UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
DELAWARE |
95-4561623 |
(State or other jurisdiction of |
(I.R.S. Employer I.D. No.) |
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 $304,260,405, based
upon the last sales price as quoted on the Nasdaq National Market for June 22,
2001.
The number of shares of common stock outstanding as of
June 22, 2001: 13,257,534
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 19, 2001 are incorporated by
reference in Part III hereof.
EXPLANATORY NOTE
On August 14, 2002, the Company announced that it would restate the weighted average shares used to calculate basic and diluted earnings per share (EPS). As a result, basic and diluted EPS for the fiscal years ended March 31, 2001, 2000, 1999, 1998 and 1997 and all interim periods within those fiscal years presented herein have been restated. These revisions do not reflect any changes to previously reported net earnings, but rather corrections of computational errors in the determination of weighted average shares used to calculate EPS. Information regarding the effect of the restatement on the consolidated financial statements is included in Note 24 to the consolidated financial statements. This amendment does not otherwise attempt to update the information in the originally filed form 10-K to reflect events after the original filing date.
INDEX |
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PART I |
PAGE |
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Item 1. |
Description of Business |
3 |
Item 2. |
Properties |
39 |
Item 3. |
Legal Proceedings |
39 |
Item 4. |
Submission of Matters to a Vote of Security Holders |
39 |
PART II |
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Item 5. |
Market for Registrant's Common Equity and Related |
|
Item 6. |
Selected Financial Data |
41 |
Item 7. |
Management's Discussion and Analysis of Financial |
|
Item 7A. |
Quantitative and Qualitative Disclosures About Market Risk |
56 |
Item 8. |
Financial Statements and Supplementary Data |
57 |
Item 9. |
Changes in and Disagreements with Accountants |
|
PART III |
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Item 10. |
Directors and Executive Officers of the Registrant |
101 |
Item 11. |
Executive Compensation |
101 |
Item 12. |
Security Ownership of Certain Beneficial Owners |
|
Item 13. |
Certain Relationships and Related Transactions |
101 |
PART IV |
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Item 14. |
Exhibits, Financial Statement Schedules and Reports |
|
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 (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; 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 (the "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 subsidiary. At March 31, 2001, on a consolidated basis, the
Company had total assets of $2.89 billion, total deposits of $2.02 billion and
total stockholders' equity of $258.0 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"), collateralized mortgage
obligations ("CMO") and other investment securities (collectively
"securities"). The Bank's current asset generation emphasis is on
originating commercial, construction and land (primarily tract construction),
commercial real estate and consumer loans (collectively the
"Four-Cs"). The Bank's revenues are derived principally from
interest on its loans, and to a lesser extent, interest and dividends on
investment securities. 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 and investment securities. Scheduled
payments on loans and investment securities are a relatively stable source of
funds, while prepayments on loans and 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 its subsidiary.
3
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 northern 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
and securities and the level of prepayments on loans and 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 Company acquired the trust operations of another bank for
$3.5 million. As a result of the acquisition, the Company 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 Company and are not included in the balance
sheet of the Company. Trust fee income for the years ended March 31, 2001 and
2000 was $1.8 million and $2.1 million, respectively. See "Notes to
Consolidated Financial Statements - Note 19: Trust Operations."
4
Lending Activities
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, |
|||||||||
|
2001 |
2000 |
1999 |
1998 |
1997 |
|||||
|
Percent |
|
Percent |
|
Percent |
|
Percent |
|
Percent |
|
|
(Dollars in thousands) |
|||||||||
|
|
|||||||||
Real estate: (1) |
||||||||||
Residential: |
|
|||||||||
One-to-four family |
$ 1,338,940 |
52.5% |
$ 1,537,233 |
60.1% |
$ 1,482,839 |
66.8% |
$ 1,467,857 |
75.3% |
$ 1,499,858 |
79.4% |
Multi-family |
87,321 |
3.4 |
85,169 |
3.3 |
87,856 |
4.0 |
97,350 |
5.0 |
108,896 |
5.8 |
Commercial real estate |
233,953 |
9.2 |
169,010 |
6.6 |
156,474 |
7.0 |
144,035 |
7.4 |
137,169 |
7.2 |
Construction and land |
597,083 |
23.4 |
517,659 |
20.2 |
349,119 |
15.7 |
185,225 |
9.5 |
113,188 |
6.0 |
Commercial |
133,564 |
5.2 |
122,095 |
4.8 |
74,451 |
3.3 |
12,468 |
0.6 |
3,100 |
0.2 |
Consumer |
160,987 |
6.3 |
126,424 |
5.0 |
70,686 |
3.2 |
42,826 |
2.2 |
26,931 |
1.4 |
Total loans, gross |
2,551,848 |
100.0% |
2,557,590 |
100.0% |
2,221,425 |
100.0% |
1,949,761 |
100.0% |
1,889,142 |
100.0% |
|
||||||||||
Undisbursed loan funds |
(237,547) |
(198,656) |
(167,042) |
(95,457) |
(38,485) |
|||||
Net premiums on loans |
818 |
1,215 |
1,665 |
1,114 |
(1,629) |
|||||
Deferred loan origination fees, net |
1,793 |
1,753 |
(276) |
(1,101) |
(1,362) |
|||||
Allowance for loan losses |
(31,022) |
(27,838) |
(26,160) |
(26,002) |
(27,721) |
|||||
Total loans, net |
2,285,890 |
2,334,064 |
2,029,612 |
1,828,315 |
1,819,945 |
|||||
Less: Loans held for sale |
(583) |
(7,362) |
(3,531) |
(701) |
(736) |
|||||
Loans receivable, net |
$ 2,285,307 |
$ 2,326,702 |
$ 2,026,081 |
$ 1,827,614 |
$ 1,819,209 |
|||||
(1) Includes loans held for sale. |
6
Loan Maturity.
The following table shows the contractual maturity of the Bank's loan portfolio at March 31, 2001.
At March 31, 2001 |
|||||||
One-to- |
|
|
|
|
|
Total |
|
(Dollars in thousands) |
|||||||
Amounts due: |
|||||||
One year or less |
$ 6,090 |
131 |
9,130 |
504,147 |
58,229 |
13,497 |
591,224 |
After one year: |
|||||||
More than one year to three years |
1,146 |
9,982 |
20,872 |
82,595 |
35,307 |
543 |
150,445 |
More than three years to five years |
3,312 |
4,452 |
25,843 |
366 |
37,643 |
729 |
72,345 |
More than five years to ten years |
13,824 |
12,182 |
113,367 |
9,256 |
2,385 |
6,902 |
157,916 |
More than ten years to twenty years |
150,900 |
43,728 |
61,781 |
- |
- |
130,320 |
386,729 |
More than twenty years |
1,163,668 |
16,846 |
2,960 |
719 |
- |
8,996 |
1,193,189 |
Total due after March 31, 2002 |
1,332,850 |
87,190 |
224,823 |
92,936 |
75,335 |
147,490 |
1,960,624 |
Total amount due |
1,338,940 |
87,321 |
233,953 |
597,083 |
133,564 |
160,987 |
2,551,848 |
Less: |
|||||||
Undisbursed loan funds |
- |
- |
- |
(237,547) |
- |
- |
(237,547) |
Net premiums on loans |
785 |
18 |
15 |
- |
- |
- |
818 |
Deferred loan origination fees, net |
3,959 |
(284) |
(819) |
(2,547) |
25 |
1,459 |
1,793 |
Allowance for loan losses |
(1,549) |
(228) |
(891) |
(17,835) |
(5,334) |
(5,185) |
(31,022) |
Total loans, net |
1,342,135 |
86,827 |
232,258 |
339,154 |
128,255 |
157,261 |
2,285,890 |
Loans held for sale |
(583) |
- |
- |
- |
- |
- |
(583) |
Loans receivable, net |
$ 1,341,552 |
86,827 |
232,258 |
339,154 |
128,255 |
157,261 |
2,285,307 |
7
The following table sets forth at March 31, 2001, the dollar amount of total gross loans receivable contractually due after March 31, 2002, and whether such loans have fixed or adjustable interest rates.
Due after March 31, 2002 |
|||
Fixed |
Adjustable |
Total |
|
(Dollars in thousands) |
|||
Real estate loans: (1) |
|||
Residential: |
|||
One-to-four family |
$ 110,558 |
1,222,292 |
1,332,850 |
Multi-family |
2,764 |
84,426 |
87,190 |
Commercial real estate |
2,088 |
222,735 |
224,823 |
Construction and land |
2,545 |
90,391 |
92,936 |
Commercial |
52,100 |
23,235 |
75,335 |
Consumer |
96,852 |
50,638 |
147,490 |
Total gross loans receivable |
$ 266,907 |
1,693,717 |
1,960,624 |
(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 in Rancho Cucamonga, California, a
satellite loan office in Redding, California and up until March 2000 wholesale
brokers approved by the Bank. During March 2000, in connection with its strategy
of de-emphasizing one-to-four family residential lending in favor of a greater
focus on the Four-Cs, the Bank discontinued one-to-four family first trust deed
residential mortgage originations through wholesale brokers. The Bank continues
to originate one-to-four family first trust deed residential mortgages through
internal sources. The Bank continues to originate equity-based consumer loans
through wholesale brokers. 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 $1.05 billion for fiscal 2001 compared to $1.27 billion
for fiscal 2000. 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 the Four-Cs as a
means of enhancing the Bank's yield on interest-earning assets. Originations
of the Four-Cs aggregated $969.3 million or 92% of total originations for fiscal
2001 compared to $833.0 million or 66% of total originations for fiscal 2000.
The weighted average initial contract rate on total originations was 10.07% for
fiscal 2001, compared to 8.25% for fiscal 2000.
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, 2001, the Bank was servicing $256.5 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 ("MSR") 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 MSR and the
mortgage loans without the MSR based on their relative fair values. MSR are
included in the financial statements in the category "other assets."
The Bank had $1.1 million of MSR as of March 31, 2001 and 2000. Impairment
losses are recognized through a valuation allowance, with any associated
provision recorded as a component of loan servicing fees. At March 31, 2001,
there were $583,000 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, |
|||
2001 |
2000 |
1999 |
|
(Dollars in thousands) |
|||
Beginning balance (1) |
$ 2,334,064 |
2,029,612 |
1,828,315 |
Loans originated: |
|||
One-to-four family |
70,019 |
432,497 |
406,445 |
Multi-family |
10,255 |
2,865 |
3,371 |
Commercial real estate |
103,454 |
29,370 |
27,465 |
Construction and land |
566,101 |
567,360 |
384,991 |
Commercial |
173,454 |
140,558 |
89,852 |
Consumer |
126,252 |
95,674 |
75,480 |
Total loans originated |
1,049,535 |
1,268,324 |
987,604 |
Loans purchased |
18,892 |
1,560 |
168,395 |
Sub-total |
3,402,491 |
3,299,496 |
2,984,314 |
Less: |
|||
Principal payments |
(1,049,029) |
(902,923) |
(831,468) |
Sales of loans |
(23,305) |
(25,253) |
(38,829) |
Transfer to foreclosed real estate owned (REO) |
|
|
|
Change in undisbursed loan |
|
|
|
Change in allowance for loan |
|
|
|
Other (2) |
(181) |
1,829 |
1,376 |
Total loans |
2,285,890 |
2,334,064 |
2,029,612 |
Loans held for sale, net |
(583) |
(7,362) |
(3,531) |
Ending balance loans receivable, |
|
|
|
(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 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
and members of the local communities. Prior to March 2000, adjustable rate loans
were offered with maturities up to 40 years. Effective during March 2000, in
response to interest rate risk considerations, the Bank discontinued offering 40
year maturities. The Bank is presently giving consideration to resuming the
origination of 40 year maturity mortgages.
At March 31, 2001, the Bank's one-to-four family residential mortgage loans
totaled $1.34 billion or 53% of total loans. Of the $1.34 billion, 28% were
classified as loans secured by non-owner-occupied properties of which 81% were
second homes. Non-owner-occupied properties 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, 2001, 92% 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, 2001, the outstanding principal balances of
these loans totaled $426.5 million, (including $37.0 million of loans serviced
by others in which the Bank has purchased a participating interest) or 32% of
total one-to-four family residential mortgage loans. At March 31, 2001, the
total outstanding negative amortization on these loans (excluding the $37.0
million of loans serviced by others) was $3.6 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 89% 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. 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 110%. 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 adverse economic conditions during
the mid 1990's 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 have subsequently experienced strong economic conditions and
real estate value appreciation.
10
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, 2001 totaled $87.3 million
or 3% of total gross loans. At March 31, 2001, 70% of the Bank's multi-family
loans were adjustable-rate indexed to COFI. The Bank's largest multi-family
loan at March 31, 2001, had an outstanding balance of $6.0 million and is
secured by a 124 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. Thirty-six percent of
these loans are indexed to COFI and 51% are indexed to the one-year CMT.
Competitive market factors have also prompted the Bank to originate such loans
with fixed rates of interest. Terms on commercial real estate loans are
generally 5 to 7 years with 25 to 30 year amortization, although these loans may
be made with terms up to 30 years. 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, 2001 was $9.0 million and is secured by a 77,100 square
foot office building. At March 31, 2001, the Bank's commercial real estate
loan portfolio was $234.0 million, or 9% of total gross loans.
Loans secured by commercial real estate properties 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 and 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.
11
Construction and Land Lending. The Company 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, 2001, the Bank had construction loans outstanding for development of
residential properties located in Nevada, Utah, Arizona and Oregon totaling
$19.1 million, $14.6 million of which was disbursed. As of March 31, 2001, the
remainder of the Bank's construction loans were for development of real estate
located in California. The Company's construction loans primarily are made to
finance tract construction of one-to-four family residential properties. These
loans are generally indexed to Prime, have maturities of two years or less and
generally include extension options of six to eighteen months upon payment of an
additional fee. The Company'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 Company requires an independent
appraisal of the property and generally requires personal guaranties. Loan
proceeds are disbursed as construction progresses and as inspections warrant.
The Company's inspectors generally visit projects twice a month to monitor the
progress of construction. At March 31, 2001, the Bank had $78.1 million of land
loans on which construction is not scheduled to begin within six months. All
such land is planned for residential developments. The largest such land loan is
for $14.6 million. The largest credit exposure in the construction loan
portfolio as of March 31, 2001 consists of $39.0 million of loans for the
development of 296 finished lots located in northern Los Angeles County
(Castaic). The aggregate disbursed balance of these loans at March 31, 2001 was
$30.3 million. At March 31, 2001 and 2000, the balance of the Bancorp's loan
on this project was $3.0 million and $3.9 million, respectively. This loan is
subordinated to $36.0 million in development and phased construction loans made
by the Bank on the project. Prior to April 2000, the Bancorp was accounting for
its loan as a direct investment in real estate and as such was deferring all
profit in excess of its cost of capital until its principal was paid down by
funds received from third party buyers of finished lots or homes. Pursuant to an
OTS interpretation of regulations regarding transactions with affiliates, during
April 2000 the Bancorp restructured the loan on the project to Prime + 4.0%.
Repayment is to come from the release of lots into phased construction loans.
See "Delinquencies and Classified Assets" and "Non-Accrual and
Past Due Loans." The second largest credit exposure in the Bank's
construction loan portfolio at March 31, 2001 had a balance of $15.9 million,
for a multi-phase residential development of 53 homes. Repayment is to come from
home sales to individual home buyers. At March 31, 2001, the Company's
construction and land loan portfolio was $597.1 million (23% of total gross
loans), $359.5 million of which was disbursed. At March 31, 2001 the aggregate
balance of loans for the construction of properties other than one-to-four
family residences was $67.3 million, $45.4 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 Company
may be confronted with a project, when completed, having a value which is
insufficient to assure full repayment of the Company's loan. 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.
Consumer and Other Lending. The Bank's consumer loans consist primarily
of home equity lines of credit ($56.2 million) and secured and unsecured
personal loans and lines of credit ($104.7 million). At March 31, 2001, the Bank's
total consumer loan portfolio was $161.0 million or 6% of total gross loans.
Commercial Lending. The Bank has expanded its operations to include
commercial business lending to small- and medium-sized businesses. 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, 2001 were $196.0 million, $133.6 million of which was
outstanding. The largest loan in the commercial portfolio is a $20.0 million
term loan to an equipment leasing company. This loan is secured by the
assignment of underlying leases and equipment as well as inventory and accounts
receivable. The second largest loan is a $15.4 million commitment to another
equipment leasing company specializing in the dental industry. This loan is also
secured by the assignment of underlying leases and equipment as well as
inventory and accounts receivable. Repayment of both loans is expected to come
from underlying cash flows. The size of the equipment leases supporting these
loans is generally in the $50,000 to $500,000 range.
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 guaranties 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 by 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 and consumer loans in amounts up to $299,999
may be approved by the Bank's staff underwriters; mortgage loans and consumer
loans in excess of $299,999 and up to $599,999 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 and
consumer loans in excess of $599,999 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 $9,999,999, and
commercial business loans in excess of $499,999 and up to $4,999,999 must be
approved by the Management Loan Committee; and mortgage loans of $10.0 million
or more, consumer loans in excess of $999,999 and commercial business loans of
$5.0 million or more require the approval of the LOARC. The LOARC presently
reviews commercial business loans in excess of $4,999,999, 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 and
selected smaller loans. 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, 2001 the Bank's limit on loans-to-one borrower was $39.4 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, 2001, the Bank was servicing $256.5 million of loans
for others. The Bank currently does not purchase servicing rights related to
mortgage loans originated by other institutions.
