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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| For the quarterly period ended June 30, 2003          or
**[    ]      TRANSITION          REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT          OF 1934**

 

For the transition period          from                                       to

 

Commission File Number 0-27404

 

**PFF BANCORP, INC.**(Exact name of registrant as specified in its charter)

 
**DELAWARE**

**95-4561623**

(State or other jurisdiction of          incorporation or organization)

 
(I.R.S. Employer I.D. No.)

**350 South Garey Avenue, Pomona,          California  91766**(Address of principal executive offices)

 
**(909) 623-2323**(Registrant's telephone number, including area code)

 

**Not Applicable**(Former name, former address and former fiscal year, if          changed since last report)

 
Indicate by check mark whether the registrant (1) has filed all          reports required to be filed by Section 13 or 15(d) of the Securities          Exchange Act of 1934 during the preceding 12 months (or for such          shorter period that the registrant was required to file such reports),          and (2) has been subject to such filing requirements for the past 90          days.     Yes               X       No                     .

 

Indicate by check mark whether the registrant is an accelerated          filer (as defined in rule 12b-2 of the Exchange Act).

Yes      X                No                     .

The registrant had 11,825,099 shares of common stock, par value          $.01 per share, outstanding as of August 8, 2003.
     
**PFF BANCORP, INC. AND SUBSIDIARIES  Form 10-Q  Index**

**PART I**

**FINANCIAL INFORMATION (Unaudited)**
**PAGE**
Item 1

Financial Statements

Consolidated Balance Sheets as of          June 30, 2003 and March 31, 2003

 

          1

Consolidated Statements of Earnings for the          three months ended June 30, 2003 and 2002

 

          2

Consolidated Statements of Comprehensive Earnings          for the three months ended June 30, 2003 and 2002

 

          3
Consolidated Statement of Stockholders' Equity          for the three months ended June 30, 2003

 

          4

Consolidated Statements of Cash Flows for the          three months ended June 30, 2003 and 2002

 

          5

Notes to Unaudited Consolidated Financial Statements

 

7
Item 2

Management's Discussion and Analysis of          Financial Condition and Results of Operations

 

          11

Item 3

Qualitative and Quantitative Disclosures about          Market Risk

 

          21

Item 4

Controls and Procedures

 

21

**PART II**

**OTHER INFORMATION**

Item 1

Legal Proceedings

 

22
Item 2

Changes in Securities and Use of Proceeds

 

22
Item 3

Defaults Upon Senior Securities

 

22
Item 4

Submission of Matters to a Vote of Security Holders

 

22
Item 5

Other Information

 

22
Item 6

Exhibits and Reports on Form 8-K

 

22
**SIGNATURES**

23 
 

**PART I - FINANCIAL INFORMATION**

**Item 1. Financial Statements.**

**PFF BANCORP, INC. AND SUBSIDIARIES  CONSOLIDATED BALANCE SHEETS  (Dollars in thousands, except per share data)  (Unaudited)**
 
**June 30,          2003**
 
**March 31,          2003**
      
**Assets**    
Cash and cash equivalents

$        40,513
 
50,323
 
Loans held for sale at lower of cost or fair value

1,578
 
3,327
 
Investment securities held-to-maturity (estimated fair value            of $6,043 at June 30, 2003, and $5,957 at March 31, 2003)

          5,750
 
          5,753
 
Investment securities available-for-sale, at fair value

61,794
 
94,094
 
Mortgage-backed securities available-for-sale, at fair value

235,608
 
215,266
 
Collateralized mortgage obligations available-for-sale, at fair          value

          825
 
          15,200
 
Loans receivable, net

2,686,548
 
2,688,950
 
Federal Home Loan Bank (FHLB) stock, at cost

26,924
 
26,610
 
Accrued interest receivable

13,234
 
14,162
 
Assets acquired through foreclosure, net

709
 
75
 
Property and equipment, net

23,500
 
23,325
 
Prepaid expenses and other assets

17,906
 
16,939
 
          Total assets

$  3,114,889
 
3,154,024
  
 
 
 
 
**Liabilities and Stockholders' Equity**
 
 
 
 
Liabilities:

 
 
 
 
  Deposits

$   2,341,876
 
2,326,108
 
  FHLB advances and other borrowings

443,000
 
485,385
 
  Accrued expenses and other liabilities

43,887
 
69,399
 
          Total          liabilities

2,828,763
 
2,880,892
 
Commitments and contingencies

-
 
-
 
Stockholders' equity:

 
 
 
 
  Preferred stock, $.01 par value.  Authorized 2,000,000              shares; none issued

          -
 
          -
 
  Common stock, $.01 par value.  Authorized 59,000,000              shares; issued 21,004,062 and 20,936,555;          outstanding              11,820,795 and 11,769,788 at June 30, 2003, and          March              31, 2003, respectively

          209
 
          208
 
  Additional paid-in capital

134,332
 
131,770
 
  Retained earnings, substantially restricted

158,077
 
150,282
 
  Unearned stock-based compensation

(3,552

)

(3,996

)

  Treasury stock (9,183,267 and 9,166,767 at June 30, 2003,              and March 31, 2003)

          (92

          )

          (92

          )

  Accumulated other comprehensive losses

(2,848

)

(5,040

)

          Total          stockholders' equity

286,126
 
273,132
 
          Total          liabilities and stockholders' equity

$   3,114,889
 
3,154,024
  See          accompanying notes to the unaudited consolidated financial statements.
                 1

**PFF BANCORP, INC. AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF EARNINGS****(Dollars in thousands, except per share data)  (Unaudited)**
 
**For the Three Months Ended          June 30,**
 
**2003**
 
**2002**
      
Interest income:
    
