority and responsibility to the Loan Origination and Asset Review Committee (LOARC), the Management Loan Committee and specified officers of the Bank. The LOARC includes four of the six outside Directors of the Bank as well as selected senior management staff. All loans must be approved by a majority of a quorum of the designated committee, group of officers or the designated individual. The following committees, groups of officers and individual officers are granted the authority to approve and commit the Bank to the funding of the following categories of loans: mortgage loans in amounts up to $299,999 and consumer loans in amounts up to $199,999 may be approved by the Bank's staff underwriters; mortgage loans in excess of $299,999 and up to $499,999 and consumer loans in excess of $199,999 and up to $299,999 may be approved by certain department managers; commercial business loans up to $499,999 may be approved by the Commercial Credit Administrator or Chief Lending Officer; mortgage loans in excess of $499,999 and up to $999,999 may be approved by the Major Loan Manager, the Senior Executive Vice President or Chief Lending Officer; mortgage loans in excess of $999,999 and up to $2,999,999, consumer loans in excess of $299,999 and up to $449,999 and commercial business loans in excess of $499,999 and up to $1,999,999 must be approved by the Management Loan Committee; and mortgage loans of $3.0 million or more, consumer loans in excess of $450,000 and commercial business loans of $2.0 million or more require the approval of the LOARC. The LOARC presently reviews all commercial business loans, post funding, for consistency with the Bank's goals and objectives. Since March 31, 1998 the Bank has also contracted with an independent credit review firm for the post funding review of all commercial business loans in excess of $500,000. This credit review firm is comprised of experienced former federal bank examiners. The Bank will not make loans-to-one borrower that are in excess of regulatory limits. Pursuant to OTS regulations, loans-to-one borrower cannot exceed 15% of the Bank's unimpaired capital and surplus. At March 31, 1999 the Bank's limit on loans-to-one borrower was $33.4 million. Loan Servicing. The Bank also services mortgage loans for others. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, making inspections of mortgaged premises as required, contacting delinquent mortgagors, supervising foreclosures and property dispositions in the event of unremedied defaults, making certain borrower insurance and tax payments are made and generally administering the loans. All of the loans currently being serviced for others are loans that have been sold by the Bank. At March 31, 1999, the Bank was servicing $325.7 million of loans for others. The Bank currently does not purchase servicing rights related to mortgage loans originated by other institutions. Delinquencies and Classified Assets. The Board of Directors generally performs a monthly review of all delinquent loans ninety days or more past due. In addition, management reviews on an ongoing basis all loans 15 or more days delinquent. The procedures taken by the Bank with respect to delinquencies vary depending on the nature of the loan and period of delinquency. The Bank generally sends the borrower a written notice of non-payment 15 days after the loan is first past due. In the event payment is not then received, additional letters and phone calls generally are made. If the loan is still not brought current and it becomes necessary for the Bank to take legal action, which typically occurs after a loan is delinquent at least 30 days or more, the Bank will commence foreclosure proceedings against the real property that secures the loan. If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the Bank generally takes possession of the real property securing the loan ("REO") and subsequently sells the property. Federal regulations and the Bank's Internal Asset Review Policy require that the Bank utilize an internal asset classification system as a means of reporting problem and potential problem assets. The Bank has incorporated the OTS internal asset classifications as a part of its credit monitoring system. The Bank currently classifies problem and potential problem assets as "Substandard," "Doubtful," or "Loss". An asset is considered Substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those characterized by the "distinct possibility" that the Bank will sustain "some loss" if the deficiencies are not corrected. Assets classified as Doubtful have all of the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, 13 conditions, and values, "highly questionable and improbable." Assets classified as Loss are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss allowance is not warranted. Assets which do not currently expose the Bank to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated "Special Mention." When the Bank classifies one or more assets, or portions thereof, as Substandard or Doubtful, under current OTS policy, the Bank is required to consider establishing a valuation allowance in an amount deemed prudent by management to recognize the inherent credit risk associated with the asset. When the Bank classifies one or more assets, or portions thereof, as Loss, it is required either to establish a valuation allowance equal to 100% of the amount of the asset so classified or to charge off such amount. The Bank has adopted a policy of charging off all amounts classified as Loss. The Bank's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OTS who can order the establishment of additional loss allowances. The OTS, in conjunction with the other federal banking agencies, has adopted an interagency policy statement on the allowance for loan and lease losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate allowances and guidance for banking agency examiners to use in determining the adequacy of valuation allowances. Generally, the policy statement recommends that institutions have effective systems and controls to identify, monitor and address asset quality problems; that management analyze all significant factors that affect the collectibility of the portfolio in a reasonable manner; and that management establish acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. As a result of the declines in local and regional real estate market values and the significant losses experienced by many financial institutions in the past, there has been a greater level of scrutiny by regulatory authorities of the loan portfolios of financial institutions undertaken as part of the examination of institutions by the OTS and the FDIC. While the Bank believes that it has established an adequate allowance for loan losses, there can be no assurance that regulators, in reviewing the Bank's loan portfolio, will not request the Bank to materially increase its allowance for loan losses, thereby negatively affecting the Bank's financial condition and earnings. Although management believes that an adequate allowance for loan losses has been established, further additions to the level of allowance for loan losses may become necessary. The LOARC reviews and classifies the Bank's assets monthly and reports the results of its review to the Board of Directors. The Bank classifies assets in accordance with the management guidelines described above. REO is classified as Substandard. The Bank utilizes an internal appraisal staff and Board approved independent appraisers to conduct appraisals at the time of foreclosure and subsequent appraisals on REO on a periodic basis. Qualified staff appraisers are also utilized for annual property inspections on all income producing properties with a loan balance over $1.0 million and other specified properties. Property inspections are intended to provide updated information concerning occupancy, maintenance, current rent levels, and changes in market conditions. At March 31, 1999, the Bank had $17.2 million of assets classified as Special Mention, on which there were no allowances compared to $15.3 million classified as Special Mention, net of allowances of $248,000 at March 31, 1998. The main component of assets classified as Special Mention at March 31, 1999 were: 45 loans totaling $5.7 million secured by one-to-four family residences; and nine large non-homogeneous loans (defined as loans with unpaid principal balances in excess of $500,000) which aggregated $9.7 million. At March 31, 1999, the Bank had $35.9 million of assets classified as Substandard, net of allowances of $3.0 million, compared to $41.7 million classified as Substandard, net of allowances of $5.1 million at March 31, 1998. The $5.8 million decrease in assets classified as Substandard, net between March 31, 1998 and 1999 was primarily attributable to improvement in commercial real estate loans classified as Substandard which decreased from 10 loans totaling $10.2 million, before allowances at March 31, 1998 to 9 loans totaling $5.8 million, before allowances at March 31, 1999. Multi-family loans classified as Substandard decreased from 17 loans totaling $6.1 million, before allowances at March 31, 1998 to 12 loans totaling $4.0 million, before allowances at March 31, 1999. 14 The Bank's present policy is generally to continue to classify a troubled- debt restructured (TDR) loan as Substandard until the asset has performed at normal contract terms for a period of six to twelve months. Where there has been a forgiveness of principal or interest or a submarket interest rate granted, the loan is generally considered a TDR. Although the economy, in general, improved during fiscal 1999, the Bank continued to utilize early intervention and flexibility in restructuring some troubled loans with borrowers rather than foreclosing on the underlying properties. See "Non-Accrual and Past-Due Loans". At March 31, 1999 and 1998 there were no assets classified as Loss and only one asset at March 31, 1998 classified as Doubtful for $17,000. The composition of assets classified Substandard at March 31, 1999 and 1998 is set forth on the following page. 15
At March 31, 1999 ----------------------------------------------------------------------------------------------------- Loans REO Total Substandard Assets ----------------------------------------------------------------------------------------------------- Gross Net Number Gross Net Number Gross Net Number Balance Balance(1) of Loans Balance Balance(1) of Loans Balance Balance(1) of Loans ----------------------------------------------------------------------------------------------------- (Dollars in thousands) Real Estate: Residential: One-to-four family $18,327 $17,179 144 $4,996 $4,974 56 $23,323 $22,153 200 Multi-family 4,038 3,249 12 - - - 4,038 3,249 12 Commercial real estate 5,769 5,427 9 - - - 5,769 5,427 9 Construction and land 2,448 2,213 4 767 344 1 3,215 2,557 5 ----------------------------------------------------------------------------------------------------- Sub Total 30,582 28,068 169 5,763 5,318 57 36,345 33,386 226 Commercial 2,504 2,504 9 - - - 2,504 2,504 9 ----------------------------------------------------------------------------------------------------- Grand Total $33,086 $30,572 178 $5,763 $5,318 57 $38,849 $35,890 235 =====================================================================================================
At March 31, 1998 ----------------------------------------------------------------------------------------------------- Loans REO Total Substandard Assets ----------------------------------------------------------------------------------------------------- Gross NEt Number Gross Net Number Gross Net Number Balance Balance(1) of Loans Balance Balance(1) of Loans Balance Balance(1) of Loans ----------------------------------------------------------------------------------------------------- (Dollars in thousands) Real Estate: Residential: One-to-four family $21,084 $18,537 172 $5,956 $5,956 74 $27,040 $24,493 246 Multi-family 6,102 4,725 17 414 414 2 6,516 5,139 19 Commercial real estate 10,197 9,644 10 512 512 1 10,709 10,156 11 Construction and land 996 996 2 1,316 713 5 2,312 1,709 7 ----------------------------------------------------------------------------------------------------- Sub Total 38,379 33,902 201 8,198 7,595 82 46,577 41,497 283 ----------------------------------------------------------------------------------------------------- Commercial 183 183 3 - - - 183 183 3 ----------------------------------------------------------------------------------------------------- Grand Total $38,562 $34,085 204 $8,198 $7,595 82 $46,760 $41,680 286 =====================================================================================================
_________________________ (1) Net balances are reduced for loss allowances established against Substandard loans and REO. 16 Non-Accrual and Past-Due Loans. The following table sets forth information regarding non-accrual loans, REO and TDR loans. There were 24 TDR loans and 57 REO properties at March 31, 1999. It is the policy of the Bank to cease accruing and establish an allowance for all previously accrued but unpaid interest on loans 90 days or more past due. For the years ended March 31, 1999, 1998, 1997, 1996, and 1995, the amount of interest income that would have been recognized on non-accrual loans if such loans had continued to perform in accordance with their contractual terms was $1.1 million, $1.7 million, $2.2 million, $858,000, and $987,000, respectively, none of which was recognized. During the year ended March 31, 1999 and 1998, the Company's average investment in impaired loans was $17,941 and $20,988, respectively and interest income recorded during these periods was $916 and $776, respectively of which $887 and $845, respectively was recorded utilizing the cash basis method of accounting. For the same period, the amount of interest income that would have been recognized on TDR loans if such loans had continued to perform in accordance with their contractual terms was $1.0 million, $1.2 million, $1.3 million, $1.2 million, and $506,000, respectively; $887,000, $779,000, $942,000, $891,000, and $326,000, of which was recognized. The decrease in TDR loans from $12.5 million at March 31, 1998 to $11.3 million at March 31, 1999 reflects a decrease in the number of TDR loans from 32 at March 31, 1998 to 24 at March 31, 1999. During March 1999, the Bank entered into an agreement to sell for $1.8 million, 12 TDR loans with principal balances aggregating $2.3 million before previously established specific allowances for losses aggregating $860,000. Upon consummation of this sale during April 1999, the TDR loans balance decreased by $2.3 million and the Bank's allowance for losses decreased by $860,000. The consummation of this sale did not have a material impact on earnings.
At March 31, ------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ------------------------------------------------------------------------------- (Dollars in thousands) Non-accrual loans: Residential real estate: One-to-four family $ 10,061 13,834 19,258 17,794 14,418 Multi-family 122 467 790 1,558 4,331 Commercial real estate - 2,717 1,331 - - Construction and land 647 131 1,447 3,254 4,521 Consumer 182 40 524 345 443 ------------------------------------------------------------------------------- Total 11,012 17,189 23,350 22,951 23,713 REO, net(1) 5,318 7,595 7,745 6,733 8,007 ------------------------------------------------------------------------------- Non-performing assets $ 16,330 24,784 31,095 29,684 31,720 =============================================================================== TDR loans $ 11,291 12,505 14,559 13,810 4,896 =============================================================================== Classified assets, gross $ 39,058 46,758 56,462 53,702 41,329 Allowance for loan losses as a percent of gross loans 1.18% 1.33% 1.47% 1.21% 1.16% receivable(2) Allowance for loan losses as a percent of total non-performing loans(3) 237.56 151.27 118.72 86.01 81.36 Non-performing loans as a percent of gross loans receivable(2)(3) 0.50 0.88 1.24 1.41 1.43 Non-performing assets as a percent of total assets(3) 0.56 0.88 1.23 1.48 1.72
________________________ (1) REO balances are shown net of related loss allowances. (2) Gross loans include loans receivable held for investment and loans receivable held for sale and excludes loans held for accelerated disposition. (3) Non-performing assets consist of non-performing loans and REO. Non- performing loans consist of all loans 90 days or more past due and all other non-accrual loans. 17 The following table sets forth delinquencies in the Bank's loan portfolio as of the dates indicated.
At March 31, 1999 At March 31, 1998 ---------------------------------------------------------------------------------------------------------- 60-89 Days 90 days or more(1) 60-89 days 90 days or more(1) Principal Principal Principal Principal Number Balance Number Balance Number Balance Number Balance of loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans ---------------------------------------------------------------------------------------------------------- (Dollars in thousands) One-to-four family 22 $1,837 91 $10,061 38 $3,774 117 $13,834 Multi-family - - 1 122 - - 3 467 Commercial real estate - - - - - - 5 2,717 Construction and land - - - - - - 1 131 Commercial - - 1 647 - - - - Consumer 2 41 14 182 5 46 16 40 ---------------------------------------------------------------------------------------------------------- Total 24 $1,878 107 $11,012 43 $3,820 142 $17,189 ==========================================================================================================
At March 31, 1997 ------------------------------------------------------------- 60-89 Days 90 Days or More(1) ------------------------------------------------------------- Principal Principal Number Balance Number Balance of Loans of Loans of Loans of Loans ------------------------------------------------------------- (Dollars in thousands) One-to-four family 46 $2,629 56 $19,258 Multi-family 1 118 2 790 Commercial real estate 2 675 2 1,331 Construction and land - - 1 1,447 Commercial - - - - Consumer 188 283 215 524 ------------------------------------------------------------ Total 237 $3,705 276 $23,350 =============================================================
____________________ (1) Loans 90 days or more past due are included in non-accrual loans. See "Non-Accrual and Past Due Loans." 18 Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses based on management's evaluation of the risks inherent in the Bank's loan portfolio and the general economy. The Bank's allowance evaluation methodology takes into account the changing composition of the loan portfolio and the increased proportion of the portfolio comprised by the Four C's. The allowance for loan losses is maintained at an amount management considers adequate to cover losses on loans receivable, which are deemed probable and estimable. The allowance is based upon a number of factors, including current economic conditions, actual loss experience and industry trends. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to make additional provisions for loan losses based upon information available at the time of the examination. At March 31, 1999, the Bank's allowance for loan losses was $26.2 million or 1.18% of gross loans and 237.56% of non-performing loans compared to $26.0 million or 1.33% of gross loans and 151.27% of non-performing loans at March 31, 1998. At March 31, 1999, the Bank had non-accrual loans of $11.0 million or .50% of gross loans compared to $17.2 million or .88% of gross loans at March 31, 1998. The Bank will continue to monitor and modify its allowance for loan losses as economic conditions, loss experience, changes in portfolio composition and other factors dictate. During the year ended March 31, 1994, in connection with a program for the rapid reduction of problem loans, the Bank identified loans for accelerated disposition with an aggregate principal balance of $33.3 million, which resulted in a $10.7 million provision for loan losses and a charge-off of the same amount for the year ended March 31, 1994. During the year ended March 31, 1995, and prior to the consummation of the sale of the $33.3 million of loans, additional loans with aggregate principal balances of $4.0 million were added to the accelerated disposition program. The inclusion of this additional $4.0 million in the accelerated disposition coupled with receipt of final pricing on the entire $37.3 million of loans held for accelerated disposition resulted in a $2.1 million charge to the provision for loan losses during the year ended March 31, 1995. The closing of the sale of the $37.3 million of loans held for accelerated disposition occurred in September 1994. During the year ended March 31, 1996, the Bank identified loans for accelerated disposition with an aggregate principal balance of $8.8 million, which resulted in a $2.7 million provision for loan losses and a charge-off of the same amount for the year ended March 31, 1996. The closing of the sale of the $8.8 million of loans held for accelerated disposition occurred in December 1995. The following table sets forth activity in the Bank's allowance for loan losses for the periods set forth in the table.
For the Year Ended March 31, --------------------------------------------------------------------------- 1999 1998 1997 1996 1995 --------------------------------------------------------------------------- (Dollars in Thousands) Beginning balance $26,002 27,721 19,741 19,294 11,723 Provision for loan losses 4,020 7,099 13,661 10,895 13,901 Charge-offs: Real estate: One-to-four family (3,361) (7,251) (4,190) (5,089) (3,493) Multi-family (115) (316) (134) (1,635) (98) Commercial real estate - (188) (842) - (420) Construction and land (31) (1,012) (313) (589) (113) Commercial Consumer (372) (343) (303) (422) (121) Loans held for accelerated disposition - - - (2,716) (2,090) ---------------------------------------------------------------------------- Total (3,879) (9,110) (5,782) (10,451) (6,335) Recoveries 17 292 101 3 5 ---------------------------------------------------------------------------- Ending balance $26,160 26,002 27,721 19,741 19,294 =========================================================================== Net charge-offs to average gross loans outstanding 0.17% 0.47% 0.31% 0.64% 0.38%
19 The following tables set forth the amount of the Bank's allowance for loan losses, the percent of allowance for loan losses to total allowance and the percent of gross loans to total gross loans in each of the categories listed at the dates indicated.
At March 31, ------------------------------------------------------------------------------------------------------------ 1999 1998 1997 ------------------------------------------------------------------------------------------------------------ Percent of Percent of Percent of Gross Loans Gross Loans Gross Loans Percent of in each Percent of in each Percent of in each Allowance Category to Allowance Category to Allowance Category to to Total Total Gross to Total Total Gross to Total Total Gross Amount Allowance Loans Amount Allowance Loans Amount Allowance Loans ------------------------------------------------------------------------------------------------------------ (Dollars in thousands) One-to-four $ 5,721 21.87% 66.75% $10,766 41.40% 75.28% $13,841 49.93% 79.39% family Multi-family 2,026 7.74 3.95 3,133 12.05 4.99 3,410 12.30 5.77 Commercial real 2,048 7.83 7.04 3,898 14.99 7.39 4,648 16.77 7.26 estate Construction 8,911 34.06 15.72 4,454 17.13 9.50 4,103 14.80 5.99 and land Commercial 2,761 10.56 3.36 3,024 11.63 0.64 56 0.20 0.16 Consumer 4,690 17.93 3.18 473 1.82 2.20 1,586 5.72 1.43 Unallocated 3 0.01 - 254 0.98 - 77 0.28 - ------------------------------------------------------------------------------------------------------------ Total allowance for loan losses $26,160 100.0% 100.0% $26,002 100.00% 100.00% $27,721 100.00% 100.00% ============================================================================================================
At March 31, --------------------------------------------------------------------------- 1996 1995 --------------------------------------------------------------------------- Percent of Percent of Gross Loans Gross Loans Percent of in each Percent of in each Allowance Category to Allowance Category to to Total Total Gross to Total Total Gross Amount Allowance Loans Amount Allowance Loans --------------------------------------------------------------------------- (Dollars in thousands) One-to-four $ 9,687 49.07% 77.85% $ 9,710 50.33% 77.96% family Multi-family 3,468 17.57 7.02 2,485 12.88 7.23 Commercial real 3,116 15.78 9.10 2,160 11.20 8.86 estate Construction 2,413 12.22 4.69 3,826 19.83 4.59 Commercial - - - - - - Consumer 730 3.70 1.34 653 3.38 1.36 Unallocated 327 1.66 - 460 2.38 - --------------------------------------------------------------------------- Total allowance for loan losses $19,741 100.00% 100.00% $19,294 100.00% 100.00% ===========================================================================
20 Real Estate At March 31, 1999, the Company had $5.3 million of REO and $6.4 million of real estate acquired for investment (REI), net of allowances. If the Bank acquires any REO, it is initially recorded at fair value. If there is a further deterioration in va value, the Bank provides for a specific valuation allowance and charges operations for the diminution in value. It is the policy of the Bank to obtain an appraisal on all REO at the time of possession. Prior to fiscal 1999, REI consisted of a former branch facility and land acquired for a new branch site, which the Bank subsequently decided to not pursue, and a security interest in 26 lots held for development through the Bank's service corporation. The former branch facility was disposed of during the year ended March 31, 1996 and the security interest in the 26 lots paid in full in February 1999. The Bank is currently exploring opportunities for sale of the land originally acquired for the new branch site. During fiscal 1999, the Bancorp provided "mezzanine" investment financing for three residential real estate development projects. The three projects are being undertaken by developers with whom the Bank has had a long history of successful construction lending activities. The largest investment was $6.0 million on a project for lot development and construction of 296 single-family homes in northern Los Angeles County. At March 31, 1999, the balance of this investment was $3.96 million. This investment is subordinated to $23.9 million in development and phased construction loans made by the Bank on this project, $7.7 million of which has been disbursed as of March 31, 1999. The Bancorp expects this investment to be repaid along with the associated profits by December 2000. The second investment was $1.7 million for a project for development of 56 lots in a new master- planned community in southeastern San Bernardino County. This investment was made in March 1999 and there have been no paydowns expected or made to date. The developer of this project is not related to nor affiliated with the first project noted. This investment is not subordinated to any loans of the Bank. However, the Bank does have a loan commitment of $16.7 million outstanding to an unrelated developer for infrastructure improvements (e.g. flood control channels, etc.) in connection with this master-planned community. The Bancorp expects this investment to be repaid, along with the associated profits by July 2000. The third investment was for $111,500 to provide a short term escrow deposit on a property in Ventura County. All of these investments provide for a preferential return to the Bancorp of between 11.00% and 29.25% per annum on the outstanding balance of the Bancorp's investment. The Bancorp is accounting for these investments as direct investments in real estate and as such is deferring all profit in excess of its cost of capital until its investment is paid down by funds received from third party buyers of finished lots or homes. During the year ended March 31, 1999 the Company recognized $246,000 of profit on these investments. The following table sets forth certain information with regard to the Bank's REO and REI.
At March 31, ------------------------------------------------------------------------------------ 1999 1998 1997 1996 1995 ------------------------------------------------------------------------------------ (Dollars in thousands) REO - --- Properties acquired in settlement of loans(REO) $ 5,763 8,198 8,074 11,495 13,028 Allowance for losses (445) (603) (329) (4,762) (5,021) ------------------------------------------------------------------------------------ REO, net 5,318 7,595 7,745 6,733 8,007 ------------------------------------------------------------------------------------ REI - --- Properties wholly owned 558 731 1,113 911 1,449 Mezzanine equity investments in real estate 5,813 - - - - Allowance for losses - - - - (419) ------------------------------------------------------------------------------------ REI, net 6,371 731 1,113 911 1,030 ------------------------------------------------------------------------------------ Total real estate, net $11,689 8,326 8,858 7,644 9,037 ====================================================================================
21 Investment Activities Federally chartered savings institutions have the authority to invest in various types of liquid assets, including United States Treasury obligations, securities of various federal agencies, certificates of deposit of insured banks and savings institutions, bankers' acceptances, repurchase agreements and federal funds. Subject to various restrictions, federally chartered savings institutions may also invest their assets in commercial paper, investment-grade corporate debt securities and mutual funds whose assets conform to the investments that a federally chartered savings institution is otherwise authorized to make directly. Additionally, the Bank must maintain minimum levels of investments that qualify as liquid assets under OTS regulations. See "Regulation and Supervision - Federal Savings Institution Regulation - Liquidity." Historically, the Bank has maintained liquid assets above the minimum OTS requirements and at a level considered to be adequate to meet its normal daily activities. The investment policy of the Bank, as established by the Board of Directors, attempts to provide and maintain liquidity, generate a favorable return on investments without incurring undue interest rate or credit risk, and complement the Bank's lending activities. Specifically, the Bank's policies generally limit investments to government and federal agency-backed securities and MBS and other non-government guaranteed securities, including corporate debt obligations, that are investment grade. On November 4, 1998 the OTS issued Thrift Bulletin 73 (TB73) "Trust Preferred Securities" which, among other things, limits the aggregate investment in investment grade trust preferred securities for OTS supervised institutions to 15 percent of total capital. At the time TB73 was issued, the Bank's aggregate investment in such securities of $52.4 million, exceeded the OTS limitation by $23.0 million. The Bank applied for and was granted a waiver by the OTS permitting the Bank to continue to hold its trust preferred securities. At March 31, 1999, the Bank's aggregate investment in trust preferred securities is $44.7 million which represents 21.80% of the Bank's total capital. The investment powers of the Bancorp are substantially broader than those permitted for the Bank. The investment policy of the Bancorp as established by its Board of Directors, while generally consistent with that of the Bank, permits the investment by the Bancorp in equity securities and non-rated corporate debt obligations. At March 31, 1999, the Bancorp had direct equity investments (excluding REI) of $1.8 million, investments in equity mutual funds of $5.4 million and investments in non-rated corporate debt obligations (trust preferred debt securities) of $13.1 million. Given the non-rated nature of the Bancorp's investments in trust preferred debt securities along with the longer- term (typically 30 years) structure of the obligations, the Bancorp undertakes a review of the historical and current financial condition and operating results of the issuer prior to making an investment. These reviews are updated periodically during the holding periods for the investments. A portion of Bancorp's direct equity investments are managed by the Bank's trust department on a no fee basis. The Bancorp's equity mutual fund investments are placed with fund managers with whom the Bancorp's Senior Management is familiar. The performance of the Bancorp's direct and mutual fund equity investments is reviewed no less frequently than monthly by the Bancorp's Senior Management and no less frequently than quarterly by the Bancorp's Board of Directors. Unlike the securities comprising the Bank's investment portfolio, which by their nature present little to no risk of loss of principal or interest, the trust preferred debt securities and equity investments of the Bancorp are subject to partial or complete diminution in market value upon the occurrence of adverse economic events affecting the issuers of the securities. At March 31, 1999, the Company had $190.1 million in investment securities consisting primarily of investment grade corporate and U.S. agency securities including $17.5 million of U.S. agency securities that are callable at par by the issuers at specified dates prior to maturity. The Company invests in such callable securities when the yields to each call date and to final maturity exceed those available from comparable term and credit quality non-callable securities by amounts which management deems sufficient to compensate the Company for the call options inherent in the securities. The Company's MBS portfolio 22 consists of adjustable-rate securities tied to the one-year CMT (43.40% of the portfolio), or six-month LIBOR (1.00% of the portfolio), seasoned fixed-rate securities (13.39% of the portfolio) and five and seven year balloon securities (42.21% of the portfolio). At March 31, 1999, the carrying value of the Company's MBS portfolio totaled $526.1 million, $525.6 million or 99.90% of which was classified as available-for-sale. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Comparison of Financial Condition at March 31, 1999 and March 31, 1998." All of the Company's MBS were insured or guaranteed by either the Government National Mortgage Association (GNMA), FNMA or the Federal Home Loan Mortgage Corporation (FHLMC). Investments in MBS involve a risk that actual prepayments will vary from the estimated prepayments over the life of the security. This may require adjustments to the amortization of any premium or accretion of any discount relating to such instruments, thereby reducing the net yield on such securities. There is also reinvestment risk associated with the cash flows from such securities. In addition, the market value of such securities may be adversely affected by changes in interest rates. The Company's Collateralized Mortgage Obligations (CMO) portfolio consists principally of adjustable rate securities tied to the one or three month LIBOR or the Prime rate. The adjustment intervals for these securities are generally monthly. All of the Company's $102.7 million CMO portfolio is backed by mortgages insured by FNMA or FHLMC. As with MBS, CMOs involve a risk that actual levels of prepayments will require an adjustment to the amortization of any premium or accretion of any discounts on the security with an adverse impact on the yield on the security. Additionally, the structure of many CMOs is such that their cash flows exhibit greater sensitivity to changes in prepayments than do traditional MBS. The following table sets forth certain information regarding the carrying and fair values of the Company's mortgage-backed securities at the dates indicated.
At March 31, ------------------------------------------------------------------------------------ 1999 1998 1997 ------------------------------------------------------------------------------------ Carrying Fair Carrying Fair Carrying Fair Value Value Value Value Value Value ------------------------------------------------------------------------------------ (Dollars in thousands) Held-to-maturity: FHLMC $ 556 560 1,373 1,375 5,490 5,509 ------------------------------------------------------------------------------------ Total held-to-maturity 556 560 1,373 1,375 5,490 5,509 ------------------------------------------------------------------------------------ Available-for-sale: GNMA 19,650 19,650 35,094 35,094 56,682 56,682 FHLMC 158,475 158,475 137,706 137,706 149,788 149,788 FNMA 347,435 347,435 308,820 308,820 279,539 279,539 ------------------------------------------------------------------------------------ Total available-for-sale 525,560 525,560 481,620 481,620 486,009 486,009 ------------------------------------------------------------------------------------ Total mortgage-backed securities $526,116 526,120 482,993 482,995 491,499 491,518 ====================================================================================
23 The following table sets forth certain information regarding the carrying and fair values of the Company's investment securities at the dates indicated.