13
For commercial business loans, management conducts an ongoing review of
all loans 15 or more days delinquent. The procedures undertaken by the Company
with respect to delinquencies may vary depending on the nature of the loan, the
period of delinquency, and the quality of collateral or guaranties. The Company
generally sends the borrower a notice of non-payment within 15 days after the
due date and subsequent notices thereafter. In the event that payment is not
then received, the responsible loan officer contacts the borrower directly and
may notify guarantors and grantors of collateral that the loan is delinquent.
The loan officer may review the loan documentation and secure additional
collateral or sources of repayment. Delinquent loans may be classified as other
than a "pass" credit, in order to provide management visibility,
periodic reporting, and appropriate reserves. Legal recourse is considered and
promptly undertaken if alternate repayment sources cannot be identified. At 90
days past due, the loan will be placed on a non-accrual status.
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, 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.
Management 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.
14
At March 31, 2001 and 2000 the Bank had $24.5 million and $15.9 million,
respectively of assets classified as Special Mention, on which there were no
allowances. The main components of assets classified as Special Mention at March
31, 2001 were: 12 loans totaling $1.1 million secured by one-to-four family
residences; and 13 non-homogeneous loans (defined as loans with unpaid principal
balances in excess of $500,000). The composition of the non-homogeneous loans is
as follows: two commercial property loans totaling $3.4 million; one 27 unit
residential property loan for $613,000; two 16 unit residential property loans
totaling $1.1 million; six commercial credit loans totaling $15.2 million; and
two construction loans totaling $1.9 million. At March 31, 2001, the Company had
$59.8 million of assets, net of specific allowances of $5.3 million classified
as Substandard, compared to $36.3 million, net of specific allowances of $1.0
million classified as Substandard at March 31, 2000. Included in the Substandard
total are construction loans for a 296 home development in Castaic with a
disbursed balance reported as a classified asset of $30.3 million. These loans
were classified Substandard during fiscal 2000 due to delays in construction and
increased costs caused by grading problems. See "Non-Accrual and Past-Due
Loans." Commercial real estate loans classified as Substandard changed from
2 loans totaling $3.5 million, before specific allowances at March 31, 2000 to 3
loans totaling $3.0 million, before specific allowances at March 31, 2001.
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 2001, 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, 2001 there were no assets classified as Loss and seven assets
totaling $707,000 classified as Doubtful compared to no assets classified as
loss and two assets totaling $300,000 classified as Doubtful at March 31, 2000.
The composition of assets classified Substandard at March 31, 2001 and 2000 is
set forth on the following page.
15
At March 31, 2001 |
|||||||||
Loans |
REO |
Total Substandard Assets |
|||||||
Gross |
Net |
Number |
Gross |
Net |
Number |
Gross |
Net |
Number |
|
(Dollars in thousands) |
|||||||||
Real estate: |
|||||||||
Residential: |
|||||||||
One-to-four family |
$ 14,385 |
$ 14,168 |
112 |
$ 400 |
$ 351 |
4 |
$ 14,785 |
$ 14,519 |
116 |
Multi-family |
1,188 |
1,188 |
1 |
- |
- |
- |
1,188 |
1,188 |
1 |
Commercial real estate |
2,951 |
2,741 |
3 |
- |
- |
- |
2,951 |
2,741 |
3 |
Construction and land |
41,359 |
36,777 |
9 |
- |
- |
- |
41,359 |
36,777 |
9 |
Sub-total |
59,883 |
54,874 |
125 |
400 |
351 |
4 |
60,283 |
55,225 |
129 |
Commercial |
4,830 |
4,566 |
10 |
- |
- |
- |
4,830 |
4,566 |
10 |
Total |
$ 64,713 |
$ 59,440 |
135 |
$ 400 |
$ 351 |
4 |
$ 65,113 |
$ 59,791 |
139 |
At March 31, 2000 |
|||||||||
Loans |
REO |
Total Substandard Assets |
|||||||
Gross |
Net |
Number |
Gross |
Net |
Number |
Gross |
Net |
Number |
|
(Dollars in thousands) |
|||||||||
Real Estate: |
|||||||||
Residential: |
|||||||||
One-to-four family |
$ 7,935 |
$ 7,618 |
70 |
$1,522 |
$1,466 |
15 |
$ 9,457 |
$ 9,084 |
85 |
Multi-family |
2,071 |
1,713 |
4 |
- |
- |
- |
2,071 |
1,713 |
4 |
Commercial real estate |
3,493 |
3,148 |
2 |
- |
- |
- |
3,493 |
3,148 |
2 |
Construction and land |
20,430 |
20,430 |
2 |
- |
- |
- |
20,430 |
20,430 |
2 |
Sub-total |
33,929 |
32,909 |
78 |
1,522 |
1,466 |
15 |
35,451 |
34,375 |
93 |
Commercial |
1,959 |
1,959 |
3 |
- |
- |
- |
1,959 |
1,959 |
3 |
Total |
$35,888 |
$34,868 |
81 |
$1,522 |
$1,466 |
15 |
$37,410 |
$36,334 |
96 |
(1) Net balances are reduced for specific 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 was one TDR loan and four REO properties at March 31, 2001. It is the policy of the Company 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, 2001, 2000, 1999, 1998 and 1997, 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 $733,000, $466,000, $1.1 million, $1.7 million and $2.2 million, respectively, none of which was recognized. 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 $86,000, $499,000, $1.0 million, $1.2 million and $1.3 million, respectively; zero, $369,000, $887,000, $779,000 and $942,000, of which was recognized on a cash basis. The Company has a total of $30.3 million in loans outstanding on a 296 home residential development project in Castaic with an aggregate commitment of $39.0 million. The project incurred cost overruns and construction delays which caused the Bancorp to determine that its one loan in the amount of $3.0 million is impaired. Management has determined that given the current status of the project and the structure of this loan it is doubtful that the Bancorp will collect all principal and interest due in accordance with the contractual terms of this loan. Therefore, during the quarter ended December 31, 2000, the Bancorp placed this loan on non-accrual status and considered the effect of its impairment in determining the allowance for loan losses as of December 31, 2000 and March 31, 2001. The Company has determined that it is still probable that it will collect all amounts contractually due on the remaining $27.3 million of loans outstanding on this project. The Company has taken an assignment of interest on two projects, on which the Company has no other indebtedness, from the borrower of the Castaic project, which will enhance the overall collateral position of the Company. Management is continuing to closely monitor the status of these loans. The status of this project as of March 31, 2001 was as follows: 125 of the 296 homes have been sold and closed and 19 homes are in escrow. Construction of 56 homes is anticipated to be started during the quarter ending June 30, 2001. Construction and sale of all homes is expected to be completed in late calendar 2002 or early 2003. During the year ended March 31, 2001 and 2000, the Company's average investment in impaired loans was $26.3 million and $13.8 million, respectively and interest income recorded during these periods was $47,000 and $381,000, respectively of which zero and $369,000, respectively was recorded utilizing the cash basis method of accounting.
17
At March 31, |
|||||
2001 |
2000 |
1999 |
1998 |
1997 |
|
(Dollars in thousands) |
|||||
Non-accrual loans: |
|||||
Residential real estate: |
|||||
One-to-four family |
$ 5,420 |
4,415 |
10,061 |
13,834 |
19,258 |
Multi-family |
- |
- |
122 |
467 |
790 |
Commercial real estate |
- |
- |
- |
2,717 |
1,331 |
Construction and land (4) |
4,572 |
- |
647 |
131 |
1,447 |
Commercial |
437 |
243 |
- |
- |
- |
Consumer |
1,052 |
769 |
182 |
40 |
524 |
Total |
11,481 |
5,427 |
11,012 |
17,189 |
23,350 |
REO, net (1) |
351 |
1,466 |
5,318 |
7,595 |
7,745 |
Non-performing assets |
$ 11,832 |
6,893 |
16,330 |
24,784 |
31,095 |
TDR loans (4) |
$ 3,012 |
1,950 |
11,291 |
12,505 |
14,559 |
Classified assets, gross |
$ 62,102 |
37,354 |
39,058 |
46,758 |
56,462 |
Allowance for loan losses as a |
|
|
|
|
|
Allowance for loan losses as a |
|
|
|
|
|
Non-performing loans as a percent |
|
|
|
|
|
Non-performing assets as a percent |
|
|
|
|
|
(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. | |||||
(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. | |||||
(4)At March 31, 2001 the Bancorp's $3.0 million loan for the Castaic development is included in non-accrual and TDR loans. |
18
The following table sets forth delinquencies in the Bank's loan portfolio as of the dates indicated.
At March 31, 2001 |
At March 31, 2000 |
|||||||
60-89 Days |
90 Days or More(1) |
60-89 Days |
90 Days or More(1) |
|||||
|
Principal |
|
Principal |
|
Principal |
|
Principal |
|
(Dollars in thousands) |
||||||||
One-to-four family |
18 |
$ 1,847 |
43 |
$ 5,420 |
16 |
$ 1,869 |
35 |
$ 4,415 |
Multi-family |
- |
- |
- |
- |
1 |
106 |
- |
- |
Commercial real estate |
1 |
242 |
- |
- |
- |
- |
- |
- |
Construction and land |
- |
- |
2 |
4,572 |
1 |
990 |
- |
- |
Commercial |
- |
- |
5 |
437 |
- |
- |
1 |
243 |
Consumer |
8 |
256 |
27 |
1,052 |
8 |
226 |
21 |
769 |
Total |
27 |
$ 2,345 |
77 |
$ 11,481 |
26 |
$ 3,191 |
57 |
$ 5,427 |
At March 31, 1999 |
||||||||
60-89 Days |
90 Days or More(1) |
|||||||
|
Principal |
|
Principal |
|||||
(Dollars in thousands) |
||||||||
One-to-four family |
22 |
$ 1,837 |
91 |
$ 10,061 |
||||
Multi-family |
- |
- |
1 |
122 |
||||
Commercial real estate |
- |
- |
- |
- |
||||
Construction and land |
- |
- |
- |
- |
||||
Commercial |
- |
- |
1 |
647 |
||||
Consumer |
2 |
41 |
14 |
182 |
||||
Total |
24 |
$ 1,878 |
107 |
$ 11,012 |
||||
(1) Loans 90 days or more past due are included in non-accrual loans. See "Non-Accrual and Past Due Loans." |
19
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 Company's loan portfolio and the general economy. The Company'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-Cs. 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 Company's allowance for loan losses. Such agencies may require the Company to make additional provisions for loan losses based upon information available at the time of the examination. At March 31, 2001, the Company's allowance for loan losses was $31.0 million or 1.22% of gross loans and 270.20% of non-performing loans compared to $27.8 million or 1.09% of gross loans and 512.96% of non-performing loans at March 31, 2000. At March 31, 2001, the Company had non-performing loans of $11.5 million or 0.45% of gross loans compared to $5.4 million or 0.21% of gross loans at March 31, 2000. The Company will continue to monitor and modify its allowance for loan losses as economic conditions, loss experience, changes in portfolio composition and other factors dictate.
For the Year Ended March 31, |
|||||
2001 |
2000 |
1999 |
1998 |
1997 |
|
(Dollars in thousands) |
|||||
Beginning balance |
$ 27,838 |
26,160 |
26,002 |
27,721 |
19,741 |
Provision for loan losses |
5,004 |
4,000 |
4,020 |
7,099 |
13,661 |
Charge-offs: |
|||||
Real estate: |
|||||
One-to-four family |
(524) |
(1,522) |
(3,361) |
(7,251) |
(4,190) |
Multi-family |
- |
(319) |
(115) |
(316) |
(134) |
Commercial real estate |
(216) |
- |
- |
(188) |
(842) |
Construction and land |
- |
- |
(31) |
(1,012) |
(313) |
Commercial |
(223) |
- |
- |
- |
- |
Consumer |
(898) |
(549) |
(372) |
(343) |
(303) |
Total |
(1,861) |
(2,390) |
(3,879) |
(9,110) |
(5,782) |
Recoveries |
41 |
68 |
17 |
292 |
101 |
Ending balance |
$ 31,022 |
27,838 |
26,160 |
26,002 |
27,721 |
Net charge-offs to average gross |
|
|
|
|
|
20
The following tables set forth the amount of the Company'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, |
|||||||||
2001 |
2000 |
1999 |
|||||||
|
|
Percent of |
|
|
Percent of |
|
|
Percent of |
|
(Dollars in thousands) |
|||||||||
One-to-four family |
$ 1,549 |
5.00% |
52.47% |
$ 3,453 |
12.40% |
60.10% |
$ 5,721 |
21.87% |
66.75% |
Multi-family |
228 |
0.73 |
3.42 |
783 |
2.81 |
3.33 |
2,026 |
7.74 |
3.95 |
Commercial real estate |
891 |
2.87 |
9.17 |
1,593 |
5.72 |
6.61 |
2,048 |
7.83 |
7.04 |
Construction and land |
17,835 |
57.50 |
23.40 |
12,186 |
43.78 |
20.24 |
8,911 |
34.06 |
15.72 |
Commercial |
5,334 |
17.19 |
5.23 |
6,367 |
22.88 |
4.94 |
2,761 |
10.56 |
3.36 |
Consumer |
5,185 |
16.71 |
6.31 |
3,455 |
12.41 |
4.78 |
4,690 |
17.93 |
3.18 |
Unallocated |
- |
- |
- |
1 |
- |
- |
3 |
0.01 |
- |
Total allowance for |
|
|
|
|
|
|
|
|
|
At March 31, |
|||||||||
1998 |
1997 |
||||||||
|
|
Percent of |
|
|
Percent of |
||||
(Dollars in thousands) |
|||||||||
One-to-four family |
$ 10,766 |
41.40% |
75.28% |
$ 13,841 |
49.93% |
79.39% |
|||
Multi-family |
3,133 |
12.05 |
4.99 |
3,410 |
12.30 |
5.77 |
|||
Commercial real estate |
3,898 |
14.99 |
7.39 |
4,648 |
16.77 |
7.26 |
|||
Construction |
4,454 |
17.13 |
9.50 |
4,103 |
14.80 |
5.99 |
|||
Commercial |
3,024 |
11.63 |
0.64 |
56 |
0.20 |
0.16 |
|||
Consumer |
473 |
1.82 |
2.20 |
1,586 |
5.72 |
1.43 |
|||
Unallocated |
254 |
0.98 |
- |
77 |
0.28 |
- |
|||
Total allowance for |
|
|
|
|
|
|
21
Real Estate
At March 31, 2001, the Company had $351,000 of REO, net of allowances, and no
real estate acquired for investment ("REI"). If the Bank acquires any
REO, it is initially recorded at fair value. If there is a further deterioration
in 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 following table sets forth certain information with regard to the Bank's
REO and REI.
At March 31, |
|||||
2001 |
2000 |
1999 |
1998 |
1997 |
|
(Dollars in thousands) |
|||||
REO |
|||||
Properties acquired in |
|
|
|
|
|
Allowance for losses |
(49) |
- |
(445) |
(603) |
(329) |
Total REO, net |
351 |
1,466 |
5,318 |
7,595 |
7,745 |
REI |
|||||
Properties wholly owned |
- |
558 |
558 |
731 |
1,113 |
Mezzanine real estate |
|
|
|
|
|
Allowance for losses |
- |
- |
- |
- |
- |
Total REI, net |
- |
4,928 |
6,371 |
731 |
1,113 |
Total real estate, net |
$ 351 |
6,394 |
11,689 |
8,326 |
8,858 |
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 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, 2001, the Bank's aggregate
investment in trust preferred securities is $46.9 million which represents 20%
of the Bank's total capital.
22
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, 2001, the Bancorp had direct equity
investments of $7.3 million, investments in equity mutual funds of $2.4 million
and investments in non-rated corporate debt obligations (trust preferred debt
securities) of $5.0 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 the 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, 2001, the Company had $61.5 million in investment securities
consisting primarily of investment grade corporate and U.S. agency securities.
The Company's MBS portfolio consists of adjustable-rate securities tied to the
one-year CMT (45% of the portfolio), or six-month LIBOR (1% of the portfolio),
seasoned fixed-rate securities (16% of the portfolio) and five and seven year
balloon securities (38% of the portfolio). At March 31, 2001, the carrying value
of the Company's MBS portfolio totaled $303.0 million. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Comparison of Financial Condition at March 31, 2001 and March 31, 2000."
All of the Company's MBS were insured or guaranteed by either the Government
National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("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 changing 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 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 $82.3 million
CMO portfolio is backed by mortgages insured by FNMA or FHLMC. As with MBS, CMO
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 impact on the yield on the security. Additionally, the structure of many
CMO is such that their cash flows exhibit greater sensitivity to changes in
prepayments than do traditional MBS.
23
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, |
||||||
2001 |
2000 |
1999 |
||||
Carrying |
Fair |
Carrying |
Fair |
Carrying |
Fair |
|
(Dollars in thousands) |
||||||
Held-to-maturity: |
||||||
FHLMC |
$ - |
- |
- |
- |
556 |
560 |
Total held-to-maturity |
- |
- |
- |
- |
556 |
560 |
Available-for-sale: |
||||||
GNMA |
12,221 |
12,221 |
14,879 |
14,879 |
19,650 |
19,650 |
FHLMC |
83,851 |
83,851 |
111,830 |
111,830 |
158,475 |
158,475 |
FNMA |
206,892 |
206,892 |
254,568 |
254,568 |
347,435 |
347,435 |
Total available-for-sale |
302,964 |
302,964 |
381,277 |
381,277 |
525,560 |
525,560 |
Total |
$ 302,964 |
302,964 |
381,277 |
381,277 |
526,116 |
526,120 |
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, |
||||||
2001 |
2000 |
1999 |
||||
Carrying |
Fair |
Carrying |
Fair |
Carrying |
Fair |
|
(Dollars in thousands) |
||||||
Held-to-maturity: |
||||||
U.S. government and |
|
|
|
|
|
|
Total held-to-maturity |
702 |
772 |
701 |
719 |
709 |
716 |
Available-for-sale: |
||||||
Corporate debt securities |
51,808 |
51,808 |
48,315 |
48,315 |
57,765 |
57,765 |
Equity securities: |
|
|
|
|
|
|
Mutual funds |
2,429 |
2,429 |
1,663 |
1,663 |
1,780 |
1,780 |
U.S. government and |
|
|
|
|
|
|
Total available-for-sale |
59,137 |
59,137 |
87,810 |
87,810 |
82,387 |
82,387 |
Total |
$ 59,839 |
59,909 |
88,511 |
88,529 |
83,096 |
83,103 |
24
The following table sets forth certain information regarding the carrying and fair values of the Company's collateralized mortgage obligations at the dates indicated.