  Loans receivable

$       41,090
 
43,486
 
  Mortgage-backed securities

1,932
 
2,604
 
  Collateralized mortgage obligations

(294

)

490
 
  Investment securities and deposits

1,076
 
2,043
 
      Total interest income

43,804
 
48,623
 
Interest expense:
    
  Deposits

10,291
 
14,751
 
  Borrowings

3,465
 
5,629
 
      Total interest expense

13,756
 
20,380
 
Net interest income

30,048
 
28,243
 
Provision for loan losses

660
 
1,000
 
Net interest income after provision for loan losses

29,388
 
27,243
 
Non-interest income:
    
  Deposit and related fees

2,831
 
2,726
 
  Loan and servicing fees

1,593
 
1,141
 
  Trust fees

557
 
549
 
  Gain on sale of loans, net

375
 
51
 
  Gain on sale of securities, net

117
 
15
 
  Loss on trading securities, net

-
 
(209

)

  Other non-interest income

134
 
39
 
      Total non-interest income

5,607
 
4,312
 
Non-interest expense:
    
  General and administrative:
    
    Compensation and benefits

10,673
 
9,663
 
    Occupancy and equipment

3,059
 
2,855
 
    Marketing and professional services

2,088
 
1,538
 
    Other general and administrative

3,015
 
2,419
 
      Total general and administrative

18,835
 
16,475
 
  Foreclosed real estate operations, net

(1

)

(105

)

      Total non-interest expense

18,834
 
16,370
 
Earnings before income taxes

16,161
 
15,185
 
  Income taxes

6,829
 
6,332
 
Net earnings

$                  9,332
 
8,853
      
Basic earnings per share

$                    0.83
 
0.70
 
Weighted average shares outstanding for basic            earnings per share

          11,300,157
 
          12,600,125
 
Diluted earnings per share

$                    0.79 
 
0.68
 
Weighted average shares outstanding for diluted            earnings per share

          11,787,238 
 
          13,046,236
 See accompanying notes to the unaudited          consolidated financial statements     
2

**PFF BANCORP, INC. AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS  (Dollars in thousands)  (Unaudited)**
 
**For the Three Months Ended          June 30,**
 
**2003**
 
**2002**
      
Net earnings

$        9,332
 
8,853
      
Other comprehensive earnings, net of $1,609 and $1,797            income taxes at June 30, 2003 and 2002, respectively:
    
  Unrealized gains (losses) on securities available-for-sale:
    
    U.S. Treasury and agency securities and other          investment                securities available-for-sale, at fair          value

          2,199
 
          1,600
 
    Collateralized mortgage obligations          available-for-sale, at fair                value

          193
 
          (586

          )

    Mortgage-backed securities available-for-sale,          at fair value

(96

)

1,546
 
    Reclassification of realized gains included in          earnings

(104

)

(98

)

Other comprehensive earnings

2,192
 
2,462
 
Comprehensive earnings

$      11,524
 
11,315
 
See accompanying notes to the unaudited consolidated financial          statements.

 
 
3

 

**PFF BANCORP, INC. AND SUBSIDIARIES  CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY  (Dollars in thousands, except per share data)  (Unaudited)**
 
**Number of          Shares**
 
**Common          Stock**

**Additional          Paid-in          Capital**
 
**Retained          Earnings,          Substantially          Restricted**
 
**Unearned          Stock-based          Compensation**
 
**Treasury          Stock**
 
**Accumulated          Other          Comprehensive          Losses**
 
**Total**
                 
Balance at March 31, 2003

11,769,788
 
$    208

$  131,770
 
$   150,282 
 
$    (3,996

)

$    (92

)

$    (5,040

)

$273,132
                 
Net earnings

-
 
-

-
 
9,332
 
-
 
-
 
-
 
9,332
 
Purchases of treasury stock

(16,500

)

-

(165

)

(395

)

-
 
-
 
-
 
(560

)

Amortization under stock-            based compensation plans

          -
 
          -

          1,121
 
          -
 
          444
 
          -
 
          -
 
          1,565
 
Stock options exercised

67,507
 
1

1,044
 
-
 
-
 
-
 
-
 
1,045
 
Cash dividends ($.10 per            share)

          -
 
          -

          -
 
          (1,142

          )

          -
 
          -
 
          -
 
          (1,142

          )

Other comprehensive            earnings, net of income tax

          -
 
          -

          -
 
          -
 
          -
 
          -
 
          2,192
 
          2,192
 
Tax benefit from exercise of            stock options

          -
 
          -

          562
 
          -
 
          -
 
          -
 
          -
 
          562
 
Balance at June 30, 2003

11,820,795
 
$    209

$  134,332
 
$   158,077
 
$    (3,552

)

$    (92

)

$    (2,848

)

$286,126
 See accompanying notes to the          unaudited consolidated financial statements.    
4

 

**PFF BANCORP, INC. AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF CASH FLOWS  (Dollars in thousands)  (Unaudited)**
 
**Three Months Ended          June 30,**
 
**2003**
 
**2002**
      
Cash flows from operating activities:
    
  Net earnings

$                       9,332 
 
8,853
 
  Adjustments to reconcile net earnings to net cash (used in)              provided by operating activities:
    
      Amortization of premiums, net of          discount accretion, on                  loans and securities

          934 
 
          201 
 
      Amortization of deferred loan          origination fees

89
 
(123

)

      Loan fees collected

253
 
7
 
      Dividends on FHLB stock

(314

)

(486

)

      Provision for loan losses

660
 
1,000 
 
      Gains on sales of loans,          mortgage-backed securities                  available-for-sale, real          estate and property and equipment

          (363

          )

          (185

          )

      Losses on trading securities

-
 
209
 
      Depreciation and amortization of          property and equipment

743
 
674
 
      Loans originated for sale

(12,303

)