At March 31, -------------------------------------------------------------------------------------------------- 1999 1998 1997 -------------------------------------------------------------------------------------------------- Carrying Fair Carrying Fair Carrying Fair Value Value Value Value Value Value -------------------------------------------------------------------------------------------------- (Dollars in thousands) Held-to-maturity Domestic corporate $ - - - - 15,000 15,000 Collateralized mortgage obligations - - - - 472 474 U.S. government and federal agency obligations 709 716 714 725 718 739 -------------------------------------------------------------------------------------------------- Total held-to-maturity 709 716 714 725 16,190 16,213 -------------------------------------------------------------------------------------------------- Available-for-sale: Collateralized mortgage obligations 102,700 102,700 223,502 223,502 24,437 24,437 FHLMC non-cumulative preferred stock - - 5,768 5,768 5,600 5,600 Corporate debt securities 57,765 57,765 17,359 17,359 - - Equity securities Direct 5,370 5,370 6,239 6,239 - - Mutual funds 1,780 1,780 7,490 7,490 - - U.S. government and federal agency obligations 17,472 17,472 56,052 56,052 57,610 57,610 -------------------------------------------------------------------------------------------------- Total available-for-sale 185,087 185,087 316,410 316,410 87,647 87,647 -------------------------------------------------------------------------------------------------- Total $185,796 185,803 317,124 317,135 103,837 103,860 ==================================================================================================
24 The table below sets forth certain information regarding the carrying value, weighted average yields and maturities of the Company's investment securities and mortgage-backed securities as of March 31, 1999.
AT March 31, 1999 ----------------------------------------------------------------- More than ONE More than FIVE One Year or less Year to Five Years Years to Ten Years ----------------------------------------------------------------- Weighted Weighted Weighted Carrying Average Carrying Average Carrying Average Value Yield Value Yield Value Yield ----------------------------------------------------------------- (Dollars in Thousands) Mortgage-backed securities Held-to-maturity: FHLMC $ 560 6.59% $ - -% $ - -% FNMA - - - - - - GNMA - - - - - - ----------------------------------------------------------------- Total held-to-maturity 560 - - - - - Available-for-sale FHLMC - - 53,568 6.08 20,927 5.97 FNMA 1,735 6.65 74,966 6.36 79,036 6.14 GNMA - - - - 91 9.00 ----------------------------------------------------------------- Total available-for-sale 1,735 6.65 128,534 6.24 100,054 6.11 ----------------------------------------------------------------- Total mortgage-backed securities $ 2,295 6.64% $128,534 6.24% $100,054 6.11% ================================================================= Investment securities: Held-to-maturity: U.S. government and Federal agency obligations $ 716 7.16% - - - - ----------------------------------------------------------------- Total held-to-maturity 716 7.16 - - - - ----------------------------------------------------------------- Available-for-sale: Collateralized mortgage obligations - - - - - - FHLMC non-cumulative preferred stock - - - - - - Corporate debt securities - - - - - - Equity securities Direct (1) - - - - - - Mutual funds (1) - - - - - - U.S. government and federal agency obligations 17,472 6.03 - - - - ----------------------------------------------------------------- Total available-for-sale 17,472 6.03 - - - - ----------------------------------------------------------------- Total investment securities $18,188 6.08% - - - - ================================================================= --------------------------------------- More than Ten Years Total --------------------------------------- Weighted Weighted Carrying Average Carrying Average Value Yield Value Yield --------------------------------------- Mortgage-backed securities Held-to-maturity: FHLMC - -% $ 560 6.59% FNMA - - - - GNMA - - - - --------------------------------------- Total held-to-maturity - - 560 6.59 Available-for-sale FHLMC 83,980 6.18 158,475 6.12 FNMA 191,698 6.45 347,435 6.36 GNMA 19,559 7.02 19,650 7.03 --------------------------------------- Total available-for-sale 295,237 6.41 525,560 6.31 --------------------------------------- Total mortgage-backed securities $295,237 6.41% $526,120 6.31% ======================================= Investment securities: Held-to-maturity: U.S. government and Federal agency obligations $ - -% 716 7.16% Total held-to-maturity --------------------------------------- - - 716 7.16 Available-for-sale: --------------------------------------- Collateralized mortgage obligations 102,700 5.94 102,700 5.94 FHLMC non-cumulative preferred stock - - - - Corporate debt securities 57,765 6.51 57,765 6.51 Equity securities Direct (1) 5,370 -3.56 5,370 -3.56 Mutual funds (1) 1,780 -9.73 1,780 -9.73 U.S. government and federal agency obligations - - 17,472 - --------------------------------------- Total available-for-sale 167,615 5.88 185,087 6.29 --------------------------------------- Total investment securities $167,615 5.88% $185,803 6.29% =======================================
__________________________ (1) "Yield" derived from unrealized change in market value of equity securities is not included in totals for purposes of the calculation of weighted average yield on the portfolio here or on average balance sheets in Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations". 25 Sources of Funds General. Deposits, loan repayments and prepayments, proceeds from sales of loans, cash flows generated from operations and FHLB advances and other borrowings are the primary sources of the Bank's funds for lending, investing and other general purposes. Deposits. The Bank offers a variety of deposit accounts with a range of interest rates and terms. The Bank's deposits consist of passbook accounts, NOW and other demand accounts, money market savings accounts and certificate accounts. The terms of the fixed-rate certificate accounts offered by the Bank vary from 90 days to five years and the offering rates are established by the Bank on a weekly basis. Once an account is established, no additional amounts are permitted to be deposited in fixed-rate accounts. The Bank's 12-month and step-up certificates permit additions to the account and the ability to increase the interest rate one time if the offering rate increases during the term of the account. Variable-rate certificates offer rates that change each month relative to COFI and additions to the account are permitted. Specific terms of an individual account vary according to the type of account, the minimum balance required, the time period funds must remain on deposit and the interest rate, among other factors. The flow of deposits is influenced significantly by general economic conditions, changes in money market rates, prevailing interest rates and competition. At March 31, 1999, the Bank had $1.01 billion of certificate accounts maturing in less than one year. The Bank expects to retain a substantial portion of these maturing dollars. The Bank's deposits are obtained predominantly from the areas in which its branch offices are located. The Bank relies primarily on customer service and long-standing relationships with customers to attract and retain these deposits. However, market interest rates and rates offered by competing financial institutions significantly affect the Bank's ability to attract and retain deposits. During the fourth quarter of fiscal 1998, the Bank opened a wholesale deposit operation (Money Desk) through its Telebanking Center. The Bank's Money Desk solicits deposits directly from individual and institutional investors. At March 31, 1999 the Bank's certificate accounts include $18.5 million generated through the Money Desk. The weighted average interest rate on these deposits was 4.97% at March 31, 1999. During the fourth quarter of fiscal 1999, the Bank made the decision to discontinue its Money Desk effective April 6, 1999 due to the availability of alternative, cost-effective sources of funds, including retail deposit growth and FHLB advances. The Bank does not expect to retain any significant portion of the Money Desk deposits upon their maturity dates, which are all within on year. The following table presents the deposit activity of the Bank for the periods indicated.
For the Year Ended March 31, 1999 1998 1997 ---------------------------------------------------- (Dollars in thousands) Net deposits (withdrawals) $ 24,561 (49,543) (42,601) Interest credited on deposit accounts 78,153 79,318 71,577 ---------------------------------------------------- Total increase in deposit accounts $102,714 29,775 28,976 ====================================================
At March 31, 1999, the Bank had $247.9 million in certificate accounts in amounts of $100,000 or more maturing as follows:
Weighted Maturity Period Amount Average Rate ----------------------------------------------------------------------------------------------- (Dollars in thousands) Three months or less $ 79,348 5.14% Over three through six months 89,079 5.39 Over six through 12 months 66,241 5.06 Over 12 months 13,185 5.65 ------------------------------ Total $247,853 5.24% ==============================
26 The following table sets forth the distribution of the Bank's average deposit accounts for the periods indicated and the weighted average interest rates on each category of deposits presented.
For the Year Ended March 31, --------------------------------------------------------------------------------- 1999 1998 --------------------------------------------------------------------------------- Percent Percent of Total Weighted of Total Weighted Average Average Average Average Average Average Average Balance Deposits Yield Balance Deposits Yield Balance --------------------------------------------------------------------------------- (Dollars in thousands) Passbook accounts $ 147,702 8.30% 2.31% $ 162,874 9.48% 2.58% $ 192,520 Money market savings accounts 290,917 16.34 4.51 193,146 11.25 4.13 111,793 NOW accounts 133,102 7.48 0.96 126,244 7.35 0.96 106,355 Non-interest bearing accounts 55,028 3.09 - 33,054 1.92 - 27,292 --------------------------------------------------------------------------------- Total 626,749 35.21 2.84% 515,318 30.00 2.60% 437,960 Certificate accounts: Variable-rate certificates of deposit 31,788 1.79 4.98 26,852 1.56 5.03 45,395 Step-up certificates of deposit 76,681 4.31 5.12 126,123 7.35 5.50 303,595 Less than 6 months 47,040 2.64 4.61 49,145 2.86 4.60 171,594 6 through 11 months 290,462 16.32 5.22 234,850 13.68 5.41 184,274 12 though 23 months 533,774 29.99 5.43 581,927 33.89 5.66 304,984 24 months through 47 months 83,834 4.71 5.67 76,129 4.43 5.68 85,515 48 months or greater 85,498 4.80 5.84 96,835 5.64 5.82 111,648 Jumbo 3,970 0.22 6.27 9,800 .57 5.99 31,021 Acquired certificates of deposit(1) 152 .01 3.99 328 .02 4.14 1,484 --------------------------------------------------------------------------------- Total certificate accounts 1,153,199 64.79 5.35% 1,201,989 70.00 5.55% 1,239,510 --------------------------------------------------------------------------------- Total average deposits $1,779,948 100.00% 4.47% $1,717,307 100.00% 4.67% $1,677,470 ================================================================================= -------------------- 1997 -------------------- Percent of Total Weighted Average Average Deposits Yield -------------------- Passbook accounts 11.48% 2.87% Money market savings accounts 6.66 3.52 NOW accounts 6.34 0.91 Non-interest bearing accounts 1.63 - -------------------- Total 26.11 2.38% Certificate accounts: Variable-rate certificates of deposit 2.71 4.88 Step-up certificates of deposit 18.10 5.77 Less than 6 months 10.23 4.94 6 through 11 months 10.98 5.09 12 though 23 months 18.18 5.35 24 months through 47 months 5.10 5.64 48 months or greater 6.65 5.78 Jumbo 1.85 5.39 Acquired certificates of deposit(1) 0.09 4.28 -------------------- Total certificate accounts 73.89 5.55% -------------------- Total average deposits 100.00% 4.72% ====================
________________________ (1) These certificates of deposit were acquired in connection with various acquisitions of branch offices from other institutions. 27 The following table presents, by various rate categories, the amount of certificate accounts outstanding at the dates indicated and the periods to maturity of the certificate accounts outstanding at March 31, 1999.
Period to Maturity from March 31, 1999 At March 31, --------------------------------------------------------------------------------------------------------- Three to Less than One to Two to Four Four to More than One Year Two Years Three Years Years Five Years Five Years 1999 1998 1997 --------------------------------------------------------------------------------------------------------- (Dollars in thousands) 0.00 to 4.00% $ 499 2 - - - - 501 702 828 4.01 to 5.00% 478,858 12,141 2,492 623 4,652 135 498,901 60,740 116,684 5.01 to 6.00% 513,058 27,818 14,430 11,067 5,210 261 571,844 1,035,511 1,034,377 6.01 to 7.00% 19,754 6,873 732 1,232 99 - 28,690 81,086 87,082 7.01 to 8.00% 138 - 23 - - - 161 349 1,006 8.01 to 9.00% - - - - - - - - - Over 9.01% 127 - - - - - 127 127 254 --------------------------------------------------------------------------------------------------------- Total $1,012,434 46,834 17,677 12,922 9,961 396 1,100,224 1,178,515 1,240,231 =========================================================================================================
28 FHLB Advances and Other Borrowings. The Bank utilizes FHLB advances and reverse repurchase agreements as alternative sources of funds to retail deposits. These borrowings are collateralized by MBS and other investment securities and, in the case of certain FHLB advances, certain of the Bank's mortgage loans and secondarily by the Bank's investment in the capital stock of the FHLB. See "Regulation and Supervision-Federal Home Loan Bank System". The FHLB provides advances pursuant to several different credit programs, each of which has its own interest rate, range of maturities and collateralization requirements. The maximum amount that the FHLB will advance to member institutions, including the Bank fluctuates from time to time in accordance with the policies of the OTS and FHLB. At March 31, 1999, the Bank had outstanding FHLB advances and other borrowings of $814.0 million at a weighted average cost of 5.74% secured by GNMA, FNMA and FHLMC MBS and other investment securities. The original terms of the FHLB advances and other borrowings outstanding at March 31, 1999, range from 1 year to 10 years. The Bank expects to continue to utilize FHLB advances and other borrowings including reverse repurchase agreements as secondary sources of funds to deposit liabilities. FHLB advances and other borrowings are utilized to balance the differential net cash flows arising from loan and deposit activities and as a primary funding vehicle for the Bank's investment in MBS and other investment securities. Reverse repurchase agreements take the form of sales of securities under agreements to repurchase the identical securities at a later date. These transactions are accounted for as financing arrangements with the obligations to repurchase securities sold reflected as a liability while the securities underlying the agreements remain in the respective asset account. During fiscal 1998, the Bank began making increased use of putable borrowings (primarily FHLB advances). Under the putable advance program, in exchange for a favorable interest rate on the borrowing, the Bank grants to the FHLB an option to "put" the advance back to the Bank at specified quarterly "put" dates prior to maturity but after the conclusion of a specified lock out period. Under the putable advance program, the Bank obtains funds below the cost of non-putable FHLB advances which have fixed maturities between the first "put" date and the final maturity date of the putable advance. In exchange for this favorable funding rate, the Bank is exposed to the risk that the advance is "put" back to the Bank following an increase in the general level of interest rates causing the Bank to initiate a new borrowing at a less advantageous cost. The Bank's increased use of putable advances has allowed the Bank to extend the term to maturity and initial "put" dates of its funding in connection with increased investment in balloon MBS products. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Asset/Liability Management". The use of reverse repurchase agreements involves the risk that between the dates of "sale" and subsequent repurchase, a decline in the market value of the underlying security may require the sale of additional securities to the counterparty to the reverse repurchase agreement. See "Sources of Funds - FHLB Advances and Other Borrowings". 29 The following table sets forth certain information regarding the Bank's borrowed funds at or for the periods ended on the dates indicated.
At or For the Years Ended March 31, ------------------------------------------------------- 1999 1998 1997 ------------------------------------------------------- (Dollars in thousands) FHLB advances: Average balance outstanding $855,197 $601,078 $335,188 Maximum amount outstanding at any month-end during the year 949,000 790,086 545,400 Balance outstanding at end of year (1) 764,000 735,886 480,000 Weighted average interest rate during the year 5.57% 5.87% 5.78% Weighted average interest rate end of year 5.37% 5.70% 5.78% Reverse repurchase agreements: Average balance outstanding $ 50,000 $ 50,000 $ 10,129 Maximum amount outstanding at any month-end during the year 50,000 50,000 50,000 Balance outstanding at end of year (1) 50,000 50,000 50,000 Weighted average interest rate during the year 5.87% 5.87% 5.96% Weighted average interest rate end of year 5.87% 5.87% 5.87%
_______________ (1) Included in the balances of FHLB advances and reverse repurchase agreements outstanding at March 31, 1999 are putable borrowings of $465.0 million and $50.0 million, respectively, with initial put dates ranging from April 1999 to February 2003 and May 1999 to December 1999, respectively. The weighted average term to maturity for these putable borrowings are 40 and 34 months, respectively, and the weighted average terms to first put dates are 14 and 5 months, respectively. Subsidiary Activities Pomona Financial Services, Inc. ("PFS"), a California corporation, is a wholly owned subsidiary of the Bank. PFS acts as a holding company for the service corporations described below and acts as trustee under deeds of trusts. For the year ended March 31, 1999, PFS had net earnings of $132,000. PFF Financial Services, Inc. ("PFFFS"), a California corporation, is a wholly owned subsidiary of PFS. Prior to July 1994, PFFFS operated as an agency selling various personal and business insurance policies strictly as an adjunct to the Bank's traditional thrift business. As part of the Bank's strategy to diversify the products and services it offers and restructure its balance sheet, a decision was made to expand the role of PFFFS. In July 1994, PFFFS was authorized to sell fixed annuities to the Bank's customers through the Bank's branches. In August 1995, PFFFS was further authorized to offer variable annuities and mutual funds through a relationship with a third party marketer of annuity and mutual fund non-deposit investment products. In addition, PFFFS is working with vendors of other insurance products, such as auto, home and life insurance, to further expand the products and services offered to the Bank's customers and members of the local community. For the year ended March 31, 1999, PFFFS had net earnings of $50,000. Diversified Services, Inc. ("DSI"), a California corporation, is a wholly owned subsidiary of PFS. DSI had historically participated as an investor in residential real estate projects. DSI may consider additional real estate activities as market conditions warrant. For the year ended March 31, 1999, DSI had net earnings of $41,000. 30 Personnel As of March 31, 1999, the Bank had 474 full-time employees and 130 part- time employees. The employees are not represented by a collective bargaining unit and the Bank considers its relationship with its employees to be good. See Item 11 "Executive Compensation" for a description of certain compensation and benefit programs offered to the Bank's employees. REGULATION AND SUPERVISION General The Bancorp, as a savings and loan holding company, is required to file certain reports with, and otherwise comply with the rules and regulations of the OTS under the Home Owners' Loan Act, as amended (the "HOLA"). In addition, the activities of savings institutions, such as the Bank, are governed by the HOLA and the Federal Deposit Insurance Act ("FDI Act"). The Bank is subject to extensive regulation, examination and supervision by the OTS, as its primary federal regulator, and the FDIC, as the deposit insurer. The Bank is a member of the Federal Home Loan Bank ("FHLB") System and its deposit accounts are insured up to applicable limits by the Savings Association Insurance Fund ("SAIF") managed by the FDIC. The Bank must file reports with the OTS and the FDIC concerning its activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other savings institutions. The OTS and/or the FDIC conduct periodic examinations to test the Bank's safety and soundness and compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss allowances for regulatory purposes. Any change in such regulatory requirements and policies, whether by the OTS, the FDIC or the Congress, could have a material adverse impact on the Bancorp, the Bank and their operations. Certain of the regulatory requirements applicable to the Bank and to the Bancorp are referred to below or elsewhere herein. The description of statutory provisions and regulations applicable to savings institutions and their holding companies set forth in this Form 10-K does not purport to be a complete description of such statutes and regulations and their effects on the Bank and the Bancorp. Holding Company Regulation The Bancorp is a non diversified unitary savings and loan holding company within the meaning of the HOLA. As a unitary savings and loan holding company, the Bancorp generally is not restricted under existing laws as to the types of business activities in which it may engage, provided that the Bank continues to be a qualified thrift lender ("QTL"). See "Federal Savings Institution Regulation - QTL Test." Upon any non-supervisory acquisition by the Bancorp of another savings institution or savings bank that meets the QTL test and is deemed to be a savings institution by the OTS, the Bancorp would become a multiple savings and loan holding company (if the acquired institution is held as a separate subsidiary) and would be subject to extensive limitations on the types of business activities in which it could engage. The HOLA limits the activities of a multiple savings and loan holding company and its non-insured institution subsidiaries primarily to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act ("BHC Act"), subject to the prior approval of the OTS, and certain activities authorized by OTS regulation, and no multiple savings and loan holding company may acquire more than 5% of the voting stock of a company engaged in impermissible activities. The HOLA prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of the voting stock of another savings institution or holding 31 company thereof, without prior written approval of the OTS or acquiring or retaining control of a depository institution that is not insured by the FDIC. In evaluating applications by holding companies to acquire savings institutions, the OTS must consider the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community and competitive factors. The OTS is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions: (i) the approval of interstate supervisory acquisitions by savings and loan holding companies and (ii) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions. Although savings and loan holding companies are not subject to specific capital requirements or specific restrictions on the payment of dividends or other capital distributions, HOLA does prescribe such restrictions on subsidiary savings institutions as described below. The Bank must notify the OTS 30 days before declaring any dividend to the Bancorp. In addition, the financial impact of a holding company on its subsidiary institution is a matter that is evaluated by the OTS and the agency has authority to order cessation of activities or divestiture of subsidiaries deemed to pose a threat to the safety and soundness of the institution. Federal Savings Institution Regulation Business Activities. The activities of federal savings institutions are governed by federal law and regulations. These laws and regulations delineate the nature and extent of the activities in which federal associations may engage. In particular, many types of lending authority for federal associations are limited to a specified percentage of the institution's capital or assets. Capital Requirements. The OTS capital regulations require savings institutions to meet three minimum capital standards: a 1.5% tangible capital ratio, a 3% leverage (core) capital ratio and an 8% risk-based capital ratio. Effective April 1, 1999, however, the minimum leverage ratio increased to 4% for all institutions except those with the highest rating on the CAMELS financial institution rating system. In addition, the prompt corrective action standards discussed below also establish, in effect, a minimum 2% tangible capital standard, a 4% leverage (core) capital ratio (3% for institutions receiving the highest rating on the CAMELS financial institution rating system), and, together with the risk-based capital standard itself, a 4% Tier I risk-based capital standard. Core capital is defined as common stockholders' equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus, and minority interests in equity accounts of consolidated subsidiaries less intangibles other than certain mortgage servicing rights and credit card relationships. The OTS regulations also require that, in meeting the tangible, leverage (core) and risk-based capital standards, institutions must generally deduct investments in and loans to subsidiaries engaged in activities as principal that are not permissible for a national bank. The risk-based capital standard for savings institutions requires the maintenance of Tier I (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%, as assigned by the OTS capital regulation based on the risks OTS believes are inherent in the type of asset. The components of Tier I (core) capital are equivalent to those discussed earlier. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock and the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital. The OTS regulatory capital requirements also incorporate an interest rate risk component. Savings institutions with "above normal" interest rate risk exposure are subject to a deduction from total capital for 32 purposes of calculating their risk-based capital requirements. A savings institution's interest rate risk is measured by the decline in the net portfolio value of its assets (i.e., the difference between incoming and outgoing discounted cash flows from assets, liabilities and off-balance sheet contracts) that would result from a hypothetical 200 basis point increase or decrease in market interest rates divided by the estimated economic value of the institution's assets. In calculating its total capital under the risk-based capital rule, a savings institution whose measured interest rate risk exposure exceeds 2% must deduct an amount equal to one-half of the difference between the institution's measured interest rate risk and 2%, multiplied by the estimated economic value of the institution's assets. The Director of the OTS may waive or defer a savings institution's interest rate risk component on a case-by-case basis. A savings institution with assets of less than $300 million and risk- based capital ratios in excess of 12% is not subject to the interest rate risk component, unless the OTS determines otherwise. For the present time, the OTS has deferred implementation of the interest rate risk component. At March 31, 1999, the Bank met each of its capital requirements and it is anticipated that the Bank would not be subject to the interest rate risk component. The following table presents the Bank's capital position at March 31, 1999.