At March 31, |
||||||
2001 |
2000 |
1999 |
||||
Carrying |
Fair |
Carrying |
Fair |
Carrying |
Fair |
|
(Dollars in thousands) |
||||||
Available-for-sale: |
||||||
Collateralized mortgage |
||||||
FHLMC |
$ 57,236 |
57,236 |
58,254 |
58,254 |
70,359 |
70,359 |
FNMA |
25,079 |
25,079 |
27,399 |
27,399 |
32,341 |
32,341 |
Total |
$ 82,315 |
82,315 |
85,653 |
85,653 |
102,700 |
102,700 |
25
The table below sets forth certain information regarding the carrying value, weighted average yields and maturities of the Company's mortgage-backed securities, investment securities and collateralized mortgage obligations as of March 31, 2001. The table presented represents stated maturities and does not reflect scheduled principal payments.
At March 31, 2001 |
||||||||||
|
More than One |
More than Five |
More than Ten |
|
||||||
|
Weighted |
|
Weighted |
|
Weighted |
|
Weighted |
|
Weighted |
|
(Dollars in thousands) |
||||||||||
Mortgage-backed securities: |
||||||||||
Available-for-sale: |
||||||||||
FHLMC |
$ - |
-% |
$ 68,857 |
6.31% |
$ 512 |
9.27% |
$ 14,482 |
7.65% |
$ 83,851 |
6.56% |
FNMA |
- |
- |
132,255 |
6.31 |
9,540 |
7.11 |
65,097 |
7.12 |
206,892 |
6.60 |
GNMA |
- |
- |
49 |
9.00 |
- |
- |
12,172 |
7.58 |
12,221 |
7.59 |
Total mortgage-backed securities |
$ - |
-% |
$ 201,161 |
6.31% |
$ 10,052 |
7.22% |
$ 91,751 |
7.26% |
$ 302,964 |
6.62% |
Investment securities: |
||||||||||
Held-to-maturity: |
||||||||||
U.S. government and Federal agency |
|
|
|
|
|
|
|
|
|
|
Total held-to-maturity |
- |
- |
- |
- |
702 |
6.80 |
- |
- |
702 |
6.80 |
Available-for-sale: |
||||||||||
Corporate debt securities |
- |
- |
10,024 |
7.03 |
31,832 |
6.49 |
9,952 |
7.33 |
51,808 |
6.76 |
Equity securities: |
||||||||||
Direct (1) |
- |
- |
- |
- |
- |
- |
4,900 |
16.00 |
4,900 |
13.22 |
Mutual funds (1) |
- |
- |
- |
- |
- |
- |
2,429 |
13.22 |
2,429 |
- |
Total available-for-sale |
- |
- |
10,024 |
7.03 |
31,832 |
6.49 |
17,281 |
10.62 |
59,137 |
7.79 |
Total investment securities |
$ - |
-% |
$ 10,024 |
7.03% |
$ 32,534 |
6.49% |
$ 17,281 |
10.62% |
$ 59,839 |
7.78% |
Collateralized mortgage obligations: |
||||||||||
Available-for-sale: |
||||||||||
FHLMC |
$ - |
-% |
$ - |
-% |
$ - |
-% |
$ 47,081 |
6.70% |
$ 47,081 |
6.70% |
FNMA |
- |
- |
- |
- |
- |
- |
35,234 |
6.59 |
35,234 |
6.59 |
Total collateralized mortgage obligations |
$ - |
-% |
$ - |
-% |
$ - |
-% |
$ 82,315 |
6.65% |
$ 82,315 |
6.65% |
(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". |
26
Sources of Funds
For the Year Ended March 31, |
|||
2001 |
2000 |
1999 |
|
(Dollars in thousands) |
|||
Net deposits (withdrawals) |
$ 22,662 |
16,047 |
24,561 |
Sale of branch deposits |
- |
(45,859) |
- |
Interest credited on deposit accounts |
92,065 |
92,808 |
78,153 |
Total increase in deposit accounts |
$ 114,727 |
62,996 |
102,714 |
At March 31, 2001, the Bank had $427.3 million in certificate accounts in amounts of $100,000 or more maturing as follows:
|
|
Weighted |
||
(Dollars in thousands) |
||||
Three months or less |
$ 70,130 |
6.34% |
||
Over three through six months |
203,256 |
6.43 |
||
Over six through 12 months |
108,163 |
6.06 |
||
Over 12 months |
45,716 |
6.41 |
||
Total |
$ 427,265 |
6.32 |
27
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, |
|||||||||
2001 |
2000 |
1999 |
|||||||
|
Percent |
|
|
Percent |
|
|
Percent |
|
|
(Dollars in thousands) |
|||||||||
Passbook accounts |
$ 128,955 |
6.6% |
2.14% |
$ 141,103 |
7.6% |
2.24% |
$ 147,702 |
8.3% |
2.31% |
Money market savings accounts |
385,973 |
20.0 |
4.84 |
401,394 |
21.6 |
4.39 |
290,917 |
16.3 |
4.51 |
NOW accounts |
155,739 |
8.1 |
1.25 |
141,708 |
7.7 |
0.96 |
133,102 |
7.5 |
0.96 |
Non-interest bearing accounts |
83,325 |
4.3 |
- |
71,044 |
3.8 |
- |
55,028 |
3.1 |
- |
Total core deposits |
753,992 |
39.0 |
3.10 |
755,249 |
40.7 |
2.93 |
626,749 |
35.2 |
2.84 |
Certificate accounts: |
|||||||||
Variable-rate certificates of deposit |
23,354 |
1.2 |
5.74 |
30,790 |
1.6 |
4.93 |
31,788 |
1.8 |
4.98 |
Step-up certificates of deposit |
43,453 |
2.3 |
5.71 |
55,206 |
3.0 |
4.75 |
76,681 |
4.3 |
5.12 |
Less than 6 months |
82,876 |
4.3 |
5.93 |
108,842 |
5.9 |
5.76 |
47,040 |
2.7 |
4.61 |
6 through 11 months |
184,211 |
9.5 |
5.98 |
279,592 |
15.0 |
5.07 |
290,462 |
16.3 |
5.22 |
12 though 23 months |
665,937 |
34.5 |
6.22 |
458,097 |
24.7 |
5.08 |
533,774 |
30.0 |
5.43 |
24 months through 47 months |
126,009 |
6.5 |
5.79 |
98,429 |
5.3 |
5.42 |
83,834 |
4.7 |
5.67 |
48 months or greater |
52,604 |
2.7 |
5.77 |
68,356 |
3.7 |
5.56 |
85,498 |
4.8 |
5.84 |
Other |
282 |
0.0 |
6.60 |
1,942 |
0.1 |
6.02 |
4,122 |
0.2 |
6.19 |
Total certificate accounts |
1,178,726 |
61.0 |
6.07 |
1,101,254 |
59.3 |
5.19 |
1,153,199 |
64.8 |
5.35 |
Total average deposits |
$1,932,718 |
100.0% |
4.91% |
$1,856,503 |
100.0% |
4.27% |
$1,779,948 |
100.0% |
4.47% |
28
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, 2001.
|
Period to Maturity from March 31, 2001 |
March 31, |
||||||||
Less than |
One to |
Two to |
Three to |
Four to |
More than |
|
|
|
||
(Dollars in thousands) |
||||||||||
0.00 to 4.00% |
$ 2 |
- |
- |
- |
- |
- |
2 |
287 |
501 |
|
4.01 to 5.00% |
74,309 |
5,756 |
3,298 |
1,145 |
257 |
7 |
84,772 |
212,182 |
498,901 |
|
5.01 to 6.00% |
308,930 |
38,203 |
6,956 |
7,943 |
3,988 |
226 |
366,246 |
731,502 |
571,844 |
|
6.01 to 7.00% |
683,772 |
33,597 |
7,394 |
3,263 |
6,981 |
138 |
735,145 |
223,341 |
28,690 |
|
7.01 to 8.00% |
22,369 |
8,351 |
475 |
- |
- |
- |
31,195 |
27 |
161 |
|
8.01 to 9.00% |
- |
- |
- |
- |
- |
- |
- |
- |
- |
|
Over 9.01% |
- |
- |
- |
- |
- |
- |
- |
- |
127 |
|
Total |
$1,089,382 |
85,907 |
18,123 |
12,351 |
11,226 |
371 |
1,217,360 |
|
1,167,339 |
1,100,224 |
29
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 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 FHLB.30
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, |
|||
2001 |
2000 |
1999 |
|
(Dollars in thousands) |
|||
FHLB advances: |
|||
Average balance outstanding |
$ 771,869 |
792,778 |
855,197 |
Maximum amount outstanding at any |
|
|
|
Balance outstanding at end of year (1) |
575,000 |
884,000 |
764,000 |
Weighted average interest rate during |
|
|
|
Weighted average interest rate end |
|
|
|
Reverse repurchase agreements: |
|||
Average balance outstanding |
$ - |
43,750 |
50,000 |
Maximum amount outstanding at any |
|
|
|
Balance outstanding at end of year (1) |
- |
- |
50,000 |
Weighted average interest rate during |
|
|
|
Weighted average interest rate end |
|
|
|
(1) Included in the balance of FHLB advances outstanding at March 31, 2001 are putable borrowings of $165.0 million with initial put dates ranging from April 16, 2001 to February 12, 2003. The weighted average term to maturity for these putable borrowings is 28 months and the weighted average term to first put date is 4 months. |
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, 2001, PFS had net earnings of
$67,000.
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, 2001, PFFFS had net earnings of $99,000.
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,
2001, DSI had minimal activity and net earnings of $3,000.
31
Personnel
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 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 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.
32
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 4% leverage (core) capital ratio (or a 3% leverage (core) capital ratio
for those institutions with the highest rating on the CAMELS financial
institution rating system) and an 8% risk-based capital ratio. 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.
33
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 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, 2001, 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, 2001.
|
|
|
Actual |
Required |
|
(Dollars in thousands) |
|||||
Tangible |
$ 237,838 |
43,076 |
194,762 |
8.28% |
1.50% |
Core (Leverage) |
237,838 |
114,869 |
122,969 |
8.28 |
4.00 |
Risk-based |
262,994 |
165,449 |
97,545 |
12.72 |
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 CAMELS 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. 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.
34
In addition to the assessment for deposit insurance, institutions are required
to pay on bonds issued in the late 1980s by the Federal Financing Corporation to
recapitalize the predecessor to the SAIF (the "FICO Bonds"). During
2000, FICO Bond payments for SAIF members and Bank Insurance Fund
("BIF" - the deposit insurance fund that covers most commercial bank
deposits) members approximated 2.07 basis points. The BIF and SAIF have equal
sharing of FICO Bond payments between the members of both insurance funds.
The Bank's assessment rate for fiscal 2001 ranged from 1.9 to 3.0 basis points
and the premium paid for this period was $661,000 all of which was paid towards
the FICO 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. 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, 2001, the Bank's limit on loans to one borrower was $39.4 million. At
March 31, 2001, the Bank's largest aggregate outstanding balance of loans was
$36.1 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" (i.e,
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,
2001, the Bank maintained 76.11% 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."
35
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
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, 2001, 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, 2001. Monetary
penalties may be imposed for failure to meet these liquidity requirements. The
Bank's liquidity ratio at March 31, 2001 was 6.25%, which exceeded the
applicable requirement. The Bank has never been subject to monetary penalties
for failure to meet its liquidity requirements. Effective March 14, 2001, the
OTS adopted an interim rule eliminating the statutory liquidity requirement. In
its place, the OTS adopted a policy, consistent with that of the other Federal
banking regulatory agencies that liquidity be maintained at a level which
provides for safe and sound banking practices and financial flexibility.
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, 2001 totaled $509,000.
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. 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.
36
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.
Recent Developments. On November 12, 1999, the Gramm-Leach-Bliley
Financial Modernization Act of 1999 became law. The Modernization Act contains
new financial privacy provisions that will generally prohibit financial
institutions, including the Company and the Bank, from disclosing nonpublic
personal financial information to third parties unless customers have the
opportunity to "opt out" of the disclosure. The Modernization Act also
allows, among other things, for bank holding companies meeting certain
management, capital and CRA standards to engage in a substantially broader range
of nonbanking activities than were previously permissible, including insurance
underwriting and making merchant banking investments in commercial and financial
companies. The Modernization Act further allows insurers and other financial
services companies to acquire banks; removes various restrictions that currently
apply to bank holding company ownership of securities firms and mutual fund
advisory companies; and establishes the overall regulatory structure applicable
to bank holding companies that also engage in insurance and securities
operations.
Because the Modernization Act permits banks, securities firms and insurers to
combine and to offer a wide variety of financial products and services, many of
these resulting companies will be larger and have more resources than the
Company. Should these companies choose to compete directly with the Company in
its target markets, the Company's results of operations could be adversely
impacted.
Federal Reserve System
37
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company reports its income on a fiscal 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 1994 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, 2001) 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.
38
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 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.
As of March 31, 2001, PFF Bank & Trust was conducting its business through
24 banking branches, two trust offices (one of which is domiciled in one of the
Bank's branch banking buildings), a regional loan center, a satellite loan
office, a human resources 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 24 banking branches, 17 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 separate trust office, the
administrative office and land on which they are located are leased. The
regional loan center and the land on which it is located are owned and the
satellite loan office is leased. The human resources and training center and the
records center and land occupied by them are owned.
As of March 31, 2001, the net book value of owned real estate including the
branch located on leased land totaled $18.3 million. The net book value of
leased offices was $2.0 million. The net book value of furniture, fixtures and
electronic data processing equipment was $4.6 million.
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.
39
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. As of March 31,
2001, there were approximately 4800 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, 2001 |
|||
First Quarter |
$18.25 |
12.25 |
18.25 |
Second Quarter |
22.50 |
16.63 |
21.75 |
Third Quarter |
23.75 |
15.75 |
20.88 |
Fourth Quarter |
25.00 |
19.25 |
22.94 |
Year Ended March 31, 2000 |
|||
First Quarter |
$19.75 |
15.38 |
18.75 |
Second Quarter |
21.38 |
18.81 |
20.63 |
Third Quarter |
23.75 |
19.25 |
19.38 |
Fourth Quarter |
19.75 |
13.50 |
15.50 |
The Company initiated a cash dividend program on its common stock during the fiscal year ended March 31, 2000. Dividend activity during the fiscal year ended March 31, 2001 was as follows:
Amount |
||
Record Date |
Payment Date |
Per share |
June 15, 2000 |
June 30, 2000 |
$.06 |
September 15, 2000 |
September 29, 2000 |
$.06 |
December 15, 2000 |
December 29, 2000 |
$.06 |
March 15, 2001 |
March 30, 2001 |
$.06 |
The Company neither paid nor declared any dividends prior to September 1999.