(921

)

      Proceeds from sale of loans          held-for-sale

14,364
 
1,012
 
      Amortization of unearned stock-based          compensation

1,565
 
1,329
 
      Increase (decrease) in accrued          expenses and other liabilities

(26,441

)

4,516
 
      (Increase) decrease in:
    
        Accrued interest          receivable

928
 
386
 
        Prepaid expenses and          other assets

(967

)

1,065
 
          Net cash          (used in) provided by operating activities

(11,520

)

17,537
      
Cash flows from investing activities:
    
  Loans originated for investment

(496,248

)

(392,735

)

  Increase in construction loans in process

18,880
 
24,783
 
  Purchases of loans held-for-investment

(93,262

)

(62,567

)

  Principal payments on loans

573,675
 
388,688
 
  Principal payments on mortgage-backed securities              available-for-sale

          21,921 
 
          27,538 
 
  Principal payments on collateralized mortgage obligations              available-for-sale

          14,373 
 
          1,173 
 
  Purchases of investment securities available-for-sale

(6

)

(20,006

)

  Redemption of FHLB stock

-
 
3,048
 
  Purchases of mortgage-backed securities available-for-sale

(45,333

)

-
    
(Continued)
 
5

**PFF BANCORP, INC. AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF CASH FLOWS  (Dollars in thousands)  (Unaudited)**
 
**Three Months Ended          June 30,**
 
**2003**
 
**2002**
 
  Proceeds from sale of investment securities          available-for-sale

$                    35,968
 
10,000
 
  Proceeds from sale of real estate

- 
 
765
 
  Purchases of property and equipment

(984

)

(1,035

)

          Net cash          provided by (used in) investing activities

28,984
 
(20,348

)

Cash flows from financing activities:
    
  Proceeds from FHLB advances and other borrowings

274,500
 
-
 
  Repayment of FHLB advances and other borrowings

(316,885

)

(70,000

)

  Net change in deposits

15,768
 
19,220
 
  Proceeds from exercise of stock options

1,045
 
2,513
 
  Cash dividends

(1,142

)

(1,060

)

  Purchases of treasury stock

(560

)

-
 
          Net cash          used in financing activities

(27,274

)

(49,327

)

          Net decrease          in cash and cash equivalents

(9,810

)

(52,138

)

Cash and cash equivalents, beginning of period

50,323
 
105,965
 
Cash and cash equivalents, end of period

$                     40,513 
 
53,827
 
Supplemental information:
    
  Interest paid, including interest credited

$                     14,332 
 
20,730
 
  Income taxes paid

1,200
 
-
 
Non-cash investing and financing activities:
    
  Net transfers from loans receivable to assets acquired              through foreclosure

          634 
 
          545 
 See accompanying notes to the unaudited          consolidated financial statements. 
6

**PFF BANCORP, INC. AND SUBSIDIARIES  Notes to Unaudited Consolidated Financial Statements**

**(1)****Basis of Consolidation**

The accompanying unaudited consolidated financial statements include the  accounts of PFF Bancorp, Inc. (the "Bancorp") and its subsidiaries PFF  Bank & Trust, Glencrest Investment Advisers, Inc. and Diversified Builder  Services, Inc. (collectively, "the Company"). The Company's business is  conducted primarily through PFF Bank & Trust and its subsidiary, Pomona  Financial Services, Inc. (collectively, "the Bank"). Pomona Financial  Services, Inc. includes the accounts of Diversified Services, Inc.   Glencrest Investment Advisors, Inc.  includes the accounts of Glencrest  Insurance Services, Inc. All material intercompany balances and transactions  have been eliminated in consolidation.

The accompanying unaudited consolidated financial statements have been  prepared in accordance with accounting principles generally accepted in the  United States of America for interim financial information and with the  instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly,  they do not include all of the information and footnotes required by  accounting principles generally accepted in the United States of America for  complete financial statements.  In the opinion of management, all  adjustments (consisting principally of normal recurring accruals) necessary  for a fair presentation have been included.  Certain reclassifications  have been made to the consolidated financial statements for the prior period  to conform to the current presentation.

The results of operations for the three months ended June 30, 2003 are not  necessarily indicative of results that may be expected for the entire fiscal  year ending March 31, 2004.

**New Accounting Pronouncements**

In December, 2002 the FASB issued Statement of Financial Accounting  Standards No. 148, "Accounting for Stock-Based Compensation - Transition  and Disclosure" ("SFAS 148"), which amends Statement of  Financial Accounting Standards No. 123, "Accounting for Stock-Based  Compensation" ("SFAS 123"), to provide alternative methods of  transition for an entity that voluntarily changes to the fair value method of  accounting for stock-based employee compensation.  SFAS 148 also amends  the disclosure provisions of SFAS 123 to require prominent disclosure about  the effects on reported net income of accounting policy decisions with respect  to stock-based employee compensation.  Finally, SFAS 148 amends APB  Opinion No. 28, "Interim Financial Reporting", to require disclosure  about those effects in interim financial information.  The Company is the  process of evaluating the adoption of the fair value method. 

In April 2003, the FASB issued Statement of Financial Accounting Standards  No. 149, "Amendment of Statement 133 on Derivative Instruments and  Hedging Activities" ("SFAS 149"), which clarifies and amends  financial accounting and reporting for derivative instruments, including  certain derivative instruments embedded in other contracts and for hedging  activities under Statement of Financial Accounting Standards No. 133,  "Accounting for Derivative Instruments and Hedging Activities"  ("SFAS 133").  In general, SFAS 149 is effective for contracts  entered into or modified after June 30, 2003 and for hedging relationships  designated after June 30, 2003.  It is anticipated that the financial  impact of this statement will not have a material effect on the Company.