Actual Required Actual Required Excess Percentage Percentage ----------------------------------------------------------------------- (Dollars in thousands) Tangible $201,210 46,429 154,781 6.95% 1.50% Core (Leverage) 201,210 86,859 114,351 6.95 3.00 Risk-based 222,915 142,403 80,512 12.52 8.00
Prompt Corrective Regulatory Action. Under the OTS prompt corrective action regulations, the OTS is required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution's degree of under capitalization. Generally, a savings institution is considered "well capitalized" if its ratio of total capital to risk-weighted assets is at least 10%, its ratio of Tier I (core) capital to risk-weighted assets is at least 6%, its ratio of core capital to total assets is at least 5%, and it is not subject to any order or directive by the OTS to meet a specific capital level. A savings institution generally is considered "adequately capitalized" if its ratio of total capital to risk-weighted assets is at least 8%, its ratio of Tier I (core) capital to risk-weighted assets is at least 4%, and its ratio of core capital to total assets is at least 4% (3% if the institution receives the highest CAMELS rating). A savings institution that has a ratio of total capital to risk weighted assets of less than 8%, a ratio of Tier I (core) capital to risk-weighted assets of less than 4% or a ratio of core capital to total assets of less than 4% (3% or less for institutions with the highest examination rating) is considered to be "undercapitalized." A savings institution that has a total risk-based capital ratio less than 6%, a capital Tier 1 to risk-weighted assets ratio of less than 3% or a Tier 1 capital to total assets ratio that is less than 3% is considered to be "significantly undercapitalized" and a savings institution that has a Tier 1 capital to assets ratio equal to or less than 2% is deemed to be "critically undercapitalized." Subject to a narrow exception, the banking regulator is required to appoint a receiver or conservator for an institution that is "critically undercapitalized." The regulation also provides that a capital restoration plan must be filed with the OTS within 45 days of the date a savings institution receives notice that it is "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." Compliance with the plan must be guaranteed by any parent holding company. In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion. The OTS could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. Insurance of Deposit Accounts. Deposits of the Bank are presently insured by the SAIF. The FDIC maintains a risk-based assessment system by which institutions are assigned to one of three categories based on their capitalization and one of three subcategories based on examination ratings and other supervisory information. An institution's assessment rate depends upon the categories to which it is assigned. 33 Assessment rates for SAIF member institutions are determined semiannually by the FDIC and currently range from zero basis points for the healthiest institutions to 27 basis points for the riskiest. In addition to the assessment for deposit insurance, institutions are required to pay on bonds issued in the late 1980s by the Financing Corporation to recapitalize the predecessor to the SAIF. During 1998, Financing Corporation payments for SAIF members approximated 6.10 basis points, while BIF members paid 1.22 basis points. By law, there will be equal sharing of Financing Corporation payments between the members of both insurance funds on the earlier of January 1, 2000 or the date the two insurance funds are merged. The Bank's assessment rate for fiscal 1999 ranged from 5.8 to 6.1 basis points and the premium paid for this period was $1.0 million all of which was paid towards the Financing Corporation bonds. The FDIC has authority to increase insurance assessments. A significant increase in SAIF insurance premiums would have an adverse effect on the operating expenses and results of operations of the Bank. Management cannot predict what the insurance assessment rate will be in the future. Under the FDI Act, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the OTS. The management of the Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance. Thrift Rechartering Legislation. Legislation enacted in 1996 provided that the BIF and the SAIF were to have merged on January 1, 1999 if there were no more savings associations as of that date. Various proposals to eliminate the federal savings association charter, create a uniform financial institutions charter, abolish the OTS and restrict savings and loan holding company activities have been introduced in Congress. The Bank is unable to predict whether any of this legislation will be enacted or the extent to which legislation might restrict or disrupt its operations. Loans to One Borrower. Under the HOLA, savings institutions are generally subject to the limits on loans to one borrower applicable to national banks. Generally, savings institutions may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if such loan is secured by readily marketable collateral, which is defined to include certain financial instruments and bullion. At March 31, 1999, the Bank's limit on loans to one borrower was $33.4 million. At March 31, 1999, the Bank's largest aggregate outstanding balance of loans was $29.9 million to a single family tract developer. QTL Test. The HOLA requires savings institutions to meet a QTL test. Under the QTL test, a savings and loan association must either qualify as a "domestic building and loan association" as defined in the Internal Revenue Code or maintain at least 65% of its "portfolio assets" (total assets less: (i) specified liquid assets up to 20% of total assets; (ii) intangibles, including goodwill; and (iii) the value of property used to conduct business) in certain "qualified thrift investments" (primarily residential mortgages and related investments, including certain mortgage-backed securities) in at least 9 months out of each 12 month period. A savings institution that fails the QTL test is subject to certain operating restrictions and may be required to convert to a bank charter. As of March 31, 1999, the Bank maintained 81.4% of its portfolio assets in qualified thrift investments and, therefore, met the QTL test. Recent legislation has expanded the extent to which education loans, credit card loans and small business loans may be considered "qualified thrift investments." Limitation on Capital Distributions. OTS regulations impose limitations upon all capital distributions by savings institutions, such as cash dividends, payments to repurchase or otherwise acquire its shares, payments to shareholders of another institution in a cash-out merger and other distributions 34 charged against capital. The rule effective in fiscal 1999 established three tiers of institutions, which are based primarily on an institution's capital level. An institution that exceeded all fully phased-in capital requirements before and after a proposed capital distribution ("Tier 1 Bank") and had not been advised by the OTS that it was in need of more than normal supervision, could, after prior notice but without obtaining approval of the OTS, make capital distributions during a calendar year equal to the greater of (i) 100% of its net earnings to date during the calendar year plus the amount that would reduce by one-half its "surplus capital ratio" (the excess capital over its fully phased-in capital requirements) at the beginning of the calendar year or (ii) 75% of its net income for the previous four quarters. Effective April 1, 1999, the OTS's capital distribution regulation changed. Under the new regulation, an application to and the prior approval of the OTS is required before any capital distribution if the institution does not meet the criteria for "expedited treatment" of applications under OTS regulations, the total capital distributions for the calendar year exceed net income for that year plus the amount of retained net income for the preceding two years, the institution would be undercapitalized following the distribution, or the distribution would otherwise be contrary to a statute, regulation or agreement with the OTS. If an application is not required, institutions in a holding company structure must still give advance notice to the OTS of the capital distribution. If the Bank's capital fell below its regulatory requirements or if the OTS notified it that it was in need of more than normal supervision, the Bank's ability to make capital distributions could be restricted. In addition, the OTS could prohibit a proposed capital distribution, which would otherwise be permitted by the regulation, if the OTS determined that the distribution would be an unsafe or unsound practice. At March 31, 1999, the Bank was a Tier 1 Bank. Liquidity. The Bank is required to maintain an average daily balance of specified liquid assets equal to a monthly average of not less than a specified percentage of its net withdrawal deposit accounts plus short-term borrowings. This liquidity requirement was 4% at March 31, 1999, but is subject to change from time to time by the OTS to any amount within the range of 4% to 10% depending upon economic conditions and the savings flows of member institutions. Monetary penalties may be imposed for failure to meet these liquidity requirements. The Bank's liquidity ratio for March 31, 1999 was 5.7%, which exceeded the applicable requirement. The Bank has never been subject to monetary penalties for failure to meet its liquidity requirements. Assessments. Savings institutions are required to pay assessments to the OTS to fund the agency's operations. The general assessments, paid on a semi- annual basis, are computed upon the savings institution's total assets, including consolidated subsidiaries, as reported in the Bank's latest quarterly thrift financial report. The assessments paid by the Bank for the fiscal year ended March 31, 1999 totaled $439,000. Branching. OTS regulations permit nationwide branching by federally chartered savings institutions to the extent allowed by federal statute. This permits federal savings institutions to establish interstate networks and to geographically diversify their loan portfolios and lines of business. The OTS authority preempts any state law purporting to regulate branching by federal savings institutions. Transactions with Related Parties. The Bank's authority to engage in transactions with related parties or "affiliates" (e.g., any company that controls or is under common control with an institution, including the Bancorp and its non-savings institution subsidiaries) is limited by Sections 23A and 23B of the Federal Reserve Act ("FRA"). Section 23A limits the aggregate amount of covered transactions with any individual affiliate to 10% of the capital and surplus of the savings institution. The aggregate amount of covered transactions with all affiliates is limited to 20% of the savings institution's capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of a type described in Section 23A and the purchase of low quality assets from affiliates is generally prohibited. Section 23B generally provides that certain transactions with affiliates, including loans and asset purchases, must be on terms and under circumstances, including credit standards, that are substantially the same or at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. In addition, savings institutions are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings institution may purchase the securities of any affiliate other than a subsidiary. 35 The Bank's authority to extend credit to executive officers, directors and 10% shareholders ("insiders"), as well as entities such persons control, is governed by Sections 22(g) and 22(h) of the FRA and Regulation O thereunder. Among other things, such loans are required to be made on terms substantially the same as those offered to unaffiliated individuals and to not involve more than the normal risk of repayment. Recent legislation created an exception for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to insiders over other employees. Regulation O also places individual and aggregate limits on the amount of loans the Bank may make to insiders based, in part, on the Bank's capital position and requires certain board approval procedures to be followed. Enforcement. Under the FDI Act, the OTS has primary enforcement responsibility over savings institutions and has the authority to bring actions against the institution and all institution-affiliated parties, including stockholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors to institution of receivership, conservatorship or termination of deposit insurance. Civil penalties cover a wide range of violations and can amount to $25,000 per day, or even $1 million per day in especially egregious cases. Under the FDI Act, the FDIC has the authority to recommend to the Director of the OTS enforcement action to be taken with respect to a particular savings institution. If action is not taken by the Director, the FDIC has authority to take such action under certain circumstances. Federal law also establishes criminal penalties for certain violations. Standards for Safety and Soundness. The federal banking agencies have adopted Interagency Guidelines Prescribing Standards for Safety and Soundness ("Guidelines") and a final rule to implement safety and soundness standards required under the FDI Act. The Guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The standards set forth in the Guidelines address internal controls and information systems; internal audit system; credit underwriting; loan documentation; interest rate risk exposure; asset growth; asset quality; earnings; and compensation, fees and benefits. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the Guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard, as required by the FDI Act. The final rule establishes deadlines for the submission and review of such safety and soundness compliance plans when such plans are required. Federal Reserve System The Federal Reserve Board regulations require savings institutions to maintain non-interest earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The Federal Reserve Board regulations generally require that reserves be maintained against aggregate transaction accounts as follows: for accounts aggregating $46.5 million or less (subject to adjustment by the Federal Reserve Board) the reserve requirement was 3%; and for accounts aggregating greater than $46.5 million, the reserve requirement was $1.40 million plus 10% (subject to adjustment by the Federal Reserve Board between 8% and 14%) against that portion of total transaction accounts in excess of $46.5 million. The first $4.9 million of otherwise reservable balances (subject to adjustments by the Federal Reserve Board) were exempted from the reserve requirements. The Bank maintained compliance with the foregoing requirements. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy liquidity requirements imposed by the OTS. 36 FEDERAL AND STATE TAXATION Federal Taxation General. The Company reports its income on a calendar year basis using the accrual method of accounting and is subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly the Bank's reserve for bad debts discussed below. The Company files federal income tax returns on a consolidated basis. The Bank has been audited by the IRS through the 1990 tax year and the California Franchise Tax Board through the 1985 tax year and for the 1993 tax year. The statute of limitations has closed for all tax years for both IRS and California Franchise Tax Board purposes through the 1992 tax year. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Company. Tax Bad Debt Reserve. Formerly, savings institutions such as the Bank which met certain definitional tests primarily relating to their assets and the nature of their business ("qualifying thrifts") were permitted to establish a reserve for bad debts and to make annual additions , which additions could, within specified formula limits, be deducted in arriving at taxable income. The Bank's deduction with respect to "qualifying loans," ( generally loans secured by certain interests in real property), could be computed using a percentage based on the Bank's actual loss experience, (the "experience method"), or a percentage equal to eight percent of the Bank's taxable income before such deduction (the "percentage of taxable income method"). Each year the Bank selected the more favorable way to calculate the deduction attributable to an addition to the bad debt reserve. Pursuant to the Small Business Job Protection Act of 1996 (the "Act"), Congress repealed the reserve method of accounting for bad debts for savings institutions, effective for taxable years beginning after 1995. The Bank changed its method of accounting for bad debts from the reserve method formerly permitted under section 593 of the Internal Revenue Code of 1986, as amended (the "Code") to the "specific charge-off" method. Under the specific charge-off method, which is governed by section 166 of the Code and the regulations thereunder, tax deductions may be taken for bad debts only if loans become wholly or partially worthless. Although the Act requires that qualifying thrifts recapture (i.e., include in taxable income) over a six-year period a portion of their existing bad debt reserves equal to their "applicable excess reserves," the Bank does not have applicable excess reserves subject to recapture. However, the Bank's tax bad debt reserve balance of approximately $25.3 million (as of March 31, 1999) will, in future years, be subject to recapture in whole or in part upon the occurrence of certain events, such as a distribution to shareholders in excess of the Bank's current and accumulated earnings and profits, a redemption of shares, or upon a partial or complete liquidation of the Bank. The Bank does not intend to make distributions to shareholders that would result in recapture of any portion of its bad debt reserves. These reserves would also be subject to recapture if the Bank fails to qualify as a "bank" for federal income tax purposes. Corporate Alternative Minimum Tax. The Internal Revenue Code of 1986, as amended (the "Code") imposes a tax on alternative minimum taxable income ("AMTI") at a rate of 20%. The excess of the bad debt reserve deduction using the percentage of taxable income method over the deduction that would have been allowable under the experience method is treated as a preference item for purposes of computing the AMTI. Only 90% of AMTI can be offset by net operating loss carryovers of which the Company currently has none. AMTI is increased by an amount equal to 75% of the amount by which the Company's adjusted current earnings exceeds its AMTI (determined without regard to this preference and prior to reduction for net operating losses). In addition, for taxable years beginning after December 31, 1996 and before January 1, 1996, an environmental tax of .12% of the excess of AMTI (with certain modifications) over $2.0 million is imposed on corporations, including the Company, whether or not an Alternative Minimum Tax ("AMT") is paid. The Company does not expect to be subject to the AMT, but may be subject to the environmental tax liability. Dividends Received Deduction and Other Matters. The Company may exclude from its income 100% of dividends received from the Bank as a member of the same affiliated group of corporations. The corporate dividends received deduction is generally 70% in the case of dividends received from unaffiliated 37 corporations with which the Company will not file a consolidated tax return, except that if the Company owns more than 20% of the stock of a corporation distributing a dividend then 80% of any dividends received may be deducted. State and Local Taxation State of California. The California franchise tax rate applicable to the Company equals the franchise tax rate applicable to corporations generally, plus an "in lieu" rate approximately equal to personal property taxes and business license taxes paid by such corporations (but not generally paid by banks or financial corporations such as the Company); however, the total tax rate cannot exceed 10.84%. Under California regulations, bad debt deductions are available in computing California franchise taxes using a three or six-year weighted average loss experience method. The Bancorp and its California subsidiary file California state franchise tax returns on a combined basis. Assuming that the holding company form of organization is continued to be utilized, the Bancorp, as a savings and loan holding company commercially domiciled in California, will generally be treated as a financial corporation and subject to the general corporate tax rate plus the "in lieu" rate as discussed previously. Delaware Taxation. As a Delaware holding company not earning income in Delaware, the Bancorp is exempted from Delaware corporate income tax but is required to file an annual report with and pay an annual franchise tax to the State of Delaware. Item 2. Properties. - ------------------ PFF Bank & Trust, as of March 31, 1999, conducted its business through twenty-four banking branches, two separate trust offices, a regional loan center, a human resource and training center, plus one executive administrative building and one records center. The executive offices for the Bank and the Bancorp are located at 350 South Garey Avenue, Pomona, California. Of the twenty-four bank branches, seventeen of the buildings and the land on which they are located are owned, one building is owned on leased land, and six buildings and the land on which they are located are leased. The two separate trust offices and the administrative offices and land on which they are located are leased, and the human resources and training center and the records center and land occupied by them are owned. As of March 31, 1999, the net book value of owned real estate including the branch located on leased land totaled $15.8 million. The net book value of leased branch offices was $2.0 million. The net book value of furniture, fixtures and electronic data processing equipment was $6.0 million. 38 Item 3. Legal Proceedings. - -------------------------- The Bancorp and subsidiaries have been named as defendants in various lawsuits arising in the normal course of business. The outcome of these lawsuits cannot be predicted, but the Bancorp intends to vigorously defend the actions and is of the opinion that the lawsuits will not have a material effect on the Bancorp. Item 4. Submission of Matters to a Vote of Security Holders. - ------------------------------------------------------------ None. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. - ------------------------------------------------------------------------------- The Common Stock of PFF Bancorp, Inc. is traded over-the-counter on the NASDAQ National Market under the symbol "PFFB." The stock began trading on March 29, 1996. The table below sets forth for the periods indicated the high, low and closing sale prices of PFF Bancorp, Inc. common stock. To date, the Bancorp has not paid a dividend to its stockholders. In the future, the Board of Directors may consider a policy of paying cash dividends on the Common Stock. As of March 31, 1999, there were approximately 6,898 holders of the Common Stock of the Company, which includes the approximate number of shares held in street name.
High Low Closing ----------------------------------------- Year Ended March 31, 1999 First Quarter $21.38 17.75 18.63 Second Quarter 19.63 11.50 15.25 Third Quarter 16.13 10.75 16.00 Fourth Quarter 18.63 15.25 17.50 Year Ended March 31, 1998 First Quarter $19.00 13.25 18.75 Second Quarter 20.13 17.75 19.38 Third Quarter 22.19 17.94 19.88 Fourth Quarter 21.13 16.88 20.63
39 Item 6. Selected Financial Data. - --------------------------------- The selected consolidated financial and other data of the Company set forth below is derived in part from, and should be read in conjunction with the consolidated financial statements of the Company and notes thereto - See Item 8 - - "Financial Statements and Supplementary Data".
At March 31, --------------------------------------------------------------------------- 1999 1998 1997 1996 1995 --------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Selected Balance Sheet Data: Total assets $2,935,980 2,812,384 2,535,767 2,008,139 1,842,877 Investment securities held-to- maturity 709 714 16,190 28,026 40,059 Investment securities available-for- 185,087 316,410 87,647 9,932 6,881 sale Mortgage-backed securities held- to-maturity 556 1,373 5,490 7,134 80,778 Mortgage-backed securities available-for-sale 525,560 481,620 486,009 125,588 - Trading securities 4,271 - - - - Investment in real estate 6,371 731 1,113 911 1,449 Loans held for sale 3,531 701 736 6,015 - Loans receivable, net(1) 2,026,081 1,827,614 1,819,209 1,574,935 1,605,675 Deposits 1,843,538 1,740,824 1,711,049 1,682,073 1,669,416 FHLB advances and other borrowings 814,000 785,886 530,000 19,722 49,095 Stockholders' equity, substantially restricted 242,665 254,278 265,526 289,071 108,053
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For the Year Ended March 31, ---------------------------------------------------------------------- 1999 1998 1997 1996 1995 ---------------------------------------------------------------------- (Dollars in thousands, except per share amounts) Selected Operating Data: Interest income $206,955 191,368 168,515 136,173 108,009 Interest expense 130,356 118,517 99,306 87,556 62,066 ---------------------------------------------------------------------- Net interest income 76,599 72,851 69,209 48,617 45,943 Provision for loan losses 4,020 7,099 13,661 10,895 13,901 ---------------------------------------------------------------------- Net interest income after provision for loan losses 72,579 65,752 55,548 37,722 32,042 Non-interest income 15,548 14,280 10,227 8,139 4,912 Non-interest expense: General and administrative expense 54,960 51,560 49,381 40,475 39,534 SAIF recapitalization assessment - - 10,900 - - Foreclosed real estate operations, net (45) 473 (325) 1,670 4,691 ---------------------------------------------------------------------- Total non-interest expense 54,915 52,033 59,956 42,145 44,225 ---------------------------------------------------------------------- Earnings (loss) before income taxes 33,212 27,999 5,819 3,716 (7,271) Income taxes (benefit) 14,208 12,019 3,087 1,651 (3,112) ---------------------------------------------------------------------- Net earnings (loss) $ 19,004 15,980 2,732 2,065 (4,159) ====================================================================== Basic earnings per share (2) $ 1.37 1.00 0.15 N/A N/A ====================================================================== Diluted earnings per share (2) $ 1.29 .95 0.15 N/A N/A ======================================================================
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At or for the Year Ended March 31, ------------------------------------------------------------------ 1999 1998 1997 1996 1995 ------------------------------------------------------------------ (Dollars in thousands) Performance Ratios (3): Return on average assets 0.64% 0.60 0.12 0.11 (0.24) Return on average equity 7.92 6.07 0.96 1.86 (3.68) Average equity to average assets 8.08 9.87 12.10 5.88 6.60 Equity to total assets at end of period 8.27 9.04 10.47 14.39 5.86 Net interest spread (4) 2.47 2.41 2.52 2.51 2.63 Effective interest spread (5) 2.71 2.82 3.05 2.66 2.80 Average interest-earning assets to average interest-bearing liabilities 105.16 108.98 112.04 103.17 104.52 Efficiency ratio (6) 59.64 59.18 62.16 71.31 77.74 General and administrative expense to average assets 1.85 1.93 2.10 2.14 2.31 Regulatory Capital Ratios (3)(7): Tangible capital 6.95 7.10 8.46 10.53 5.67 Core capital 6.95 7.10 8.46 10.53 5.67 Risk-based capital 12.52 14.17 16.54 20.93 10.56 Asset Quality Ratios (3): Non-performing loans as a percent of gross loans receivable (8)(9) 0.50 0.88 1.24 1.41 1.43 Non-performing assets as a percent of total assets (9) 0.56 0.88 1.80 2.17 1.99 Allowance for loan losses as a percent of gross loans receivable (8) 1.18 1.33 1.47 1.21 1.16 Allowance for loan losses as a percent of non-performing loans (9) 237.56 151.27 118.72 86.01 81.36 Number of full-service customer facilities 24 23 23 22 22 Loan originations $987,604 557,428 499,667 265,210 403,073
____________________________ (1) The allowances for loan losses at March 31, 1999, 1998, 1997, 1996, and 1995 were $26.2 million, $26.0 million, $27.7 million, $19.7 million, and $19.3 million, respectively. (2) Earnings per share have been restated to reflect the adoption of Statement of Financial Accounting Standards No. 128, "Earnings Per Share." (3) Asset Quality Ratios and Regulatory Capital Ratios are end of period ratios. Performance Ratios are based on average daily balances during the indicated periods. (4) Net interest spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest- bearing liabilities. (5) Effective interest spread represents net interest income as a percent of average interest-earning assets. (6) The efficiency ratio represents general and administrative expense as a percent of net interest income plus non-interest income. (7) For definitions and further information relating to the Bank's regulatory capital requirements, see "Regulation - Federal Savings Institution Regulation - Capital Requirements." (8) Gross loans receivable includes loans receivable held for investment and loans held for sale and excludes loans held for accelerated disposition. (9) Non-performing assets consist of non-performing loans and REO. Non- performing loans consist of all loans 90 days or more past due and all other non-accrual loans. It is the Bank's policy to cease accruing interest on loans 90 days or more past due. See "Business of the Bank - Non-Accrual and Past Due Loans" and "Real Estate." 42 Item 7. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations. ------------- Asset/Liability Management The Company's earnings depend primarily on its net interest income. Net interest income is affected by net interest spread. Changes in net interest spread ("interest rate risk") are influenced to a significant degree by the repricing characteristics of assets and liabilities ("timing risk"), the relationship between various rates ("basis risk"), customer options, and changes in the shape of the yield curve. The Company's Asset/Liability Committee ("ALCO") is responsible for implementing the interest rate risk policies designed to manage its interest rate risk exposure. The Board of Directors approves acceptable interest rate risk levels designed to provide sufficient net interest income and market value of shareholder equity (NPV) assuming specified changes in interest rates. NPV is defined as the present value of expected net cash flows from existing assets minus the present value of expected net cash flows from existing liabilities. One measure of the Company's exposure to interest rate risk is shown in the following table which sets forth the repricing frequency of its major assets and liabilities as of March 31, 1999. Repricing frequencies of assets are based upon contractual maturities, repricing opportunities, and the scheduled principal payments and estimated prepayments. Repricing of liabilities are based upon the contractual maturities, estimated decay rates for passbook, NOW and other demand accounts and money market savings accounts ("core deposits"), and the earliest repricing opportunity for variable and floating rate instruments. The Company also had $515.0 million of putable borrowings on the balance sheet as of March 31, 1999 that are assumed to reprice at their contractual final maturity. The interest rate sensitivity of the Company's assets and liabilities illustrated in the following table would vary substantially if different assumptions were used, or if actual experience differed from that assumed. 43
March 31, 1999 --------------------------------------------------------- More than 3 More than 6 More than 12 3 Months Months to 6 Months to 12 Months to 3 or Less Months Months Years --------------------------------------------------------- (Dollars in thousands) Interest-earning assets: Cash, investment securities and FHLB stock (1) $ 178,176 1,175 2,743 5,253 Loans and mortgage-backed securities: (1) Mortgage-backed securities 47,987 40,613 78,426 167,186 Loans receivable, net 944,568 332,103 180,971 364,474 -------------------------------------------------------- Total loans and mortgage-backed securities 992,555 372,716 259,397 531,660 -------------------------------------------------------- Total interest-earning assets 1,170,731 373,891 262,140 536,913 Non-interest earning assets - - - - --------------------------------------------------------- Total assets $1,170,731 373,891 262,140 536,913 ======================================================== Interest-bearing liabilities: Fixed maturity deposits $ 364,695 355,174 289,854 63,776 Core deposits (2) 48,905 48,905 97,812 391,246 -------------------------------------------------------- Total deposits 413,600 404,079 387,666 455,022 Borrowings (3) 65,000 70,000 45,000 224,000 -------------------------------------------------------- Total interest-bearing liabilities 478,600 474,079 432,666 679,022 Non-interest bearing liabilities - - - - Equity - - - - -------------------------------------------------------- Total liabilities and stockholders' equity $ 478,600 474,079 432,666 679,022 ======================================================== Interest sensitivity gap $ 692,131 (100,188) (170,526) (142,109) Cumulative interest sensitivity gap $ 692,131 591,943 421,417 279,308 Cumulative interest sensitivity gap as a percentage of total assets 23.57% 20.16 14.35 9.51 Cumulative interest-earning assets as a percentage of cumulative interest- bearing liabilities 244.62% 162.13 130.42 113.53 March 31, 1999 -------------------------------------------------------- More than 3 Years to 5 More than 5 Fair Years Years Total Value -------------------------------------------------------- Interest-earning assets: Cash, investment securities and FHLB stock (1) 30,325 49,803 267,475 267,482 Loans and mortgage-backed securities: (1) Mortgage-backed securities 106,275 85,629 526,116 526,120 Loans receivable, net 70,325 137,171 2,029,612 2,034,596 -------------------------------------------------------- Total loans and mortgage-backed securities 176,600 222,800 2,555,728 2,034,596 --------------------------------------------------------- Total interest-earning assets 206,925 272,603 2,823,203 2,828,198 Non-interest earning assets - 112,777 112,777 112,777 -------------------------------------------------------- Total assets 206,925 385,380 2,935,980 2,940,975 ======================================================== Interest-bearing liabilities: Fixed maturity deposits 21,094 364 1,094,957 1,098,802 Core deposits (2) 142,554 19,159 748,581 748,581 -------------------------------------------------------- Total deposits 163,648 19,523 1,843,538 1,847,383 Borrowings (3) 345,000 65,000 814,000 737,083 -------------------------------------------------------- Total interest-bearing liabilities 508,648 84,523 2,657,538 2,584,466 Non-interest bearing liabilities - 35,777 35,777 35,777 Equity - 242,665 242,665 242,665 -------------------------------------------------------- Total liabilities and stockholders' equity 508,648 362,965 2,935,980 2,862,908 ======================================================== Interest sensitivity gap (301,723) 188,080 165,665 Cumulative interest sensitivity gap (22,415) 165,665 Cumulative interest sensitivity gap as a percentage of total assets (0.76) 5.64 Cumulative interest-earning assets as a percentage of cumulative interest- bearing liabilities 99.13 106.23
______________ (1) Based upon contractual maturities, repricing date, and forecasted principal payments assuming normal amortization and, where applicable prepayments. (2) Assumes annual decay rates ranging from 17%-35%. (3) Putable borrowings are presented based upon contractual final maturities. 44 The Company's one year GAP at March 31, 1999, was 14.35% (i.e., more interest earning assets reprice within one year than interest-bearing liabilities); this compares with 11.07% at March 31, 1998. The increase in the Company's one-year repricing GAP between March 31, 1998 and 1999 is attributable, in part, to an acceleration in the assumed level of principal prepayments on loans and MBS between the two years. The Company's continuing strategy to limit its interest rate risk exposure is emphasizing the origination of adjustable rate loans indexed to more responsive indices such as the one year CMT and the Prime rate and attempting to more closely match the sensitivity of liabilities to the anticipated repricing characteristics of assets through the use of putable borrowings and growth in core deposits. Although the table indicates the Company is better protected against rising interest rates, a GAP table is limited to measuring the timing risk and does not reflect the impact of customer options or basis risk. To better measure the Company's exposure to these and other components of interest rate risk, management relies on an internally maintained, externally supported asset/liability simulation model. The Company forecasts its net interest income for the next twelve months, and its NPV, assuming there are no changes in interest rates or the balance sheet structure from the current period end. Once this "base case" has been established, the Company subjects its balance sheet to instantaneous and sustained rate changes of 100, 200, 300 and 400 basis points to the treasury yield curve. Prepayment speeds and the responsiveness of the various indices are estimated for each rate change level. The model then re-forecasts net interest income and NPV. The table below indicates the results of the Company's internal modeling of its balance sheet as of March 31, 1999. Once again, it should be noted that the internal calculation of the Company's sensitivity to interest rate changes would vary substantially if different assumptions were used, or if the Company's response to changes in interest rates included changes in the structure of its balance sheet. Percentage Change ------------------------------------------------ Change in Interest Rates (in basis points) Net Interest Income(1) Net Portfolio Value(2) --------------------------------------------------------------------------- 200 (2.1)% (14.5)% 100 (0.2) (6.3) (100) (1.3) 2.7 (200) (2.6) 3.7 _________________ (1) This percentage change represents the impact to net interest income for the period from April 1, 1999 through March 31, 2000 assuming the Company does not change the structure of its balance sheet. (2) This percentage represents the NPV of the Company assuming no changes to the balance sheet. Although the GAP table indicates the Company's net interest income would perform better in a rising rate environment, results from the asset/liability simulation model indicate that yield compression would occur decreasing net interest income over the next twelve months. These results reflect the impact rising rates would have in decreasing prepayments, assets encountering periodic and lifetime caps, certain borrowings being "put" back to the Bank, and other factors that are not included in the GAP table. The OTS produces an analysis of the Bank's interest rate risk using its own model, based upon data submitted on the Bank's quarterly Thrift Financial Reports. The results of the OTS model may vary from the Bank's internal model primarily due to differences between assumptions utilized in the Bank's internal model and the OTS model, including estimated loan market rates, prepayment rates, reinvestment rates and deposit decay rates. As of March 31, 1999, the Bank's sensitivity measure, as calculated by the OTS, was a negative 1.52%. This represents an increase in sensitivity of 30 basis points from the March 31, 1998 results. 45 Average Balance Sheets The following table sets forth certain information relating to the Company for the years ended March 31, 1999, 1998, and 1997. The yields and costs are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods shown. Average balances are derived from average daily balances. The yields include fees that are considered adjustments to yields.
Year Ended March 31, ------------------------------------------------------------------- 1999 1998 -------------------------------------------------------------------- Average Average Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost -------------------------------------------------------------------- Assets: (Dollars in Thousands) Interest-earning assets: Interest-earning deposits and short-term investments 40,037 $ 1,921 4.80% $ 30,158 $ 1,590 5.27% Investment securities, net 270,164 16,842 6.23 179,895 11,931 6.63 Mortgage-backed securities, net 596,185 37,471 6.29 489,562 33,167 6.77 Loans receivable, net 1,872,869 148,013 7.90 1,853,686 142,815 7.70 FHLB stock 47,778 2,708 5.67 30,911 1,865 6.03 --------------------------- ------------------------- Total interest-earning assets 2,827,033 206,955 7.32 2,584,212 191,368 7.41 Non-interest-earning assets 139,799 85,842 --------------- -------------- Total assets $2,966,832 $2,670,054 =============== ============== Liabilities and Stockholders' Equity: Interest-bearing liabilities: Passbook accounts $ 147,702 3,405 2.31 $ 162,874 4,205 2.58 Money market savings accounts 290,917 13,131 4.51 193,146 7,981 4.13 NOW and other demand deposit accounts 188,130 1,293 0.69 159,298 1,214 0.76 Certificate accounts 1,153,199 61,705 5.35 1,201,989 66,755 5.55 ------------------------- ------------------------ Total 1,779,948 79,534 4.47 1,717,307 80,155 4.67 FHLB advances and other borrowings 905,197 50,711 5.60 651,078 38,233 5.87 Other 3,101 111 3.58 2,910 129 4.43 ------------------------- ------------------------- Total interest-bearing liabilities 2,688,246 130,356 4.85 2,371,295 118,517 5.00 ----------- ------------ Non-interest-bearing liabilities 38,729 35,318 -------------- -------------- Total liabilities 2,726,975 2,406,613 Stockholders' equity 239,857 263,441 -------------- -------------- Total liabilities and stockholders' equity $2,966,832 $2,670,054 ============== ============== Net interest income $ 76,599 $ 72,851 ================= ================ Net interest spread 2.47 2.41 Effective interest spread 2.71% 2.82% Ratio of interest-earning assets to interest- bearing liabilities 105.16% 108.98% -------------------------------------- 1997 -------------------------------------- Average Average Yield/ Balance Interest Cost ------------------------------------- Assets: Interest-earning assets: Interest-earning deposits and short-term investments $ 35,676 $ 2,005 5.62% Investment securities, net 62,671 4,292 6.85 Mortgage-backed securities, net 406,703 27,723 6.82 Loans receivable, net 1,743,487 133,116 7.64 FHLB stock 21,383 1,379 6.45 -------------------------- Total interest-earning assets 2,269,920 168,515 7.42 Non-interest-earning assets 78,368 -------------- Total assets $2,348,288 ============== Liabilities and Stockholders' Equity: Interest-bearing liabilities: Passbook accounts $ 192,520 5,525 2.87 Money market savings accounts 111,793 3,935 3.52 NOW and other demand deposit accounts 133,647 1,096 0.82 Certificate accounts 1,239,510 68,690 5.55 -------------------------- Total 1,677,470 79,246 4.72 FHLB advances and other borrowings 345,317 19,981 5.79 Other 3,223 79 2.45 -------------------------- Total interest-bearing liabilities 2,026,010 99,306 4.90 ---------- Non-interest-bearing liabilities 38,143 -------------- Total liabilities 2,064,153 Stockholders' equity 284,135 -------------- Total liabilities and stockholders' equity $2,348,288 ============== Net interest income $ 69,209 ========== Net interest spread 2.52 Effective interest spread 3.05% Ratio of interest-earning assets to interest- bearing liabilities 112.04%
46 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.