40
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, |
|||||
2001 |
2000 |
1999 |
1998 |
1997 |
|
(Dollars in thousands) |
|||||
Selected Balance Sheet Data: |
|||||
Total assets |
$2,886,431 |
3,034,023 |
2,935,980 |
2,812,384 |
2,535,767 |
Investment securities held-to-maturity |
|
|
|
|
|
Investment securities available-for-sale |
|
|
|
|
|
Mortgage-backed securities held-to-maturity |
|
|
|
|
|
Mortgage-backed securities available-for-sale |
|
|
|
|
|
Collateralized mortgage obligations available-for-sale |
|
|
|
|
|
Trading securities |
2,375 |
4,318 |
4,271 |
- |
- |
Investment in real estate |
- |
4,928 |
6,371 |
731 |
1,113 |
Loans held for sale |
583 |
7,362 |
3,531 |
701 |
736 |
Loans receivable, net(1) |
2,285,307 |
2,326,702 |
2,026,081 |
1,827,614 |
1,819,209 |
Deposits |
2,021,261 |
1,906,534 |
1,843,538 |
1,740,824 |
1,711,049 |
FHLB advances and other borrowings |
|
|
|
|
|
Stockholders' equity, substantially restricted |
|
|
|
|
|
(continued on next page) |
41
For the Year Ended March 31, |
|||||
2001 |
2000 |
1999 |
1998 |
1997 |
|
(Dollars in thousands, except per share amounts) |
|||||
Selected Operating Data: |
|||||
Interest income |
$ 240,356 |
215,328 |
206,955 |
191,368 |
168,515 |
Interest expense |
143,471 |
126,539 |
130,356 |
118,517 |
99,306 |
Net interest income |
96,885 |
88,789 |
76,599 |
72,851 |
69,209 |
Provision for loan losses |
5,004 |
4,000 |
4,020 |
7,099 |
13,661 |
Net interest income after provision for loan losses |
|
|
|
|
|
Non-interest income |
13,912 |
17,252 |
15,548 |
14,280 |
10,227 |
Non-interest expense: |
|||||
General and administrative expense |
|
|
|
|
|
SAIF recapitalization assessment |
- |
- |
- |
- |
10,900 |
Foreclosed real estate operations, net |
|
|
|
|
|
Total non-interest expense |
56,742 |
55,228 |
54,915 |
52,033 |
59,956 |
Earnings before income taxes |
49,051 |
46,813 |
33,212 |
27,999 |
5,819 |
Income taxes |
20,791 |
20,215 |
14,208 |
12,019 |
3,087 |
Net earnings |
$ 28,260 |
26,598 |
19,004 |
15,980 |
2,732 |
Basic earnings per share (as restated) (2) |
|
|
|
|
|
Diluted earnings per share (as restated) (2) |
|
|
|
|
|
(continued on next page) |
42
At or for the Year Ended March 31, |
||||||||
2001 |
2000 |
1999 |
1998 |
1997 |
||||
(Dollars in thousands) |
||||||||
Performance Ratios (3): |
||||||||
Return on average assets |
0.95% |
0.90 |
0.64 |
0.60 |
0.12 |
|||
Return on average equity |
11.81 |
11.91 |
7.92 |
6.07 |
0.96 |
|||
Average equity to average assets |
8.04 |
7.54 |
8.08 |
9.87 |
12.10 |
|||
Equity to total assets at end of period |
8.94 |
7.31 |
8.27 |
9.04 |
10.47 |
|||
Net interest spread (4) |
2.94 |
2.83 |
2.47 |
2.41 |
2.52 |
|||
Effective interest spread (5) |
3.32 |
3.10 |
2.71 |
2.82 |
3.05 |
|||
Average interest-earning assets to average interest-bearing liabilities |
|
|
|
|
|
|||
Core efficiency ratio (6) |
50.82 |
53.43 |
60.01 |
59.18 |
62.16 |
|||
General and administrative expense to average assets |
|
|
|
|
|
|||
Regulatory Capital Ratios (3)(7): |
||||||||
Tangible capital |
8.28 |
6.77 |
6.95 |
7.10 |
8.46 |
|||
Core capital |
8.28 |
6.77 |
6.95 |
7.10 |
8.46 |
|||
Risk-based capital |
12.72 |
11.00 |
12.52 |
14.17 |
16.54 |
|||
Asset Quality Ratios (3): |
||||||||
Non-performing loans as a percent of gross loans receivable (8)(9) |
|
|
|
|
|
|||
Non-performing assets as a percent of total assets (9) |
|
|
|
|
|
|||
Allowance for loan losses as a percent of gross loans receivable (8) |
|
|
|
|
|
|||
Allowance for loan losses as a percent of non-performing loans (9) |
|
|
|
|
|
|||
Number of full-service customer facilities |
|
|
|
|
|
|||
Loan originations |
$1,049,535 |
1,268,324 |
987,604 |
557,428 |
499,667 |
|||
(1) The allowances for loan losses at March 31, 2001, 2000, 1999, 1998, and 1997 were $31.0 million $27.8 million, $26.2 million, $26.0 million, and $27.7 million, respectively. | ||||||||
(2) See Note 24 of the accompanying Notes to the Consolidated Financial Statements regarding the restatement of the earnings per share data. | ||||||||
(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) Core efficiency ratio represents general and administrative expense as a percent of net interest income plus core non-interest income. Core non-interest income excludes trading securities activity, fiscal 2000 gain on branch sale and fiscal 2000 marketable equity security impairment writedown. | ||||||||
(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. | ||||||||
(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." |
43
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
.44
|
March 31, 2001 |
||||||||
|
More than 3 |
More than 6 |
More than 12 |
More than 3 |
|
|
|
||
(Dollars in thousands) |
|||||||||
Interest-earning assets: |
|||||||||
Cash, investment securities, collateralized mortgage obligations and FHLB stock (1) |
|
|
|
|
|
|
|
|
|
Loans and mortgage-backed |
|||||||||
Mortgage-backed securities |
64,908 |
51,976 |
82,519 |
83,018 |
16,703 |
3,840 |
302,964 |
302,964 |
|
Loans receivable, net |
1,168,567 |
338,956 |
255,543 |
292,424 |
174,032 |
56,368 |
2,285,890 |
2,297,168 |
|
Total loans and mortgage-backed |
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
1,423,400 |
390,932 |
338,062 |
375,442 |
190,735 |
112,459 |
2,831,030 |
2,842,373 |
|
Non-interest earning assets |
- |
- |
- |
- |
- |
55,401 |
55,401 |
55,401 |
|
Total assets |
$ 1,423,400 |
390,932 |
338,062 |
375,442 |
190,735 |
167,860 |
2,886,431 |
2,897,774 |
|
Interest-bearing liabilities: |
|||||||||
Fixed maturity deposits |
$ 397,098 |
398,857 |
293,429 |
104,030 |
23,578 |
368 |
1,217,360 |
1,228,086 |
|
Core deposits (2) |
201,781 |
201,782 |
400,338 |
- |
- |
- |
803,901 |
803,898 |
|
Total deposits |
598,879 |
600,639 |
693,767 |
104,030 |
23,578 |
368 |
2,021,261 |
2,031,984 |
|
Borrowings (3) |
305,000 |
105,000 |
140,000 |
25,000 |
- |
- |
575,000 |
575,465 |
|
Total interest-bearing liabilities |
903,879 |
705,639 |
833,767 |
129,030 |
23,578 |
368 |
2,596,261 |
2,607,449 |
|
Non-interest bearing liabilities |
- |
- |
- |
- |
- |
32,172 |
32,172 |
32,172 |
|
Equity |
- |
- |
- |
- |
- |
257,998 |
257,998 |
257,998 |
|
Total liabilities and stockholders' equity |
$ 903,879 |
705,639 |
833,767 |
129,030 |
23,578 |
290,538 |
2,886,431 |
2,897,619 |
|
Interest sensitivity gap |
$ 519,521 |
(314,707) |
(495,705) |
246,412 |
167,157 |
(122,678) |
- |
||
Cumulative interest sensitivity gap |
519,521 |
204,814 |
(290,891) |
(44,479) |
122,678 |
- |
- |
||
Cumulative interest sensitivity gap as a percentage of total assets |
|
|
|
|
|
|
|||
Cumulative interest-earning assets as a percentage of cumulative interest-bearing liabilities |
|
|
|
|
|
|
|||
(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 20%-33%. | |||||||||
(3) Putable borrowings are presented based upon their first put date. |
45
The Company's one year GAP at March 31, 2001, was negative 10.08% (i.e.,
more interest bearing liabilities reprice within one year than interest-earning
assets); this compares with positive 2.96% at March 31, 2000. The change in the
Company's one-year repricing GAP between March 31, 2000 and 2001 is
attributable, in part, to a change in the presentation of core deposits from
decay rates with lives of more than five years to recognition that all core
deposits are subjected to repricing within one year.
Although the table indicates the Company is more exposed to declining interest
rates in the short term, 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 and 200 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 tables below indicate the results of the Company's internal modeling
of its balance sheet as of March 31, 2001 and 2000. 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.
March 31, 2001 |
||
Percentage Change |
||
Change in Interest Rates |
|
|
200 |
1.10% |
13.27% |
100 |
1.21 |
9.16 |
(100) |
(0.58) |
(16.87) |
(200) |
(0.87) |
(37.06) |
(1) This percentage change represents the impact to net interest income for the period from April 1, 2001 through March 31, 2002 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. |
The results from the asset/liability simulation model indicate that the Company's net interest income would benefit, or increase, during periods of rising rates, and decline during periods of declining rates. This is a direct result of the success of the Company's strategic concentration on the Four-Cs and core deposits. The Four-Cs generally have shorter durations, quicker response to rate changes, and are associated with more responsive indices than traditional single family loans. Additionally, core deposits have relatively low sensitivity to movements in market rates compared to CDs.
46
March 31, 2000 |
||
Percentage Change |
||
Change in Interest Rates |
|
|
200 |
(8.43)% |
(56.43)% |
100 |
(2.06) |
(27.47) |
(100) |
0.44 |
26.71 |
(200) |
0.14 |
53.08 |
(1) This percentage change represents the impact to net interest income for the period from April 1, 2000 through March 31, 2001 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 should
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 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,
2001, the Bank's sensitivity measure, as calculated by the OTS, was a negative
1.80%. This represents a decrease in sensitivity of 97 basis points from the
March 31, 2000 results.
47
Average Balance Sheets
The following table sets forth certain information
relating to the Company for the years ended March 31, 2001, 2000 and 1999. 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, |
|||||||||
2001 |
2000 |
1999 |
|||||||
|
|
Average |
|
|
Average |
|
|
Average |
|
(Dollars in thousands) |
|||||||||
Assets: |
|||||||||
Interest-earning assets: |
|||||||||
Interest-earning deposits and short-term investments |
$ 32,979 |
$ 2,011 |
6.10% |
$ 35,688 |
$ 1,656 |
4.64% |
$ 40,037 |
$ 1,921 |
4.80% |
Investment securities, net |
88,290 |
6,386 |
7.23 |
92,208 |
5,935 |
6.44 |
102,626 |
6,633 |
6.46 |
Mortgage-backed securities, net |
338,956 |
22,274 |
6.57 |
437,549 |
27,910 |
6.38 |
596,185 |
37,471 |
6.29 |
Collateralized mortgage obligations, net |
86,267 |
6,393 |
7.41 |
92,637 |
5,893 |
6.36 |
167,538 |
10,209 |
6.09 |
Loans receivable, net |
2,323,919 |
199,918 |
8.60 |
2,162,492 |
171,618 |
7.94 |
1,872,869 |
148,013 |
7.90 |
FHLB stock |
46,094 |
3,374 |
7.32 |
43,752 |
2,316 |
5.29 |
47,778 |
2,708 |
5.67 |
Total interest-earning assets |
2,916,505 |
240,356 |
8.24 |
2,864,326 |
215,328 |
7.52 |
2,827,033 |
206,955 |
7.32 |
Non-interest-earning assets |
59,426 |
98,750 |
139,799 |
||||||
Total assets |
$2,975,931 |
$2,963,076 |
$2,966,832 |
||||||
Liabilities and Stockholders' Equity: |
|||||||||
Interest-bearing liabilities: |
|||||||||
Passbook accounts |
$ 128,955 |
2,756 |
2.14 |
$ 141,103 |
3,156 |
2.24 |
$ 147,702 |
3,405 |
2.31 |
Money market savings accounts |
385,973 |
18,684 |
4.84 |
401,394 |
17,649 |
4.40 |
290,917 |
13,131 |
4.51 |
NOW and other demand deposit accounts |
239,064 |
1,957 |
0.82 |
212,752 |
1,366 |
0.64 |
188,130 |
1,293 |
0.69 |
Certificate accounts |
1,178,726 |
71,592 |
6.07 |
1,101,254 |
57,149 |
5.19 |
1,153,199 |
61,705 |
5.35 |
Total |
1,932,718 |
94,989 |
4.91 |
1,856,503 |
79,320 |
4.27 |
1,779,948 |
79,534 |
4.47 |
FHLB advances and other borrowings |
774,750 |
48,482 |
6.26 |
840,091 |
47,219 |
5.62 |
908,298 |
50,822 |
5.60 |
Total interest-bearing liabilities |
2,707,468 |
143,471 |
5.30 |
2,696,594 |
126,539 |
4.69 |
2,688,246 |
130,356 |
4.85 |
Non-interest-bearing liabilities |
29,215 |
43,157 |
38,729 |
||||||
Total liabilities |
2,736,683 |
2,739,751 |
2,726,975 |
||||||
Stockholders' equity |
239,248 |
223,325 |
239,857 |
||||||
Total liabilities and stockholders' equity |
$2,975,931 |
$2,963,076 |
$2,966,832 |
||||||
Net interest income |
$ 96,885 |
$ 88,789 |
$ 76,599 |
||||||
Net interest spread |
2.94 |
2.83 |
2.47 |
||||||
Effective interest spread |
3.32 |
3.10 |
2.71 |
||||||
Ratio of interest-earning assets to interest- |
|
|
|
48
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, 2001 |
Year Ended March 31, 2000 |
|||||||
Increase (Decrease) |
Increase (Decrease) |
|||||||
|
|
Rate/ |
|
|
|
Rate/ |
|
|
(Dollars in thousands) |
||||||||
Interest-earning assets: |
||||||||
Interest-earning deposits and short-term investments |
$ (126) |
520 |
(39) |
355 |
(209) |
(63) |
7 |
(265) |
Investment securities, net |
(252) |
731 |
(28) |
451 |
(673) |
(27) |
2 |
(698) |
Mortgage-backed securities, net |
(6,290) |
837 |
(183) |
(5,636) |
(9,970) |
558 |
(149) |
(9,561) |
Collateralized mortgage obligations, net |
(405) |
973 |
(68) |
500 |
(4,564) |
449 |
(201) |
(4,316) |
Loans receivable, net |
12,817 |
14,329 |
1,154 |
28,300 |
22,889 |
620 |
96 |
23,605 |
FHLB stock |
124 |
888 |
46 |
1,058 |
(228) |
(179) |
15 |
(392) |
Total interest-earning assets |
5,868 |
18,278 |
882 |
25,028 |
7,245 |
1,358 |
(230) |
8,373 |
Interest-bearing liabilities: |
||||||||
Passbook accounts |
(272) |
(145) |
17 |
(400) |
(152) |
(101) |
4 |
(249) |
Money market savings accounts |
(679) |
1,769 |
(55) |
1,035 |
4,987 |
(340) |
(129) |
4,518 |
NOW and other demand deposit accounts |
168 |
380 |
43 |
591 |
169 |
(85) |
(11) |
73 |
Certificate accounts |
4,021 |
9,732 |
690 |
14,443 |
(2,779) |
(1,860) |
83 |
(4,556) |
FHLB advances and other borrowings |
(3,672) |
5,358 |
(423) |
1,263 |
(3,830) |
268 |
(41) |
(3,603) |
Total interest-bearing liabilities |
(434) |
17,094 |
272 |
16,932 |
(1,605) |
(2,118) |
(94) |
(3,817) |
Change in net interest income |
$ 6,302 |
1,184 |
610 |
8,096 |
8,850 |
3,476 |
(136) |
12,190 |
49
Comparison of Operating Results for the Years Ended March 31,
2001 and March 31, 2000
General
50
Interest Expense
51
Income Taxes
Income Taxes were $20.8 million for fiscal 2001 compared to $20.2 million for
fiscal 2000. The effective income tax rate was 42.4% for fiscal 2001 compared to
43.2% for fiscal 2000.
Comparison of Financial Condition at March 31, 2001 and March 31, 2000
Total assets
decreased $147.6 million or 5% from $3.03 billion at March 31, 2000 to $2.89
billion at March 31, 2001. Loans receivable, net decreased $41.4 million from
$2.33 billion at March 31, 2000 to $2.29 billion at March 31, 2001. Loan
originations were $1.05 billion for fiscal 2001 compared to $1.27 billion for
fiscal 2000. The decrease in originations between fiscal 2000 and 2001 reflects
the Bank's de-emphasis on 1-4 family residential mortgage lending. The
weighted average initial contract rate for total loan originations was 10.07%
for fiscal 2001, compared to 8.25% for fiscal 2000. Investment securities (as
defined earlier) decreased $110.3 million from $555.4 million at March 31, 2000
to $445.1 million at March 2001. The $16.4 million increase in cash and cash
equivalents from $35.1 million at March 31, 2000 to $51.5 million at March 31,
2001 reflects the acceleration in cash inflows during the fourth quarter of
fiscal 2001 arising from increased levels of loan and investment security
pre-payments.
Total liabilities
decreased $183.8 million or 7% from $2.81 billion March 31, 2000 to $2.63
billion at March 31, 2001. Total deposits increased $114.7 million from $1.91
billion at March 31, 2000 to $2.02 billion at March 31, 2001. Core deposits
increased $64.7 million during fiscal 2001 to $803.9 million or 40 percent of
total deposits at March 31, 2001. FHLB advances and other borrowings decreased
$309.0 million from $884.0 million at March 31, 2000 to $575.0 million at March
31, 2001. The decrease in FHLB advances and other borrowings was facilitated by
the strong deposit activity as well as the Bank's strategy of de-emphasizing
wholesale leverage. In response to the acceleration in cash inflows from loans
and securities, the Bank pre-paid $65.0 million of FHLB advances and other
borrowings during the fourth quarter of fiscal 2001.
Total stockholders'
equity increased $36.2 million from $221.8 million at March 31, 2000 to $258.0
million at March 31, 2001. The $36.2 million increase is comprised principally
of a $24.2 million increase in retained earnings, substantially restricted, a
$4.4 million decrease in unearned stock-based compensation and a $7.1 million
decrease in accumulated other comprehensive loss on securities
available-for-sale. The $24.2 million increase in retained earnings,
substantially restricted was attributable to the Company's net earnings of
$28.3 million for fiscal 2001 partially offset by 1) $2.6 million attributable
to the amount paid by the Company to repurchase 145,000 shares of its common
stock in excess of the original issuance price of the stock and 2) $3.2 million
of cash dividends declared during fiscal 2001. The $4.4 million decrease in
unearned stock-based compensation was attributable to the amortization of shares
under the Company's ESOP ($1.8 million) and 1996 Incentive Plan ($2.6
million).
52
Comparison of Operating Results for the Years Ended March 31, 2000 and March 31, 1999
53
The increase in the average balance of interest-bearing liabilities was
comprised of a $76.6 million increase in the average balance of deposits from
$1.78 billion for fiscal 1999 to $1.86 billion for fiscal 2000, partially offset
by a $68.7 million decrease in the average balance of FHLB advances and other
borrowings from $905.2 million for fiscal 1999 to $836.5 million for fiscal
2000. The $76.6 million increase in the average balance of deposits during
fiscal 2000 is net of $45.9 million of deposits sold during the fiscal year.