In May 2003, the FASB issued Statement of Financial Accounting Standards  No. 150, "Accounting for Certain Financial Instruments with  Characteristics of Both Liabilities and Equity" ("SFAS 150"),  which establishes standards for how an issuer classifies and measures certain  financial instruments with characteristics of both liabilities and equity that  have been presented either entirely as equity or between the liabilities  section and the equity section of the statement of financial position.   SFAS 150 is effective for financial instruments entered into or modified after  May 31, 2003, and otherwise is effective at the beginning of the first interim  period beginning

7

**PFF BANCORP, INC. AND SUBSIDIARIES  Notes to Unaudited Consolidated Financial Statements  (Continued)**

after June 15, 2003.  It is anticipated that the  financial impact of this statement will not have a material effect on the  Company.

Financial Accounting Standards Board Interpretation 45, "Guarantors  Accounting and Disclosure Requirementsfor Guarantees, Including Indirect  Guarantees and Indebtedness of Others" ("FIN 45"), provides an  interpretation of SFAS Nos. 5, 57 and 107, and rescission of FIN 34,  "Disclosure of Indirect Guarantees of Indebtedness of Others."   Fin 45 elaborates on the disclosures to be made by the guarantor in its  interim and annual financial statements about its obligations under certain  guarantees that it has issued.  It also requires that a guarantor  recognize, at the inception of a guarantee, a liability for the fair value of  the obligation undertaken in issuing the guarantee.  The initial  recognition and measurement provisions of the interpretation are applicable on  a prospective basis to guarantees issued or modified after December 31, 2002,  while the provisions of the disclosure requirements were effective for  financial statements of interim or annual periods ended after December 15,  2002.  The implementation of FIN 45 has not had a significant impact on  the Company.

Financial Accounting Standards Board Interpretation 46, "Consolidation  of Variable Interest Entities" ("FIN 46"), provides guidance to  improve financial reporting for variable interest entities, off-balance sheet  structures and similar entities.  FIN 46 requires a variable interest  entity to be consolidated by a company if that company is subject to a  majority of the risk of loss from the variable interest entity's activities or  is entitled to receive a majority of the entity's residual returns or  both.  Prior to FIN 46, a company included another entity in its  consolidated financial statements only if it controlled the entity through  voting interests.  FIN 46 also requires disclosures about variable  interest entities that the company is not required to consolidate but in which  it has a

significant variable interest.  The consolidation requirements of FIN  46 apply immediately to variable interest entities created after January 31,  2003.  The consolidation requirements apply to older entities in the  first fiscal year or interim period beginning after June 15, 2003.   Certain disclosure requirements apply in all financial statements issued after  January 31, 2003, regardless of when the variable interest entity was  established.  The implementation of FIN 46 has not had a significant  impact on the Company.

 

8

**PFF BANCORP, INC. AND SUBSIDIARIES  Notes to Unaudited Consolidated Financial Statements  (Continued)**

**(3)  Stock Option Plan**

The Company applies APB No. 25 in accounting for its 1996 and 1999  Incentive Plans and, accordingly, under the intrinsic value method 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 123, the Company's results of operations would  have been adjusted to the pro forma amounts for the periods indicated below:
 
**Three Months Ended          June 30,**
 
**2003**
 
**2002**
  
**(Dollars in thousands,            except per share data)**

Net earnings:
     
As reported

$   9,332
 
8,853
  
Add: Stock-based employee compensation            expense included in reported net income, net            of related tax effects

          904
 
          775
  
Deduct: Total stock-based employee            compensation expense determined under            fair value based method for all awards,            net of related tax effects

          (1,304

          )

          (1,209

          )
 
Pro forma net earnings

$   8,932
 
8,419
 
Earnings per share
     
Basic - as reported

$     0.83
 
0.70
  
Basic - pro forma

$     0.79
 
0.67
        
Diluted - as reported

$     0.79
 
0.68
  
Diluted - pro forma

$     0.76
 
0.65
  
9

 

**PFF BANCORP, INC. AND SUBSIDIARIES  Notes to Unaudited Consolidated Financial Statements  (Continued)**

**(4)  Earnings per share**

Basic EPS excludes dilution and is computed by dividing earnings available  to common stockholders by the weighted average number of common shares  outstanding for the period.  Diluted EPS reflects the potential dilution  that could occur if securities or other contracts to issue common stock were  exercised or converted into common stock or resulted from the issuance of  common stock that then shared in earnings.

The following table is a reconciliation of the numerators and denominators  of the basic and diluted EPS computations for net earnings for PFF Bancorp,  Inc.
 
**For the Three Months Ended June 30,**
 
**2003 (a)**
 
**2002 (b)**
 
**Earnings          (Numerator)**

**Shares          (Denominator)**

**Per-Share          Amount**
 
**Earnings            (Numerator)**

**Shares          (Denominator)**

**Per-Share          Amount**
 
**(Dollars in thousands, except per share data)**
        
Net Earnings

$    9,332
   
$    8,853
          **Basic EPS**       
Earnings available to common stockholders

9,332

11,300,157

$    0.83
 
8,853

12,600,125

$    0.70
**Effect of Dilutive Securities**       
Options and Stock Awards
 
487,081
   
446,111
 
**Diluted EPS**
       
Earnings available to common stockholders            and assumed conversions

          $    9,332

          11,787,238

          $    0.79
 
          $    8,853

          13,046,236

          $    0.68

(a) Options to purchase 3,650 shares of common stock at a weighted average  price of $37.75 per share were outstanding during the three month period ended  June 30, 2003 but were not included in the computation of diluted EPS because  the options' exercise price was greater than  the average market price  of the common shares. The options, which expire on June 25, 2013, were still  outstanding at June 30, 2003.