Year Ended March 31, 1999 Year Ended March 31, 1998 Compared To Compared To Year Ended March 31, 1998 Year Ended March 31, 1997 ------------------------------------------------------------------------ Increase (Decrease) Increase (Decrease) Due to Due to ------------------------------------------------------------------------ Rate/ Rate/ Volume Rate Volume Net Volume Rate Volume Net ------------------------------------------------------------------------ (Dollars In Thousands) Interest-earning Assets: Interest-earning deposits and short-term investments $ 521 (143) (47) 331 (310) (125) 20 (415) Investment securities, net (1) 5,987 (716) (360) 4,911 8,030 (138) (253) 7,639 Mortgage-backed securities, net (1) - - - - 5,651 (203) (4) 5,444 Loans held for sale 1,478 3,682 38 5,198 - - - - Loans receivable, net (2) 7,224 (2,397) (523) 4,304 8,419 1,046 234 9,699 FHLB stock 1,018 (113) (62) 843 615 (90) (39) 486 ------------------------------------------------------------------------ Total interest-earning assets $16,228 313 (954) 15,587 22,405 490 (42) 22,853 ------------------------------------------------------------------------ Interest-bearing Liabilities: Passbook accounts $ (392) (450) 42 (800) (851) (558) 89 (1,320) Money market savings accounts 4,040 737 373 5,150 2,864 682 500 4,046 NOW and other demand deposit accounts 220 (119) (22) 79 210 (80) (12) 118 Certificate accounts (2,710) (2,439) 99 (5,050) (2,082) - 147 (1,935) FHLB advances and other borrowings 14,923 (1,758) (687) 12,478 17,704 276 272 18,252 Other 8 (25) (1) (18) (8) 64 (6) 50 ------------------------------------------------------------------------ Total interest-bearing liabilities 16,089 (4,054) (196) 11,839 17,837 384 990 19,211 ------------------------------------------------------------------------ Change in net interest income $ 139 4,367 (758) 3,748 4,568 106 (1,032) 3,642 ========================================================================
_________________________ (1) Includes assets available-for-sale. (2) Included in the increases/(decreases) in interest income on loans receivable, net for the year ended March 31, 1999 compared to 1998, the year ended March 31, 1998 compared to 1997 are increases/(decreases) in interest income on loans held for sale attributable to volume and rate of $(3.4 million) and $(267,000); $3.2 million and $82,000, respectively. 47 Comparison of Operating Results for the Years Ended March 31, 1999 and March 31, 1998 General - ------- The Company reported net earnings of $19.0 million for fiscal 1999 compared to net earnings of $16.0 million for fiscal 1998. The improvement in operating resul ts between fiscal 1999 and fiscal 1998 was attributable to three factors: (i) an increase in net interest income from $72.9 million for fiscal 1998 to $76.6 million for fiscal 1999 attributable to growth in average interest-earning assets (ii) a decrease in the provision for loan losses from $7.1 million for fiscal 1998 to $4.0 million for fiscal 1999 arising from an improvement in asset quality and (iii) an increase in non-interest income from $14.3 million for fiscal 1998 to $15.5 million for fiscal 1999 driven principally by increases in deposit and related fees from $8.2 million for fiscal 1998 to $8.6 million for fiscal 1999 and the gain on trading securities of $569,000 for fiscal 1999 compared to zero for fiscal 1998. Interest Income - --------------- Interest income for fiscal 1999 was $207.0 million compared to $191.4 million for fiscal 1998, an increase of $15.6 million or 8.2%. The increase in interest income between fiscal 1998 and fiscal 1999 was attributable to a $242.8 million increase in average interest-earning assets from $2.58 billion for fiscal 1998 to $2.83 billion for fiscal 1999. The yield on average interest- earning assets was 7.32% for fiscal 1999 compared to 7.41% for fiscal 1998. The increase in average interest-earning assets between fiscal 1998 and fiscal 1999 was comprised principally of a $90.3 million increase in the average balance of investment securities from $179.9 million for fiscal 1998 to $270.2 million for fiscal 1999, a $19.2 million increase in the average balance of loans receivable, net from $1.85 billion for fiscal 1998 to $1.87 billion for fiscal 1999 and $106.6 million increase in the average balance of mortgage- backed securities (MBS) from $489.6 million for fiscal 1998 to $596.2 million for fiscal 1999. The increases in the average balances of MBS and investment securities between fiscal 1998 and 1999 reflect activity during fiscal 1998 and early fiscal 1999. During mid-fiscal 1999, the Company undertook a strategy of reducing its wholesale leverage (MBS and investment securities funded with FHLB advances and other borrowings). This strategy was undertaken in connection with an increased focus by the Company on enhancing its net interest spread and achieving an earnings stream and balance sheet comprised to a greater extent by commercial business, construction and land, commercial real estate and consumer loans (collectively, the "Four-C's") on the asset side and money market savings, passbook, NOW and other demand deposits (core deposits) on the liability side. Strong loan origination volumes of the Four-C's have provided an investment alternative for the Company which is preferential over MBS or investment securities and is consistent with its long term strategic objectives. Additionally, having passed the three year anniversary of the Bank's March 28, 1996 mutual to stock conversion, the Company has alternative avenues for capital management available to it (e.g. stock repurchases) which did not exist prior to March 28, 1999. The average yield on loans receivable, net increased 20 basis points from 7.70% for fiscal 1998 to 7.90% for fiscal 1999 reflecting the Bank's increased emphasis on the origination of the Four-C's. The disbursed balance of the Four-C's averaged $370.0 million or 19.76% of average total loans receivable, net during fiscal 1999 compared to $259.2 million or 13.98% for fiscal 1998. The Bank also increased the proportion of its loan portfolio comprised by single-family residential mortgage loans which provide for a 36 to 84 month fixed-rate of interest before transitioning to an adjustable-rate loan tied to the one-year constant maturity treasury (CMT) index (hybrid ARMs). During fiscal 1999, the Bank's portfolio of hybrid ARM loans averaged $418.0 million at an average yield of 7.08% compared to $318.9 million at an average yield of 7.22% during fiscal 1998. Unlike the typical COFI based adjustable-rate loans originated by the Bank, these hybrid ARM loans are not originated with lower introductory rates. 48 The increase in yield on loans receivable, net attributable to the change in the composition of the loan portfolio was partially offset by a decrease in the general level of interest rates and an increase in the level of prepayments of higher yielding residential mortgage loans. These prepayments also resulted in an increase in the amortization of premiums paid on loans purchased. This premium amortization amounted to $2.4 million for fiscal 1999 compared to $784,000 for fiscal 1998. At March 31, 1999, the Bank's weighted average carrying value of loans purchased from others as a percentage of outstanding principal balance was 101.6%. The average yield on investment securities decreased from 6.63% for fiscal 1998 to 6.23% for fiscal 1999 as lower-yielding adjustable rate collateralized mortgage obligations (CMOs) indexed primarily to the one-month London Interbank Offered Rate (LIBOR) were added to the portfolio during the first half of fiscal 1999 prior to the Company's decision during mid-fiscal year to begin de- emphasizing wholesale leverage. The decrease in the yield on investment securities between fiscal 1998 and fiscal 1999 was attributable in part to a decrease in one month LIBOR. One month LIBOR decreased from 5.63% at March 31, 1998 to 4.93% at March 31, 1999. Premium amortization on investment securities of $780,000 for fiscal 1999 and $131,000 for fiscal 1998 decreased the yield on investment securities by 29 basis points and 8 basis points for fiscal 1999 and 1998, respectively. The average yield on MBS decreased from 6.77% for fiscal 1998 to 6.29% for fiscal 1999. This decrease in the yield on MBS was attributable in part to a decrease in the general level of interest rates during fiscal 1999, particularly the one year CMT index to which 43.3% of the Company's MBS portfolio is tied. The CMT index decreased from 5.41% at March 31, 1998 to 3.86% on October 16, 1998 before increasing to 4.72% at March 31, 1999. Premium amortization on MBS of $3.3 million for fiscal 1999 and $2.0 million for fiscal 1998 decreased the yield on MBS by 55 basis points and 41 basis points for fiscal 1999 and 1998, respectively. The weighted average cost basis of the MBS and other investment securities held by the Company at March 31, 1999 was 100.9 percent of par value. Interest Expense - ---------------- Interest expense for fiscal 1999 was $130.4 million compared to $118.5 million for fiscal 1998, an increase of $11.8 million or 10.0%. The increase in interest expense between fiscal 1998 and fiscal 1999, was due to a $317.0 million increase in average interest-bearing liabilities from $2.37 billion for fiscal 1998 to $2.69 billion for fiscal 1999 partially offset by a decrease in the average cost of interest-bearing liabilities from 5.00% for fiscal 1998 to 4.85% for fiscal 1999. The increase in the average balance of interest-bearing liabilities was principally attributable to a $254.1 million increase in the average balance of FHLB advances and other borrowings from $651.1 million for fiscal 1998 to $905.2 million for fiscal 1999. The average balance of deposits increased $62.6 million from $1.72 billion for fiscal 1998 to $1.78 billion for fiscal 1999. During fiscal 1999, the Bank utilized FHLB advances and other borrowings as its primary funding source for its investments in MBS and other investment securities and as a means of managing the difference in cash flows between retail loan and deposit activity in a manner complementary to the overall interest rate risk and profitability objectives of the Bank. The average cost of deposits decreased from 4.67% for fiscal 1998 to 4.47% for fiscal 1999. Contributing to the decrease in the average cost of deposits was a $111.4 million increase in the average balance of core deposits from $515.3 million for fiscal 1998 to $626.7 million for fiscal 1999. The average cost of FHLB advances and other borrowings decreased from 5.87% for fiscal 1998 to 5.60% for fiscal 1999. This decrease reflects the decrease in the general level of interest rates during fiscal 1999. Provision for Loan Losses - -------------------------- Provision for loan losses was $4.0 million for fiscal 1999 compared to $7.1 million for fiscal 1998. The decrease in provision for losses between fiscal 1998 and 1999 reflects an improvement in the Bank's overall level of asset quality as well as an assessment by the Bank of an improvement in general economic conditions and property valuations in its market area. Non-accrual loans were $11.0 million or 0.50%, of gross loans receivable at March 31, 1999 compared to $17.2 million or 0.88% of gross loans receivable at March 31, 1998. The allowance for loan losses was $26.2 million or 1.18% of gross loans receivable at March 31, 1999 compared to $26.0 million or 1.33% of gross loans receivable at March 31, 1998. 49 Non-interest Income - ------------------- Non-interest income was $15.5 million for fiscal 1999 compared to $14.3 million for fiscal 1998, an increase of $1.3 million or 8.9%. The increase between fiscal 1998 and fiscal 1999 was attributable principally to an increase in deposit and related fees from $8.2 million for fiscal 1998 to $8.6 million for fiscal 1999 due to a combination of higher volumes of core deposit activity and an increased emphasis on the assessment and collection of fees. The income from the sale of non-deposit investments decreased from $1.6 million for fiscal 1998 to $1.1 million for fiscal 1999. Trust fees were $1.9 million for fiscal 1998 and 1999. Gain on sales of loans and securities was $698,000 for fiscal 1999 compared to $1.6 million for fiscal 1998. The $698,000 for fiscal 1999 is comprised of gains on sales of loans of $672,000 and gain on sales of securities of $26,000. During fiscal 1999, the Bancorp established a trading portfolio comprised principally by readily marketable equity securities. This portfolio is managed by the Bank's Trust Department with the objective of enhancing the overall returns to the Bancorp. The net gain from trading activity was $569,000 for fiscal 1999. Non-interest Expense - -------------------- Non-interest expense was $54.9 million for fiscal 1999 compared to $52.0 million for fiscal 1998, a increase of $2.9 million or 5.5%. The $1.5 million increase in marketing and professional services expense between fiscal 1999 and fiscal 1998 is attributable principally to the costs associated with the Bank's image branding campaign which carries the theme, "As big as you need, as small as you like." General and administrative expense was $55.0 million or 1.9% of average assets for fiscal 1999 compared to $51.6 million or 1.9% of average assets for fiscal 1998, an increase of $3.4 million or 6.6%. Compensation and benefits expense increased $1.2 million from $26.8 million for fiscal 1998 to $28.0 million for fiscal 1999. Included in compensation and benefits expense are non- cash charges of $2.7 million and $1.9 million associated with the Bank's ESOP and 1996 Incentive Plan. Occupancy and equipment expense was $12.1 million for fiscal 1999 compared to $11.6 million for fiscal 1998. The $519,000 increase in occupancy and equipment expense between fiscal 1998 and fiscal 1999 is attributable principally to depreciation on computer equipment related to upgrades to the Bank's wide area networked personal computers and service bureau charges. Foreclosed real estate operations, net generated income of $45,000 for fiscal 1999 compared to expense of $473,000 for fiscal 1998 reflecting an improved regional economy and real estate market. Income Taxes - ------------ Income taxes were $14.2 million for fiscal 1999 compared to $12.0 million for fiscal 1998. The effective income tax rate for fiscal 1999 was 42.8% compared to an effective rate of 42.9% for fiscal 1998. Comparison of Financial Condition at March 31, 1999 and March 31, 1998 - ---------------------------------------------------------------------- Total assets at March 31, 1999 were $2.94 billion compared to $2.81 billion at March 31, 1998 an increase of $123.6 million or 4.4%. Loans receivable, net increased $198.5 million from $1.83 billion at March 31, 1998 to $2.03 billion at March 31, 1999. Loan originations were $987.6 million for fiscal 1999 compared to $557.4 million for fiscal 1998. The increase in originations between fiscal 1998 and 1999 reflects the impact of a very favorable interest rate environment for re-finance activity combined with an increase in real estate values and sales volume in the Bank's market areas. The weighted average initial contract rate for total loan originations was 8.58% for fiscal 1999, compared to 8.75% for fiscal 1998. Originations of the Four-C's totaled $577.8 million for fiscal 1999 compared to $308.4 million for fiscal 1998 reflecting the Bank's emphasis on these areas of lending. Investment securities available-for-sale decreased $131.3 million from $316.4 million at March 31, 1998 to $185.1 million at March 31, 1999. MBS available-for-sale increased $43.9 million from $481.6 million at March 31, 1998 to $525.6 million at March 31, 1999. The increase in FHLB stock from $39.5 million at March 31, 1998 to $50.3 million at March 31, 1999 reflects the additional stock the Bank is required to hold based upon its level of outstanding FHLB 50 advances. Prepaid expenses and other assets were $23.3 million at March 31, 1999 compared to $47.2 million at March 31, 1998 due to MBS sold but not yet settled as of March 31, 1998. Total liabilities at March 31, 1999 were $2.69 billion compared to $2.56 billion at March 31, 1998, an increase of $135.2 million or 5.3%. Total deposits of the Bank were $1.84 billion at March 31, 1999 compared to $1.74 billion at March 31, 1998. FHLB advances and other borrowings were $814.0 million at March 31, 1999 compared to $785.9 million at March 31, 1998. The increase in FHLB advances and other borrowings between March 31, 1998 and 1999 was attributable to the Bank's use of FHLB advances and other borrowings to supplement deposits in funding the growth in loans receivable during fiscal 1999. As noted above in the discussion of interest income, during mid-fiscal 1999 the Company began reducing its level of wholesale leverage. Total stockholders' equity decreased $11.6 million from $254.3 million at March 31, 1998 to $242.7 million at March 31, 1999. The $11.6 million decrease is comprised principally of a $15.3 million decrease in additional paid-in- capital partially offset by a $3.7 million decrease in unearned stock-based compensation and a $3.6 million decrease in accumulated other comprehensive earnings (loss) on securities available-for-sale. The $15.3 million decrease in additional paid-in-capital was attributable principally to the Company's repurchase during fiscal 1999 of 1,664,144 shares of its outstanding common stock, at a weighted average price of $19.29 per share. The $3.5 million increase in retained earnings from $106.6 million at March 31, 1998 to $110.2 million at March 31, 1999 reflects $15.5 million attributable to the amount paid by the Company to repurchase its common stock in excess of the issuance price of the stock, partially offset by the Company's net earnings of $19.0 million for fiscal 1999. The $3.7 million decrease in unearned stock-based compensation was attributable to the amortization of shares under the Company's ESOP and 1996 Incentive Plan. Comparison of Operating Results for the Years Ended March 31, 1998 and March 31, 1997 General - ------- The Company reported net earnings of $16.0 million for fiscal 1998 compared to net earnings of $2.7 million for fiscal 1997. The improvement in operating results between fiscal 1998 and fiscal 1997 was attributable to four factors: (i) an increase in net interest income from $69.2 million for fiscal 1997 to $72.9 million for fiscal 1998 attributable to growth in average interest-earning assets (ii) a decrease in the provision for loan losses from $13.7 million for fiscal 1997 to $7.1 million for fiscal 1998 arising from an improvement in asset quality (iii) an increase in non-interest income from $10.2 million for fiscal 1997 to $14.3 million for fiscal 1998 driven principally by an increase in deposit and related fees from $9.0 million for fiscal 1997 to $11.7 million for fiscal 1998 and (iv) the impact on fiscal 1997 of the Bank's $10.9 million share of the SAIF recapitalization assessment. Interest Income - --------------- Interest income for fiscal 1998 was $191.4 million compared to $168.5 million for fiscal 1997, an increase of $22.9 million or 13.6%. The increase in interest income between fiscal 1997 and fiscal 1998 was attributable to a $314.3 million increase in average interest-earning assets from $2.27 billion for fiscal 1997 to $2.58 billion for fiscal 1998. The yield on average interest- earning assets was 7.41% for fiscal 1998 compared to 7.42% for fiscal 1997. The increase in average interest-earning assets between fiscal 1997 and fiscal 1998 was comprised principally of a $117.2 million increase in the average balance of investment securities from $62.7 million for fiscal 1997 to $179.9 million for fiscal 1998, a $110.2 million increase in the average balance of loans receivable, net from $1.74 billion for fiscal 1997 to $1.85 billion for fiscal 1998 and $82.9 million increase in the average balance of MBS from $406.7 million for fiscal 1997 to $489.6 million for fiscal 1998. The average yield on loans receivable, net increased 6 basis points from 7.64% for fiscal 1997 to 7.70% for fiscal 1998 reflecting the Bank's increased emphasis on the origination of mortgages which provide higher yields than those earned on single-family residential FHLB and COFI based loan products. The disbursed balance 51 of the Bank's portfolio of construction loans totaled $90.3 million at an average yield of 10.02% during fiscal 1998 compared to $74.7 million at an average yield of 11.49% during fiscal 1997. The Bank has also increased the proportion of its loan portfolio comprised by hybrid ARM loans. During fiscal 1998, the Bank's portfolio of hybrid ARM loans averaged $318.9 million at an average yield of 7.22% compared to $193.9 million at an average yield of 7.12% during fiscal 1997. Unlike the typical COFI based adjustable-rate loans originated by the Bank, these hybrid ARM loans are not originated with lower introductory rates. The increase in yield on loans receivable, net attributable to the change in the composition of the loan portfolio was partially offset by an increase in the level of prepayments of higher yielding residential mortgage loans. These prepayments also resulted in an increase in the amortization of premiums paid on loans purchased. This premium amortization amounted to $784,000 for fiscal 1998 compared to $38,000 for fiscal 1997. At March 31, 1998, the Bank's weighted average carrying value of loans purchased from others as a percentage of the outstanding principal balance of $165.0 million was 101.8 percent of par value. The yield on investment securities decreased from 6.85% for fiscal 1997 to 6.63% for fiscal 1998 as lower-yielding adjustable rate CMOs indexed primarily to the one-month LIBOR were added to the portfolio in connection with the Bank's strategy of supplementing growth in loans and deposits with MBS and other securities funded primarily with FHLB advances and other borrowings. The yield on MBS decreased from 6.82% for fiscal 1997 to 6.77% for fiscal 1998. This decrease in the yield on MBS was attributable to a decrease in the general level of interest rates during fiscal 1998, particularly the one year CMT index to which 26.02% of the Company's MBS portfolio is tied. The CMT index decreased from 6.02% at March 31, 1997 to 5.08% on January 9, 1998 before increasing slightly to 5.41% at March 31, 1998. The decrease in the general level of interest rates also resulted in an acceleration in the level of prepayments of the higher yielding fixed and adjustable rate MBS in the Company's portfolio with a resulting increase in premium amortization. This premium amortization was $2.0 million for fiscal 1998 compared to $1.1 million for fiscal 1997. The weighted average cost basis of the MBS and other investment securities held by the Company at March 31, 1998 was 100.8 percent of par value. Interest Expense - ---------------- Interest expense for fiscal 1998 was $118.5 million compared to $99.3 million for fiscal 1997, an increase of $19.2 million or 19.3%. The increase in interest expense between fiscal 1997 and fiscal 1998, was due to a $345.3 million increase in average interest-bearing liabilities from $2.03 billion for fiscal 1997 to $2.37 billion for fiscal 1998 coupled with an increase in the average cost of interest-bearing liabilities from 4.90% for fiscal 1997 to 5.00% for fiscal 1998. The increase in the average balance of interest-bearing liabilities was attributable to a $305.8 million increase in the average balance of FHLB advances and other borrowings from $345.3 million for fiscal 1997 to $651.1 million for fiscal 1998. The average balance of deposits increased $39.8 million from $1.68 billion for fiscal 1997 to $1.72 billion for fiscal 1998. During fiscal 1998, the Bank utilized FHLB advances and other borrowings as its primary funding source for its additional investments in MBS and other investment securities and as a means of managing the difference in cash flows between retail loan and deposit activity in a manner complementary to the overall interest rate risk and profitability objectives of the Bank. The average cost of deposits decreased from 4.72% for fiscal 1997 to 4.67% for fiscal 1998. Contributing to the decrease in the average cost of deposits was a $77.4 million increase in the average balance of core deposits from $438.0 million for fiscal 1997 to $515.3 million for fiscal 1998. The average cost of FHLB advances and other borrowings increased from 5.79% for fiscal 1997 to 5.87% for fiscal 1998. This increase reflects the Bank's lengthening of the term to repricing of its FHLB advances in order to achieve greater correlation between the repricing of its interest-earning assets and interest-bearing liabilities. At March 31, 1998, the weighted average maturity for the Bank's FHLB advances and other borrowings was 15 months compared to 9 months at March 31, 1997. In calculating 52 these weighted average terms to repricing, putable borrowings have been assumed to reprice at their first put date. Provision for Loan Losses - -------------------------- Provision for loan losses was $7.1 million for fiscal 1998 compared to $13.7 million for fiscal 1997. The provision for loan losses for fiscal 1997 includes $2.5 million applicable to the establishment of specific allowances on several loans based upon updated reviews in June 1996. Non-accrual loans were $17.2 million or 0.88%, of gross loans receivable at March 31, 1998 compared to $23.4 million or 1.24% of gross loans receivable at March 31, 1997. The allowance for loan losses was $26.0 million or 1.33% of gross loans receivable at March 31, 1998 compared to $27.7 million or 1.47% of gross loans receivable at March 31, 1997. Non-Interest Income - ------------------- Non-interest income was $14.3 million for fiscal 1998 compared to $10.2 million for fiscal 1997, an increase of $4.1 million or 39.6%. The increase between fiscal 1997 and fiscal 1998 was attributable principally to an increase in deposit and related fees from $6.3 million for fiscal 1997 to $8.2 million for fiscal 1998 due to a combination of higher volumes of core deposit activity and an increased emphasis on the assessment and collection of fees. The income from the sale of non-deposit investments increased from $1.4 million for fiscal 1997 to $1.6 million for fiscal 1998 as the Bank continued to expand its offerings of non-proprietary annuity and mutual fund products. Trust fees increased from $1.4 million for fiscal 1997 to $1.9 million for fiscal 1998 reflecting, in part, growth in assets under custody from $211.0 million at March 31, 1997 to $238.6 million at March 31, 1998. Gain on sale of loans and securities was $1.6 million for fiscal 1998 compared to $150,000 for fiscal 1997. The $1.6 million for fiscal 1998 is comprised of gains on sales of loans of $992,000 and gains on sales of securities of $624,000. The gains on sales of loans include $701,000 applicable to the sale of $149.6 million of single family loans indexed to COFI. These loans were sold and a similar amount of loans indexed to the one year CMT were purchased during the year in connection with the Bank's efforts to diversify the repricing characteristics of its loan portfolio. Non-Interest Expense - -------------------- Non-interest expense was $52.0 million for fiscal 1998 compared to $60.0 million for fiscal 1997, a decrease of $7.9 million or 13.2%. Non-interest expense for fiscal 1997 includes a pre-tax charge of $10.9 million representing the Bank's share of an industry-wide special assessment levied against the March 31, 1995 deposit bases of all savings institutions in the country with deposits insured by the SAIF. Excluding the impact of the SAIF assessment, non-interest expense increased $3.0 million or 6.1% between fiscal 1997 and fiscal 1998. General and administrative expense was $51.6 million or 1.93% of average assets for fiscal 1998 compared to $49.4 million or 2.11% of average assets for fiscal 1997, an increase of $2.2 million or 4.4%. Compensation and benefits expense increased $3.8 million from $23.0 million for fiscal 1997 to $26.8 million for fiscal 1998. The increase between fiscal 1997 and fiscal 1998 was attributable principally to a $875,000 increase in ESOP expense arising from an increase in the market value of the Company's common stock and $1.1 million of expense associated with the Company's 1996 Incentive Plan which became effective in October 1996. Other non-interest expense decreased $2.9 million from $12.8 million for fiscal 1997 to $9.9 million for fiscal 1998. The decrease was due principally to the inclusion in fiscal 1997 of approximately $2.1 million of expenses associated with the Bank's transition of its EDP systems to a new third-party service provider in October 1996. Other non-interest expense for fiscal 1997 also includes a $350,000 legal judgment and a $420,000 accrual for the interest portion of a probable adverse California franchise tax settlement. Occupancy and equipment expense was $11.6 million for fiscal 1998 compared to $10.3 million for fiscal 1997. The $1.3 million increase in occupancy and equipment expense between fiscal 1997 and fiscal 1998 is attributable principally to depreciation on computer equipment related to upgrades to the Bank's wide area networked personal computers and service bureau charges. Real estate operations, net reflects expense of $473,000 for fiscal 1998 compared to income of $325,000 for fiscal 1997. 53 The results for fiscal 1997 reflect a $1.4 million reduction in the allowance for real estate losses based upon updated property valuations. Income Taxes - ------------ Income taxes were $12.0 million for fiscal 1998 compared to $3.1 million for fiscal 1997. The effective income tax rate for fiscal 1998 was 42.9% compared to an effective rate of 43.2% for fiscal 1997. Liquidity and Capital Resources - ------------------------------- The Company's primary sources of funds are deposits, principal and interest payments on loans and securities, FHLB advances and other borrowings, proceeds from the maturation of securities and, to a lesser extent, proceeds from the sale of loans. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage and security prepayments are greatly influenced by the general level of interest rates, economic conditions and competition. The Bank has maintained the required minimum levels of liquid assets as defined by OTS regulations. This requirement, which may be varied at the direction of the OTS depending upon economic conditions and deposit flows, is based upon a percentage of deposits and short-term borrowings. Effective with the quarter ended December 31, 1997 the required ratio is 4%. Prior to that the requirement was 5%. The Bank's average liquidity ratios were 4.85%, 4.90%, and 5.30% for the years ended March 31, 1999, 1998 and 1997, respectively. Management attempts to maintain a liquidity ratio no higher than 1% above the regulatory requirement. This reflects management's strategy to invest excess liquidity in higher yielding interest-earning assets, such as loans or other investments, depending on market conditions. The Bank has invested in corporate securities when the yields thereon have been more attractive than U.S. government and federal agency securities of similar maturity. While corporate securities are not backed by any government agency, the maturity structure and credit quality of all corporate securities owned by the Bank meet the minimum standards set forth by the OTS for regulatory liquidity-qualifying investments. The Bank invests in callable debt issued by Federal agencies of the U.S. government when the yields thereon to call date(s) and maturity exceed the yields on comparable term and credit quality non-callable investments by amounts which management deems sufficient to compensate the Bank for the call options inherent in the securities. The Company's cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities and financing activities. Cash flows provided by operating activities were $97.7 million, $152.1 million, and $40.5 million, for the years ended March 31, 1999, 1998 and 1997, respectively. Net cash provided by (used in) investing activities consisted primarily of disbursements for loan originations and purchases of mortgage-backed and other investment securities, offset by principal collections on loans and proceeds from maturation of investments and paydowns on mortgage- backed securities. Principal payments on loans were $831.5 million, $471.5 million, and $226.0 million for the years ended March 31, 1999, 1998 and 1997, respectively. Disbursements on loans originated and purchased, excluding loans originated for sale, were $1.08 billion, $659.6 million, and $492.8 million for the years ended March 31, 1999, 1998 and 1997, respectively. Disbursements for purchases of mortgage-backed and other investment securities were $416.3 million, $480.8 million, and $563.1 million for the years ended March 31, 1999, 1998 and 1997, respectively. Proceeds from the maturation of investment securities and paydowns of mortgage-backed securities were $419.8 million, $207.4 million and $101.8 million for the years ended March 31, 1999, 1998 and 1997, respectively. Net cash provided by (used in) financing activities consisted primarily of net activity in deposit accounts and FHLB advances and other borrowings. The net increases in deposits were $102.7 million, $29.8 million, and $29.0 million for the years ended March 31, 1999, 1998 and 1997, respectively. The net increases in FHLB advances and other borrowings were $28.1 million, $255.9 million, and $510.3 million for the years ended March 31, 1999, 1998 and 1997, respectively. At March 31, 1999, the Bank exceeded all of its regulatory capital requirements with a tangible capital level of $201.2 million, or 6.95% of adjusted total assets, which is above the required level of $46.4 million, or 1.5%; core capital of $201.2 million, or 6.95 % of adjusted total assets, which is above the required level of $86.9 million, or 3.0%, and total risk-based capital of $222.9 million, or 12.52% of risk-weighted assets, 54 which is above the required level of $142.4 million, or 8%. See "Item 1 -Description of Business - Regulation and Supervision - Federal Savings Institution Regulation." The Company's most liquid assets are cash and short-term investments. The levels of these assets are dependent on the Company's operating, financing, lending and investing activities during any given period. At March 31, 1999 cash and short-term investments totaled $63.8 million. The Company has other sources of liquidity if a need for additional funds arises, including the utilization of reverse repurchase agreements and FHLB advances. At March 31, 1999, the Bank has $764.0 million of FHLB advances and $50.0 million of reverse repurchase agreements outstanding. Other sources of liquidity include investment securities maturing within one year. The Company currently has no material contractual obligations or commitments for capital expenditures. See "Item 1 - Description of Business - General." At March 31, 1999, the Bank had outstanding commitments to originate and purchase loans of $28.8 million and zero, respectively, compared to $15.2 million and zero, respectively, at March 31, 1998. At March 31, 1999, and 1998 the Company had no outstanding commitments to purchase mortgage-backed securities and other investment securities. The Company anticipates that it will have sufficient funds available to meet these commitments. See "Item 1 - Description of Business - General." Certificate accounts that are scheduled to mature in less than one year from March 31, 1999 totaled $1.0 billion. The Bank expects that a substantial portion of the maturing certificate accounts will be retained by the Bank at maturity. Impact of Inflation - ------------------- The Consolidated Financial Statements and Notes thereto presented herein have been prepared in accordance with GAAP, which require the measurement of financial position and operating results in terms of historical dollar amounts or market value without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company's operations. Unlike industrial companies, nearly all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Company's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services. Segment Reporting - ----------------- The Company, through the branch network of the Bank, provides a broad range of financial services to individuals and companies located primarily in Southern California. These services include demand, time, and savings deposits; real estate, business and consumer lending; ATM processing; cash management; and trust services. While the Company's chief decision makers monitor the revenue streams of the various Company products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the Company's banking operations are considered by management to be aggregated in one reportable operating segment. Year 2000 - --------- Risks of the Year 2000 Issue The Year 2000 issue is the result of computer programs being written using two digits rather than four digits to represent the calendar year (e.g. "98" for "1998"). Software so developed, and not corrected, could produce inaccurate or unpredictable results or system failures commencing January 1, 2000, when dates present a lower two digit year number than dates in the prior century. Such occurrences may have a material adverse effect on the Company's financial condition, results of operation, business or business prospects, as the Company, like most financial organizations, is significantly subject to the potential impact of the Year 2000 issue due to the nature of financial information. Potential impacts to the Company may arise from software, computer hardware, and other equipment both within the Company's direct control and outside the Company's ownership, yet with which the Company electronically or operationally interfaces. 55 Financial institution regulators have intensively focused upon Year 2000 exposures, issuing guidance concerning the responsibilities of management and the board of directors. Year 2000 testing and certification is being addressed as a key safety and soundness issue in conjunction with regulatory exams and the Office of Thrift Supervision has authority to bring enforcement actions against any institution under its supervision which it believes is not properly addressing Year 2000 issues. State of Readiness The Company has established a five-phase process to address the Year 2000 issue and pursuant to its plans, for both information technology and non- information technology related systems, the majority of effort remaining is in the fifth and final phases of the project. The Company's Board of Directors oversees the Year 2000 compliance project's progress through monthly status reports provided by the Year 2000 Project Office, which indicate that the Company expects to be ready for Year 2000. The Company expects to be substantially ready by June 30, 1999. Phase one of the project consisted of developing a Company-wide awareness of the Year 2000 issue and included establishment of a Year 2000 Project Office for the Company. As part of the second phase, the Company completed an inventory of all data systems to determine which are most critical to support customer transaction processing and provide customer services. This inventory not only included in-house systems, but those provided by third party vendors as well. Project plans were developed which place priority emphasis on those systems requiring change and classified as mission critical. Third party vendors were contacted during this phase to determine their processes and timelines for correcting any Year 2000 compliance issues. The Company has in place a process to monitor the progress of mission critical third party vendors toward making required Year 2000 corrections. In addition, significant real estate and commercial loan borrowers of the Company were also contacted to determine the extent of their preparations for Year 2000 and any potential impact Year 2000 may have on their businesses and ability to repay loan obligations to the Company. The first two phases are completed. Phase three of the process consists of making appropriate Year 2000 programming changes to the Company's in-house and vendor-provided core processing systems, as well as replacement of other vendor-provided PC-based systems. Phase four consists of acceptance testing and sign-off of both the Company's in-house and vendor-provided systems. The fifth and final phase of the Year 2000 compliance project includes installation of the system modifications. The Company has completed renovation, validation and installation of one of the two major applications currently maintained on its internally maintained mid-range computer, and replacement of another major application is scheduled to be completed in the second calendar quarter of 1999. A third system, for internal Human Resources and payroll processing, will be converted from a PC-based, outsourced solution to the mid-range computer, with installation scheduled for the third calendar quarter. The application this will be replacing is not Y2K ready, but could be with an upgrade that would require minimal effort for the Company. However, due to business reasons, the Company has decided to convert to a new system rather than upgrade the existing system. This brings it under the Y2K umbrella and is being tracked accordingly. The Company's core processing systems vendors have installed Year 2000 compliant code for all systems and remaining validation testing scheduled to be substantially completed by June 30, 1999. Two external vendors provide core processing. The Y2K project office has closely monitored the renovation, testing and implementation phases of the two processors' Y2K projects and is satisfied with the progress. The timing of Year 2000 acceptance testing and installation of all third party vendor changes is dependent upon when such systems become available to the Company. In addition to the computer systems utilized by the Company, the Company has also inventoried other essential services that may be impacted by Year 2000 issues, such as telecommunications and utilities. The Company is monitoring such essential service providers to determine their progress and how they are addressing Year 2000 issues. To date, no information exists to suggest such essential services will not be Year 2000 compliant. 56 Costs to Address the Year 2000 Issue Currently the Company estimates that Year 2000 project costs will approximate $3.1 million. This cost is in addition to existing personnel who may participate in the project. Included in the estimate are costs for hardware and software renovation or replacement, as well as existing staff who are specifically devoted to the project. Approximately 60% of the cost represents expenditures to replace certain older hardware and software which the Company might otherwise have replaced during the period, notwithstanding the Year 2000 issue, the costs of which will be depreciated over its anticipated useful life. Of the estimated total cost, approximately $2.1 million has been incurred on the project year-to-date. The table below summarizes by year the estimated amount and anticipated timing of the planned Year 2000 expenditures.