The average cost of deposits decreased from 4.47% for fiscal 1999 to 4.27% for
fiscal 2000. Contributing to the decrease in the average cost of deposits was a
$128.5 million increase in the average balance of core deposits from $626.7
million for fiscal 1999 to $755.2 million for fiscal 2000. The average cost of
FHLB advances and other borrowings was 5.64% for fiscal 2000 compared to 5.60%
for fiscal 1999.
Provision for Loan Losses
Provision for loan losses was $4.0 million for both fiscal 1999 and 2000. The
consistency in provision for loan losses between fiscal 1999 and 2000 reflects
the relationship between two factors. The Bank is experiencing improvement in
its overall level of asset quality and has assessed an improvement in general
economic conditions and property valuations in its market area. At the same
time, the Bank's emphasis on the Four-Cs is changing the overall risk profile
of the Bank's loan portfolio. Non-performing loans were $5.4 million or 0.21%
of gross loans receivable at March 31, 2000 compared to $11.0 million or 0.50%
of gross loans receivable at March 31, 1999. The allowance for loan losses was
$27.8 million or 1.09% of gross loans receivable at March 31, 2000 compared to
$26.2 million or 1.18% of gross loans receivable at March 31, 1999.
Non-Interest Income
Non-interest income was $17.3 million for fiscal 2000 compared to $15.5 million
for fiscal 1999, an increase of $1.7 million or 11%. The increase was
attributable principally to a $1.5 million gain on branch sale during fiscal
2000. Deposit and related fees were $9.1 million for fiscal 2000 compared to
$8.6 million for fiscal 1999. Trust fees were $2.1 million for fiscal 2000
compared to $1.9 million for fiscal 1999. Gain (loss) on sales of assets was
($1.0 million) for fiscal 2000 compared to $698,000 for fiscal 1999. The $1.0
million loss for fiscal 2000 includes a $995,000 writedown of a marketable
equity security deemed to be other than temporarily impaired. The increase in
loan and servicing fees from $2.8 million for fiscal 1999 to $3.5 million for
fiscal 2000 is attributable, in part, to a $445,000 prepayment fee received on a
commercial loan during fiscal 2000. The net gain from trading activity was $1.7
million for fiscal 2000 compared to $569,000 for fiscal 1999.
Non-Interest Expense
Non-interest expense was $55.2 million for fiscal 2000 compared to $54.9
million for fiscal 1999. General and administrative expense increased $546,000
or 1% from $55.0 million or 1.85% of average assets for fiscal 1999 to $55.5
million or 1.87% of average assets for fiscal 2000. Compensation and benefits
expense increased $1.5 million from $28.0 million for fiscal 1999 to $29.5
million for fiscal 2000. Included in compensation and benefits expense are
non-cash charges of $3.1 million and $2.1 million associated with the Bank's
ESOP and 1996 Incentive Plan. Occupancy and equipment expense was $11.7 million
for fiscal 2000 compared to $12.1 million for fiscal 1999. The $408,000 decrease
in occupancy and equipment expense between fiscal 1999 and fiscal 2000 was
attributable principally to a reduction in expenditures and reduced
depreciation. The $930,000 decrease in other non-interest expense from $10.2
million for fiscal 1999 to $9.2 million for fiscal 2000 was due primarily to a
$433,000 reduction in office supplies and expense resulting from renegotiation
and consolidation of telecommunications services.
Income Taxes
Income taxes were $20.2 million for fiscal 2000 compared to $14.2 million for
fiscal 1999. The effective income tax rate for fiscal 2000 was 43.2% compared to
an effective tax rate of 42.8% for fiscal 1999.
54
Liquidity and Capital Resources
55
The Company currently has no material contractual obligations or
commitments for capital expenditures. See "Item 1 - Description of Business
- General." At March 31, 2001 the Bank had outstanding commitments to
originate and purchase loans of $124.6 million and zero, respectively, compared
to $87.9 million and zero, respectively, at March 31, 2000. At March 31, 2001
and 2000 the Company had no outstanding commitments to purchase mortgage-backed
securities, collateralized mortgage obligations 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, 2001 totaled $1.09 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.
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 in Item 7 of this Form 10-K.
56
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements | PAGE |
|
|
Consolidated Balance Sheets - March 31, 2001 and 2000 | 58 |
Consolidated Statements of Earnings - Years ended March 31, 2001, 2000 and 1999 | 59 |
Consolidated Statements of Comprehensive Earnings - Years ended March 31, 2001, 2000 and 1999 | 60 |
Consolidated Statements of Stockholders' Equity - Years ended March 31, 2001, 2000 and 1999 | 61 |
Consolidated Statements of Cash Flows - Years ended March 31, 2001, 2000 and 1999 | 62 |
Notes to Consolidated Financial Statements | 64 |
Independent Auditors' Report | 100 |
57
PFF BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(Dollars in thousands)
March 31, |
||
2001 |
2000 |
|
Assets |
||
Cash and equivalents |
$ 51,526 |
35,131 |
Loans held-for-sale (note 20) |
583 |
7,362 |
Investment securities held-to-maturity (estimated fair value |
|
|
Investment securities available-for-sale, at fair value |
|
|
Mortgage-backed securities available-for-sale, at fair value |
|
|
Collateralized mortgage obligations available-for-sale, at fair value (notes 4, 10 and 12) |
|
|
Trading securities, at fair value |
2,375 |
4,318 |
Investment in real estate (note 6) |
- |
4,928 |
Loans receivable, net (notes 5, 7, 10 and 12) |
2,285,307 |
2,326,702 |
Federal Home Loan Bank (FHLB) stock, at cost (note 12) |
46,121 |
44,550 |
Accrued interest receivable (note 8) |
18,466 |
18,584 |
Real estate acquired through foreclosure, net (notes 6 and 7) |
351 |
1,466 |
Property and equipment, net (note 9) |
22,946 |
22,374 |
Prepaid expenses and other assets (notes 13 and 19) |
13,638 |
13,167 |
Total assets |
$ 2,886,431 |
3,034,023 |
Liabilities and Stockholders' Equity |
||
Liabilities: |
||
Deposits (note 10) |
$ 2,021,261 |
1,906,534 |
FHLB advances and other borrowings (notes 11 and 12) |
575,000 |
884,000 |
Deferred income taxes payable (note 14) |
7,849 |
663 |
Accrued expenses and other liabilities (notes 10 and 13) |
24,323 |
20,995 |
Total liabilities |
2,628,433 |
2,812,192 |
Commitments and contingencies (notes 13, 17, 18, 19 and 20) |
- |
- |
Stockholders' equity (notes 13, 14, 15, 22 and 23): |
||
Preferred stock, $.01 par value. Authorized 2,000,000 |
|
|
Common stock, $.01 par value. Authorized 59,000,000 |
|
|
Additional paid-in capital |
131,919 |
131,370 |
Retained earnings, substantially restricted |
137,703 |
113,521 |
Unearned stock-based compensation |
(8,953) |
(13,303) |
Treasury stock (6,843,467 and 6,698,467 in 2001 and 2000, |
|
|
Accumulated other comprehensive losses |
(2,803) |
(9,890) |
Total stockholders' equity |
257,998 |
221,831 |
Total liabilities and stockholders' equity |
$ 2,886,431 |
3,034,023 |
See accompanying notes to consolidated financial statements. |
58
PFF BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Earnings
(Dollars in thousands, except per share data)
Year Ended March 31, |
|||
2001 |
2000 |
1999 |
|
Interest income: |
|||
Mortgage loans |
$ 171,592 |
148,720 |
133,972 |
Non-mortgage loans |
28,326 |
22,898 |
14,041 |
Mortgage-backed securities |
22,274 |
27,910 |
37,471 |
Collateralized mortgage obligations |
6,393 |
5,893 |
10,209 |
Investment securities and deposits |
11,771 |
9,907 |
11,262 |
Total interest income |
240,356 |
215,328 |
206,955 |
Interest on deposits (note 10) |
94,989 |
79,320 |
79,534 |
Interest on borrowings (note 11) |
48,482 |
47,219 |
50,822 |
Total interest expense |
143,471 |
126,539 |
130,356 |
Net interest income |
96,885 |
88,789 |
76,599 |
Provision for loan losses (note 7) |
5,004 |
4,000 |
4,020 |
Net interest income after provision for loan losses |
91,881 |
84,789 |
72,579 |
Non-interest income: |
|||
Deposit and related fees |
8,969 |
9,136 |
8,637 |
Trust fees |
1,846 |
2,098 |
1,891 |
Loan and servicing fees (note 20) |
3,447 |
3,471 |
2,780 |
Gain (loss) on sale of assets, net (note 20) |
557 |
(1,017) |
698 |
Gain (loss) on trading securities, net |
(1,490) |
1,677 |
569 |
Gain on sale of branch |
- |
1,468 |
- |
Other non-interest income |
583 |
419 |
973 |
Total non-interest income |
13,912 |
17,252 |
15,548 |
Non-interest expense: |
|||
General and administrative: |
|||
Compensation and benefits (note 13) |
30,332 |
29,475 |
27,997 |
Occupancy and equipment |
11,792 |
11,690 |
12,098 |
Marketing and professional services |
6,310 |
5,114 |
4,708 |
Other non-interest expense (note 16) |
8,632 |
9,227 |
10,157 |
Total general and administrative |
57,066 |
55,506 |
54,960 |
Foreclosed real estate operations, net (note 6) |
(324) |
(278) |
(45) |
Total non-interest expense |
56,742 |
55,228 |
54,915 |
Earnings before income taxes |
49,051 |
46,813 |
33,212 |
Income taxes (note 14) |
20,791 |
20,215 |
14,208 |
Net earnings |
$ 28,260 |
26,598 |
19,004 |
Basic earnings per share (as restated) (Note 24) |
$ 2.32 |
2.13 |
1.35 |
Weighted average shares outstanding for basic |
|
|
|
Diluted earnings per share (as restated) (Note 24) |
$ 2.24 |
2.05 |
1.30 |
Weighted average shares outstanding for diluted |
|
|
|
See accompanying notes to consolidated financial statements. |
59
PFF BANCORP, INC. AND SUBSIDIARY
For the Year Ended |
|||
2001 |
2000 |
1999 |
|
Net earnings |
$ 28,260 |
26,598 |
19,004 |
Other comprehensive earnings (losses), net |
|||
Unrealized gains (losses) on securities |
|||
Investment securities available-for-sale, at fair |
|
|
|
Collateralized mortgage obligations |
|
|
|
Mortgage-backed securities available-for-sale, |
|
|
|
Reclassification of realized gains (losses) included in earnings |
|
|
|
7,087 |
(8,213) |
(3,568) |
|
Minimum pension liability adjustment |
- |
(582) |
- |
Other comprehensive gains (losses) |
7,087 |
(8,795) |
(3,568) |
Comprehensive earnings |
$ 35,347 |
17,803 |
15,436 |
See accompanying notes to consolidated financial statements. |
60
PFF BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
(Dollars in thousands)
|
|
|
Retained Earnings Substantially Restricted |
|
|
Accumulated Other Comprehensive Earnings (Loss) |
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
- |
- |
- |
19,004 |
- |
- |
- |
19,004 |
Purchase of treasury stock |
(1,664,144) |
- |
(16,624) |
(15,458) |
- |
(17) |
- |
(32,099) |
Change in minimum pension liability |
- |
- |
(313) |
- |
229 |
- |
- |
(84) |
Amortization of shares under stock-based compensation plans |
|
|
|
|
|
|
|
|
Stock options exercised |
42,526 |
- |
531 |
- |
- |
- |
- |
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) |
(1,095) |
242,665 |
Net earnings |
- |
- |
- |
26,598 |
- |
- |
- |
26,598 |
Purchase of treasury stock |
(2,200,000) |
- |
(21,978) |
(20,968) |
- |
(22) |
- |
(42,968) |
Change in minimum pension liability |
- |
- |
- |
- |
- |
- |
(582) |
(582) |
Amortization of shares under stock-based compensation plans |
|
|
|
|
|
|
|
|
Stock options exercised |
69,024 |
1 |
573 |
- |
- |
- |
- |
574 |
Dividends |
- |
- |
- |
(2,272) |
- |
- |
- |
(2,272) |
Changes in unrealized gains on securities available-for-sale, net |
|
|
|
|
|
|
|
|
Balance at March 31, 2000 |
13,314,505 |
200 |
131,370 |
113,521 |
(13,303) |
(67) |
(9,890) |
221,831 |
|
||||||||
Net earnings |
- |
- |
- |
28,260 |
- |
- |
- |
28,260 |
Purchase of treasury stock |
(145,000) |
- |
(1,449) |
(1,117) |
- |
(1) |
- |
(2,567) |
Amortization of shares under stock-based compensation plans |
|
|
|
|
|
|
|
|
Stock options exercised |
69,122 |
- |
595 |
- |
- |
- |
- |
595 |
Dividends |
- |
- |
- |
(2,961) |
- |
- |
- |
(2,961) |
Changes in unrealized gains on securities available-for-sale, net |
|
|
|
|
|
|
|
|
Balance at March 31, 2001 |
13,238,627 |
$ 200 |
$ 131,919 |
$ 137,703 |
$ (8,953) |
$ (68) |
$ (2,803) |
$257,998 |
See accompanying notes to consolidated financial statements. |
61
PFF BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Dollars in thousands)
Year Ended March 31, |
|||
2001 |
2000 |
1999 |
|
Cash flows from operating activities: |
|||
Net earnings |
$ 28,260 |
26,598 |
19,004 |
Adjustments to reconcile net earnings to net cash provided by operating activities: |
|||
Amortization of premiums net of discount accretion on loans and securities |
|
|
|
Amortization of deferred loan origination fees |
(276) |
190 |
(460) |
Loan fees collected |
237 |
(2,219) |
(2,400) |
Dividends on FHLB stock |
(3,284) |
(2,441) |
(2,587) |
Provisions for losses on: |
|||
Loans |
5,004 |
4,000 |
4,020 |
Real estate |
49 |
- |
41 |
Gains on sales of loans, mortgage-backed securities available-for-sale, real estate and property and equipment |
|
|
|
Proceeds from sale of trading securities |
466 |
1,700 |
1,500 |
(Gains) losses on trading securities |
1,490 |
(1,677) |
(569) |
Depreciation and amortization of property and equipment |
|
|
|
Loans originated for sale |
(16,341) |
(32,799) |
(42,360) |
Proceeds from sale of loans held-for-sale |
23,439 |
25,673 |
39,407 |
Amortization of unearned stock-based compensation |
|
|
|
Increase (decrease) in accrued expenses and other liabilities |
|
|
|
(Increase) decrease in: |
|||
Accrued interest receivable |
118 |
(1,466) |
202 |
Prepaid expenses and other assets |
(471) |
10,173 |
23,874 |
Net cash provided by operating activities |
54,026 |
23,660 |
55,294 |
Cash flows from investing activities: |
|||
Loans originated for investment |
(1,033,194) |
(1,235,525) |
(945,244) |
Increase in construction loans in process |
38,891 |
31,614 |
71,585 |
Purchases of loans held-for-investment |
(18,892) |
(1,560) |
(168,395) |
Principal payments on loans |
1,049,029 |
902,923 |
831,468 |
Principal payments on mortgage-backed securities held-to-maturity |
|
|
|
Principal payments on mortgage-backed securities available-for-sale |
|
|
|
Principal payments on collateralized mortgage obligations available-for-sale |
|
|
|
Purchases of investment securities available-for-sale |
(5,000) |
(28,066) |
(90,111) |
Purchases of FHLB stock |
- |
(1,974) |
(8,232) |
62
PFF BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
(Dollars in thousands)
Year Ended March 31, |
|||
2001 |
2000 |
1999 |
|
Redemption of FHLB stock |
$ 1,713 |
10,188 |
- |
Purchases of mortgage-backed securities available-for-sale |
|
|
|
Proceeds from maturities of investment securities available-for-sale |
|
|
|
Proceeds from sale of investment securities available-for-sale |
|
|
|
Proceeds from sale of real estate |
2,993 |
8,515 |
13,611 |
Investment in or proceeds from real estate held for investment |
|
|
|
Purchases of property and equipment |
(3,968) |
(2,345) |
(2,247) |
Proceeds from sale of property and equipment |
- |
933 |
5 |
Net cash provided by (used in) investing activities |
161,575 |
(140,649) |
(136,785) |
Cash flows from financing activities: |
|||
Proceeds from FHLB advances and other borrowings |
494,800 |
884,600 |
804,876 |
Repayment of FHLB advances and other borrowings |
(803,800) |
(814,600) |
(776,762) |
Net change in deposits |
114,727 |
62,996 |
102,714 |
Proceeds from exercise of stock options |
595 |
574 |
531 |
Cash dividends |
(2,961) |
(2,272) |
- |
Purchase of treasury stock |
(2,567) |
(42,968) |
(32,099) |
Net cash provided by (used in) financing activities |
(199,206) |
88,330 |
99,260 |
Net increase (decrease) in cash and cash equivalents |
16,395 |
(28,659) |
17,769 |
Cash and cash equivalents, beginning of year |
35,131 |
63,790 |
46,021 |
Cash and cash equivalents, end of year |
$ 51,526 |
35,131 |
63,790 |
Supplemental information: |
|||
Interest paid, including interest credited |
$ 142,689 |
128,402 |
136,165 |
Income taxes paid |
19,200 |
17,000 |
10,700 |
Non-cash investing and financing activities: |
|||
Change in unrealized gain (loss) on securities available-for-sale |
|
|
|
Net transfers from loans receivable to real estate acquired through foreclosure |
|
|
|
Net transfers from available-for-sale securities to trading securities |
|
|
|
See accompanying notes to consolidated financial statements. |
63
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 22" 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
accounting principles generally accepted in the United States of America. 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 $37,886
and $35,060 and short-term deposits in banks of $13,640 and $71 at March 31,
2001 and 2000, 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 and Collateralized Mortgage
Obligations
At the time of purchase of an investment security, a mortgage-backed
security or a collateralized mortgage obligation, 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.