(b) The exercise price of all options was less than the average market  price of the common shares outstanding during the three-month period ending  June 30, 2002. As a result, all options to purchase shares of common stock  were included in the computation of diluted EPS.

**(5)  Subsequent Events**

On July 23, 2003, the Board of Directors of the company declared a 40%  common stock dividend payable on September 5, 2003, to shareholders of record  as of the close of business on August 15, 2003.  As of August 8, 2003,  the Company had 11,825,099 shares of common stock outstanding. 
10

 

**PFF BANCORP, INC. AND SUBSIDIARIES  Item 2. Management's Discussion and Analysis of Financial Condition and  Results of Operations**

**Average Balance Sheets**

The following table sets forth certain information relating to the Company  for the three months ended June 30, 2003 and 2002.  The yields and costs  are derived by dividing income or expense by the average balance of assets or  liabilities, respectively, for the periods shown.  Average balances are  derived from average daily balances.  The yields and costs include fees  that are considered adjustments to yields.
 
**Three Months Ended June 30,**
  
**2003**
 
**2002**
  
**Average          Balance**

**Interest**
 
**Average          Yield/          Cost**
 
**Average          Balance**

**Interest**

**Average          Yield/          Cost**
  
**(Dollars in thousands)**

**Assets:**
         
  Interest-earning assets:
         
    Interest-earning deposits and short-term          investments

$    38,240

$                    72
 
0.76

%

$     67,708

$                   269

1.59

%

    Investment securities, net

76,321

751
 
3.95
 
123,248

1,303

4.24
 
    Mortgage-backed securities, net

215,561

1,932
 
3.59
 
176,700

2,604

5.89
 
    Collateralized mortgage obligations, net

9,853

(294

)

(11.94

)

61,686

490

3.18
 
    Loans receivable, net

2,686,677

41,090
 
6.12
 
2,491,000

43,486

6.99
 
    FHLB stock

26,752

253
 
3.79
 
33,292

471

5.67
 
        Total interest-earning          assets

3,053,404

43,804
 
5.74
 
2,953,634

48,623

6.59
 
    Non-interest-earning assets

85,121
    
57,564
   
        Total assets

$3,138,525
    
$3,011,198
             
**Liabilities and Stockholders' Equity:**
         
  Interest-bearing liabilities:
         
    Savings accounts

$   146,764

170
 
0.46   
 
$   130,503

276

0.85
 
    Money market accounts

479,409

1,760
 
1.47
 
445,058

2,764

2.49
 
    NOW and other demand deposit accounts

805,591

1,894
 
0.94
 
572,792

2,368

1.66
 
    Certificate accounts

909,602

6,467
 
2.85
 
1,034,649

9,343

3.62
 
        Total

2,341,366

10,291
 
1.76
 
2,183,002

14,751

2.71
 
    FHLB advances and other borrowings

466,735

3,465
 
2.98
 
511,500

5,629

4.41
 
        Total interest-bearing          liabilities

2,808,101

13,756
 
1.96
 
2,694,502

20,380

3.03
 
    Non-interest-bearing liabilities

48,307
    
21,743
   
        Total liabilities

2,856,408
    
2,716,245
   
  Stockholders' Equity

282,117
    
294,953
   
        Total liabilities and          stockholders' equity

$3,138,525
    
$3,011,198
   
Net interest income
 
$     30,048
    
$     28,243
  
Net interest spread
   
3.78   
   
3.56   
 
Effective interest spread
   
3.94   
   
3.82   
 
Ratio of interest-earning assets to interest-bearing liabilities

108.74%
    
109.62%
   ****
11

 

**PFF BANCORP, INC. AND SUBSIDIARIES   Management's Discussion and Analysis of Financial Condition and Results  of Operations  (Continued)**

**Rate/Volume Analysis**

The following table presents the extent to which changes in interest rates  and changes in the volume of interest-earning assets and interest-bearing  liabilities have affected the Company's interest income and interest expense  during the periods indicated. Information is provided in each category with  respect to:  (i) changes attributable to changes in volume (changes in  volume multiplied by prior rate); (ii) changes attributable to changes in rate  (changes in rate multiplied by prior volume); (iii) changes attributable to  changes in rate/volume (change in rate multiplied by change in volume); and  (iv) the net change.
 
**Three Months Ended June 30, 2003          Compared to          Three Months Ended June 30, 2002**

 
 
**Increase (Decrease)          Due to**

 
 
**Volume**

**Rate**

**Rate/          Volume**

**Net**

 
 
**(In thousands)**

 
       
**  Interest-earning assets:**
      
    Interest-earning deposits and short-term          investments

$       (117

)

(141)

61
 
(197)

    Investment securities, net

(496

)

(90)

34
 
(552)

    Mortgage-backed securities, net

572
 
(1,018)

(226

)

(672)

    Collateralized mortgage obligations, net

(412

)

(2,331)

1,959
 
(784)

    Loans receivable, net

3,419
 
(5,399)

(416

)

(2,396)

    FHLB stock

(92

)

(156)

30
 
(218)

        Total interest-earning          assets

2,874
 
(9,135)

1,442
 
(4,819)
       
**  Interest-bearing liabilities:**
      
    Savings accounts

34
 
(125)

(15

)

(106)

    Money market accounts

213
 
(1,129)

(88

)

(1,004)

    NOW and other demand deposit accounts

963
 
(1,024)

(413

)

(474)

    Certificate accounts

(1,129

)

(1,982)

235
 
(2,876)

    FHLB advances and other borrowings

(492

)

(1,827)

155
 
(2,164)

        Total interest-bearing          liabilities

(411

)

(6,087)

(126

)

(6,624)

        Change in net interest          income

$      3,285 
 
(3,048)

1,568
 
       1,805

 