Fiscal Year - ---------------------------------------------------------------------------------------------- (In Millions) 1998 1999 2000 Total - ---------------------------------------------------------------------------------------------- Capital $ - 1.1 .5 1.6 Operating .3 .7 .5 1.5 - ---------------------------------------------------------------------------------------------- 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 is in the process of finalizing and testing contingency plans, including manual procedures, for systems classified as mission critical and high risk. These contingency plans provide timetables to pursue various alternatives based upon the failure of a system to be adequately modified and/or sufficiently tested and validated to ensure Year 2000 compliance. However, there can be no assurance that either the compliance process or contingency plans will avoid partial or total system interruptions (particularly for disruptions caused by systems outside of the Company's control), nor that the costs necessary to update hardware and software would not have a material adverse effect upon the Company's financial condition, results of operation, business or business prospects. ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk - -------------------------------------------------------------------- Disclosure related to market risk is included in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Asset/Liability Management" contained at Item 7 of this Form 10-K. 57 ITEM 8. Financial Statements and Supplementary Data - ----------------------------------------------------- Index to Financial Statements
PAGE ---- Consolidated Balance Sheets - March 31, 1999 and 1998............................ 59 Consolidated Statements of Earnings - Years ended March 31, 1999, 1998 and 1997................................................................ 60 Consolidated Statements of Comprehensive Earnings - Years ended March 31, 1999, 1998 and 1997................................................................ 61 Consolidated Statements of Stockholders' Equity - Years ended March 31, 1999, 1998 and 1997................................................................ 62 Consolidated Statements of Cash Flows - Years ended March 31, 1999, 1998 and 1997..................................................................... 63 Notes to Consolidated Financial Statements....................................... 65 Independent Auditors' Report..................................................... 97
58 PFF BANCORP, INC. AND SUBSIDIARY Consolidated Balance Sheets (Dollars in thousands)
MARCH 31, ----------------------------------------- 1999 1998 ----------------------------------------- Assets Cash and equivalents $ 63,790 46,021 Loans held for sale (note 19) 3,531 701 Investment securities held-to-maturity (estimated fair value of $716 and $725 at March 31, 1999 and 1998) (notes 2, 9 and 11) 709 714 Investment securities available-for-sale, at fair value (notes 2, 9 and 11) 185,087 316,410 Mortgage-backed securities held-to-maturity (estimated fair value of $560 and $1,375 at March 31, 1999 and 1998) (notes 3, 9,10 and 11) 556 1,373 Mortgage-backed securities available-for-sale, at fair value (notes 3, 9,10 and 11) 525,560 481,620 Trading securities, at fair value 4,271 - Investment in real estate (note 5) 6,371 731 Loans receivable, net (notes 4, 6, 9 and 11) 2,026,081 1,827,614 Federal Home Loan Bank (FHLB) stock, at cost (note 11) 50,323 39,504 Accrued interest receivable (note 7) 17,118 17,320 Real estate acquired through foreclosure, net (notes 5 and 6) 5,318 7,595 Property and equipment, net (note 8) 23,925 25,567 Prepaid expenses and other assets (notes 12 and 18) 23,340 47,214 ----------------------------------------- Total assets $2,935,980 2,812,384 ========================================= Liabilities and Stockholders' Equity Liabilities: Deposits (note 9) $1,843,538 1,740,824 FHLB advances and other borrowings (notes 10 and 11) 814,000 785,886 Deferred income taxes payable (note 13) 5,921 3,396 Accrued expenses and other liabilities (notes 9 and 12) 29,856 28,000 ----------------------------------------- Total liabilities 2,693,315 2,558,106 Commitments and contingencies (notes 12, 16, 17 and 18) - - Stockholders' equity (notes 12, 13, 14, 21 and 22): Preferred stock, $.01 par value. Authorized 2,000,000 - - shares; none issued Common stock, $. 01 par value. Authorized 59,000,000 shares; issued 19,943,948 and 19,901,422; outstanding 15,445,481 and 17,067,099 at March 31, 1999 and 1998, respectively 199 199 Additional paid-in capital 150,612 165,912 Retained earnings, substantially restricted 110,163 106,617 Unearned stock-based compensation (17,169) (20,895) Treasury stock (4,498,467 and 2,834,323 in 1999 and 1998, respectively) (45) (28) Accumulated other comprehensive earnings (loss) (1,095) 2,473 ----------------------------------------- Total stockholders' equity 242,665 254,278 ----------------------------------------- Total liabilities and stockholders' equity $2,935,980 2,812,384 =========================================
See accompanying notes to consolidated financial statements. 59 PFF BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Earnings (Dollars in thousands, except per share data)
Year EndeD March 31, ----------------------------------------------------------- 1999 1998 1997 ----------------------------------------------------------- Interest income: Mortgage loans $ 138,639 138,480 130,788 Non-mortgage loans 9,374 4,335 2,328 Mortgage-backed securities 37,471 33,167 27,723 Investment securities and deposits 21,471 15,386 7,676 ----------------------------------------------------------- Total interest income 206,955 191,368 168,515 ----------------------------------------------------------- Interest on deposits (note 9) 79,534 80,155 79,246 Interest on borrowings (note 10) 50,822 38,362 20,060 ----------------------------------------------------------- Total interest expense 130,356 118,517 99,306 ----------------------------------------------------------- Net interest income 76,599 72,851 69,209 Provision for loan losses (note 6) 4,020 7,099 13,661 ----------------------------------------------------------- Net interest income after provision for loan losses 72,579 65,752 55,548 ----------------------------------------------------------- Non-interest income: Deposit and related fees 8,637 8,220 6,255 Trust fees 1,891 1,852 1,390 Loan and servicing fees (note 19) 2,780 2,494 2,307 Gain on sale of loans and securities, net (note 19) 698 1,615 150 Gain on trading securities, net 569 - - Profit on real estate investments (note 5) 246 - - Other non-interest income 727 99 125 ----------------------------------------------------------- Total non-interest income 15,548 14,280 10,227 ----------------------------------------------------------- Non-interest expense: General and administrative: Compensation and benefits (note 12) 27,997 26,803 23,003 Occupancy and equipment 12,098 11,579 10,305 Marketing and professional services 4,708 3,248 3,238 Other non-interest expense (note 15) 10,157 9,930 12,835 ----------------------------------------------------------- Total general and administrative 54,960 51,560 49,381 SAIF recapitalization assessment - - 10,900 Foreclosed real estate operations, net (note 5) (45) 473 (325) ----------------------------------------------------------- Total non-interest expense 54,915 52,033 59,956 ----------------------------------------------------------- Earnings before income taxes 33,212 27,999 5,819 Income taxes (note 13) 14,208 12,019 3,087 ----------------------------------------------------------- Net earnings $ 19,004 15,980 2,732 =========================================================== Basic earnings per share $ 1.37 1.00 0.15 =========================================================== Weighted average shares outstanding for basic earnings per share 13,876,440 16,055,127 17,819,870 =========================================================== Diluted earnings per share $ 1.29 0.95 0.15 =========================================================== Weighted average shares outstanding for diluted earnings per share 14,716,682 16,795,096 17,959,561 ===========================================================
See accompanying notes to consolidated financial statements. 60 PFF BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Comprehensive Earnings (Dollars in thousands)
For the Year Ended March 31, ---------------------------------------------------------- 1999 1998 1997 ---------------------------------------------------------- Net earnings $ 19,004 15,980 2,732 ---------------------------------------------------------- Other comprehensive earnings (losses), net of income taxes: Unrealized gains (losses) on securities available-for-sale: U.S. Treasury and agency securities and other investment securities available-for-sale, at fair value (2,454) 787 (261) Reclassification of realized (gains) losses included in earnings (312) 57 - Mortgage-backed securities available-for-sale, at fair value (802) 2,120 (1,109) ---------------------------------------------------------- Other comprehensive earnings (3,568) 2,964 (1,370) ---------------------------------------------------------- Comprehensive earnings $ 15,436 18,944 1,362 ==========================================================
See accompanying notes to consolidated financial statements. 61 PFF BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Stockholders' Equity (Dollars in thousands)
Retained Additional Earnings Unearned Number of Common Paid-in Substantially Stock-based Treasury Shares Stock Capital Restricted Compensation Stock ---------------------------------------------------------------------------- Balance at March 31, 1996 19,837,500 $198 $193,677 $110,187 $(15,870) $ Net earnings - - - 2,732 - - Purchase of treasury stock (991,875) - (9,909) (4,898) - (10) Purchase of 793,500 shares for the Company's 1996 incentive plan - - - - (11,262) - Amortization of shares under stock-based compensation plans - - (1,249) - 2,421 - Changes in unrealized losses on securities available for sale, net - - - - - - ----------------------------------------------------------------------------- Balance at March 31, 1997 18,845,625 198 182,519 108,021 (24,711) (10) Net earnings - - - 15,980 - - Purchase of treasury stock (1,842,448) - (18,406) (17,384) - (18) Amortization of shares under stock-based compensation plans - - 1,118 - 3,816 - Stock options exercised 63,922 1 681 - - - Changes in unrealized gains on securities available for sale, net - - - - - - ----------------------------------------------------------------------------- Balance at March 31, 1998 17,067,099 199 165,912 106,617 (20,895) (28) Net earnings - - - 19,004 - - Purchase of treasury stock (1,664,144) - (16,624) (15,458) - (17) Change in deferred compensation - - (313) - 229 - market value Amortization of shares under stock-based compensation plans - - 1,106 - 3,497 - Stock options exercised 42,526 - 531 - - - Changes in unrealized gains on securities available for sale, net - - - - - - ----------------------------------------------------------------------------- Balance at March 31, 1999 15,445,481 $199 $150,612 $110,163 $(17,169) $ (45) ============================================================================= Accumulated Other Comprehensive Earnings (Loss) Total ---------------------------------------- Balance at March 31, 1996 $ 879 $289,071 Net earnings - 2,732 Purchase of treasury stock - (14,817) Purchase of 793,500 shares for the Company's 1996 incentive plan - (11,262) Amortization of shares under stock-based compensation plans - 1,172 Changes in unrealized losses on securities available for sale, net (1,370) (1,370) ---------------------------------------- Balance at March 31, 1997 (491) 265,526 Net earnings - 15,980 Purchase of treasury stock - [35,808) Amortization of shares under stock-based compensation plans - 4,934 Stock options exercised - 682 Changes in unrealized gains on securities available for sale, net 2,964 2,964 ---------------------------------------- Balance at March 31, 1998 2,473 254,278 Net earnings - 19,004 Purchase of treasury stock - [32,099) Change in deferred compensation - (84) market value Amortization of shares under stock-based compensation plans - 4,603 Stock options exercised - 531 Changes in unrealized gains on securities available for sale, net (3,568) (3,568) ---------------------------------------- Balance at March 31, 1999 $ (1,095) $242,665 ========================================
See accompanying notes to consolidated financial statements. 62 PFF BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows (Dollars in thousands)
Year Ended March 31, --------------------------------------------------------- 1999 1998 1997 --------------------------------------------------------- Cash flows from operating activities Net earnings $ 19,004 15,980 2,732 Adjustments to reconcile net earnings to net cash provided by operating activities: Amortization of premiums on loans, investments and mortgage-backed securities 4,560 1,415 331 Amortization of deferred loan origination fees (460) (261) (1,666) Loan fees collected (2,400) (3,487) (212) Dividends on FHLB stock (2,587) (1,716) (1,150) Provisions for losses on: Loans 4,020 7,099 13,661 Real estate 41 416 (970) Gains on sales of loans, mortgage-backed securities available-for-sale, real estate and property (1,777) (1,792) (764) and equipment Proceeds from sale of trading securities 1,500 - - Gains on trading securities (569) - - Depreciation and amortization of property and equipment 3,855 5,051 3,134 Loans originated for sale - (3,893) (21,590) Proceeds from sale of loans held-for-sale 39,407 166,989 26,869 Amortization of unearned stock-based compensation 4,603 4,934 1,172 Increase (decrease) in: Deferred income taxes 2,525 (5,141) (2,415) Accrued expenses and other liabilities 1,856 5,702 15,395 (Increase) decrease in: Accrued interest receivable 202 (1,441) (5,060) Prepaid expenses and other assets 23,874 (37,751) 11,061 --------------------------------------------------------- Net cash provided by operating activities 97,654 152,104 40,528 --------------------------------------------------------- Cash flows from investing activities: Net maturities of long-term certificates of deposit - - 190 Loans originated for investment (987,604) (553,535) (478,077) Increase in construction loans in process 71,585 56,972 13,695 Purchases of loans held for investment (168,395) (163,045) (28,417) Principal payments on loans 831,468 471,544 225,996 Principal payments on mortgage-backed securities held-to-maturity 804 3,325 1,644 Principal payments on mortgage-backed securities available-for-sale 272,546 144,920 70,040 Purchases of investment securities held-to-maturity - - (15,000) Purchases of investment securities (90,111) (279,762) (86,515) available-for-sale Purchases of FHLB stock (8,232) (10,518) (10,228)
63 PFF BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows, continued (Dollars in thousands)
YEAR ENDED MARCH 31, -------------------------------------------------------- 1999 1998 1997 -------------------------------------------------------- Purchases of mortgage-backed securities available- for-sale $(317,988) (190,539) (451,322) Proceeds from maturities of investment securities held-to-maturity - 15,475 26,899 Proceeds from maturities of investment securities available-for-sale 146,449 43,687 3,197 Proceeds from maturities of mortgage-backed securities available-for-sale - 793 - Proceeds from sale of investment securities available-for-sale 64,668 8,934 5,000 Proceeds from sale of mortgage-backed securities available-for-sale - 52,789 19,542 Principal payments on real estate held for investment 599 Proceeds from sale of real estate 13,611 14,214 10,853 Investment in real estate held for investment (5,704) - (555) Purchases of property and equipment (2,247) (4,172) (5,045) Proceeds from sale of property and equipment 5 69 129 --------------------------------------------------------- Net cash used in investing activities (179,145) (388,250) (697,974) --------------------------------------------------------- Cash flows from financing activities: Proceeds from FHLB advances and other borrowings 804,876 1,342,886 1,215,600 Repayment of FHLB advances and other borrowings (776,762) (1,087,000) (705,323) Net change in deposits 102,714 29,775 28,976 Proceeds from exercise of stock options 531 682 - Purchase of stock for unearned stock-based compensation plans - - (11,262) Purchase of treasury stock (32,099) (35,808) (14,817) --------------------------------------------------------- Net cash provided by financing activities 99,260 250,535 513,174 --------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 17,769 14,389 (144,272) Cash and cash equivalents, beginning of year 46,021 31,632 175,904 --------------------------------------------------------- Cash and cash equivalents, end of year $ 63,790 46,021 31,632 ========================================================= Supplemental information: Interest paid, including interest credited $ 136,165 $ 116,991 $ 90,298 Income taxes paid 10,700 16,608 1,838 Non-cash investing and financing activities: Change in unrealized gain (loss) on securities available-for-sale (6,185) 5,145 (2,431) Net transfers from loans receivable to real estate 14,038 12,563 9,979 Net transfer from loans receivable to loans held for sale 41,659 163,000 - Loans originated for the sale of real estate acquired in settlement of loans 444 617 1,187 Net transfers from available-for-sale securities to trading securities 5,419 - -
See accompanying notes to consolidated financial statements. 64 PFF BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Dollars in thousands) (1) Summary Of Significant Accounting Policies Effective March 28, 1996, pursuant to a plan of conversion, Pomona First Federal Savings and Loan Association (the Association) reorganized from a federally chartered mutual savings and loan association to PFF Bank & Trust (the "Bank"), a federally chartered stock savings bank. PFF Bancorp, Inc. (the "Bancorp") was incorporated under Delaware law in March 1996 for the purpose of acquiring and holding all of the outstanding capital stock of the Bank as part of the Bank's conversion. Any references to financial information for periods before March 28, 1996, refer to the Association prior to the conversion (see note 21 for further discussion). The following accounting policies, together with those disclosed elsewhere in the consolidated financial statements, represent the significant accounting policies used in presenting the accompanying consolidated financial statements. Basis Of Consolidation The accompanying consolidated financial statements include the accounts of PFF Bancorp, Inc. and its subsidiary, PFF Bank & Trust (collectively, the Company). The Company's business is conducted primarily through PFF Bank & Trust and its subsidiary, Pomona Financial Services, Inc. The accounts of Diversified Services, Inc. and PFF Financial Services, Inc. are included in Pomona Financial Services, Inc. All material intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to the prior years' consolidated financial statements to conform to the current year's presentation. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities and contingent liabilities as of the dates of the consolidated balance sheets, and revenues and expenses reflected in the consolidated statements of earnings. Actual results could differ from those estimates. Cash And Cash Equivalents Cash and cash equivalents consist of cash on hand and in banks of $38,419 and $33,560 and short-term deposits in banks of $25,371 and $12,461 at March 31, 1999 and 1998, respectively. The Company considers all highly liquid debt instruments with maturities at the date of acquisition of three months or less to be cash equivalents. Investment And Mortgage-Backed Securities At the time of purchase of an investment security or a mortgage-backed security, the Company designates the security as either held-to-maturity, available-for- sale or trading based on the Company's investment objectives, operational needs and intent. The Company then monitors its investment activities to ensure that those activities are consistent with the established guidelines and objectives. 65 PFF BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (Dollars in thousands) Held-to-Maturity Securities held-to-maturity are carried at cost, adjusted for amortization of premiums and accretion of discounts which are recognized in interest income using the interest method. Mortgage-backed securities represent participating interests in pools of long-term first mortgage loans originated and serviced by the issuers of the securities. Mortgage-backed securities held-to-maturity are carried at unpaid principal balances, adjusted for unamortized premiums and unearned discounts. Premiums and discounts on mortgage-backed securities are amortized or accreted using the interest method over the remaining period to contractual maturity, adjusted for anticipated prepayments. It is the intent of the Company and the Company has the ability, to hold these securities until maturity as part of its portfolio of long-term interest earning assets. If the security is determined to be other than temporarily impaired, the amount of the impairment is charged to operations. Available-for-Sale Securities available-for-sale are carried at fair value. Unrealized holding gains and losses are excluded from earnings and reported as a separate component of stockholders' equity, net of income taxes, unless the security is deemed to be other than temporarily impaired. If the security is determined to be other than temporarily impaired, the amount of the impairment is charged to operations. Realized gains and losses on the sale of securities available-for-sale are determined using the specific identification method and recorded in earnings. Trading Trading securities are comprised principally of equity securities which are carried at fair value, based upon the quoted market prices of those investments. Accordingly, the net realized gains and losses on trading securities are included in net earnings. Loans Held for Sale Loans designated as held for sale in the secondary market are carried at the lower of cost or market value in the aggregate, as determined by outstanding commitments from investors or current investor requirements. Loan fees and costs are deferred and recognized as a component of gain or loss on sale of loans when the loans are sold. Net unrealized losses are recognized through a valuation allowance established by charges to operations. Gains or Losses on Sales of Loans Gains or losses on sales of loans are recognized at the time of sale and are determined by the difference between the net sales proceeds and the allocated basis of the loans sold. The Company capitalizes mortgage servicing rights ("MSRs") through the sale of mortgage loans which are sold with servicing rights retained. At the time of sale the total cost of the mortgage loans is allocated to the MSRs and the mortgage loans without the MSRs based upon their relative fair values. The MSRs are included in other assets and as a component of the gain on the sale of loans. The MSRs are amortized in proportion to and over the estimated period of the net servicing income. This amortization is reflected as a component of loan servicing fees. The MSRs are periodically reviewed for impairment based upon their fair value. The fair value of the MSRs, for the purposes of impairment, is measured using a discounted cash flow analysis using market prepayment rates, the Company's net servicing income and market-adjusted discount rates. Impairment losses are recognized through a valuation allowance, with any associated provision recorded as a component of loan servicing fees. 66 PFF BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (Dollars in thousands) Loans Receivable Loans receivable are stated at unpaid principal balances less the undisbursed portion of construction loans, unearned discounts, net deferred loan origination fees and allowances for losses. Premiums/discounts are amortized/accreted using the interest method over the remaining term to maturity. Uncollected interest on loans contractually delinquent more than ninety days or on loans for which collection of interest appears doubtful is excluded from interest income and accrued interest receivable. Payments received on nonaccrual receivables are recorded as a reduction of principal or as interest income depending on management's assessment of the ultimate collectibility of the loan principal. Such loans are restored to an accrual status only if the loan is brought contractually current and the borrower has demonstrated the ability to make future payments of principal and interest. Loan Origination, Commitment Fees and Related Costs Loan fees and certain direct loan origination costs are deferred, with the net fee or cost being accreted or amortized to interest income over the remaining term to maturity of the related loan using the interest method. Accretion or amortization is discontinued in the event the loan becomes contractually delinquent by more than ninety days. Accretion or amortization resumes in the period all delinquent interest and principal is paid. When a loan is paid in full, any unamortized net loan origination fee or cost is recognized in interest income. When a loan is sold any net loan origination fee or cost is recognized in the calculation of the gain (loss) on sale of loans. Commitment fees and costs related to commitments where the likelihood of exercise is remote are recognized over the commitment period on a straight-line basis. If the commitment is subsequently exercised during the commitment period, the remaining net unamortized commitment fees at the time of exercise are recognized over the life of the loan using the interest method. Valuation Allowances for Loans Receivable and Real Estate Valuation allowances for loan losses are provided on both a specific and non- specific basis. Specific allowances are provided when an identified significant decline in the value of the underlying collateral occurs or an identified adverse situation occurs that may affect the borrower's ability to repay. Non- specific allowances are provided based on a number of factors, including the Company's past loan loss experience, current and prospective economic conditions and management's ongoing evaluation of the credit risk inherent in the portfolio. Valuation allowances for losses on real estate are established when a decline in value reduces the fair value less estimated disposal costs to less than the carrying value. Management believes that allowances for loan losses and real estate are adequate. While management uses available information to recognize losses on loans and real estate, future additions to the allowances may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowances for loan and real estate losses. Such agencies may require the Company to recognize additions to the allowances based on their judgments of the information available to them at the time of their examinations. Management considers loans with a principal balance of $500 or more, including loans to one borrower that exceed $500, as non-homogeneous for purposes of evaluation for impairment. A loan is considered impaired if it is probable that the creditor will be unable to collect all contractual amounts due (principal and interest) as scheduled in the loan agreement. Impaired loans are measured based on either an estimate of the present value of expected future cash flows discounted at the loan's effective interest rate or the loan's market value or the fair value of collateral if the loan is collateral dependent. The amount by which the recorded investment in the loan exceeds the measure of the impaired loan is recognized by recording a valuation 67 PFF BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (Dollars in thousands) allowance with a corresponding charge to operations. The Company will charge-off a portion of an impaired loan against the valuation allowance when it is probable that there is no possibility of recovering the full amount of the impaired loan. All non-homogeneous loans designated by the Company as impaired are either placed on nonaccrual status or are designated as restructured loans. Only nonaccrual loans and restructured loans not performing in accordance with their restructured terms are included in nonperforming loans. Loans are generally placed on nonaccrual status when the payment of interest is 90 days or more delinquent, or if the loan is in the process of foreclosure, or earlier if the timely collection of interest and/or principal appears doubtful. The Company's policy allows for loans to be designated as impaired and placed on nonaccrual status even though the loan may be current as to the principal and interest payments and may continue to perform in accordance with its contractual terms. Payments received on impaired loans are recorded as a reduction of principal or as interest income depending on management's assessment of the ultimate collectibility of the loan principal. The amount of interest income recognized is limited to the amount of interest that would have accrued at the loan's contractual rate applied to the recorded loan balance, with any difference recorded as a loan loss recovery. Generally, interest income on an impaired loan is recorded on a cash basis when the outstanding principal is brought current. Real Estate Acquired Through Foreclosure Real estate properties acquired through loan foreclosure are initially recorded at fair value at the date of foreclosure. Once real estate properties are acquired, evaluations are periodically performed by management and an allowance for losses is established by a charge to operations if the carrying value of a property exceeds its fair value. Real estate properties held for sale or development are carried at the lower of cost, including cost of improvements and amenities incurred subsequent to acquisition, or net realizable value. Costs related to development and improvement of properties are capitalized, whereas costs relating to holding the properties are expensed. During the development period, the portion of interest costs related to development of real estate are capitalized. Property and Equipment Land is carried at cost. Buildings and improvements, furniture, fixtures and equipment, and leasehold improvements are carried at cost, less accumulated depreciation or amortization. Depreciation and amortization are recorded using the straight-line method over the estimated useful lives of the assets or the terms of the related leases, if shorter. The Company capitalizes interest on all construction in progress based on the cost of funds in effect during the construction period. Intangibles In January 1995, the Company acquired the trust operations of another bank for $3,470. The excess cost over net assets acquired was capitalized and is being amortized on a straight-line basis over the estimated average life of the trust relationships acquired of 11 years. On a periodic basis, the Company reviews its intangible assets for events or changes in circumstances that may indicate the carrying amounts of the assets may not be recoverable. Recoverability of an asset to be held and used is measured by a comparison of the carrying amount of the asset to future net cash flows expected to be generated by the asset. If such asset is considered to be impaired, the impairment is measured by the amount by which the carrying amount exceeds the fair value of the asset. 68 PFF BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (Dollars in thousands) Reverse Repurchase Agreements The Company enters into sales of securities under agreements to repurchase the same securities. Reverse repurchase agreements are accounted for as financing arrangements, with the obligation to repurchase securities sold reflected as a liability in the consolidated balance sheets. The dollar amount of securities underlying the agreements remains in the respective asset account. Interest on Deposits Accrued interest is either paid to the depositor or added to the deposit account on a periodic basis. On term accounts, the forfeiture of interest (because of withdrawal prior to maturity) is offset as of the date of withdrawal against interest expense in the consolidated statements of operations. Income Taxes The Company files consolidated Federal income and combined state franchise tax returns. Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Employee Stock Ownership Plan The Company accounted for the original issuance of the Employee Stock Ownership Plan (ESOP) as a component of equity recorded in a contra-equity account. When the issuance occurs, compensation expense is recognized over the allocation period based upon the fair value of the shares committed to be released to employees. This may result in fluctuations in compensation expense as a result of changes in the fair value of the Company's common stock. However, any such compensation expense fluctuations result in an equal and offsetting adjustment to additional paid-in capital. Stock Option Plan On October 23, 1996, the Company granted stock options and adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), which permits entities to recognize as expense over the vesting period the fair value of all stock-based compensation on the date of grant. Alternatively, SFAS No. 123 allows entities to apply the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and related interpretations, and provide pro forma net earnings and pro forma earnings per share disclosures for employee stock option grants made in 1996 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. The Company has elected to apply the provisions of APB 25 and provide the pro forma disclosure provisions of SFAS No. 123. SEGMENT REPORTING The Company, through the branch network of the Bank, provides a broad range of financial services to individuals and companies located primarily in Southern California. These services include demand, time, and savings deposits; real estate, business and consumer lending; ATM processing; cash management; and trust services. While the Company's chief decision makers monitor the revenue streams of the various Company products and services, operations are managed and financial performance is evaluated on a 69 PFF BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (Dollars in thousands) Company-wide basis. Accordingly, all of the Company's banking operations are considered by management to be aggregated in one reportable operating segment. New Accounting Pronouncements In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign- currency-denominated forecasted transaction. Under SFAS No. 133, an entity that elects to apply hedge accounting is required to establish at the inception of the hedge the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach of determining the ineffective aspect of the hedge. Those methods must be consistent with the entity's approach to managing risk. This statement is effective for all quarters of fiscal years beginning after June 15, 1999 however, the FASB has issued an exposure draft which would delay the implementation by one year if approved. Management is in the process of determining the impact of SFAS No. 133 on the Company's financial position and results of operations. (2) Investment Securities The amortized cost and estimated fair values of investment securities are summarized as follows:
March 31, 1999 ------------------------------------------------------------------ Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------------------------------------------------------------ Held-to-maturity: Bonds, notes and debentures at amortized cost: U.S. Government and federal agency obligations $ 709 7 - 716 ------------------------------------------------------------------ Total $ 709 7 - 716 ================================================================== Available-for-sale: Collateralized mortgage obligations $104,338 126 (1,764) 102,700 U.S. Government and federal agency obligations 17,491 12 (31) 17,472 Corporate debt securities 58,879 224 (1,338) 57,765 Equity securities 8,108 - (958) 7,150 ------------------------------------------------------------------ Total $188,816 362 (4,091) 185,087 ==================================================================
70 PFF BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (Dollars in thousands) During the years ended March 31, 1999, 1998 and 1997, the Company realized net gains on sales of securities available-for-sale of $26, $114 and $23, respectively.