64
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
Held-to-Maturity
Investment securities held-to-maturity are carried at cost,
or in the case of mortgage-backed securities and collateralized mortgage
obligations at unpaid principal balance, adjusted for amortization of premiums
and accretion of discounts which are recognized in interest income using the
interest method, adjusted for anticipated prepayments where applicable. 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
Investment securities, mortgage-backed securities and
collateralized mortgage obligations available-for-sale are carried at fair
value. Amortization of premiums and accretion of discounts are recognized in
interest income using the interest method, adjusted for anticipated prepayments
where applicable. 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 gains and losses on trading
securities are included in 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
("MSR") 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 MSR and the mortgage loans without the MSR based upon
their relative fair values. The MSR are included in other assets and as a
component of the gain on the sale of loans. The MSR 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 MSR are periodically reviewed for impairment based upon their fair value.
The fair value of the MSR, 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.
65
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 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 $1,000 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.
Substantially all loans measured for impairment are measured using the fair
value of the collateral. The amount by which the recorded investment in the loan
exceeds the measure of the impaired loan is recognized by recording a valuation
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.
66
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
All non-homogeneous loans designated by the Company as
impaired are either placed on non-accrual status or are designated as
restructured loans. Only non-accrual loans and restructured loans not performing
in accordance with their restructured terms are included in non-performing
loans. Loans are generally placed on non-accrual 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 non-accrual 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.
67
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.
68
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
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.
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, as amended,
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, as amended, is effective for all quarters of fiscal years
beginning after June 15, 2000. Management has implemented SFAS No. 133 and it
has not had a significant impact on the Company's financial position or
results of operations.
In March 2000, the FASB issued Interpretation No. 44 "Accounting for
Certain Transactions Involving Stock Compensation an Interpretation of APB
Opinion No. 25" ("FIN 44"). This interpretation clarifies the
definition of an employee for purposes of applying Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB
25"), the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequence of various modifications to the
terms of a previously fixed stock option or award, and the accounting for an
exchange of stock compensation awards in a business combination. This
interpretation is effective July 1, 2000, but certain conclusions in this
interpretation cover specific events that occur after either December 15, 1998
or January 12, 2000. Management has implemented FIN 44 and it has not had a
significant impact on the Company's financial position or results of
operations.
In September
2000, the FASB issued Statement of Financial Accounting Standards No. 140
("SFAS No. 140") to replace SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities". SFAS No. 140 provides the accounting and reporting guidance
for transfers and servicing of financial assets and extinguishments of
liabilities. SFAS No. 140 will be the authoritative accounting literature for:
(1) securitization transactions involving financial assets; (2) sales of
financial assets (including loan participations); (3) factoring transactions;
(4) wash sales; (5) servicing assets and liabilities; (6) collateralized
borrowing arrangements; (7) securities lending transactions; (8) repurchase
agreements; and (9) extinguishment of liabilities. Management has implemented
SFAS No. 140 and it has not had a significant impact on the Company's
financial position or results of operations.
69
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
(2) Investment Securities
The amortized cost and estimated fair values of investment securities are
summarized as follows:
March 31, 2001 |
||||
|
Gross |
Gross |
Estimated |
|
Held-to-maturity: |
||||
Bonds, notes and debentures at amortized cost: |
||||
U.S. Government and federal agency obligations |
$ 702 |
70 |
- |
772 |
Total |
$ 702 |
70 |
- |
772 |
Available-for-sale: |
||||
Corporate debt securities |
$ 56,194 |
25 |
(4,411) |
51,808 |
Equity securities |
4,600 |
2,729 |
- |
7,329 |
Total |
$ 60,794 |
2,754 |
(4,411) |
59,137 |
During the years ended March 31, 2001, 2000 and 1999, the Company realized net losses on sales of investment securities available-for-sale of $156, $279 and $53, respectively.
March 31, 2000 |
||||
|
Gross |
Gross |
Estimated |
|
Held-to-maturity: |
||||
Bonds, notes and debentures at amortized cost: |
||||
U.S. Government and federal agency obligations |
$ 701 |
18 |
- |
719 |
Total |
$ 701 |
18 |
- |
719 |
Available-for-sale: |
||||
U.S. Government and federal agency obligations |
$ 35,000 |
- |
(938) |
34,062 |
Corporate debt securities |
51,086 |
- |
(2,771) |
48,315 |
Equity securities |
6,708 |
- |
(1,275) |
5,433 |
Total |
$ 92,794 |
- |
(4,984) |
87,810 |
Maturities of investment securities at March 31, 2001 are summarized as follows:
|
Available- |
||
|
|
Estimated |
Estimated |
Within one year |
$ - |
- |
- |
After one to five years |
- |
- |
- |
After five to ten years |
702 |
772 |
- |
After ten years |
- |
- |
59,137 |
Total |
$ 702 |
772 |
59,137 |
70
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
(3) Mortgage-Backed Securities
The amortized cost and estimated fair values of mortgage-backed securities are
summarized as follows:
March 31, 2001 |
||||
|
Gross |
Gross |
Estimated |
|
Available-for-sale: |
||||
GNMA |
$ 12,104 |
117 |
- |
12,221 |
FHLMC |
84,222 |
170 |
(541) |
83,851 |
FNMA |
206,973 |
979 |
(1,060) |
206,892 |
Total |
$ 303,299 |
1,266 |
(1,601) |
302,964 |
During the years ended March 31, 2001, 2000 and 1999, the Company realized net gains on sales of mortgage-backed securities available-for-sale of zero, zero and $79, respectively.
March 31, 2000 |
||||
|
Gross |
Gross |
Estimated |
|
Available-for-sale: |
||||
GNMA |
$ 14,820 |
112 |
(53) |
14,879 |
FHLMC |
114,534 |
100 |
(2,804) |
111,830 |
FNMA |
260,336 |
189 |
(5,957) |
254,568 |
Total |
$ 389,690 |
401 |
(8,814) |
381,277 |
The mortgage-backed securities have original maturities of up
to 30 years.
(4) Collateralized Mortgage Obligations
The amortized cost and estimated fair values of collateralized mortgage
obligations are summarized as follows:
March 31, 2001 |
||||
|
Gross |
Gross |
Estimated |
|
Available-for-sale: |
||||
FHLMC |
$ 58,430 |
14 |
(1,208) |
57,236 |
FNMA |
25,701 |
- |
(622) |
25,079 |
Total |
$ 84,131 |
14 |
(1,830) |
82,315 |
|
March 31, 2000 |
|||
|
Gross |
Gross |
Estimated |
|
Available-for-sale: |
||||
FHLMC |
$ 60,005 |
- |
(1,751) |
58,254 |
FNMA |
28,300 |
- |
(901) |
27,399 |
Total |
$ 88,305 |
- |
(2,652) |
85,653 |
71
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
(5) Loans Receivable
Loans receivable are summarized as follows:
March 31, |
||
2001 |
2000 |
|
Mortgage loans: |
||
Residential: |
||
One-to-four family |
$ 1,338,357 |
1,529,871 |
Multi-family |
87,321 |
85,169 |
Commercial real estate |
233,953 |
169,010 |
Construction and land |
597,083 |
517,659 |
Total mortgage loans |
2,256,714 |
2,301,709 |
Commercial |
133,564 |
122,095 |
Consumer |
160,987 |
126,424 |
Total loans |
2,551,265 |
2,550,228 |
Less: |
||
Undisbursed portion of construction loans |
(237,547) |
(198,656) |
Net premium on loans |
818 |
1,215 |
Net deferred loan origination fees |
1,793 |
1,753 |
Allowance for loan losses (note 7) |
(31,022) |
(27,838) |
Total loans receivable, net |
$ 2,285,307 |
2,326,702 |
Weighted average yield |
8.60% |
7.94% |
Loans receivable from officers and directors of the Company were as follows:
March 31, |
||
2001 |
2000 |
|
Beginning balance |
$ 2,210 |
2,445 |
Additions |
270 |
228 |
Repayments |
(231) |
(463) |
Ending balance |
$ 2,249 |
2,210 |
72
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
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, |
|||
2001 |
2000 |
1999 |
|
Non-accrual loans |
$ 11,481 |
5,427 |
11,012 |
TDR loans |
3,012 |
1,950 |
11,291 |
Total non-accrual and TDR loans (1) |
$ 14,493 |
7,377 |
22,303 |
(1) At March 31, 2001 the Bancorp's $3,000 loan for the Castaic development is included in both non-accrual and TDR loans. |
The effect of non-accrual and TDR loans on interest income is presented below.
Year Ended March 31, |
|||
2001 |
2000 |
1999 |
|
Contractual interest due: |
|||
Non-accrual loans |
$ 733 |
466 |
1,144 |
TDR loans |
86 |
499 |
1,032 |
819 |
965 |
2,176 |
|
Interest income recognized on TDR loans on a cash basis |
|
|
|
Interest income not recognized |
|
|
|
The following table identifies the Company's total recorded investment in impaired and TDR loans with a recorded investment greater than $500 by type, at the dates indicated.
March 31, |
||||
2001 |
2000 |
|||
Recorded |
Specific |
Recorded |
Specific |
|
Impaired loans: |
||||
Residential: |
||||
One-to-four family |
$ 599 |
- |
- |
- |
Multi-family |
1,188 |
- |
1,798 |
252 |
Commercial real estate |
2,951 |
210 |
1,795 |
45 |
Commercial |
3,533 |
93 |
1,887 |
- |
Construction and land (1) |
38,347 |
1,570 |
20,178 |
- |
TDR loans (1) |
3,012 |
3,012 |
1,950 |
406 |
Total |
$ 49,630 |
4,885 |
27,608 |
703 |
(1) At March 31, 2001 the Bancorp's $3,000 loan for the Castaic development is included in both non-accrual and TDR loans. |
During the year ended March 31, 2001, 2000 and 1999, the Company's average investment in impaired loans was $26,306, $13,810 and $17,941, respectively and interest income recorded during these periods was $47, $381 and $916, respectively of which zero, $369 and $887, 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)
(6) Real Estate
Real estate acquired through foreclosure is summarized as follows:
March 31, |
||
2001 |
2000 |
|
Properties acquired in settlement of loans |
$ 400 |
1,466 |
Allowance for losses (note 7) |
(49) |
- |
Total |
$ 351 |
1,466 |
(Gain) loss from foreclosed real estate operations, net is summarized as follows:
Year Ended March 31, |
|||
2001 |
2000 |
1999 |
|
(Gain) loss on sale of foreclosed real estate, net |
$ (248) |
(870) |
(1,356) |
Real estate (income) expense |
(125) |
592 |
1,270 |
Provision for (recoveries of) losses on real estate |
49 |
- |
41 |
Total |
$ (324) |
(278) |
(45) |
Real estate held for sale or development is summarized as follows:
March 31, |
||
2001 |
2000 |
|
Properties wholly owned |
$ - |
558 |
Mezzanine equity investments in real estate |
|
|
Total |
$ - |
4,928 |
During the years ended March 31, 2001, 2000 and 1999, the Company recognized net gains of zero, zero, and $36, respectively from the sale of properties wholly owned by the Company and profit of zero, zero and $246, respectively from equity investments in real estate developments.
74
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
(7) 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, |
|||
2001 |
2000 |
1999 |
|
Loans receivable: |
|||
Beginning balance |
$ 27,838 |
26,160 |
26,002 |
Provision |
5,004 |
4,000 |
4,020 |
Charge-offs |
(1,861) |
(2,390) |
(3,879) |
Recoveries |
41 |
68 |
17 |
Ending balance |
31,022 |
27,838 |
26,160 |
Foreclosed real estate: |
|||
Beginning balance |
- |
445 |
603 |
Provision (recoveries) |
49 |
- |
41 |
Charge-offs |
- |
(445) |
(199) |
Ending balance |
49 |
- |
445 |
Total loans receivable and real estate: |
|||
Beginning balance |
27,838 |
26,605 |
26,605 |
Provision |
5,053 |
4,000 |
4,061 |
Charge-offs |
(1,861) |
(2,835) |
(4,078) |
Recoveries |
41 |
68 |
17 |
Ending balance |
$ 31,071 |
27,838 |
$ 26,605 |
(8) Accrued Interest Receivable
Accrued interest receivable is summarized as follows:
March 31, |
||
2001 |
2000 |
|
|
||
Investment securities |
$ 700 |
1,420 |
Mortgage-backed securities |
2,032 |
2,545 |
Collateralized mortgage obligations |
469 |
516 |
Loans receivable |
15,265 |
14,103 |
Total |
$ 18,466 |
18,584 |
75
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
(9) Property and Equipment, net
Property and equipment, net is summarized as follows:
March 31, |
|||
|
|
Estimated Life |
|
Land |
$ 5,945 |
5,215 |
- |
Buildings and improvements |
21,815 |
21,209 |
40 |
Leasehold improvements |
2,121 |
2,192 |
10 |
Furniture, fixtures and equipment |
26,939 |
25,920 |
7 |
Automobiles |
156 |
156 |
3 |
Construction in progress |
1,004 |
168 |
- |
57,980 |
54,860 |
||
Accumulated depreciation and Amortization |
|
|
|
Total |
$ 22,946 |
22,374 |
(10) Deposits
Deposits and their respective weighted average interest rates are summarized as
follows:
March 31, |
||||
2001 |
2000 |
|||
Weighted |
|
Weighted |
|
|
Regular passbook |
2.21% |
$ 124,830 |
2.21% |
$ 134,700 |
NOW and other demand deposit accounts |
|
|
|
|
Fixed and variable-rate certificate accounts |
|
|
|
|
Money market checking and savings |
|
|
|
|
|
|
|
|
|
Certificate accounts maturing subsequent to March 31, 2001 are summarized as follows:
Year Ending March 31, |
Amount |
2002 |
$ 1,089,382 |
2003 |
85,907 |
2004 |
18,123 |
2005 |
12,351 |
2006 |
11,226 |
thereafter |
371 |
Total |
$ 1,217,360 |
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, |
|||
2001 |
2000 |
1999 |
|
Regular passbook |
$ 2,756 |
3,156 |
3,405 |
NOW and other demand deposit accounts |
|
|
|
Money market checking and savings |
18,684 |
17,649 |
13,133 |
Certificates of deposit |
71,593 |
57,149 |
61,705 |
Total |
$ 94,989 |
79,320 |
79,534 |
At March 31, 2001 and 2000, the Company had accrued interest
payable on deposits of $1,767 and $1,563, respectively, which is included in
other liabilities in the accompanying consolidated balance sheets.
At March 31, 2001 and 2000, $23,296 and $23,800 of public funds on deposit were
secured by loans receivable, mortgage-backed securities, investment securities
and collateralized mortgage obligations with aggregate carrying values of
$33,401 and $36,448, respectively.
Accounts which are greater than $100 at March 31, 2001 and 2000 total $593,707
and $361,155, respectively. Deposit accounts greater than $100 are not federally
insured.
77
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
(11) 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, collateralized mortgage
obligations 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 $575,000 and
zero and $884,000 and zero at March 31, 2001 and March 31, 2000, respectively.
(See "Note 12.")
March 31, |
|||
2001 |
2000 |
1999 |
|
FHLB advances: |
|||
Average amount outstanding during the year |
$771,869 |
792,778 |
855,197 |
Maximum amount outstanding at any month end |
886,000 |
884,000 |
949,000 |
Amount outstanding at year end (1) |
575,000 |
884,000 |
764,000 |
Average interest rate: |
|||
For the year |
6.25% |
5.63 |
5.57 |
At year end |
5.98 |
6.02 |
5.37 |
Reverse repurchase agreements: |
|||
Average amount outstanding during the year |
$ - |
43,750 |
50,000 |
Maximum amount outstanding at any month end |
- |
50,000 |
50,000 |
Amount outstanding at year end (1) |
- |
- |
50,000 |
Average interest rate: |
|||
For the year |
-% |
5.87 |
5.87 |
At year end |
- |
- |
5.87 |
(1) Included in the balance of FHLB advances outstanding at March 31, 2001 are putable borrowings of $165,000 with original terms to maturity of 48 to 120 months with final maturity dates ranging from January 2002 to February 2008 and initial put dates ranging from April 2001 to February 2003. |
FHLB advances have the following final maturities at March 31, 2001.