12

**PFF BANCORP, INC. AND SUBSIDIARIES   Management's Discussion and Analysis of Financial Condition and Results  of Operations  (Continued)**
**Forward-Looking Statements**

Except for historical information contained herein, the matters discussed  in this report contain forward-looking statements within the meaning of  Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),  and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange  Act"), that involve substantial risks and uncertainties. When used in this  report, or in the documents incorporated by reference herein, the words "anticipate,"  "believe," "estimate," "may," "intend," "expect" and  similar expressions identify certain of such forward-looking statements.   Actual results could differ materially from such forward-looking statements  contained herein.  Factors that could cause future results to vary from  current expectations include, but are not limited to, the following: changes  in economic conditions (both generally and more specifically in the markets in  which the Company operates); changes in interest rates, deposit flows, loan  demand, real estate values and competition; changes in accounting principles,  policies or guidelines and in government legislation and regulation (which  change from time to time and over which the Company has no control); other  factors affecting the Company's operations, markets, products and services;  and other risks detailed in this Form 10-Q and in the Company's other  Securities and Exchange Commission filings. Readers are cautioned not to place  undue reliance on these forward-looking statements, which reflect management's  analysis only as of the date hereof.  The Company undertakes no  obligation to publicly revise these forward-looking statements to reflect  events or circumstances that arise after the date hereof.

**Critical Accounting Policies**

  The Company has established various accounting policies which govern the  application of accounting principles generally accepted in the United Sates of  America in the preparation of the consolidated financial statements.  The  significant accounting policies are described in the Company's Annual Report  on Form 10-K for the year ended March 31, 2003. Certain accounting policies  require significant estimates and assumptions which have a material impact on  the carrying value of certain assets and liabilities, and these are considered  to be critical accounting policies.  The estimates and assumptions used  are based on historical experience and other factors, which are believed to be  reasonable under the circumstances.  Actual results could differ  significantly from these estimates and assumptions which could have a material  impact on the carrying value of assets and liabilities at the balance sheet  dates and on the results of operations for the reporting periods.

  The following represents critical accounting policies that require the most  significant estimates and assumptions that are particularly susceptible to  significant change in the preparation of the consolidated financial  statements:
- Allowance for loan losses.  For further information, see      "Comparison of Financial Condition at June 30, 2003 and March 31,      2003."
- Mortgage Servicing Rights.  For further information, see "Item      1 - Lending Activities - Loan Servicing" and "Note 10 to the      Consolidated Financial Statements" as found in the Company's March      31, 2003 Annual Report on Form 10-K.
- Pension Accounting.  For further information, see "Note 14 to      the Consolidated Financial Statements" as found in the Company's      Annual Report on Form 10-K.
- Other-Than-Temporary-Impairment.  For further information, see      "Item 1 - Investment Activities" as found in the Company's      Annual Report on Form 10-K.
     
13

 

**PFF BANCORP, INC. AND SUBSIDIARIES   Management's Discussion and Analysis of Financial Condition and Results  of Operations  (Continued)**

**Comparison of Operating Results for the Three Months Ended June 30,  2003 and 2002**

**General**

The following discussion compares the results of operations for the three  months ended June 30, 2003 with the same period of 2002 and the consolidated  financial condition at June 30, 2003 to March 31, 2003. This discussion should  be read in conjunction with the consolidated financial statements and  footnotes included therein.

The Company recorded net earnings of $9.3 million or $0.79 per diluted  share for the three months ended June 30, 2003 compared to net earnings of  $8.9 million or $0.68 per diluted share for the comparable period of 2002.

Net interest income increased $1.8 million from $28.2 million for the three  months ended June 30, 2002 to $30.0 million for the comparable period of 2003.  The increase in net interest income reflects a 22 basis point increase in net  interest spread from 3.56% for the three months ended June 30, 2002 to 3.78%  for the comparable period of 2003, coupled with a $99.8 million increase in  average interest-earning assets from $2.95 billion for the three months ended  June 30, 2002 to $3.05 billion for the comparable period of 2003.

Provision for loan losses was $660,000 for the three months ended June 30,  2003 compared to $1.0 million for the comparable period of 2002.

Total non-interest income increased $1.3 million from $4.3 million for the  three months ended June 30, 2002 to $5.6 million for the comparable period of  2003. Total non-interest expense increased $2.5 million from $16.4 million for  the three months ended June 30, 2002 to $18.8 million for the comparable  period of 2003.

**Interest Income**

Interest income decreased $4.8 million from $48.6 million for the three  months ended June 30, 2002 to $43.8 million for the comparable period of 2003.  The decrease in interest income was attributable to an 85 basis point decrease  in average yield on interest-earning assets from 6.59% for the three months  ended June 30, 2002 to 5.74% for the comparable period of 2003.

Reflecting the lower interest rate environment, the average yield on loans  receivable, net decreased 87 basis points from 6.99% for the three months  ended June 30, 2002 to 6.12% for the comparable period of 2003. A substantial  increase in loan portfolio turnover coupled with the lower interest rate  environment has contributed significantly to the decrease in loan portfolio  yield. Loan originations and purchases were $508.6 million and $93.3 million  for the three months ended June 30, 2003, compared to $393.7 million and $62.6  million for the comparable period of 2002. Loan principal repayments were  $573.7 million and $388.7 million for the three months ended June 30, 2003 and  2002, respectively. Approximately 92 percent or $2.5 billion of the Company's  loans receivable, net are adjustable rate. This includes approximately 34  percent or $906.9 million of the portfolio comprised by hybrid adjustable rate  mortgages that are still in their initial fixed rate periods.