March 31, 1998 --------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------------------------------------------------------------- Held-to-maturity: Bonds, notes and debentures at amortized cost: U.S. Government and federal agency $ 714 11 - 725 obligations --------------------------------------------------------------- Total $ 714 11 - 725 =============================================================== Available-for-sale: Collateralized mortgage obligations $223,514 839 (851) 223,502 U.S. Government and federal agency 56,007 50 (5) 56,052 obligations FHLMC non-cumulative preferred stock 5,600 168 - 5,768 Corporate debt securities 17,309 130 (80) 17,359 Equity securities 13,112 617 - 13,729 --------------------------------------------------------------- Total $315,542 1,804 (936) 316,410 =================================================================
Maturities of investment securities at March 31, 1999 are summarized as follows:
Available- Held-to-maturity for-sale --------------------------------------------- Estimated Estimated Amortized Fair Fair Maturity Cost Value Value ------------------------------------------------------------------------------------- Within one year $709 716 - After one to five years - - 17,472 After five to ten years - - - After ten years - - 167,615 --------------------------------------------- $709 716 185,087 =============================================
(3) Mortgage-Backed Securities The amortized cost and estimated fair values of mortgage-backed securities are summarized as follows:
March 31, 1999 ------------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------------------------------------------------------------------- Held-to-maturity FHLMC $ 556 4 - 560 ========================================================================= Available-for-sale GNMA $ 19,334 316 - 19,650 FHLMC 158,494 538 (557) 158,475 FNMA 345,892 2,516 (973) 347,435 ------------------------------------------------------------------------- Total $ 523,720 3,370 (1,530) 525,560 =========================================================================
71 PFF BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (Dollars in thousands)
March 31, 1998 ----------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------------------------------------------------------------------- Held-to-maturity FHLMC $ 1,373 2 - 1,375 ======================================================================= Available-for-sale GNMA $ 34,399 695 - 35,094 FHLMC 137,504 525 (323) 137,706 FNMA 306,287 2,892 (359) 308,820 ----------------------------------------------------------------------- Total $ 478,190 4,112 (682) 481,620 =======================================================================
The mortgage-backed securities have original maturities of up to 30 years. (4) Loans Receivable Loans receivable are summarized as follows:
March 31, ---------------------------------- 1999 1998 ---------------------------------- Mortgage loans: Residential: One-to-four family $ 1,479,308 1,467,156 Multi-family 87,856 97,350 Commercial real estate 156,474 144,035 Construction and land 349,119 185,225 ---------------------------------- Total mortgage loans 2,072,757 1,893,766 Commercial 74,451 12,468 Consumer 70,686 42,826 ---------------------------------- 2,217,894 1,949,060 Less: Undisbursed portion of construction loans (167,042) (95,457) Net premium on loans 1,665 1,114 Net deferred loan origination fees (276) (1,101) Allowance for loan losses (note 6) (26,160) (26,002) ---------------------------------- $ 2,026,081 1,827,614 ================================== Weighted average yield 7.66% 7.70% ==================================
72 PFF BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (Dollars in thousands) Loans receivable from officers and directors of the Company were as follows:
March 31, ---------------------------------- 1999 1998 ---------------------------------- Beginning balance $ 2,070 1,897 Additions 1,346 288 Repayments (971) (115) ---------------------------------- Ending balance $ 2,445 2,070 ==================================
The following table provides information with respect to the Company's nonaccrual loans and troubled debt restructured (TDR) loans at the dates indicated.
March 31, --------------------------------------------------- 1999 1998 1997 --------------------------------------------------- Nonaccrual loans $ 11,012 17,189 23,350 TDR loans 11,291 12,505 14,559 --------------------------------------------------- Total nonaccrual and TDR loans $ 22,303 29,694 37,909 ===================================================
The following table identifies the Company's total recorded investment in impaired loans by type at the dates indicated.
March 31, ---------------------------------------------------------------------- 1999 1998 ---------------------------------------------------------------------- Recorded Specific Recorded Specific Investment Allowances Investment Allowances ---------------------------------------------------------------------- Non accrual loans: Residential: One-to-four family $ 547 33 504 202 Multi-family 1,252 195 2,214 436 Commercial real estate 3,142 - 4,872 - Construction and land - - 865 - TDR loans 11,291 1,694 12,505 1,922 ---------------------------------------------------------------------- Total $ 16,232 1,922 20,960 2,560 ======================================================================
During the year ended March 31, 1999, 1998 and 1997, the Company's average investment in impaired loans was $17,941, $20,988 and $24,940, respectively and interest income recorded during these periods was $916, $776 and $764, respectively of which $887, $845 and $784, respectively was recorded utilizing the cash basis method of accounting. 73 PFF BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (Dollars in thousands) The effect of nonaccrual and TDR loans on interest income is presented below.
Year Ended March 31, ------------------------------------------------------------ 1999 1998 1997 ------------------------------------------------------------ Contractual interest due: Nonaccrual loans $ 1,144 1,749 2,226 TDR loans 1,032 1,186 1,312 ------------------------------------------------------------ 2,176 2,935 3,538 Interest income recognized on TDR loans on a cash basis 887 779 942 ------------------------------------------------------------ Interest income not recognized $ 1,289 2,156 2,596 ============================================================
(5) Real Estate Real estate acquired through foreclosure is summarized as follows:
March 31, ------------------------------------- 1999 1998 ------------------------------------- Properties acquired in settlement of loans $ 5,763 8,198 Allowance for losses (note 6) (445) (603) ------------------------------------- Total $ 5,318 7,595 =====================================
(Gain) loss from foreclosed real estate operations, net is summarized as follows:
Year Ended March 31, -------------------------------------------- 1999 1998 1997 -------------------------------------------- (Gain)loss on sale of foreclosed real estate, net $(1,356) (1,692) (519) Real estate expense 1,270 1,749 1,164 Provision for (recoveries of) losses on real estate 41 416 (970) -------------------------------------------- Total $ (45) 473 (325) ============================================
Real estate held for sale or development is summarized as follows:
March 31, ---------------------------------- 1999 1998 ---------------------------------- Properties wholly owned $ 558 731 Mezzanine equity investments in real estate 5,813 - ---------------------------------- Total $ 6,371 731 ==================================
During the years ended March 31, 1999, 1998, and 1997, the Company recognized net gains of $36, zero and zero, respectively from the sale of properties wholly owned by the Company and profit of $246, zero and zero respectively from equity investments in real estate developments. Profit from equity investments takes the form of a preferential fixed return on the Company's outstanding investment balances and is recognized as and to the extent the Company's investment is paid down. The funds for such paydowns have been provided to the project through proceeds from sales to independent third parties. The investment balance at March 31, 1999 of $5,813 is net of $32 deferred income representing preferential return payments made to the Company by the developer of the project in excess of funds received by the project from sales to third parties. 74 PFF BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (Dollars in thousands) (6) Allowances For Losses On Loans Receivable And Real Estate Activity in the allowances for losses on loans and real estate is summarized as follows:
Year Ended March 31, ----------------------------------------------------- 1999 1998 1997 ----------------------------------------------------- Loans receivable: Beginning balance $ 26,002 27,721 19,741 Provision 4,020 7,099 13,661 Charge-offs (3,879) (9,110) (5,782) Recoveries 17 292 101 ----------------------------------------------------- Ending balance 26,160 26,002 27,721 ----------------------------------------------------- Foreclosed real estate: Beginning balance 603 329 4,762 Provision (recoveries) 41 416 (970) Charge-offs (199) (142) (3,463) ----------------------------------------------------- Ending balance 445 603 329 ----------------------------------------------------- Total loans receivable and real estate: Beginning balance 26,605 28,050 24,503 Provision 4,061 7,515 12,691 Charge-offs (4,078) (9,252) (9,245) Recoveries 17 292 101 ----------------------------------------------------- Ending balance $ 26,605 26,605 28,050 =====================================================
(7) Accrued Interest Receivable Accrued interest receivable is summarized as follows:
March 31, ------------------------------------ 1999 1998 ------------------------------------ Investment securities $ 1,783 2,963 Mortgage-backed securities 3,421 3,596 Loans receivable 11,914 10,761 ------------------------------------ Total $17,118 17,320 ====================================
75 PFF BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (Dollars in thousands) (8) Property and Equipment, net Property and equipment, net is summarized as follows:
March 31, ----------------------------------- 1999 1998 Estimated Life ----------------------------------------------------- Land $ 5,254 5,254 - Buildings and improvements 21,688 21,299 40 Leasehold improvements 2,040 1,939 10 Furniture, fixtures and equipment 24,285 23,017 7 Automobiles 156 159 3 Construction in progress 23 92 - ----------------------------------- 53,446 51,760 Accumulated depreciation and amortization (29,521) (26,193) ----------------------------------- Total $ 23,925 25,567 ===================================
(9) Deposits Deposits and their respective weighted average interest rates are summarized as follows:
March 31, ------------------------------------------------------------------ 1999 1998 ------------------------------------------------------------------ Weighted Weighted Average Average Rate Amount Rate Amount ------------------------------------------------------------------ Regular passbook 2.27% $ 143,827 2.55% $ 152,649 NOW and other demand deposit accounts 0.67 197,936 0.76 176,060 Fixed and variable-rate certificate accounts 5.10 1,100,224 5.40 1,178,515 Money market checking and savings 4.44 401,551 4.05 233,600 ----------------- ----------------- Total 4.26% $1,843,538 4.50% $1,740,824 ================= =================
Certificate accounts maturing subsequent to March 31, 1999 are summarized as follows:
Year Ending March 31, Amount ------------------------------------------------------------ 2000 $1,012,434 2001 46,834 2002 17,677 2003 12,922 2004 9,961 thereafter 396 -------------- $1,100,224 ==============
76 PFF BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (Dollars in thousands) Interest expense on deposits is summarized as follows:
Year Ended March 31, ------------------------------------------------------ 1999 1998 1997 ------------------------------------------------------ Regular passbook $ 3,405 4,205 5,525 NOW and other demand deposit accounts 1,291 1,214 1,096 Money market checking and savings 13,133 7,981 3,935 Certificates of deposit 61,705 66,755 68,690 ------------------------------------------------------ Total $ 79,534 80,155 79,246 ======================================================
At March 31, 1999 and 1998, the Company had accrued interest payable on deposits of $1,389 and $811, respectively, which is included in other liabilities in the accompanying consolidated balance sheets. At March 31, 1999 and 1998, $6,988 and $7,637 of public funds on deposit were secured by loans receivable, mortgage-backed securities and investment securities with aggregate carrying values of $19,346 and $23,575, respectively. Accounts which are greater than $100 at March 31, 1999 and 1998 total $247,853 and $306,187, respectively. Deposit accounts greater than $100 are not federally insured. (10) FHLB Advances And Other Borrowings The Company utilizes FHLB advances and reverse repurchase agreements as sources of funds. The advances and repurchase agreements are collateralized by mortgage-backed securities, investment securities and/or loans. The Company only transacts business with the FHLB or brokerage firms that are recognized as primary dealers in U.S. government securities. FHLB advances and reverse repurchase agreements were $764,000 and $50,000 and $735,886 and $50,000 at March 31, 1999 and March 31, 1998, respectively. See Note 11. The original terms to maturity for reverse repurchase agreements outstanding at March 31, 1999 were 5 years. Under these agreements, the debt may be put back to the Company by the creditor beginning May 1999 and quarterly thereafter, continuing to final maturity in February 2002. These agreements are collateralized by FHLMC and FNMA mortgage-backed and other investment securities with a historical cost basis and fair value of $52,361 and $52,756 and $55,780 and $56,033 at March 31, 1999 and March 31, 1998, respectively. The underlying collateral for reverse repurchase agreements is held by and under the control of Morgan Stanley, Inc. 77 PFF BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (Dollars in thousands)
March 31, ----------------------------------------------------------- 1999 1998 1997 ----------------------------------------------------------- FHLB advances: Average amount outstanding during the year $ 855,197 601,078 335,188 Maximum amount outstanding at any month end 949,000 790,086 545,400 Amount outstanding at year end (1) 764,000 735,886 480,000 Average interest rate: For the year 5.57% 5.87% 5.78% At year end 5.37% 5.70% 5.78% Reverse repurchase agreements: Average amount outstanding during the year 50,000 50,000 10,129 Maximum amount outstanding at any month end 50,000 50,000 50,000 Amount outstanding at year end (1) 50,000 50,000 50,000 Average interest rate: For the year 5.87% 5.87% 5.96% At year end 5.87% 5.87% 5.87%
______________________ (1) Included in the balance of FHLB advances and reverse repurchase agreements outstanding at March 31, 1999 are putable borrowings of $465,000 and $50,000 respectively with original terms to maturity of 24 to 120 months, and 36 to 60 months, respectively with final maturity dates ranging from December 1999 to February 2008 and December 2001 to February 2002, respectively, and initial put dates ranging from April 1999 to February 2003 and May 1999 to December 1999, respectively. The underlying collateral for reverse repurchase agreements is held by and under the control of Morgan Stanley, Inc. FHLB advances have the following final maturities at March 31, 1999.
Amount --------------- 2000 $180,000 2001 174,000 2002 75,000 2003 270,000 2004 50,000 thereafter 15,000 --------------- Total $764,000 ===============
Interest expense on borrowings is summarized as follows:
Year Ended March 31, --------------------------------------------------------- 1999 1998 1997 --------------------------------------------------------- FHLB advances $ 47,735 35,273 19,378 Reverse repurchase agreements 2,976 2,959 604 Other interest expense 111 130 78 --------------------------------------------------------- Total $ 50,822 38,362 20,060 =========================================================
78 PFF BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (Dollars in thousands) (11) LINES OF CREDIT At March 31, 1999 and 1998, the Company had maximum borrowing capacity from the FHLB of San Francisco in the approximate amount of $724,696 and $690,108, respectively. Based upon pledged collateral in place, the Company had available borrowing capacity of $278,613 and $192,386 as of March 31, 1999 and 1998, respectively. Pledged collateral consists of certain loans receivable, mortgage-backed securities and investment securities aggregating $1,136,876 and $1,045,522 and the Company's required investment in one hundred dollar par value capital stock of the FHLB of San Francisco. At March 31, 1999 and 1998, the cost of this FHLB capital stock was $50,323 and $39,504, respectively. (12) EMPLOYEE BENEFIT PLANS The Company maintains a defined benefit Pension Plan ("Pension Plan") covering substantially all of its employees. The benefits are based on each employee's years of service and final average earnings determined over the five-year period prior to the benefit determination date. Employees became fully vested upon completion of five years of qualifying service. The Company also maintains a Retirement Plan for all directors and a Supplemental Plan for all senior officers of the Company. Effective December 31, 1995, the Company elected to freeze the Pension Plan, Directors' Retirement and Supplemental Plan. Accordingly, no new accruals for future years of service have occurred since December 31, 1995. The following table sets forth the plans' change in benefit obligation and change in plan assets at the plans' most recent measurement dates of December 31, 1998 and 1997.
1998 1997 --------------------------------------------------------------------------------- Directors' Directors' Retirement and Retirement and Pension Supplemental Pension Supplemental Plan Plans Plan Plans --------------------------------------------------------------------------------- Change in benefit obligation Projected benefit obligation, beginning of year $20,792 2,536 18,038 2,561 Interest cost 1,411 171 1,360 187 Benefits paid (1,362) (210) (1,187) (189) Actuarial loss (gain) 929 206 2,581 (23) --------------------------------------------------------------------------------- Projected benefit obligation, end of year $21,770 2,703 20,792 2,536 --------------------------------------------------------------------------------- Change in plan assets Plan assets, beginning of year $21,964 - 20,090 - Actual return on plan assets 3,051 - 3,061 - Employer contribution - 210 - 189 Benefits paid (1,362) (210) (1,187) (189) --------------------------------------------------------------------------------- Plan assets, end of year $23,653 - 21,964 - --------------------------------------------------------------------------------- Funded status 1,883 (2,703) 1,172 (2,536) Unrecognized transition obligation - 99 - 132 Unrecognized prior service cost 152 - 222 (11) Unrecognized (gain)/loss (62) 594 514 - --------------------------------------------------------------------------------- Prepaid (accrued) benefit cost $ 1,973 (2,010) 1,908 (2,415) =================================================================================
79 PFF BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (Dollars in thousands) Net periodic pension costs for 1998, 1997 and 1996 included the following components:
December 31, ----------------------------------------------------------------------------- 1998 1997 1996 ----------------------------------------------------------------------------- Directors' Directors' Directors' Retirement Retirement Retirement and Supple- Pension and Supple- Pension and Supple- Pension mental Plan mental Plans Plan mental Plans Plan Plans(1) ----------------------------------------------------------------------------- Components of net periodic benefit cost Interest Cost $ 1,411 - 1,360 187 1,357 188 Expected return on plan assets (1,546) 171 (3,061) - (1,917) - Amortization of unrecognized transition obligation - 33 - 33 - 33 Amortization of unrecognized prior service cost 70 (11) 1,856 (11) 780 (11) Amortization of unrecognized (gain) / loss - 29 - 36 - 36 ----------------------------------------------------------------------------- Net periodic pension (income) expense $ (65) 222 155 245 220 246 =============================================================================
(1) The total pension expense for the Directors' Retirement and Supplemental Plans (including amortization of prior service cost over 15 years) was $1,773 for the year ended March 31, 1997. The $1,527 difference between total pension expense and net periodic pension expense for the Directors' Retirement and Supplemental Plans for the year ended March 31, 1997, results from the curtailment of these plans. The assumptions used in determining the actuarial present value of the accumulated benefit obligation and the expected return on plan assets for 1998 and 1997 are as follows:
December 31, ------------------------------------------------------------------------- 1998 1997 ------------------------------------------------------------------------- Directors' Directors' Retirement Retirement Pension and Supple- Pension and Supple- Plan mental Plans Plan mental Plans ------------------------------------------------------------------------- Weighted-average assumptions Discount rate 6.25% 6.25 7.00 7.00 Expected long-term rate of return on plan assets 7.25 - 7.25 -
In 1985, the Company established a capital accumulation plan (401(k) Plan) which is available to all full-time employees over 21 years of age with more than six months of service. Under the 401(k) Plan, the Company contributes funds in an amount equal to a percentage of employee contributions. In 1999, 1998 and 1997, the total 401(k) Plan expense was $393, $348, and $290, respectively. The Company provides a non-qualified Directors' Deferred Compensation Plan and a non-qualified Employees' Deferred Compensation Plan that offer directors and senior officers of the Company, respectively, the opportunity to defer compensation through a reduction in salary and then receipt of a benefit upon retirement. The benefit from the Directors' Deferred Compensation Plan is payable upon the occurrence of the first Board of Directors' meeting held in the fiscal year following the participant attaining age 73. The benefit from the Employees' Deferred Compensation Plan is payable at normal retirement (age 65) or actual retirement but no later than age 70, or alternatively upon termination if termination occurs earlier due to disability. The primary form of benefit is 120 monthly installment payments of the account balance. Such balance shall equal the amount of the deferrals and interest thereon. Other actuarially 80 equivalent payout schedules, including a lump sum payout, are available with certain restrictions. Deferrals are currently credited with an interest rate equal to the highest interest rate paid on a designated date to depositors of the Company or, at the Participants' election, investment earnings or losses equivalent to that of the Company's common stock. At March 31, 1999, the liability for these plans is included in accrued expenses and other liabilities. The Company currently provides post retirement medical coverage to eligible employees. At March 31, 1999 and 1998, the expected cost associated with this coverage was $17 and is included in accrued expenses and other liabilities. As part of the reorganization to the stock form of ownership, the ESOP purchased 1,587,000 shares of the Company's common stock at $10 per share, or $15,870, which was funded by a loan from the Company. The loan will be repaid from the Company's or the Bank's discretionary contributions over a period of 10 years. The loan is secured by the common stock owned by the ESOP. Shares purchased with the loan proceeds are held in a suspense account for allocation among participants as the loan is repaid. ESOP shares are allocated to the eligible participants based on compensation as described in the ESOP plan. In each of the fiscal years ending March 31, 1999 and 1998 158,700 shares were allocated to the eligible participants. At March 31, 1999 and 1998, the unearned balance of the ESOP shares is included in unearned stock-based compensation as a reduction of total stockholders' equity in the accompanying consolidated financial statements. The value of ESOP shares committed to be released is included in compensation expense based upon the fair value of the shares on the dates they were committed. At March 31, 1999, the fair value of the unearned ESOP shares is $19,441. Compensation expense associated with the ESOP was $2,694, $2,921 and zero for the years ended March 31, 1999, 1998 and 1997. During October, 1996, the stockholders of the Company approved the PFF Bancorp, Inc. 1996 Incentive Plan (the "1996 Plan"). The 1996 Plan authorizes the granting of options to purchase the Company's common stock, option related awards, and grants of common stock (collectively "Awards"). Concurrent with the approval of the 1996 Plan, the Company adopted SFAS No. 123, Accounting for Stock-Based Compensation, which permits a company to account for stock options granted under either the fair-value-based or the intrinsic-value-based (as described in APB No. 25) method of accounting. If the Company elects to account for options granted under the intrinsic-value-based method, it must make certain disclosures with respect thereto. The Company has elected to account for stock options granted under the intrinsic-value-based method of accounting. The maximum number of shares reserved for Awards under the 1996 Plan is 2,777,250 shares, with 1,983,750 shares reserved for purchase pursuant to options and option-related awards and 793,500 shares reserved for grants of the Company's common stock. The exercise price of all options and option-related awards must be 100% of the fair value of the Company's common stock at the time of grant and the term of the options may not exceed 10 years. Of the 793,500 shares reserved for stock grants, 746,745 shares with a fair value of $11,263 were granted to directors and executive officers during the year ended March 31, 1997. 532,500 of the 746,745 shares represented grants to employees with the remaining shares granted to directors of the Company. An additional 23,800 shares with a fair value of $369 at the time of grant, were granted to the directors of the Company during the year ended March 31, 1999. All shares granted are eligible to vest in five equal annual installments. With respect to shares of the Company's common stock granted to executive officers, the 1996 Plan provides that the vesting of 75% of the third, fourth and fifth annual installments is subject to the attainment of certain performance goals. Compensation expense, associated with the stock grants recognized based upon the market price of the common stock at the time of grant, was $1,910 , $1,904 and $834 for the years ended March 31, 1999, 1998 and 1997. The unamortized balance of the grants is included in unearned stock-based compensation in the accompanying consolidated financial statements. At March 31, 1999 and 1998 the unamortized balance of the stock awards was $6,100 and $8,900, respectively. 81 PFF BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (Dollars in thousands) The following table contains certain information with respect to the stock options granted under the 1996 Plan.
Options Granted During the Year Ended March 31, 1999 Assumptions Used in Determining Options' Values - ------------------------------------------------------------------------------------------------------------ Calculated Expected Value of Number Exercise Term in Risk-Free Expected Each Grant Date Granted Price Years Rate(1) Volatility Option - ------------------------------------------------------------------------------------------------------------------------- April 22, 1998 1,328 $20.50 8.00 5.20% 38.44% $10.97 September 23, 1998 15,214 14.50 8.00 5.20 38.44 7.76 October 28, 1998 1,427 14.31 8.00 5.20 38.44 7.66 March 24, 1999 7,273 17.94 8.00 5.20 38.44 9.60 Options Granted During the Year Ended March 31, 1998 Assumptions Used in Determining Options' Values - ------------------------------------------------------------------------------------------------------------ Calculated Expected Value of Number Exercise Term in Risk-Free Expected Each Grant Date Granted Price Years Rate(1) Volatility Option - ------------------------------------------------------------------------------------------------------------------------- April 23, 1997 1,660 $14.25 8.00 5.70% 30.00% $ 6.93 May 7, 1997 1,229 14.50 8.00 5.70 30.00 7.05 October 22, 1997 6,154 20.63 8.00 5.70 30.00 10.03 February 25, 1998 2,626 18.75 8.00 5.70 30.00 9.12 Options Granted During the Year Ended March 31, 1997 Assumptions Used in Determining Options' Values - ------------------------------------------------------------------------------------------------------------ Calculated Expected Value of Number Exercise Term in Risk-Free Expected Each Grant Date Granted Price Years Rate(1) Volatility Option - ------------------------------------------------------------------------------------------------------------------------- October 23, 1996 1,900,611 $12.75 8.00 6.92% 25.00% $ 7.64 December 19, 1996 1,031 13.75 8.00 6.92 25.00 7.23 February 27, 1997 1,446 16.25 8.00 6.92 25.00 6.30 March 1, 1997 96,000 16.25 8.00 6.92 25.00 6.30 March 26, 1997 62,162 15.50 8.00 6.92 25.00 6.57
(1) The risk-free rate is the market rate for U.S. Government securities with the same maturities as the options, as of March 31, 1999. The Company applies APB No. 25 in accounting for its Plan and, accordingly, no compensation cost has been recognized for its stock options in the consolidated financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options exercisable under SFAS No. 123, the Company's results of operations would have been adjusted to the pro forma amounts indicated below:
1999 1998 1997 --------------------------------------------------------------------- Net earnings: As reported $19,004 15,980 2,732 Pro forma 17,533 14,463 1,000 Earnings per share - Basic As reported 1.37 1.00 0.15 Pro forma 1.26 0.90 0.06 Earnings per share - Diluted As reported 1.29 0.95 0.15 Pro forma 1.19 0.86 0.06
82 PFF BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (Dollars in thousands) The table below reflects, for the periods indicated, the activity in the Company's stock options issued under the 1996 Plan.
For the Year Ended March 31, 1999 1998 1997 ------------------------------------ Balance at beginning of period 1,876,471 1,960,069 - Granted 25,242 11,669 2,061,250 Canceled or expired (19,764) (31,345) (101,181) Exercised (42,526) (63,922) - ------------------------------------ Balance at end of period 1,839,423 1,876,471 1,960,069 ==================================== Options exercisable 707,762 381,083 2,452 Options available for grant 29,969 26,813 23,681 Weighted average option price per share: Under option $ 13.10 13.05 13.01 Exercisable 13.07 13.06 12.75 Exercised 18.83 19.26 -
The following table summarizes information with respect to the Company's stock options outstanding as of March 31, 1999.