Amount |
|
2002 |
$ 520,000 |
2003 |
55,000 |
2004 |
- |
2005 |
- |
thereafter |
- |
Total |
$ 575,000 |
78
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
Included in the table above are putable advances with first put dates as follows:
Amount |
|
2002 |
$ 150,000 |
2003 |
15,000 |
Total |
$ 165,000 |
Interest expense on borrowings is summarized as follows:
Year ended March 31, |
|||
2001 |
2000 |
1999 |
|
FHLB advances |
$ 48,434 |
44,435 |
47,735 |
Reverse repurchase agreements |
- |
2,760 |
2,976 |
Other interest expense |
48 |
24 |
111 |
Total |
$ 48,482 |
47,219 |
50,822 |
(12) Lines of Credit
79
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
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, 2000 and 1999.
|
2000 |
1999 |
||
|
Directors' Supplemental Plans |
|
Directors' Supplemental Plans |
|
Change in benefit obligation |
||||
Projected benefit obligation, |
|
|
|
|
Interest cost |
1,354 |
200 |
1,568 |
167 |
Benefits paid |
(1,390) |
(210) |
(1,299) |
(210) |
Actuarial loss (gain) |
1,859 |
41 |
(3,916) |
25 |
Projected benefit obligation, end of year |
|
|
|
|
Change in plan assets |
||||
Plan assets, beginning of year |
$ 27,310 |
- |
23,653 |
- |
Actual return on plan assets |
(2,111) |
- |
4,956 |
- |
Employer contribution |
- |
210 |
- |
210 |
Benefits paid |
(1,391) |
(210) |
(1,299) |
(210) |
Plan assets, end of year |
$ 23,808 |
- |
27,310 |
- |
Funded status |
$ 3,862 |
(2,716) |
9,187 |
(2,685) |
Unrecognized transition obligation |
- |
33 |
- |
66 |
Unrecognized prior service cost |
11 |
- |
82 |
- |
Unrecognized (gain)/loss |
(799) |
590 |
(7,173) |
582 |
Prepaid (accrued) benefit cost |
$ 3,074 |
(2,093) |
2,096 |
(2,037) |
Net periodic pension costs for 2000, 1999 and 1998 included the following components:
December 31, |
||||||
2000 |
1999 |
1998 |
||||
|
|
|
|
|
|
|
Components of net periodic benefit cost |
||||||
Interest cost |
$ 1,354 |
200 |
1,568 |
167 |
1,411 |
171 |
Expected return on plan assets |
(1,933) |
- |
(1,761) |
- |
(1,546) |
- |
Amortization of unrecognized transition obligation |
|
|
|
|
|
|
Amortization of unrecognized prior service cost |
|
|
|
|
|
|
Amortization of unrecognized (gain)/loss |
|
|
|
|
|
|
Net periodic pension (income) expense |
|
|
|
|
|
|
80
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
The assumptions used in determining the actuarial present value of the accumulated benefit obligation and the expected return on plan assets for 2000 and 1999 are as follows:
December 31, |
||||
2000 |
1999 |
|||
|
Directors' |
|
Directors' |
|
Weighted-average assumptions |
||||
Discount rate |
7.00% |
7.00 |
7.75 |
7.75 |
Expected long-term rate of return on plan assets |
|
|
|
|
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 2001, 2000 and 1999, the total 401(k) Plan expense was $422, $514 and $393,
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
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, 2001, 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, 2001 and 2000, the expected cost associated with this
coverage was $15 and $17, respectively, 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 ten dollars 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. For
the years ended March 31, 2001 and 2000, 181,281 and 171,621 ESOP shares,
respectively were allocated to the participants. At March 31, 2001 and 2000, 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, 2001, the fair value of
the unearned ESOP shares is $21,545. Compensation expense associated with the
ESOP was $3,230, $3,152 and $2,694 for the years ended March 31, 2001, 2000 and
1999.
81
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
During October, 1996, the stockholders of the Company
approved the PFF Bancorp, Inc. 1996 Incentive Plan (the "1996 Plan").
During September, 1999, the stockholders of the Company approved the PFF
Bancorp, Inc. 1999 Incentive Plan (the "1999 Plan"). The 1996 Plan
authorized the granting of options to purchase the Company's common stock,
option related awards, and grants of common stock (collectively
"Awards"). The 1999 Plan authorized the granting of options to
purchase the Company's common stock. 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 maximum number of shares reserved under the 1999
Plan is 625,000 all of which are reserved for purchase pursuant to options and
option related awards. The exercise price of all options and option-related
awards under both Plans 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, 770,545 shares with a fair
value of $9,890 were granted to directors and executive officers during the year
ended March 31, 1997. 532,500 of the 770,545 shares represented grants to
employees with the remaining shares granted to directors of the Company. An
additional 15,000 shares with a fair value of $214 at the time of grant, were
granted to an executive officer of the Company during the year ended March 31,
1998. 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. Those goals have been met. Compensation expense, associated
with the stock grants recognized based upon the market price of the common stock
at the time of grant, was $2,538, $2,094, and $1,910 for the years ended March
31, 2001, 2000 and 1999, respectively. The unamortized balance of the grants is
included in unearned stock-based compensation in the accompanying consolidated
financial statements. At March 31, 2001 and 2000, the unamortized balance of the
stock awards was $1,429 and $4,000, respectively.
82
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
The following table contains certain information with respect to the stock options granted under the 1996 and 1999 Plans.
Assumptions Used in Determining Options' Values |
||||||||||||
|
|
|
|
|
|
|
Calculated |
|||||
Options Granted During the Year Ended March 31, 2001 |
||||||||||||
May 24, 2000 |
1,268 |
$14.25 |
8.00 |
4.78% |
42.10% |
1.27% |
$ 6.77 |
|||||
May 24, 2000 |
30,000 |
14.25 |
8.00 |
4.78 |
42.10 |
1.27 |
6.77 |
|||||
June 28, 2000 |
1,366 |
16.63 |
8.00 |
4.78 |
42.10 |
1.27 |
7.89 |
|||||
November 22, 2000 |
7,323 |
16.00 |
8.00 |
4.78 |
42.10 |
1.27 |
7.60 |
|||||
Options Granted During the Year Ended March 31, 2000 |
||||||||||||
May 26, 1999 |
4,182 |
$18.13 |
8.00 |
6.20% |
39.48% |
1.28% |
$ 8.78 |
|||||
November 23, 1999 |
2,612 |
21.88 |
8.00 |
6.20 |
39.48 |
1.28 |
10.59 |
|||||
March 22, 2000 |
17,876 |
14.50 |
8.00 |
6.20 |
39.48 |
1.28 |
7.02 |
|||||
Options Granted During the Year Ended March 31, 1999 |
||||||||||||
April 22, 1998 |
1,328 |
$20.50 |
8.00 |
5.20% |
38.44% |
N/A |
$10.97 |
|||||
September 23, 1998 |
15,214 |
14.50 |
8.00 |
5.20 |
38.44 |
N/A |
7.76 |
|||||
October 28, 1998 |
1,427 |
14.31 |
8.00 |
5.20 |
38.44 |
N/A |
7.66 |
|||||
March 24, 1999 |
7,273 |
17.94 |
8.00 |
5.20 |
38.44 |
N/A |
9.60 |
|||||
(1) The risk-free rate is the market rate for U.S. Government securities with the same maturities as the options. |
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:
2001 |
2000 |
1999 |
|
Net earnings: |
|||
As reported |
$28,260 |
26,598 |
19,004 |
Pro forma |
26,584 |
25,051 |
17,533 |
Earnings per share - Basic (as restated) (2) |
|||
As reported |
2.32 |
2.13 |
1.35 |
Pro forma |
2.18 |
2.01 |
1.24 |
Earnings per share - Diluted (as restated) (2) |
|||
As reported |
2.24 |
2.05 |
1.30 |
Pro forma |
2.10 |
1.93 |
1.20 |
(2) See Note 24 regarding this restatement. |
83
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
The table below reflects, for the periods indicated, the activity in the Company's stock options issued under the 1996 and 1999 Plans.
|
For the Year Ended March 31, |
||
|
2001 |
2000 |
1999 |
Balance at beginning of period |
1,749,950 |
1,839,423 |
1,876,471 |
Granted |
39,957 |
24,670 |
25,242 |
Canceled or expired |
(18,858) |
(3,567) |
(19,764) |
Exercised |
(102,703) |
(110,576) |
(42,526) |
Balance at end of period |
1,668,346 |
1,749,950 |
1,839,423 |
Options exercisable |
1,246,118 |
969,324 |
707,762 |
Options available for grant |
605,494 |
1,593 |
29,969 |
Weighted average option price per share: |
|||
Under option |
$13.19 |
13.16 |
13.10 |
Exercisable |
13.12 |
13.11 |
13.07 |
Exercised |
21.60 |
20.86 |
18.83 |
The following table summarizes information with respect to the Company's stock options outstanding as of March 31, 2001.
Options Outstanding |
Options Exercisable |
||||
|
|
|
|
|
|
$12 to 14 |
1,434,094 |
5.6 |
$12.75 |
1,099,968 |
$12.75 |
14 to 16 |
119,059 |
7.6 |
14.96 |
62,798 |
15.10 |
16 to 18 |
99,952 |
6.0 |
16.32 |
77,408 |
16.28 |
18 to 20 |
6,808 |
7.7 |
18.37 |
2,410 |
18.53 |
20 to 22 |
8,433 |
7.3 |
21.00 |
3,534 |
20.81 |
84
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
(14) Income Taxes
Income taxes (benefit) is summarized as follows:
Current |
Deferred |
Total |
|
Year Ended March 31, 2001 |
|||
Federal |
$ 12,942 |
2,008 |
14,950 |
State |
5,174 |
23 |
5,197 |
Taxes charged to stockholders equity |
|
|
|
Total |
$ 18,760 |
2,031 |
20,791 |
Year Ended March 31, 2000 |
|||
Federal |
$13,008 |
1,356 |
14,364 |
State |
4,484 |
920 |
5,404 |
Taxes charged to stockholders equity |
|
|
|
Total |
$17,939 |
2,276 |
20,215 |
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 |
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, |
||||||
2001 |
2000 |
1999 |
||||
Amount |
Percent |
Amount |
Percent |
Amount |
Percent |
|
Computed "expected" taxes |
$ 17,168 |
35% |
$16,385 |
35% |
$11,624 |
35% |
Increase (reduction) in taxes resulting from: |
||||||
California franchise tax, net of Federal tax benefit |
|
|
|
|
|
|
Other items |
245 |
1 |
317 |
1 |
257 |
1 |
Total |
$ 20,791 |
43% |
$20,215 |
43% |
$14,208 |
43% |
85
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, |
|
Deferred tax assets: |
|||||
Allowance for real estate loan losses |
|
|
|
|
|
California franchise tax |
(2,787) |
(41) |
(2,746) |
(950) |
(1,796) |
Accrued expenses |
(750) |
48 |
(798) |
681 |
(1,479) |
Core deposit intangibles amortization |
|
|
|
|
|
Non-accrual interest |
(263) |
(142) |
(121) |
363 |
(484) |
Unrealized gains (loss) on securities available-for-sale, net |
|
|
|
|
|
Other |
(2,397) |
(323) |
(2,074) |
(189) |
(1,885) |
(18,387) |
5,106 |
(23,493) |
(8,424) |
(15,069) |
|
Deferred tax liabilities: |
|||||
Deferred loan origination fees |
17,519 |
1,252 |
16,267 |
2,651 |
13,616 |
Unredeemed FHLB stock dividends |
|
|
|
|
|
Pension plan liability |
1,126 |
353 |
773 |
584 |
189 |
Accumulated depreciation |
(544) |
(204) |
(340) |
(183) |
(157) |
Customer early withdrawal Penalty depreciation |
|
|
|
|
|
Accrued interest on pre-1985 loans |
|
|
|
|
|
Excess servicing rights Amortization |
|
|
|
|
|
Other |
153 |
90 |
63 |
(920) |
983 |
26,236 |
2,080 |
24,156 |
3,166 |
20,990 |
|
Net deferred tax liability |
$ 7,849 |
7,186 |
663 |
(5,258) |
5,921 |
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, 2000 and 2001 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, 2001.
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 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, 2001 and 2000 includes approximately
$25,300 for which no deferred income tax liability has been recognized.
86
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
(15) 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, 2001, 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, 2001:
PFF Bank & Trust's |
|||
Tangible |
Core |
Risk-based |
|
Capital of the Bank presented on a GAAP |
|
|
|
Adjustments to GAAP capital to arrive at regulatory capital: |
|||
Unrealized loss on securities available-for-sale, net |
3,417 |
3,417 |
3,417 |
Investments in and advances to non-includable consolidated subsidiaries |
|
|
|
Goodwill and other intangible assets |
(1,723) |
(1,723) |
(1,723) |
General loan valuation allowance (1) |
- |
- |
25,156 |
Equity investments and other assets required to be deducted |
|
|
|
Regulatory capital |
237,838 |
237,838 |
262,994 |
Regulatory capital requirement |
43,076 |
114,869 |
165,449 |
Amount by which regulatory capital exceeds requirement |
|
|
|
(1) Limited to 1.25% of risk-weighted assets. |
87
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, 2001 and 2000.
|
|
To be Well |
||||
March 31, 2001 |
Amount |
Ratio |
Amount |
Ratio |
Amount |
Ratio |
Total capital (to risk-weighted assets) |
$262,994 |
12.72% |
$165,449 |
> 8.00% |
$206,811 |
> 10.00% |
Tier 1 (Core) capital (to adjusted total assets) |
|
|
|
|
|
|
Tier 1 (Core) capital (to risk-weighted assets) |
|
|
|
|
|
|
Tangible capital (to tangible assets) |
237,838 |
8.28 |
43,076 |
> 1.50 |
- |
- (1) |
|
|
To be Well |
||||
March 31, 2000 |
Amount |
Ratio |
Amount |
Ratio |
Amount |
Ratio |
Total capital (to risk-weighted assets) |
$226,857 |
11.00% |
$164,937 |
= 8.00% |
$206,171 |
= 10.00% |
Tier 1 (Core) capital (to adjusted total assets) |
|
|
|
|
|
|
Tier 1(Core) capital (to risk-weighted assets) |
|
|
|
|
|
|
Tangible capital (to tangible assets) |
204,638 |
6.77 |
45,368 |
= 1.50 |
- |
- (1) |
(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.
(16) Other Non-Interest Expense
Other non-interest expense amounts are summarized as follows:
Year Ended March 31, |
|||
2001 |
2000 |
1999 |
|
SAIF insurance premiums |
$ 1,164 |
1,326 |
1,573 |
Office supplies and expense |
2,408 |
2,859 |
3,406 |
Savings and NOW account expenses |
1,605 |
1,146 |
1,134 |
Loan expenses |
410 |
479 |
581 |
Other |
3,045 |
3,417 |
3,463 |
$ 8,632 |
9,227 |
10,157 |
88
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
(17) 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.
Amount |
|
Year ending March 31, |
|
2002 |
$ 712 |
2003 |
556 |
2004 |
491 |
2005 |
408 |
2006 |
166 |
thereafter |
228 |
Total |
$2,561 |
(18) Off-Balance Sheet Risk
Concentrations of Operations and Assets
The Company's operations are located within Southern California. At March 31,
2001 and 2000, approximately 92.6% and 93.3% respectively, 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.
89
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, |
|
2001 |
2000 |
|
Commitments to originate loans: |
||
Variable-rate |
$121,529 |
86,342 |
Fixed-rate |
3,039 |
1,587 |
Total |
$124,568 |
87,929 |
Interest rate range for fixed-rate loans |
6.75%-9.64% |
7.63%-13.79% |
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.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. At March 31, 2001 and
2000, the Bank had standby letters of credit of $2,300 and $698, respectively.
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.
(19) Trust Operations
Included in prepaid expenses and other assets is the net unamortized trust
acquisition cost of $1,590 and $1,914 at March 31, 2001 and 2000, 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, 2001 and 2000.
90
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
(20) Loan Servicing and Sale Activities
Loan servicing and sale activities are summarized as follows:
As of and for the Year Ended March 31, |
|||
2001 |
2000 |
1999 |
|
Balance sheet information: |
|||
Loans held for sale |
$ 583 |
7,362 |
3,531 |
Statement of earnings information: |
|||
Loan servicing fees |
$ 761 |
878 |
850 |
Amortization of servicing asset |
- |
- |
(109) |
Loan servicing fees, net |
$ 761 |
878 |
741 |
Gain on sale of loans |
$ 390 |
452 |
661 |
Statement of cash flows information: |
|||
Loans originated for sale |
$ 16,341 |
32,799 |
42,360 |
Proceeds from sale of loans |
$ 23,439 |
25,673 |
39,407 |
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, 2001, 2000 and 1999, the Company was servicing loans and
participations in loans owned by others of $256,478, $282,924 and $325,730,
respectively.
(21) 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.
91
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, 2001 |
March 31, 2000 |
|||
Carrying |
Fair |
Carrying |
Fair |
|
Financial assets: |
||||
Investment securities held-to-maturity |
$ 702 |
767 |
88,511 |
88,529 |
Loans held for sale |
583 |
583 |
7,362 |
7,362 |
Loans receivable, net |
2,285,307 |
2,296,585 |
2,326,702 |
2,304,657 |
Financial liabilities: |
||||
Deposits |
2,021,261 |
2,031,984 |
1,906,534 |
1,901,595 |
FHLB advances |
575,000 |
575,465 |
884,000 |
883,055 |
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, MBS and CMO available-for-sale: Fair values were based on
quoted market prices. If a quoted market price was not available, fair value was
estimated using market prices for similar securities, as well as internal
analysis.
Investment securities held-to-maturity: Fair values were based on quoted market
prices. If a quoted market price was not available, fair value was estimated
using market prices for similar securities, as well as internal analysis.
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 the forward rates on
the treasury yield curve. The fair values of significant non-performing 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 using rates currently offered on alternative funding sources
with similar maturities.
FHLB Advances: The fair value of FHLB advances and other borrowings is based on
discounted cash flows using rates currently offered on alternative funding
sources with similar maturities.
Off-Balance Sheet Financial Instruments: Commitments to originate loans had a
notional amount of $124.6 million at March 31, 2001. The carrying value of the
commitments is zero as all are cancelable and not readily marketable. Standby
letters of credit had a notional amount of $2,300 at March 31, 2001.
92
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
(22) 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.
Subsequet 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, 200
is $28,268.
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.
93
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
(23) 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.