The average yield on the aggregate balance of mortgage-backed securities,  collateralized mortgage obligations (CMOs) and investment securities  (collectively "securities") fell 169 basis points from 4.87% for the three  months ended June 30, 2002 to 3.17% for the comparable period of 2003. The  decrease in the average yield on securities also reflects the impact of the  decrease in the general level of interest rates. Premium amortization  resulting from CMO repayments of $14.4 million for the three months ended June  30, 2003 and $1.2 million for the comparable period of 2002 reduced average  yield on securities and average yield on interest-earning assets by 44 basis  points and five basis points, respectively for the three months ended June 30,  2003 compared to three basis points and zero basis points, respectively for  the comparable period of 2002.

 

14

 

**PFF BANCORP, INC. AND SUBSIDIARIES   Management's Discussion and Analysis of Financial Condition and Results  of Operations  (Continued)**

The downward influence on average yield on interest-earning assets exerted  by the decrease in the general level of interest rates was partially mitigated  by the following two factors:
- The proportion of total average interest-earning assets comprised of      loans receivable, net increased from 84 percent for the three months ended      June 30, 2002 to 88 percent for the comparable period of 2003. The average      balance of loans receivable, net increased $195.7 million from $2.49      billion for the three months ended June 30, 2002 to $2.69 billion for the      comparable period of 2003. The average balance of securities decreased      $59.9 million from $361.6 million for the three months ended June 30,      2002, to $301.7 million for the comparable period of 2003; and
- Between the three months ended June 30, 2002 and 2003, the average      disbursed balance of construction, commercial business, commercial real      estate and consumer loans (the "Four-Cs") increased from 42 percent to      47 percent of average loans receivable, net. This represents a $208.3      million increase in the average balance of the Four-Cs from $1.06 billion      for the three months ended June 30, 2002 to $1.27 billion for the      comparable period of 2003. Originations of the Four-Cs represented 82% of      total loan originations for both the three months ended June 30, 2003 and      2002.

**Interest Expense**

Interest expense decreased $6.6 million from $20.4 million for the three  months ended June 30, 2002 to $13.8 million for the comparable period of 2003.  The decrease in interest expense was attributable principally to a 107 basis  point decrease in the average cost of interest-bearing liabilities from 3.03%  for the three months ended June 30, 2002 to 1.96% for the comparable period of  2003. Average interest-bearing liabilities increased $113.6 million from $2.69  billion for the three months ended June 30, 2002 to $2.81 billion for the  comparable period of 2003.

The 107 basis point decrease in the average cost of interest-bearing  liabilities reflects a 95 basis point decrease in the average cost of  deposits, and a 143 basis point decrease in the average cost of FHLB advances  and other borrowings. Strong growth in deposits resulted in an increase in the  proportion of total interest-bearing liabilities comprised of deposits from 81  percent for the three months ended June 30, 2002 to 83 percent for the  comparable period of 2003. The average balance of total deposits increased  $158.4 million from $2.18 billion for the three months ended June 30, 2002 to  $2.34 billion for the comparable period of 2003. The average balance of FHLB  advances and other borrowings decreased $44.8 million from $511.5 million for  the three months ended June 30, 2002 to $466.7 million for the comparable  period of 2003.

The average cost of deposits decreased from 2.71% for the three months  ended June 30, 2002 to 1.76% for the comparable period of 2003, reflecting  strong growth in the lower cost categories of deposits coupled with the  decrease in the general level of market interest rates. The average balance of  money market, savings and NOW accounts (collectively, "core deposits")  increased $283.4 million from $1.15 billion or 53 percent of average total  deposits for the three months ended June 30, 2002 to $1.43 billion or 61% of  average total deposits for the comparable period of 2003. The average cost of  core deposits was 1.07% for the three months ended June 30, 2003 compared to  1.89% for the comparable period of 2002.

Management is of the opinion that a portion of the increase in the average  balance of core deposits between the three months ended June 30, 2002 and 2003  was attributable to the volatility of the equity securities markets. The  reduction in the general level of interest rates also reduced or eliminated  the differential between rates offered on certificates of deposit  ("CDs") and rates paid on certain core deposit accounts. An increase  in investor interest in equity investments may reduce the rate of increase or  reduce the balance of core deposits. An increase in the general level of  interest rates could also cause CD rates to rise to a level sufficiently above  core deposit rates to draw money from core accounts back into CDs. See "Liquidity  and Capital Resources" in this Form 10-Q and "Asset/Liability Management"  under "Item 7 Management Discussion and Analysis of Financial Condition and  Results of Operations" in the Company's Annual Report on Form 10-K for the  fiscal year ended March 31, 2003 for a discussion of the possible impact of  changes in deposit composition and pricing.

 

15

 

**PFF BANCORP, INC. AND SUBSIDIARIES   Management's Discussion and Analysis of Financial Condition and Results  of Operations  (Continued)**

**Provision for Loan Losses**

Provision for loan losses was $660,000 for the three months ended June 30,  2003 compared to $1.0 million for the comparable period of 2002.

The provision for loan losses is a result of management's periodic  analysis of risks inherent in the loan portfolio, as well as the adequacy of  the allowance for loan losses. The Company's policy to provide valuation  allowances for estimated losses on loans is based upon past loss experience,  current trends in the level of delinquent loans, specific problem loans, loan  concentrations to single borrowers, adverse situations that may affect the  borrower's ability to repay, the estimated value of any underlying  collateral, and current economic conditions in the Company's market area.  For additional discussion on our allowance for loan losses, see "Comparison  of Financial Condition at June 30, 2003 and March 31, 2003."

**Non-Interest Income**

Non-interest income increased from $4.3 million for the three months ended  June 30, 2002 to $5.6 million for the comparable period of 2003.