Options Outstanding Options Exercisable --------------------------------------------------------------------------------------------------------------- Weighted-Average Range of Number Remaining Weighted- Number Weighted- Exercise Outstanding Contractual Life Average Outstanding Average Prices at March 31, 1999 (Years) Exercise Price at March 31, 1999 Exercise Price - --------------------------------------------------------------------------------------------------------------------------- $ 12 to 14 1,647,378 7.4 $12.7500 637,740 $12.7500 14 to 16 79,724 7.3 15.2588 30,293 15.4782 16 to 18 102,213 8.1 16.3701 37,975 16.2500 18 to 20 2,626 8.9 18.7500 525 18.7500 20 to 22 7,482 8.7 20.6028 1,229 20.6250
83 PFF BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (Dollars in thousands) (13) Income Taxes Income taxes (benefit) is summarized as follows:
Current Deferred Total ------------------------------------------- Year Ended March 31, 1999 Federal $ 7,987 2,641 10,628 State 2,695 885 3,580 ------------------------------------------- Total $10,682 3,526 14,208 =========================================== Year Ended March 31, 1998 Federal $14,448 (4,399) 10,049 State 2,508 (538) 1,970 ------------------------------------------- Total $16,956 (4,937) 12,019 =========================================== Year Ended March 31, 1997 Federal $ 3,289 (1,867) 1,422 State 1,935 (270) 1,665 ------------------------------------------- Total $ 5,224 (2,137) 3,087 ===========================================
A reconciliation of total income taxes and the amount computed by applying the applicable Federal income tax rate to earnings before income taxes follows:
Year Ended March 31, --------------------------------------------------------------------------------------- 1999 1998 1997 --------------------------------------------------------------------------------------- Amount Percent Amount Percent Amount Percent --------------------------------------------------------------------------------------- Computed "expected" taxes $11,624 35% $ 9,800 35% $2,037 35% Increase (reduction) in taxes resulting from: California franchise tax, net of Federal tax benefit 2,327 7 1,281 7 433 7 California franchise tax examination assessment, net of Federal tax benefit - - - - 649 10 Other items 257 1 938 1 (32) 1 --------------------------------------------------------------------------------------- Total $14,208 43% $12,019 43% $3,087 53% =======================================================================================
84 PFF BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (Dollars in thousands) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities and the related income taxes (benefits) are presented below:
March 31, Taxes March 31, Taxes March 31, 1999 (Benefit) 1998 (Benefit) 1997 ------------------------------------------------------------------------------------ Deferred tax assets: Allowance for real estate loan losses $(10,037) (2,487) (7,550) 453 (8,003) California franchise tax (1,796) (98) (1,698) (672) (1,026) Accrued expenses (1,479) 776 (2,255) (679) (1,576) Core deposit intangibles amortization (181) 196 (377) (106) (271) Nonaccrual interest (484) (337) (147) 886 (1,033) Unrealized gains (loss) on securities 793 (1,001) 1,794 1,439 356 available-for-sale, net Other (1,885) (364) (1,521) (434) (1,088) ------------------------------------------------------------------------------------ (15,069) (3,315) (11,754) 887 (12,641) ------------------------------------------------------------------------------------ Deferred tax liabilities: Deferred loan origination 13,616 5,000 8,616 (4,758) 13,374 fees Unredeemed FHLB stock dividends 6,077 1,241 4,836 796 4,040 Pension plan liability 189 (137) 326 (4) 330 Accumulated depreciation (157) (337) 180 (294) 474 Customer early withdrawl penalty 133 (41) 174 (44) 218 depreciation Accrued interest on pre- 1985 loans 69 104 (35) (58) 23 Excess servicing rights amortization 80 10 70 (25) 95 Other 983 - 983 2 981 ------------------------------------------------------------------------------------ 20,990 5,840 15,150 (4,385) 19,535 ------------------------------------------------------------------------------------ Net deferred tax liability $ 5,921 2,525 3,396 (3,498) 6,894 ====================================================================================
In determining the possible future realization of deferred tax assets, the future taxable income from the following sources is taken into account: (a) the reversal of taxable temporary differences, (b) future operations exclusive of reversing temporary differences and (c) tax planning strategies that, if necessary, would be implemented to accelerate taxable income into years in which net operating losses might otherwise expire. Deferred tax assets as of March 31, 1999 and 1998 have been recognized to the extent of the expected reversal of taxable temporary differences. Based on the Company's current and historical pretax earnings, adjusted for significant items, management believes it is more likely than not that the Company will realize the benefit of the deferred tax asset at March 31, 1999. Management believes the existing net deductible temporary differences will reverse during periods in which the Company generates net taxable income. However, there can be no assurance that the Company will generate any earnings or any specific level of continuing earnings in future years. On August 20, 1996, the President signed the Small Business Job Protection Act (the Act) into law. The Act repealed the reserve method of accounting for bad debts for savings institutions effective for taxable years beginning after 1995. The Company, therefore, is required to use the specific charge-off method on its 1996 and subsequent Federal income tax returns. Prior to 1996, savings institutions that met certain definitional tests and other conditions prescribed by the Internal Revenue Code were allowed to deduct, within 85 PFF BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (Dollars in thousands) limitations, a bad debt deduction. The deduction percentage was 8% for the years ended March 31, 1996 and 1995. Alternately, a qualified savings institution could compute its bad debt deduction based upon actual loan loss experience (the Experience Method). Retained earnings at March 31, 1999 and 1998 includes approximately $25,300 for which no deferred income tax liability has been recognized. (14) Regulatory Capital Savings institutions are subject to the provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), which was signed into law on December 19, 1991. Regulations implementing the prompt corrective action provisions of FDICIA became effective on December 19, 1992. In addition to the prompt corrective action requirements, FDICIA includes significant changes to the legal and regulatory environment for insured depository institutions, including reductions in insurance coverage for certain kinds of deposits, increased supervision by the federal regulatory agencies, increased reporting requirements for insured institutions, and new regulations concerning internal controls, accounting and operations. To be considered "well capitalized," a savings institution must generally have a core capital of at least 5%, a Tier 1 risk-based capital ratio of at least 6%, and a total risk-based capital of at least 10%. An institution is deemed to be "critically undercapitalized" if it has a tangible equity ratio of 2% or less. Management believes that at March 31, 1999, the Bank met the definition of "well capitalized." The following is a reconciliation of the Bank's GAAP capital to regulatory capital as of March 31, 1999:
PFF Bank & Trust's Regulatory Capital Requirement -------------------------------------------------------------- Tangible Core Risk-based Capital Capital Capital -------------------------------------------------------------- Capital of the Bank presented on a GAAP Basis $204,956 204,956 204,956 Adjustments to GAAP capital to arrive at regulatory capital: Unrealized loss on securities available-for-sale, net 293 293 293 Investments in and advances to non-includable consolidated subsidiaries (504) (504) (504) Goodwill and other intangible assets (3,535) (3,535) (3,535) General loan valuation allowance (1) - - 22,263 Real estate held for sale or development - - (558) -------------------------------------------------------------- Regulatory capital 201,210 201,210 222,915 Regulatory capital requirement 115,812 115,812 142,403 -------------------------------------------------------------- Amount by which regulatory capital exceeds requirement $ 85,398 85,398 80,512 ==============================================================
(1) Limited to 1.25% of risk-weighted assets. 86 PFF BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (Dollars in thousands) The following table summarizes the Bank's actual capital and required capital under prompt corrective action provisions of FDICIA as of March 31, 1999 and 1998.
To be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions --------------------------------------------------------------------------------- March 31, 1999 Amount Ratio Amount Ratio Amount Ratio - -------------------------------------------------------------------------------------------------------------------- Total capital (to risk-weighted $222,915 12.52% $142,403 *8.00% $178,004 *10.00% assets) Core (Tier 1) capital (to total 201,210 6.95 86,859 *3.00% 144,765 *5.00 assets) Tier 1 capital (to risk-weighted 201,210 11.30 - - (1) 173,718 *6.00 assets) Tangible capital (to total assets) 201,210 6.95 46,429 *1.50% - - (1)
* greater than or equal to
To be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions --------------------------------------------------------------------------------- March 31, 1998 Amount Ratio Amount Ratio Amount Ratio - -------------------------------------------------------------------------------------------------------------------- Total capital (to risk-weighted $213,617 14.17% $120,481 *8.00% $150,782 *10.00% assets) Core (Tier 1) capital (to total 195,298 7.10 82,559 *3.00 137,598 *5.00 assets) Tier 1 capital (to risk-weighted 195,298 12.95 - - (1) 90,469 *6.00 assets) Tangible capital (to total assets) 195,298 7.10 41,280 *1.50 - - (1)
* greater than or equal to (1) Ratio is not specified under capital regulations. At periodic intervals, both the OTS and the FDIC routinely examine the Bank's financial statements as part of their legally prescribed oversight of the thrift industry. Based on these examinations, the regulators can direct that the Bank's financial statements be adjusted in accordance with their findings. (15) Other Non-Interest Expense Other non-interest expense amounts are summarized as follows:
Year Ended March 31, 1999 1998 1997 ------------------------------------------------ SAIF insurance premiums (1) $ 1,573 1,470 3,270 Office supplies and expense 3,406 2,883 2,803 Savings and NOW account expenses 1,134 1,382 947 Loan expenses 581 438 221 EDP system conversion expenses - - 2,117 Other 3,463 3,757 3,477 ------------------------------------------------ $10,157 9,930 12,835 ================================================
(1) The 1997 SAIF recapitalization assessment of $10,900 is recorded as a separate line item on the statements of earnings. 87 PFF BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (Dollars in thousands) (16) commitments and Contingencies The Company and subsidiaries have various outstanding commitments and contingent liabilities in the ordinary course of business that are not reflected in the accompanying consolidated financial statements as follows: Litigation The Company and subsidiaries have been named as defendants in various lawsuits arising in the normal course of business. The outcome of these lawsuits cannot be predicted, but the Company intends to vigorously defend the actions and is of the opinion that the lawsuits will not have a material effect on the Company. Leases The Company leases various office facilities under noncancellable operating leases that expire through the year 2044. Net rent expense under operating leases, included in occupancy and equipment expense for the years ended March 31, 1999, 1998 and 1997, was $743, $590, and $512, respectively. A summary of future minimum lease payments under these agreements follows at March 31, 1999.
Amount -------------------- Year ending March 31, 2000 $ 711 2001 556 2002 494 2003 370 2004 307 thereafter 608 -------------------- Total $3,046 ====================
(17) Off-Balance Sheet Risk Concentrations of Operations and Assets The Company's operations are located entirely within Southern California. At both March 31, 1999 and 1998, approximately 94.6% of the Company's mortgage loans were secured by real estate in Southern California. In addition, substantially all of the Company's real estate is located in Southern California. Off-Balance-Sheet Credit Risk/Interest-Rate Risk In the normal course of meeting the financing needs of its customers and reducing exposure to fluctuating interest rates, the Company is a party to financial instruments with off-balance sheet risk. These financial instruments (commitments to originate loans and commitments to purchase loans) include elements of credit risk in excess of the amount recognized in the accompanying consolidated financial statements. The contractual amounts of those instruments reflect the extent of the Company's involvement in these particular classes of financial instruments. 88 PFF BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (Dollars in thousands) The Company's exposure to off-balance sheet credit risk (i.e., losses resulting from the other party's nonperformance of financial guarantees) and interest rate risk (for fixed-rate mortgage loans) in excess of the amount recognized in the accompanying consolidated financial statements is represented by the following contractual amounts.
March 31, ------------------------------------------------ 1999 1998 ------------------------------------------------ Commitments to originate loans: Variable-rate $ 24,287 12,857 Fixed-rate 4,523 2,319 ------------------------------------------------ Total $ 28,810 15,176 ================================================ Interest rate range for fixed-rate loans 6.25%-15.75% 6.88%-18.00%
Commitments to originate fixed and variable-rate loans represent commitments to lend to a customer, provided there are no violations of conditions specified in the agreement. Commitments to purchase variable-rate loans represent commitments to purchase loans originated by other financial institutions. These commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Since some of the commitments may expire without being drawn upon, the total commitment amounts above do not necessarily represent future cash requirements. The Company uses the same credit policies in making commitments to originate and purchase loans as it does for on-balance sheet instruments. The Company controls credit risk by evaluating each customer's creditworthiness on a case-by-case basis and by using systems of credit approval, loan limitation, and various underwriting and monitoring procedures. The Company does not require collateral or other security to support off-balance sheet financial instruments with credit risk. However, when the commitment is funded, the Company receives collateral to the extent collateral is deemed necessary, with the most significant category of collateral being real property underlying mortgage loans. (18) Trust Operations Included in prepaid expenses and other assets is the net unamortized trust acquisition cost of $2,263 and $2,599 at March 31, 1999 and 1998, respectively. As a result of the acquisition, the Company now has certain additional fiduciary responsibilities which include acting as trustee, executor, administrator, guardian, custodian, record keeper, agent, registrar, advisor and manager. In addition, the Company's Trust department holds assets for the benefit of others. These assets are not the assets of the Company and are not included in the consolidated balance sheets of the Company at March 31, 1999 and 1998. 89 PFF BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (Dollars in thousands) (19) Loan Servicing and Sale Activities Loan servicing and sale activities are summarized as follows:
As of and for the Year Ended March 31, -------------------------------------------------------------- 1999 1998 1997 -------------------------------------------------------------- Balance sheet information: Loans held for sale $ 3,531 701 736 ============================================================== Statement of earnings information: Loan servicing fees $ 850 887 945 Amortization of servicing asset (109) (42) (42) -------------------------------------------------------------- Loan servicing fees, net $ 741 845 903 ============================================================== Gain on sale of loans $ 661 992 9 ============================================================== Statement of cash flows information: Loans originated for sale $ - 3,893 21,590 ============================================================== Proceeds from sale of loans $39,407 166,989 26,869 ==============================================================
The Company originates mortgage loans, which depending upon whether the loans meet the Company's investment objectives may be sold in the secondary market or to other private investors. The servicing of these loans may or may not be retained by the Company. Indirect non-deferrable costs associated with origination, servicing and sale activities cannot be presented as these operations are integrated with and not separable from the origination and servicing of portfolio loans, and as a result, cannot be accurately estimated. At March 31, 1999, 1998 and 1997, the Company was servicing loans and participations in loans owned by others of $325,730, $390,159, and $252,057, respectively. (20) Fair Value of Financial Instruments The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" (SFAS 107). The estimated fair value amounts have been determined using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions or estimation methodologies may have a material impact on the estimated fair value amounts. 90 PFF BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (Dollars in thousands) The estimated fair values of the Company's financial instruments are as follows:
March 31, 1999 March 31, 1998 ------------------------------------------------------------------- Carrying Fair Carrying Fair Value Value Value Value ------------------------------------------------------------------- Financial assets: Cash and cash equivalents and certificates of deposit $ 63,790 63,790 46,021 46,021 Investment securities 185,796 185,803 317,124 317,135 Mortgage-backed securities 526,116 526,120 482,993 482,995 Loans held for sale 3,531 3,531 701 703 Loans receivable, net 2,026,081 2,031,065 1,827,614 1,835,033 Financial liabilities Deposits 1,843,538 1,847,383 1,740,824 1,737,923 FHLB advances and other borrowings 814,000 737,083 785,886 789,444 Off-balance sheet instruments: Commitments to originate loans 28,810 28,810 15,176 15,176
The following methods and assumptions were used in estimating the Company's fair value disclosures for financial instruments. Cash, Cash Equivalents and Certificates of Deposit: The fair values of cash and cash equivalents, and certificates of deposit approximate the carrying values reported in the consolidated balance sheet. Investment Securities: The fair values of investment securities are based on quoted market prices. Mortgage-Backed Securities: The fair values of mortgage-backed securities are based on quoted market prices or dealer quotations obtained from market sources. Loans Receivable: For purposes of calculating the fair value of loans receivable, loans were segregated by payment type, such as those with fixed interest rates and those with adjustable interest rates as well as by prepayment and repricing frequency. For all mortgage loans, fair value is estimated using discounted cash flow analysis. Discount rates are based on current loan rates for similar loan types adjusted for differences in credit and servicing characteristics. The fair values of significant nonperforming loans are based on recent appraisals, or if not available, on estimated cash flows, discounted using a rate commensurate with the risk associated with the specific properties. Deposits: The fair values of passbook accounts, demand deposits and certain money market deposits are assumed to be the carrying values at the reporting date. The fair value of term accounts is based on projected contractual cash flows discounted at rates currently offered for deposits of similar maturities. FHLB Advances and Other Borrowings: The fair value of FHLB advances and other borrowings is based on discounted cash flows using contractual rates currently offered for similar borrowings of similar final maturities. 91 PFF BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (Dollars in thousands) Off-Balance Sheet Financial Instruments: The fair value of commitments to purchase loans, mortgage-backed securities and investment securities is based upon bid quotations received from securities dealers. Commitments to fund loans outstanding at March 31, 1999 and 1998 would be offered at substantially the same rates and terms as commitments offered on March 31, 1999 and 1998 to parties of similar credit worthiness. Therefore, the carrying value of the commitments approximates their estimated fair value. (21) Conversion to Capital Stock Form of Ownership The Bancorp was incorporated under Delaware law in March 1996 for the purpose of acquiring and holding all of the outstanding capital stock of the Bank as part of the Bank's conversion from a federally chartered mutual savings and loan association to a federal stock savings bank. On March 28, 1996, the Bank became a wholly owned subsidiary of the Bancorp. In connection with the conversion, the Bancorp issued and sold to the public 19,837,500 shares of its common stock (par value $.01 per share) at a price of $10 per share. The proceeds, net of $4,500 in conversion costs, received by the Bancorp from the conversion (before deduction of $15,870 to fund the Employee Stock Ownership Plan) amounted to $193,875. The Bancorp used $105.000 of the net proceeds to purchase the capital stock of the Bank. At the time of the conversion, the Bank established a liquidation account in the amount of $109,347, which is equal to its total retained earnings as of September 30, 1995. The liquidation account will be maintained for the benefit of eligible account holders who continue to maintain their accounts at the Bank after the conversion. The liquidation account will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder's interest in the liquidation account. In the event of a complete liquidation, each eligible account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the current adjusted qualifying balances for accounts then held. The balance in the liquidation account at March 31, 1999 is $38,549. The Company may not declare or pay cash dividends on or repurchase any of its shares of common stock, if the effect would cause stockholders' equity to be reduced below applicable regulatory capital maintenance requirements or if such declaration and payment would otherwise violate regulatory requirements. 92 PFF BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (Dollars in thousands) (22) Parent Company Condensed Financial Information This information should be read in conjunction with the other notes to the consolidated financial statements. Following are the condensed parent company only financial statements for PFF Bancorp, Inc. Condensed Balance Sheets ------------------------
March 31, ------------------------------- 1999 1998 ------------------------------- Assets Cash and cash equivalents $ 4,757 4,122 Mortgage-backed securities available-for-sale, at fair value - 11,286 Equity securities available-for-sale 7,879 13,729 Trust preferred securities available-for-sale 13,303 17,360 Trading securities, at fair value 4,271 - Investment in real estate 5,813 - Investment in Bank subsidiary 204,956 202,763 Other assets 2,306 5,724 ------------------------------- Total assets $ 243,285 254,984 =============================== Liabilities and stockholders' equity Other liabilities $ 620 706 Stockholders' equity 242,665 254,278 ------------------------------- Total liabilities and stockholders' equity $ 243,285 254,984 ===============================
Condensed Statements of Earnings --------------------------------
Year Ended March 31, ----------------------------------------------- 1999 1998 1997 ----------------------------------------------- Interest and other income $ 3,916 4,474 7,002 General and administrative expense 2,798 2,653 1,548 ----------------------------------------------- Earnings before equity in undistributed earnings of subsidiary before income taxes 1,118 1,821 5,454 Dividend from Bank subsidiary 15,000 30,000 - Equity in earnings of subsidiary before income taxes 17,094 (3,822) 365 ----------------------------------------------- Earnings before income taxes 33,212 27,999 5,819 Income taxes 14,208 12,019 3,087 ----------------------------------------------- Net earnings $ 19,004 15,980 2,732 ===============================================
93 PFF BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (Dollars in thousands) Condensed Statements of Cash Flows ----------------------------------
YEAR ENDED MARCH 31, ---------------------------------------------------- 1999 1998 1997 ---------------------------------------------------- Cash flows from operating activities: Net earnings $ 19,004 15,980 2,732 Adjustments to reconcile net earnings to cash used by operating activities: Amortization of premiums on investments and mortgage-backed securities 29 262 - Gain on trading securities (569) - - Increase in trading securities (3,924) - - Amortization of unearned stock-based compensation 3,531 3,491 4,133 (Gains) losses on sale of mortgage-backed securities and investments available-for-sale 191 (438) - Undistributed earnings of subsidiary (3,474) 14,968 (365) (Increase) decrease in other assets 3,418 (1,307) (560) Increase (decrease) in other liabilities (86) (696) 1,025 --------------------------------------------------- Net cash provided by operating activities 18,120 32,260 6,965 --------------------------------------------------- Cash flow from investing activities: Increase in real estate held for investment (5,813) - - Increase in investment securities available-for-sale - (25,568) (42,411) (Increase) decrease in mortgage-backed securities available-for-sale 11,110 27,707 (4,919) Decrease in equity securities available-for-sale 5,004 - - Decrease in trust preferred securities 3,782 - - Note receivable from the Bank - - 73,005 --------------------------------------------------- Net cash provided by investing activities 14,083 2,139 25,675 --------------------------------------------------- Cash flows from financing activities: Proceeds from exercise of stock options 531 682 - Purchase of treasury stock (32,099) (35,808) (14,817) Purchase of stock for unearned stock-based compensation plans - - (12,974) --------------------------------------------------- Net cash used in financing activities (31,568) (35,126) (27,791) --------------------------------------------------- Net (decrease)increase in cash during the year 635 (727) 4,849 Cash and cash equivalents, beginning of year 4,122 4,849 - --------------------------------------------------- Cash and cash equivalents, end of year $ 4,757 4,122 4,849 ===================================================
94 PFF BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (Dollars in thousands) (23) Earnings Per Share A reconciliation of the components used to derive basic and diluted earnings per share for March 31, 1999, 1998 and 1997 follows:
Net Weighted Average Per Share Earnings Shares Outstanding Amount -------------------------------------------------- 1999: Basic earnings per share $ 19,004 13,876,440 $ 1.37 Effect of dilutive stock options and awards - 840,242 .08 -------------------------------------------------- Diluted earnings per share $ 19,004 14,716,682 $ 1.29 ================================================== 1998: Basic earnings per share $ 15,980 16,055,127 $ 1.00 Effect of dilutive stock options and awards - 739,969 0.05 -------------------------------------------------- Diluted earnings per share $ 15,980 16,795,096 $ 0.95 ================================================== 1997: Basic earnings per share $ 2,732 17,819,870 $ 0.15 Effect of dilutive stock options and awards - 139,691 - -------------------------------------------------- Diluted earnings per share $ 2,732 17,959,561 $ 0.15 ==================================================
(24) Quarterly Results of Operations (Unaudited)
Three Months Ended ------------------------------------------------------------------ June 30, September 30, December 31, March 31, Total 1998 1998 1998 1999 1999 ----------------------------------------------------------------------------------- Net interest income $ 17,959 18,298 19,576 20,766 76,599 Provision for loan losses (1,020) (1,000) (1,000) (1,000) (4,020) Other income 3,891 3,051 4,378 4,228 15,548 Other expenses (13,284) (13,573) (13,888) (14,170) (54,915) ----------------------------------------------------------------------------------- Earnings before income taxes 7,546 6,776 9,066 9,824 33,212 Income taxes 3,219 2,932 3,850 4,207 14,208 ----------------------------------------------------------------------------------- Net earnings $ 4,327 3,844 5,216 5,617 19,004 =================================================================================== Basic earnings per share $ 0.29 0.27 0.38 0.43 1.37 =================================================================================== Diluted earnings per share $ 0.28 0.26 0.37 0.38 1.29 =================================================================================== Three Months Ended ------------------------------------------------------------------ June 30, September 30, December 31, March 31, Total 1997 1997 1997 1998 1998 ----------------------------------------------------------------------------------- Net interest income $ 18,315 17,929 18,547 18,060 72,851 Provision for loan losses (2,250) (2,249) (1,300) (1,300) (7,099) Other income 3,207 3,226 4,283 3,564 14,280 Other expenses (12,805) (13,082) (13,232) (12,914) (52,033) ----------------------------------------------------------------------------------- Earnings before income taxes 6,467 5,824 8,298 7,410 27,999 Income taxes 2,784 2,538 3,546 3,151 12,019 ----------------------------------------------------------------------------------- Net earnings $ 3,683 3,286 4,752 4,259 15,980 =================================================================================== Basic earnings per share $ 0.22 0.20 0.30 0.28 1.00 =================================================================================== Diluted earnings per share $ 0.22 0.19 0.28 0.26 0.95 ===================================================================================
95 PFF BANCORP, INC. AND SUSSIDIARY Notes to consolidated Financial Statements, Continued (Dollars in Thousands) (25) Subsequent Event Between April 26 and 28, 1999, the Company repurchased 1,500,000 shares of its common stock at a weighted average price of $19.18 per share. A portion of the funding for this repurchase was provided through a $20,000 dividend declared and paid by the Bank to the Bancorp during April 1999. 96 INDEPENDENT AUDITORS' REPORT The Board of Directors PFF Bancorp, Inc.: We have audited the accompanying consolidated balance sheets of PFF Bancorp, Inc. and subsidiary (the Company) as of March 31, 1999 and 1998 and the related consolidated statements of earnings, comprehensive earnings, stockholders' equity and cash flows for each of the years in the three-year period ended March 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of PFF Bancorp, Inc. and subsidiary as of March 31, 1999 and 1998 and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 1999 in conformity with generally accepted accounting principles. KPMG LLP April 21, 1999, except as to note 25 to the consolidated financial statements which is as of April 28, 1999. 97 Item 9. Change in and Disagreements with Accountants on Accounting and - ----------------------------------------------------------------------- Financial Disclosure. - -------------------- None. PART III Item 10. Directors and Executive Officers of the Registrant. - ------------------------------------------------------------ The information appearing in the definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14 A in connection with PFF Bancorp Inc.'s Annual Meeting of Stockholders to be held on September 22, 1999 (the "Proxy Statement") under the captions "Election of Directors" and "Executive Officers Who Are Not Directors" is incorporated herein by reference. Item 11. Executive Compensation - -------------------------------- The information appearing in the Proxy Statement under the caption "Executive Compensation" is incorporated herein by reference, excluding the Stock Performance Graph and Compensation Committee Report. Item 12. Security Ownership of Certain Beneficial Owners and Management. - ------------------------------------------------------------------------ The information relating to security ownership of certain beneficial owners and management is incorporated herein by reference to the Proxy Statement. ITEM 13. Certain Relationships and related Transactions. - -------------------------------------------------------- The information relating to certain relationships and related transactions is incorporated herein by reference to the Proxy Statement. 98 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. - ------------------------------------------------------------------------- (a)(3) Exhibits (a) The following exhibits are filed as part of this report: 3.1 Certificate of Incorporation of PFF Bancorp, Inc. (1) 3.2 Bylaws of PFF Bancorp, Inc. (1) 4.0 Stock Certificate of PFF Bancorp, Inc. (1) 10.1 Form of Employment Agreement between PFF Bank & Trust and PFF Bancorp, Inc. and certain executive officers (1) 10.2 Form of Change in Control Agreement between PFF Bank & Trust and PFF Bancorp, Inc. and certain executive officers (1) 10.3 Form of PFF Bank & Trust Employee Severance Compensation Plan (1) 10.4 Capital Accumulation Plan for Employees of Pomona First Federal Savings and Loan Association (1) 10.5 PFF Bancorp, Inc. 1996 Incentive Plan (2) 10.6 Form of Non-Statutory Stock Option Agreement for officer and employees of PFF Bancorp, Inc. (3) 10.7 Form of Incentive Stock Option Agreement for officers and employees of PFF Bancorp, Inc. (3) 10.8 Form of Stock Award Agreement for officers and employees of PFF Bancorp, Inc. (3) 10.9 Form of Stock Award and Stock Option Agreement for Outside Directors of PFF Bancorp, Inc. (3) 10.10 The Pomona First Federal Bank & Trust Restated Supplemental Executive Retirement Plan (3) 10.11 The Pomona First Federal Bank & Trust Directors' Deferred Compensation Plan (3) 21 Subsidiary information is incorporated herein by reference to "Part I- Subsidiary Activities." 23 Consent of KPMG LLP 27 Financial Data Schedule 99.1 Annual Report on Form 11-K for Capital Accumulation Plan for employees of PFF Bank & Trust (b) Reports on Form 8-K None The Registrant did not file any reports on Form 8-K during the last quarter of the fiscal year ended March 31, 1999. -------------------- (1) Incorporated herein by reference from the Exhibits to the Registration Statement on Form S-1, as amended, filed on December 8, 1995, Registration No. 33-80259. (2) Incorporated herein by reference from the Proxy Statement for the 1996 Annual Meeting of Stockholders dated September 16, 1996. (3) Incorporated herein by reference from the Form 10-K filed on June 20, 1997. 99 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PFF BANCORP, INC. BY: /s/ LARRY M. RINEHART ------------------------------------- Larry M. Rinehart DATED: June 23, 1999 President, Chief Executive Officer and Director Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.