March 31, |
||
2001 |
2000 |
|
Assets |
||
Cash and cash equivalents |
$ 4,002 |
1,361 |
Equity securities available-for-sale |
7,329 |
5,433 |
Trust preferred securities available-for-sale |
4,952 |
4,833 |
Trading securities, at fair value |
2,375 |
4,318 |
Residential loans |
241 |
- |
Construction loans |
478 |
663 |
Investment in real estate |
- |
4,370 |
Investment in Bank subsidiary |
236,586 |
198,843 |
Other assets |
3,034 |
2,137 |
Total assets |
$ 258,997 |
221,958 |
Liabilities and Stockholders' Equity |
||
Other liabilities |
$ 999 |
127 |
Stockholders' equity |
257,998 |
221,831 |
Total liabilities and stockholders' equity |
$ 258,997 |
221,958 |
Condensed Statements of Earnings
Year ended March 31, |
|||
2001 |
2000 |
1999 |
|
Interest and other income |
$ 1,182 |
2,596 |
3,916 |
Provision for loan losses |
3,012 |
- |
- |
General and administrative expense |
3,416 |
3,032 |
2,798 |
Earnings before equity in undistributed earnings of subsidiary before income taxes |
|
|
|
Dividend from Bank subsidiary |
- |
27,000 |
15,000 |
Equity in earnings (loss) of subsidiary before income taxes |
|
|
|
Earnings before income taxes |
49,051 |
46,813 |
33,212 |
Income taxes |
20,791 |
20,215 |
14,208 |
Net earnings |
$ 28,260 |
26,598 |
19,004 |
94
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
Condensed Statements of Cash Flows
Year Ended March 31, |
|||
2001 |
2000 |
1999 |
|
Cash flows from operating activities: |
|||
Net earnings |
$ 28,260 |
26,598 |
19,004 |
Adjustments to reconcile net earnings to cash used by operating activities: |
|||
Amortization of premiums on investments and mortgage-backed securities |
|
|
|
(Gains) losses on trading securities |
1,490 |
(1,676) |
(569) |
Provision for loan losses |
3,012 |
- |
- |
Increase in trading securities |
76 |
1,985 |
(3,924) |
Amortization of unearned stock-based compensation |
4,125 |
4,258 |
3,531 |
(Gains) losses on sale of mortgage-backed securities and investments available-for-sale |
|
|
|
Undistributed earnings of subsidiary |
(31,409) |
53 |
(3,474) |
(Increase) decrease in other assets |
(897) |
170 |
3,418 |
(Decrease) in other liabilities |
(877) |
(493) |
(86) |
Net cash provided by operating activities |
3,941 |
31,199 |
18,120 |
Cash flow from investing activities: |
|||
(Increase) decrease in real estate held for investment |
460 |
780 |
(5,813) |
Increase in residential loans |
(241) |
||
Decrease in construction loans |
1,303 |
- |
- |
Decrease in mortgage-backed securities available-for-sale |
- |
- |
11,110 |
Decrease in equity securities available-for-sale |
2,111 |
1,400 |
5,004 |
Decrease in trust preferred securities |
- |
7,891 |
3,782 |
Net cash provided by investing activities |
3,633 |
10,071 |
14,083 |
Cash flows from financing activities: |
|||
Proceeds from exercise of stock options |
595 |
574 |
531 |
Purchase of treasury stock |
(2,567) |
(42,968) |
(32,099) |
Cash dividends |
(2,961) |
(2,272) |
- |
Net cash used in financing activities |
(4,933) |
(44,666) |
(31,568) |
Net (decrease) increase in cash during the year |
2,641 |
(3,396) |
635 |
Cash and cash equivalents, beginning of year |
1,361 |
4,757 |
4,122 |
Cash and cash equivalents, end of year |
$ 4,002 |
1,361 |
4,757 |
95
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
(24) Earnings Per Share
Effect of Restatement
On August 14, 2002, the Company announced that it would restate the weighted
average shares used to calculate basic and diluted earnings per share (EPS).
This restatement does not reflect any change to previously reported net
earnings, but rather corrections of computational errors in the determination of
weighted average shares used to calculate earnings per share. The increase to
diluted EPS results from the appropriate inclusion of the tax benefits
associated with non-qualified stock options in the computation of diluted
weighted average shares under the treasury stock method. The impact of these tax
benefits was erroneously excluded from the previous computations of diluted
weighted average shares. The adjustments to basic weighted average shares relate
to the vesting of stock awards over a five-year period following the March 1996
IPO. These shares were correctly included in the calculation of diluted EPS, but
were erroneously excluded from the calculation of basic EPS.
Diluted and basic EPS as previously reported and restated are as follows:
Fiscal Year Ended |
|
|
||
March 31, |
As Previously Reported |
As Restated |
As Previously Reported |
As Restated |
1997 |
$0.15 |
$0.15 |
$0.15 |
$0.15 |
1998 |
$0.95 |
$0.96 |
$1.00 |
$0.99 |
1999 |
$1.29 |
$1.30 |
$1.37 |
$1.35 |
2000 |
$2.02 |
$2.05 |
$2.20 |
$2.13 |
2001 |
$2.20 |
$2.24 |
$2.42 |
$2.32 |
Weighted average shares outstanding for diluted and basic EPS as previously reported and restated are as follows:
Fiscal Year Ended |
Weighted average shares outstanding |
Weighted average shares outstanding |
||
March 31, |
As Previously Reported |
As Restated |
As Previously Reported |
As Restated |
1997 |
17,999,167 |
17,998,709 |
17,819,870 |
17,819,870 |
1998 |
16,795,096 |
16,617,211 |
16,055,127 |
16,126,114 |
1999 |
14,716,682 |
14,575,721 |
13,876,440 |
14,124,509 |
2000 |
13,184,030 |
13,002,791 |
12,111,323 |
12,492,643 |
2001 |
12,821,559 |
12,640,281 |
11,656,482 |
12,182,855 |
The effect of dilutive stock options and awards on weighted average shares outstanding and per share amounts as previously reported and restated is as follows:
|
Effect of dilutive stock options and awards- weighted average shares outstanding |
|
||
March 31, |
As Previously Reported |
As Restated |
As Previously Reported |
As Restated |
1997 |
179,297 |
178,839 |
$0.00 |
$0.00 |
1998 |
739,969 |
491,097 |
$0.05 |
$0.03 |
1999 |
840,242 |
451,212 |
$0.08 |
$0.05 |
2000 |
1,072,707 |
510,148 |
$0.18 |
$0.08 |
2001 |
1,165,077 |
457,426 |
$0.22 |
$0.08 |
96
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
Annual Disclosure
A reconciliation of the components used to derive basic and diluted earnings per
share for the years ended March 31, 2001, 2000 and 1999 follows:
|
|
Weighted Average |
|
(as restated) |
(as restated) |
||
2001 (1) |
|||
Basic earnings per share |
$ 28,260 |
12,182,855 |
$ 2.32 |
Effect of dilutive stock options and awards |
- |
457,426 |
.08 |
Diluted earnings per share |
$ 28,260 |
12,640,281 |
$ 2.24 |
2000 (2) |
|||
Basic earnings per share |
$ 26,598 |
12,492,643 |
$ 2.13 |
Effect of dilutive stock options and awards |
- |
510,148 |
.08 |
Diluted earnings per share |
$ 26,598 |
13,002,791 |
$ 2.05 |
1999 (3) |
|||
Basic earnings per share |
$ 19,004 |
14,124,509 |
$ 1.35 |
Effect of dilutive stock options and awards |
- |
451,212 |
.05 |
Diluted earnings per share |
$ 19,004 |
14,575,721 |
$ 1.30 |
(1) Options to purchase 8,433 shares of common stock at a weighted average price of $21.00 per share were outstanding during the fiscal year ended March 31, 2001 but were not included in the computation of diluted EPS because the options' exercise prices were greater than the average market price of the common shares. The options, which expire between October 22, 2002 and November 23, 2004, were still outstanding at March 31, 2001. | |||
(2) Options to purchase 10,094 shares of common stock at a weighted average price of $20.93 per share were outstanding during the fiscal year ended March 31, 2000 but were not included in the computation of diluted EPS because the options' exercise prices were greater than the average market price of the common shares. The options, which expire between October 22, 2002 and November 23, 2004, were still outstanding at March 31, 2000. | |||
(3) Options to purchase 17,381 shares of common stock at a weighted average price of $19.21 per share were outstanding during the fiscal year ended March 31, 1999 but were not included in the computation of diluted EPS because the options' exercise prices were greater than the average market price of the common shares. The options, which expire between October 22, 2002 and March 24, 2004, were still outstanding at March 31, 1999. |
97
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
(25) Quarterly Results of Operations (Unaudited)
Effect of Restatement
As discussed in Note 24, on August 14, 2002, the Company announced that it
would restate the weighted average shares used to calculate basic and diluted
earnings per share (EPS). This restatement does not reflect any change to
previously reported net earnings, but rather corrections of computational errors
in the determination of weighted average shares used to calculate earnings per
share. The increase to diluted EPS results from the appropriate inclusion of the
tax benefits associated with non-qualified stock options in the computation of
diluted weighted average shares under the treasury stock method. The impact of
these tax benefits was erroneously excluded from the previous computations of
diluted weighted average shares. The adjustments to basic weighted average
shares relate to the vesting of stock awards over a five-year period following
the March 1996 IPO. These shares were correctly included in the calculation of
diluted EPS, but were erroneously excluded from the calculation of basic EPS.
Diluted and basic EPS as previously reported and restated are as follows:
|
Diluted EPS |
Basic EPS |
||
As Previously Reported |
As Restated |
As Previously Reported |
As Restated |
|
June 30, 1999 |
$0.47 |
$0.48 |
$0.51 |
$0.50 |
September 30, 1999 |
$0.47 |
$0.48 |
$0.52 |
$0.51 |
December 31, 1999 |
$0.59 |
$0.60 |
$0.65 |
$0.63 |
March 31, 2000 |
$0.48 |
$0.49 |
$0.52 |
$0.50 |
June 30, 2000 |
$0.59 |
$0.60 |
$0.63 |
$0.61 |
September 30, 2000 |
$0.55 |
$0.56 |
$0.61 |
$0.58 |
December 31, 2000 |
$0.52 |
$0.53 |
$0.57 |
$0.55 |
March 31, 2001 |
$0.54 |
$0.55 |
$0.61 |
$0.58 |
Weighted average shares outstanding for diluted and basic EPS as previously reported and restated are as follows:
|
Weighted average shares outstanding |
Weighted average shares outstanding |
||
As Previously Reported |
As Restated |
As Previously Reported |
As Restated |
|
June 30, 1999 |
13,546,247 |
13,379,818 |
12,547,461 |
12,882,083 |
September 30, 1999 |
13,299,542 |
13,089,082 |
12,129,514 |
12,464,136 |
December 31, 1999 |
13,324,001 |
13,101,500 |
12,095,794 |
12,510,437 |
March 31, 2000 |
12,550,262 |
12,441,064 |
11,672,492 |
12,114,033 |
June 30, 2000 |
12,409,259 |
12,335,619 |
11,609,116 |
12,054,513 |
September 30, 2000 |
12,877,091 |
12,683,311 |
11,665,742 |
12,111,139 |
December 31, 2000 |
12,909,442 |
12,721,315 |
11,692,108 |
12,276,826 |
March 31, 2001 |
13,053,863 |
12,810,687 |
11,658,491 |
12,289,876 |
98
PFF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
The effect of dilutive stock options and awards on weighted average shares outstanding and per share amounts as previously reported and restated is as follows:
|
Effect of dilutive stock options and awards- weighted average shares outstanding |
|
||
As Previously Reported |
As Restated |
As Previously Reported |
As Restated |
|
June 30, 1999 |
998,786 |
497,735 |
$0.04 |
$0.02 |
September 30, 1999 |
1,170,028 |
624,946 |
$0.05 |
$0.03 |
December 31, 1999 |
1,228,207 |
591,063 |
$0.06 |
$0.03 |
March 31, 2000 |
877,770 |
327,031 |
$0.04 |
$0.01 |
June 30, 2000 |
800,143 |
281,106 |
$0.04 |
$0.01 |
September 30, 2000 |
1,211,349 |
572,172 |
$0.06 |
$0.02 |
December 31, 2000 |
1,217,334 |
444,489 |
$0.05 |
$0.02 |
March 31, 2001 |
1,395,372 |
520,811 |
$0.07 |
$0.03 |
Annual Disclosure
The tables below show basic and diluted earnings per share computed on a quarterly basis for the years ended March 31, 2001 and 2000. The sum of the computation of earnings per share on a quarterly basis will not necessarily equal the computation on an annual basis.
Three Months Ended |
|||||
June 30, |
September 30, |
December 31, |
March 31, |
Total |
|
Net interest income |
$ 24,121 |
23,166 |
24,656 |
24,942 |
96,885 |
Provision for loan losses |
1,251 |
1,251 |
1,251 |
1,251 |
5,004 |
Other income |
3,619 |
4,127 |
2,595 |
3,571 |
13,912 |
Other expenses |
13,483 |
13,877 |
14,373 |
15,009 |
56,742 |
Earnings before income taxes |
13,006 |
12,165 |
11,627 |
12,253 |
49,051 |
Income taxes |
5,639 |
5,088 |
4,908 |
5,156 |
20,791 |
Net earnings |
$ 7,367 |
7,077 |
6,719 |
7,097 |
28,260 |
Basic earnings per share (as restated) (1) |
$ 0.61 |
0.58 |
0.55 |
0.58 |
2.32 |
Diluted earnings per share (as restated) (1) |
$ 0.60 |
0.56 |
0.53 |
0.55 |
2.24 |
Three Months Ended |
|||||
June 30, |
September 30, |
December 31, |
March 31, |
Total |
|
Net interest income |
$ 21,227 |
22,247 |
22,574 |
22,741 |
88,789 |
Provision for loan losses |
1,000 |
1,000 |
1,000 |
1,000 |
4,000 |
Other income |
4,251 |
3,552 |
6,022 |
3,427 |
17,252 |
Other expenses |
13,214 |
13,643 |
13,872 |
14,499 |
55,228 |
Earnings before income taxes |
11,264 |
11,156 |
13,724 |
10,669 |
46,813 |
Income taxes |
4,860 |
4,840 |
5,880 |
4,635 |
20,215 |
Net earnings |
$ 6,404 |
6,316 |
7,844 |
6,034 |
26,598 |
Basic earnings per share (as restated) (1) |
$ 0.50 |
0.51 |
0.63 |
0.50 |
2.13 |
Diluted earnings per share (as restated) (1) |
$ 0.48 |
0.48 |
0.60 |
0.49 |
2.05 |
(1) See Note 24 regarding this restatement. |
99
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, 2001 and 2000 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, 2001. 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 auditing standards generally accepted
in the United States of America. 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, 2001 and 2000 and the results of their operations
and their cash flows for each of the years in the three-year period ended March
31, 2001, in conformity with accounting principles generally accepted in the
United States of America.
As discussed in Note 24 to the consolidated financial statements, the earnings
per share data for each of the years in the three-year period ended March 31,
2001 have been restated.
/s/KPMG LLP
Orange County, California
April 19, 2001, except for Note 24,
Earnings Per Share, as to which
the date is August 14, 2002
100
Item 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
PART IIIItem 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 19, 2001 (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.
101
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 or are incorporate by reference herein: |
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. |
10.2 |
Form of Change in Control Agreement between PFF Bank
& Trust and PFF Bancorp, Inc. |
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 |
10.5 |
PFF Bancorp, Inc. 1996 Incentive Plan (2) |
10.6 |
Form of Non-Statutory Stock Option Agreement for
officer and employees of |
10.7 |
Form of Incentive Stock Option Agreement for officers
and employees of |
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 |
10.10 |
The Pomona First Federal Bank & Trust Restated
Supplemental Executive |
10.11 |
The Pomona First Federal Bank & Trust Directors' Deferred Compensation Plan (3) |
10.12 |
PFF Bancorp, Inc. 1999 Incentive Plan (4) |
21 |
Subsidiary information is incorporated herein by
reference to "Part I- Subsidiary |
23 |
Consent of KPMG LLP |
99.1 |
Annual Report on Form 11-K for Capital Accumulation
Plan for employees of |
99.2 |
Certification of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002. |
99.3 |
Certification of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002. |
(b) |
Report on Form 8-K |
The Registrant did not file any reports on Form 8-K during the last quarter of
the fiscal year ended March 31, 2001.
102
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 | ||||
DATED: August 16, 2002 | Larry M. Rinehart 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 |
August 16, 2002 |
|||
Larry M. Rinehart |
President, Chief Executive |
|||
/s/ GREGORY C. TALBOTT |
August 16, 2002 |
|||
Gregory C. Talbott |
Executive Vice President, Chief |
|||
/s/ DONALD R. DESCOMBES |
August 16, 2002 |
|||
Donald R. DesCombes |
Director |
|||
/s/ ROBERT W. BURWELL |
August 16, 2002 |
|||
Robert W. Burwell |
Director |
|||
William T. Dingle |
Director |
|||
/s/ CURTIS W. MORRIS |
August 16, 2002 |
|||
Curtis W. Morris |
Director |
|||
Jil H. Stark |
Director |
|||
/s/ STEPHEN C. MORGAN |
August 16, 2002 |
|||
Stephen C. Morgan |
Director |
103
CERTIFICATION
I, Larry M. Rinehart, certify that:
1. I have reviewed this annual report on Form 10-K of PFF Bancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report.
Date: September 4, 2002 /s/ Larry M. Rinehart Larry M. Rinehart President, Chief Executive Officer and Director
104
CERTIFICATION
I, Gregory C. Talbott, certify that:
1. I have reviewed this annual report on Form 10-K of PFF Bancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report.
Date: September 4, 2002 /s/ Gregory C. Talbott Gregory C. Talbott Executive Vice President, Chief Financial Officer and Treasurer
105