Name Title Date - ---------------------------------------------------------------------------------------------------------- /s/ LARRY M. RINEHART June 23, 1999 - --------------------------------- Larry M. Rinehart President, Chief Executive Officer and Director (Principal Executive Officer) /s/ GREGORY C. TALBOTT June 23, 1999 - --------------------------------- Gregory C. Talbott Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) /s/ DONALD R. DESCOMBES June 23, 1999 - --------------------------------- Donald R. DesCombes Director /s/ ROBERT W. BURWELL June 23, 1999 - --------------------------------- Robert W. Burwell Director /s/ WILLIAM T. DINGLE June 23, 1999 - --------------------------------- William T. Dingle Director /s/ CURTIS W. MORRIS June 23, 1999 - --------------------------------- Curtis W. Morris Director /s/ ROBERT D. NICHOLS June 23, 1999 - --------------------------------- Robert D. Nichols Director /s/ JIL H. STARK June 23, 1999 - --------------------------------- Jil H. Stark Director
100 EX-23 2 CONSENT OF KPMG LLP EXHIBIT 23 Independent Auditors' Consent The Board of Directors PFF Bancorp, Inc.: We consent to incorporation by reference in the registration statement (No. 33- 20337) on Form S-8 of PFF Bancorp, Inc. of our report dated April 23, 1999, except as to note 25 to the consolidated financial statements, which is as of April 28, 1999, relating to the consolidated balance sheets of PFF Bancorp, Inc. and subsidiary as of March 31, 1999 and 1998, and the related consolidated statements of earnings, comprehensive earnings, stockholders' equity and cash flows for each of the years in the three-year period ended March 31, 1999, which report appears in the March 31, 1999, annual report on Form 10-K of PFF Bancorp, Inc. KPMG LLP Orange County, California June 28, 1999 EX-27 3 FINANCIAL DATA SCHEDULE
9 This schedule contains summary financial information extracted from March 31, 1999 and is qualified in its entirety by reference to such financial statements 1,000 12-MOS MAR-31-1999 APR-01-1998 MAR-31-1999 40,572 3,218 20,000 4,271 710,647 1,265 1,276 2,055,772 26,160 2,935,980 1,843,538 0 849,777 0 0 0 199 242,466 2,935,980 148,013 58,942 0 206,955 79,534 50,822 76,599 4,020 569 54,960 33,212 33,212 0 0 19,004 1.37 1.29 7.32 11,012 0 11,291 0 26,002 4,078 17 26,160 26,160 0 0
EX-99.1 4 ANNUAL REPORT ON FORM 10-K EXHIBIT 99.1 CAPITAL ACCUMULATION PLAN FOR EMPLOYEES OF PFF BANK & TRUST Financial Statements and Supplemental Schedules December 31, 1998 and 1997 (With Independent Auditors' Report Thereon) CAPITAL ACCUMULATION PLAN FOR EMPLOYEES OF PFF BANK & TRUST Index to Financial Statements and Supplemental Schedules
Page Independent Auditors' Report 1 Statements of Net Assets Available for Benefits, with Fund Information December 31, 1998 and 1997 2-3 Statements of Changes in Net Assets Available for Benefits, with Fund Information Years ended December 31, 1998 and 1997 4-7 Notes to Financial Statements 8 Schedule 1 Line 27a - Schedule of Assets Held for Investment Purposes - December 31, 1998 12 2 Line 27d - Schedule of Reportable Transactions - Year ended December 31, 1998 13
Independent Auditors' Report The Plan Administrator Capital Accumulation Plan for Employees of PFF Bank & Trust: We have audited the accompanying statements of Net Assets Available for Benefits with Fund Information of the Capital Accumulation Plan for Employees of PFF Bank & Trust (the Plan), formerly the Capital Accumulation Plan for Employees of Pomona First Federal Savings and Loan Association, as of December 31, 1998 and 1997 and the related Statements of Changes in Net Assets Available for Benefits with Fund Information for the years then ended. These financial statements are the responsibility of the Plan's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets available for benefits with fund information of the Plan as of December 31, 1998 and 1997 and the changes in net assets available for benefits with fund information for the years then ended in conformity with generally accepted accounting principles. Our audits were performed for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedules of assets held for investment purposes and reportable transactions are presented for the purpose of additional analysis and are not a required part of the basic financial statements but are supplementary information required by the Department of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. The fund information in the Statements of Net Assets Available for Benefits with Fund Information and the Statement of Changes in Net Assets Available for Benefits with Fund Information is presented for purposes of additional analysis rather than to present the net assets available for benefits and changes in net assets available for benefits of each fund. The supplemental schedules and fund information have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. June 14, 1999 Orange County, California CAPITAL ACCUMULATION PLAN FOR EMPLOYEES OF PFF BANK & TRUST Statement of Net Assets Available for Benefits with Fund Information December 31, 1998
Certificates of Franklin T. Rowe Price Vanguard PFF Deposit - Small Cap International Wellington Bancorp, Inc. Fixed Growth Fund Stock Fund Fund Stock Fund --------------- ----------- ------------- ---------- ------------ Investments: Cash and cash equivalents $ - - - - (579) Certificates of deposit 2,041,509 - - - - Mutual funds - 1,552,226 610,115 1,803,418 - Common stock - - - - 3,446,688 Loans to participants - - - - - ----------- --------- ------- --------- --------- Total investments at fair value 2,041,509 1,552,226 610,115 1,803,418 3,446,109 Receivables: Employer contribution - - - - - Participants' contributions - - - - - ----------- --------- ------- --------- --------- Net assets available for plan benefits $ 2,041,509 1,552,226 610,115 1,803,418 3,446,109 =========== ========= ======= ========= ========= Highmark Diversified Money Participant Market Loans Other Total ------------ ----------- --------- ------------ Investments: Cash and cash equivalents $ 3,744,547 - - 3,743,968 Certificates of deposit - - - 2,041,509 Mutual funds - - - 3,965,759 Common stock - - - 3,446,688 Loans to participants - 530,603 - 530,603 ----------- ------- ------- ---------- Total investments at fair value 3,744,547 530,603 - 13,728,527 Receivables: Employer contribution - - 384,371 384,371 Participants' contributions - - 25,087 25,087 ----------- ------- ------- ---------- Net assets available for plan benefits $ 3,744,547 530,603 409,458 14,137,985 =========== ======= ======= ==========
See accompanying notes to financial statements. 2 CAPITAL ACCUMULATION PLAN FOR EMPLOYEES OF PFF BANK & TRUST Statement of Net Assets Available for Benefits with Fund Information December 31, 1997
Certificates of Franklin T. Rowe Price Vanguard Vanguard Deposit - Small Cap International Index Trust Wellington Fixed Growth Fund Stock Fund 500 Portfolio Fund --------------- ----------- ------------- ------------- ---------- Investments: Cash and cash equivalents $ - - - - - Certificates of deposit 2,136,902 - - - - Mutual funds - 1,528,008 566,554 2,577,910 1,761,350 Common stock - - - - - Loans to participants - - - - - ----------- --------- ------- --------- --------- Total investment at fair value 2,136,902 1,528,008 566,554 2,577,910 1,761,350 Receivables - employer contribution - - - - - ----------- --------- ------- --------- --------- Net assets available for plan benefits $ 2,136,902 1,528,008 566,554 2,577,910 1,761,350 =========== ========= ======= ========= ========= Vanguard Total Bond PFF Market Bancorp, Inc. Participant Portfolio Stock Fund Loans Other Total ------------ ------------- ----------- --------- ---------- Investments: Cash and cash equivalents $ - (13) - - (13) Certificates of deposit - - - - 2,136,902 Mutual funds 286,133 - - - 6,719,955 Common stock - 3,929,155 - - 3,929,155 Loans to participants - - 566,672 - 566,672 ---------- --------- ------- ------- ---------- Total investments at fair value 286,133 3,929,142 566,672 - 13,352,671 Receivables - employer contribution - - - 368,484 368,484 ---------- --------- ------- ------- ---------- Net assets available for plan benefits $ 286,133 3,929,142 566,672 368,484 13,721,155 ========== ========= ======= ======= ==========
See accompanying notes to financial statements. 3 CAPITAL ACCUMULATION PLAN FOR EMPLOYEES OF PFF BANK & TRUST Statement of Changes in Net Assets Available for Benefits with Fund Information Year ended December 31, 1998
Franklin T. Rowe Price Vanguard Vanguard Small Cap International Index Trust 500 Wellington Growth Fund Stock Fund Portfolio Fund ------------ ------------- --------------- ------------ Contributions: Employer (note 1) $ -- -- -- -- Participants 158,259 52,468 225,386 147,567 ------------ ------------ ------------- ------------ 158,259 52,468 225,386 147,567 ------------ ------------ ------------- ------------ Investment income: Interest and dividends earned on investments 42,026 35,621 56,056 80,402 Realized and unrealized gains and (losses) 31,715 94,504 723,993 92,634 ------------ ------------ ------------- ------------ 73,741 130,125 780,049 173,036 ------------ ------------ ------------- ------------ Total additions 232,000 182,593 1,005,435 320,603 Deductions from net assets attributed to benefits paid to participants (95,756) (35,246) (177,187) (90,630) Transfers into (out of) funds (112,026) (103,786) (3,406,158) (187,905) ------------ ------------ ------------- ------------ Increase (decrease) in net assets available for benefits 24,218 43,561 (2,577,910) 42,068 Net assets available for benefits: Beginning of year 1,528,008 566,554 2,577,910 1,761,350 ------------ ------------ ------------- ------------ End of year $ 1,552,226 610,115 -- 1,803,418 ============ ============ ============= ============ Vanguard Total Bond Certificates PFF Market of Deposit - Bancorp, Inc. Portfolio Fixed Stock Fund Subtotal ------------ ------------- --------------- ------------ Contributions: Employer (note 1) -- (90) 368,484 368,394 Participants 24,116 47,706 135,581 791,083 ------------ ----------- ------------- ------------ Investment income: 24,116 47,616 504,065 1,159,477 ------------ ----------- ------------- ------------ Interest and dividends earned on investments 23,735 113,866 9,234 360,940 Realized and unrealized gains and (losses) 4,665 74 (816,658) 130,927 ------------ ----------- ------------- ------------ 28,400 113,940 (807,424) 491,867 ------------ ----------- ------------- ------------ Total additions 52,516 161,556 (303,359) 1,651,344 Deductions from net assets attributed to benefits paid to participants (8,889) (655,820) (175,891) (1,239,419) Transfers into (out of) funds (329,760) 398,871 (3,783) (3,744,547) ------------ ----------- ------------- ------------ Increase (decrease) in net assets available for benefits (286,133) (95,393) (483,033) (3,332,622) Net assets available for benefits: Beginning of year 286,133 2,136,902 3,929,142 12,785,999 ------------ ----------- ------------- ------------ End of year -- 2,041,509 3,446,109 9,453,377 ============ =========== ============= ============
See accompanying notes to financial statements. 4 CAPITAL ACCUMULATION PLAN FOR EMPLOYEES OF PFF BANK & TRUST Statement of Changes in Net Assets Available for Benefits with Fund Information Year ended December 31, 1998
Highmark Diversified Money Participant Market Loans Other Subtotal Total ----------- ----------- --------- ---------- ---------- Contributions: Employer (note 1) $ - - 15,887 15,887 384,281 Participants - - 25,087 25,087 816,170 ---------- --------- -------- --------- ---------- - - 40,974 40,974 1,200,451 ---------- --------- -------- --------- ---------- Investment income: Interest and dividends earned on investments - - - - 360,940 Realized and unrealized gains and (losses) - - - - 130,927 ---------- --------- -------- --------- ---------- - - - - 491,867 ---------- --------- -------- --------- ---------- Total additions - - 40,974 40,974 1,692,318 Deductions from net assets attributed to benefits paid to participants - (36,069) - (36,069) (1,275,488) Transfers into (out of) funds 3,744,547 - - 3,744,547 - ---------- --------- -------- --------- ---------- Increase (decrease) in net assets available for benefits 3,744,547 (36,069) 40,974 3,749,452 416,830 Net assets available for benefits: Beginning of year - 566,672 368,484 935,156 13,721,155 ---------- --------- -------- --------- ---------- End of year $3,744,547 530,603 409,458 4,684,608 14,137,985 ========== ========= ======== ========= ==========
See accompanying notes to financial statements. 5 CAPITAL ACCUMULATION PLAN FOR EMPLOYEES OF PFF BANK & TRUST Statement of Changes in Net Assets Available for Benefits with Fund Information Year ended December 31, 1997
Franklin T. Rowe Price Vanguard Vanguard Small Cap International Index Trust 500 Wellington Growth Fund Stock Fund Portfolio Fund ----------- ------------- --------------- ----------- Contributions: Employer (note 1) $ - - - - Participants 186,720 87,028 209,134 170,871 ---------- ------- --------- --------- 186,720 87,028 209,134 170,871 ---------- ------- --------- --------- Investment income: Interest and dividends earned on investments 9,616 2,904 24,210 41,623 Realized and unrealized gains and (losses) 131,495 (2,031) 539,819 173,888 ---------- ------- --------- --------- 141,111 873 564,029 215,511 ---------- ------- --------- --------- Total additions 327,831 87,901 773,163 386,382 Deductions from net assets attributed to benefits paid to participants (154,102) (97,091) (215,228) (130,445) Transfers into (out of) funds 1,354,279 575,744 2,019,975 1,505,413 ---------- ------- --------- --------- Increase (decrease) in net assets available for benefits 1,528,008 566,554 2,577,910 1,761,350 Net assets available for benefits: Beginning of year - - - - ---------- ------- --------- --------- End of year $1,528,008 566,554 2,577,910 1,761,350 ========== ======= ========= ========= Vanguard Total Bond Certificates PFF Market of Deposit - Bancorp, Inc. Portfolio Fixed Stock Fund Subtotal ---------- ------------ ------------- --------- Contributions: Employer (note 1) - - 281,632 281,632 Participants 25,446 62,039 166,938 908,176 ---------- ---------- --------- ---------- 25,446 62,039 448,570 1,189,808 ---------- ---------- --------- ---------- Investment income: Interest and dividends earned on investments 16,530 130,470 9,499 234,852 Realized and unrealized gains and (losses) 8,237 1,860 1,008,379 1,861,647 ---------- ---------- --------- ---------- 24,767 132,330 1,017,878 2,096,499 ---------- ---------- --------- ---------- Total additions 50,213 194,369 1,466,448 3,286,307 Deductions from net assets attributed to benefits paid to participants (10,268) (520,088) (142,622) (1,269,844) Transfers into (out of) funds 246,188 756,835 (146,997) 6,311,437 ---------- ---------- --------- ---------- Increase (decrease) in net assets available for benefits 286,133 431,116 1,176,829 8,327,900 Net assets available for benefits: Beginning of year - 1,705,786 2,752,313 4,458,099 ---------- --------- --------- ---------- End of year 286,133 2,136,902 3,929,142 12,785,999 ========== ========= ========= ==========
See accompanying notes to financial statements. 6 CAPITAL ACCUMULATION PLAN FOR EMPLOYEES OF PFF BANK & TRUST Statement of Changes in Net Assets Available for Benefits with Fund Information Year ended December 31, 1997
Keystone Custodian Value Certificates Fund Series Balanced Momentum of Deposit S-3 Portfolio Portfolio Variable ------------- ------------- ------------ ------------- Contributions: Employer (note 1) $ -- -- -- -- Participants -- -- -- -- ----------- ----------- ----------- ----------- -- -- -- -- ----------- ----------- ----------- ----------- Investment income: Interest and dividends earned on investments -- -- -- 6,713 Realized and unrealized gains and (losses) (7,684) (10,145) (26,725) -- ----------- ----------- ----------- ----------- (7,684) (10,145) (26,725) 6,713 ----------- ----------- ----------- ----------- Total additions (7,684) (10,145) (26,725) 6,713 Deductions from net assets attributed to benefits paid to participants -- -- -- -- Transfers into (out of) funds (946,201) (1,229,275) (2,721,889) (1,571,649) ----------- ----------- ----------- ----------- Increase (decrease) in net assets available for benefits (953,885) (1,239,420) (2,748,614) (1,564,936) Net assets available for benefits: Beginning of year 953,885 1,239,420 2,748,614 1,564,936 ----------- ----------- ----------- ----------- End of year $ -- -- -- -- =========== =========== =========== =========== Participant Loans Other Subtotal Total ------------- ------------- ----------- ------------ Contributions: Employer (note 1) $ -- 86,852 86,852 368,484 Participants -- (35,075) (35,075) 873,101 ----------- ----------- ----------- ----------- -- 51,777 51,777 1,241,585 ----------- ----------- ----------- ----------- Investment income: Interest and dividends earned on investments -- -- 6,713 241,565 Realized and unrealized gains and (losses) -- -- (44,554) 1,817,093 ----------- ----------- ----------- ----------- -- -- (37,841) 2,058,658 ----------- ----------- ----------- ----------- Total additions -- 51,777 13,936 3,300,243 Deductions from net assets attributed to benefits paid to participants (11,090) -- (11,090) (1,280,934) Transfers into (out of) funds 157,577 -- (6,311,437) -- ----------- ----------- ----------- ----------- Increase (decrease) in net assets available for benefits 146,487 51,777 (6,308,591) 2,019,309 Net assets available for benefits: Beginning of year 420,185 316,707 7,243,747 11,701,846 ----------- ----------- ----------- ----------- End of year $ 566,672 368,484 935,156 13,721,155 =========== =========== =========== ===========
See accompanying notes to financial statements. 7 CAPITAL ACCUMULATION PLAN FOR EMPLOYEES OF PFF BANK & TRUST Notes to Financial Statements December 31, 1998 and 1997 (1) Description of Plan The following description of the Capital Accumulation Plan for Employees of PFF Bank & Trust (the Plan), formerly Pomona First Federal Savings and Loan Association Capital Accumulation Plan, provides only general information. Participants should refer to the Plan agreement for a more complete description of the Plan's provisions. (a) General The Plan is a defined contribution plan covering all eligible employees of PFF Bank & Trust (the Bank or Plan Sponsor). Employees become eligible for participation in the Plan upon 6 months of employment. Participants must complete 501 hours of service to share in the employer's matching contribution. In order to become a participant, each eligible employee authorizes contributions by filing a 401(k) enrollment/change of status election. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA). In December 1994, the Bank amended and restated the Plan by adopting the Union Bank Non-Standardized 401(k) Profit Sharing Adoption Agreement. (b) Contributions No contribution is required by the Bank; however, at the discretion of its Board of Directors, the Bank may contribute out of its income and/or accumulated earned surplus an amount equal to a specified percentage of the tax-deferred contribution of the participants or a profit sharing contribution with the amount to be determined by the Board of Directors. From inception of the Plan through July 3, 1997, the maximum annual participant contribution was 15% of the participant's annual salary, as defined within the Plan. Beginning July 4, 1997 and thereafter, to avoid violating IRS regulations, the maximum annual contribution is 8%, 7% and 5% for "non-highly" compensated employees, "highly compensated" employees and "executives," respectively. For 1998 and 1997, the Bank chose to match the participants' contributions at a rate of 100% of the first 1% and 50% of the next 6% of contributions. For "highly compensated" participants and "executives", the Bank chose to match 50% of the participants contributions up to 7% and 5%, respectively, for 1998 and 1997. Forfeitures of matching contributions are used to reduce the Bank's matching contributions. For the years ended December 31, 1998 and 1997, participant forfeitures totaled $18,539 and $2,159, respectively. (c) Participant Accounts Each participant's account is credited with the participant's contribution and allocation of (a) the Bank's contribution and (b) Plan earnings. Allocations are based on participant earnings or account balances, as defined. The benefit to which a participant is entitled is the benefit that can be provided from the participant's account. (Continued) 8 CAPITAL ACCUMULATION PLAN FOR EMPLOYEES OF PFF BANK & TRUST Notes to Financial Statements December 31, 1998 and 1997 (d) Participants Loans Participants may borrow from their fund accounts a minimum of $1,000 up to a maximum equal to the lesser of $50,000 or 50% of their vested account balance. Loan repayments are to be made over a period not to exceed 5 years except loans for the purchase of a primary residence in which case payment may exceed 5 years. The loans are secured by the balance in the participant's account and bear interest at a rate of prime plus 1%. (e) Vesting Participation in the Plan is voluntary. Employee contributions and the earnings as a result of each participant's contributions are 100% vested and nonforfeitable. The Bank's contributions vest to participants in accordance with a specified schedule with 100% vesting occurring after 5 years of service, on the participant's attaining age 65, or on the participant's death or total and permanent disablement. (f) Payment of Benefits On termination of service, a participant may elect to receive either a lump-sum amount equal to the vested balance of his or her account or annual (or more frequent) installments over a period not to exceed the life expectancy of the participant. (2) Summary of Significant Accounting Policies (a) Basis of Presentation The accompanying financial statements have been prepared on the accrual basis of accounting. (b) Trust Fund Managed by Investment Advisory Committee Under the terms of the Plan, the assets of the Plan are placed in trust (the Trust), and are held under the trusteeship of Union Bank of California, N.A. (Union Bank). Assets are managed under the direction of Employee Compensation and Benefits Committee of the Bank's Board of Directors (the Committee). The Committee has delegated certain of its ordinary management and investment responsibilities to certain members of the Bank's Executive Committee and the Human Resources Director. Committee members are appointed for an indefinite term by the Bank's Board of Directors. The Committee has full discretionary authority to administer the Plan and the trust agreement. The investments and changes therein of these trust funds have been reported by Union Bank as having been determined through the use of fair market values based upon quotations obtained from national securities exchanges or latest bid prices. Security transactions are accounted for on a trade-date basis. Realized gains and losses on the sale of investments are computed using the average cost method. (c) Disclosure about Fair Value of Financial Instruments Substantially all of the Plan's financial instruments are carried at fair value or amounts approximating fair value. (d) Use of Estimates Certain estimates and assumptions have been made relating to the reporting of Plan assets and liabilities to prepare the financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (Continued) 9 CAPITAL ACCUMULATION PLAN FOR EMPLOYEES OF PFF BANK & TRUST Notes to Financial Statements December 31, 1998 and 1997 (e) Reclassifications Certain reclassifications have been made to the prior year financial statements to conform with the current year presentation. (f) Administrative Expenses All administrative expenses of the Plan were paid directly by the Bank in 1998 and 1997. (3) Investments The following table presents the cost and fair values of those investments at December 31, that represent 5% or more of the Plan's net assets.
December 31, 1998 December 31, 1997 ---------------------------------------------- ---------------------------------------------- Identity of party and description of asset Cost Fair value Cost Fair value - ----------------------------- -------------------- -------------------- -------------------- -------------------- PFF Bank & Trust Certificates of Deposit: Fixed rate $ 2,041,509 2,041,509 2,136,902 2,136,902 Highmark Diversified Money Market 3,744,547 3,744,547 -- -- Mutual funds: Vanguard Wellington Fund 1,696,776 1,803,418 1,613,761 1,761,350 Vanguard Index Trust 500 Portfolio -- -- 2,097,799 2,577,910 Franklin Small Cap Growth Fund 1,476,557 1,552,226 1,423,950 1,528,008 PFF Bancorp, Inc. Stock Fund 2,872,662 3,446,688 2,401,110 3,929,155 -------------- -------------- -------------- -------------- Total $ 11,832,051 12,588,388 9,673,522 11,933,325 ============== ============== ============== ==============
Allocation of Plan Assets Employee contributions are allocated to various funds based on the election made by each participant. Net income or loss of each fund is allocated on the basis of the proportionate asset balance of each participant as of the previous valuation date after adjustment for withdrawals, distributions and other additions or subtractions that may be appropriate. Under the daily valuation record-keeping system, earnings are allocated on the basis of current shares held in each participant's account and the accounts are valued daily. A description of each investment fund follows: . Franklin Small Cap Growth Fund The fund seeks long-term capital appreciation by investing in equity securities of companies with a market capitalization of less than $1 billion. . T. Rowe Price International Stock Fund The fund seeks total return from long-term growth of capital and income by investing primarily in common stocks of established foreign issuers. (Continued) 10 CAPITAL ACCUMULATION PLAN FOR EMPLOYEES OF PFF BANK & TRUST Notes to Financial Statements December 31, 1998 and 1997 . Vanguard Index Trust 500 Portfolio - The fund seeks to track, as closely as possible, the investment performance of the S&P 500 Index by investing in each of the Index's 500 stocks according to each stock's weighting in the index. . Vanguard Wellington Fund - The fund seeks to provide conservative investors with conservation of principal and reasonable current income and profits without undue risk, by investing in common stocks and bonds. . Vanguard Total Bond Market Portfolio - The fund seeks to replicate the total return of the Lehman Brothers Aggregate Bond Index by investing primarily in securities listed in the index. . Certificates of Deposit - Fixed - The Fixed Rate Certificate of Deposit pays a market rate of return for a fixed term of one year. . PFF Bancorp, Inc. Stock Fund - Stock fund assets are invested in PFF Bancorp, Inc. common stock and cash and cash equivalents. PFF Bancorp, Inc., is the holding company of the Plan's sponsor, the Bank. . Highmark Diversified Money Market - Proceeds from the liquidation of mutual funds are invested at a market rate of return temporarily until the assets are reinvested. (4) Plan Termination Although the Bank has not expressed any intent to terminate the Plan, it may do so at any time subject to the provisions of ERISA. In the event the Plan is terminated, all participants become 100% vested in their account balances. (5) Federal Income Taxes The Internal Revenue Service has determined and informed the Bank by a letter dated July 24, 1995, that the Plan is designed in accordance with applicable sections of the Internal Revenue Code (IRC). The Bank and the Plan's tax counsel believe that the Plan is designed and is currently being operated in compliance with the applicable requirements of the IRC. (6) Related Party Transactions The Plan had $2.04 million and $2.14 million on deposit at December 31, 1998 and 1997, respectively, in certificates of deposit at the Bank, the employer. In addition, the Plan held 215,418 and 197,693 shares of common stock of PFF Bancorp, Inc. at December 31, 1998 and 1997, respectively. (7) Subsequent Events On January 1, 1999, the Plan was amended whereby new investment options are offered to the Plan participants and the assets of the Plan are held under the trusteeship of the Bank. 11 Schedule 1 CAPITAL ACCUMULATION PLAN FOR EMPLOYEES OF PFF BANK & TRUST Line 27a - Schedule of Assets Held for Investment Purposes December 31, 1998
Description of investment including maturity date, rate of Identity of issue, borrower, interest, collateral, par, or Current lessor or similar party maturity value Cost value - ---------------------------- -------------------------------- ------------ ------------ *PFF Bank & Trust Fixed rate certificate of deposit; 5.45% $ 2,041,509 2,041,509 *PFF Bancorp, Inc. Common Stock 215,418 shares 2,872,662 3,446,688 *PFF Bancorp, Inc. Stock Liquidity Fund (579) (579) Franklin Small Cap Growth Fund Mutual Fund 68,774 units 1,476,557 1,552,226 T. Rowe Price International Stock Fund Mutual Fund 40,701 units 566,699 610,115 Vanguard Wellington Fund Mutual Fund 61,445 units 1,696,776 1,803,418 Highmark Money Market 3,744,547 3,744,547 *Participants loans - 530,603 ----------- ---------- Total $12,398,171 13,728,527 =========== ==========
* Denotes a party in interest. See accompanying independent auditors' report. 12 Schedule 2 CAPITAL ACCUMULATION PLAN FOR EMPLOYEES OF PFF BANK & TRUST Line 27d - Schedule of Reportable Transactions Year ended December 31, 1998
(a) (b) (c) (d) (e) (f) Description of asset (include Expense interest rate and maturity in Purchase incurred with Identity of party involved price case of a loan) price Selling Lease rental transaction - ------------------------------------ -------------------------------- ----------- ---------- -------------- ------------- PFF Bancorp, Inc. Stock Common stock purchases $2,006,684 - - - PFF Bancorp, Inc. Stock Common stock sales - 1,672,020 - - Franklin Small Cap Growth Fund Mutual fund purchases 462,455 - - - Franklin Small Cap Growth Fund Mutual fund sales - 408,496 - - Participant Loan Fund Loans 148,720 - - - Participant Loan Fund Loan repayments - 715,392 - - Vanguard Index Trust 500 Portfolio Mutual fund purchases 664,444 - - - Vanguard Index Trust 500 Portfolio Mutual fund sales - 3,949,937 - - Vanguard Wellington Fund Mutual fund purchases 456,742 - - - Vanguard Wellington Fund Mutual fund sales - 413,668 - - Vanguard Total Bond Market Portfolio Mutual fund purchases 290,776 - - - Vanguard Total Bond Market Portfolio Mutual fund sales - 582,548 - - PFF Bank & Trust - Fixed CD Certificate of deposit purchases 687,706 - - - PFF Bank & Trust - Fixed CD Certificate of deposit sales - 783,098 - - Highmark Money Market purchases 3,744,547 - - - ========== ========== ========== ========== (a) (b) (g) (h) (i) Current Description of asset (include value of asset interest rate and maturity in on transaction Net gain or Identity of party involved price case of a loan) Cost of asset date (loss) - ------------------------------------ -------------------------------- ------------- -------------- ----------- PFF Bancorp, Inc. Stock Common stock purchases 2,006,684 2,006,684 - PFF Bancorp, Inc. Stock Common stock sales 1,535,441 1,672,020 136,579 Franklin Small Cap Growth Fund Mutual fund purchases 462,455 462,455 - Franklin Small Cap Growth Fund Mutual fund sales 409,848 408,496 (1,352) Participant Loan Fund Loans 148,720 148,720 - Participant Loan Fund Loan repayments 715,392 715,392 - Vanguard Index Trust 500 Portfolio Mutual fund purchases 664,444 664,444 - Vanguard Index Trust 500 Portfolio Mutual fund sales 2,762,050 3,949,937 1,187,887 Vanguard Wellington Fund Mutual fund purchases 456,742 456,742 - Vanguard Wellington Fund Mutual fund sales 373,725 413,668 39,943 Vanguard Total Bond Market Portfolio Mutual fund purchases 290,776 290,776 - Vanguard Total Bond Market Portfolio Mutual fund sales 569,117 582,548 13,431 PFF Bank & Trust - Fixed CD Certificate of deposit purchases 687,706 687,706 - PFF Bank & Trust - Fixed CD Certificate of deposit sales 783,098 783,098 - Highmark Money Market purchases 3,744,547 3,744,547 - ========= ========= =========
See accompanying independent auditors' report. -----END PRIVACY-ENHANCED MESSAGE-----