Reflecting the growth in core deposits, deposit and related fees increased  $105,000 from $2.7 million for the three months ended June 30, 2002 to $2.8  million for the comparable period of 2003. The greatest growth in core  deposits has been in the higher balance tiers of the interest-bearing checking  and money market accounts on which there is less opportunity for the  assessment of service charges. As of June 30, 2003 and 2002, the Bank's  average core deposit account balances were $1.43 billion and $1.15 billion,  respectively. Accordingly, the four percent growth in deposit and related fees  should not be expected to mirror the 25 percent growth in the average balance  of core deposits between the three months ended June 30, 2002 and 2003.

The increase in loan and servicing fees from $1.1 million for the three  months ended June 30, 2002 to $1.6 million for the comparable period of 2003  reflects the increase in fees associated with the loan repayments noted  earlier. The increase in gain on sale of loans, net from $51,000 for the three  months ended June 30, 2002 to $375,000 for the three months ended June 30,  2003 reflects the Company's policy of managing long-term interest rate risk  exposure by selling virtually all of its 15 and 30 year fixed rate mortgage  originations. Loan sales were $14.1 million and $963,000 for the three months  ended June 30, 2003 and 2002, respectively. Loan and servicing fees income is  shown net of amortization of $14,000 and $109,000 for the three months ended  June 30, 2003 and 2002, respectively of the Company's originated mortgage  servicing rights (MSR) asset.

During the three months ended June 30, 2002, the Company incurred a net  loss of $209,000 on trading securities activity. The Company liquidated its  entire portfolio of trading securities during the quarter ended March 31,  2003.
     
16

 

**PFF BANCORP, INC. AND SUBSIDIARIES   Management's Discussion and Analysis of Financial Condition and Results  of Operations  (Continued)**

**Non-Interest Expense**

Non-interest expense increased from $16.4 million for the three months  ended June 30, 2002 to $18.8 million for the comparable period of 2003.

General and administrative (G&A) expense increased from $16.5 million  or 2.19%, on an annualized basis, of average assets for the three months ended  June 30, 2002 to $18.8 million or 2.40%, on an annualized basis, of average  assets for the comparable period of 2003.

The Company's opening of two new de-novo branches during July and  September, 2002, was responsible for $354,000 of the increase in G&A  expense between the three months ended June 30, 2002 and 2003. The Company's  registered investment advisor, Glencrest Investment Advisors, Inc. (Glencrest),  which commenced operations in April 2002, also contributed to the increase in  operating expenses. During the three months ended June 30, 2003 and 2002  operating expense associated with Glencrest totaled $668,000, and $475,000,  respectively.

The increase in compensation and benefits from $9.7 million for the three  months ended June 30, 2002 to $10.7 million for the comparable period of 2003  reflects increases in staffing for the two new branches and Glencrest as well  as personnel necessary to handle higher volumes of the Four-Cs and core  deposits.

**Income Taxes**

Income taxes were $6.8 million for the three months ended June 30, 2003  compared to $6.3 million for the comparable period of 2002. The effective tax  rates were 42.3% and 41.7% for the three months ended June 30, 2003 and 2002,  respectively.

**Comparison of Financial Condition at June 30, 2003 and March 31, 2003**

Total assets decreased $39.1 million from $3.15 billion at March 31, 2003  to $3.11 billion at June 30, 2003. Loans receivable, net were virtually  unchanged at $2.69 billion at both March 31, and June 30, 2003. The aggregate  balance of securities decreased $26.3 million from $330.3 million at March 31,  2003 to $304.0 million at June 30, 2003.

Non-accrual loans increased to $22.3 million or 0.71 percent of gross loans  at June 30, 2003, from $18.6 million or 0.59 percent of gross loans at March  31, 2003. The increase in non-accrual loans was attributable principally to  $5.5 million of tract construction loans on a residential subdivision located  in La Quinta, California. The loans are secured by five single-family homes  (of ten originally constructed in the first phase) and 26 finished lots for  the future construction of homes. Due to the lack of absorption in the  project, the third-party equity provider took over day-to-day operations of  the project, and arranged for the bulk sale of the 26 lots.  The escrow  on this sale was extended for a period not to exceed 30 days and is now  expected to close in early September 2003.  In connection with this  extension, the buyers deposited into escrow an additional non-refundable  $50,000.  The buyers have also paid the City of La Quinta a building  permit extension fee on the project.  Proceeds from the sale of the lots  is expected to reduce the Bank's outstanding loans to $2.1 million on the  remaining five homes, and include the collection of all accrued but unpaid  interest on the loans.  No loss is anticipated on this loan.

 

17

 

**PFF BANCORP, INC. AND SUBSIDIARIES   Management's Discussion and Analysis of Financial Condition and Results  of Operations  (Continued)**

Other developments with respect to problem credits during the current  quarter were as follows:
- The lead lender on two commercial aircraft leases in which the Bank had      participating interests totaling $3.2 million repurchased the Bank's      interests in the leases for $2.9 million. The Bank charged-off the      $319,000 difference between the repurchase price and its investment in the      leases.
- With respect to the commercial business loan to a chain of jewelry      stores that was discussed in the Company's March 31, 2003 Form 10-K, the      Bank charged off the $2.1 million difference between the estimated      realizable value of jewelry inventory repossessed by the Bank and the $2.7      million loan balance.

In determining the adequacy of the allowance for loan and lease losses at  March 31, 2003, the Company had anticipated and fully provided for the losses  represented by the two charge-offs noted above.

At June 30, 2003, the allowance for loan losses was $29.2 million or 0.93  percent of gross loans and 131 percent of non-accrual loans compared to $31.1  million or 0.99 percent of gross loans and 168 percent of non-accrual loans at  March 31, 2003.

The allowance for loan losses is maintained at an amount management  considers adequate to cover probable losses on loans receivable. The allowance  is based upon a number of factors, including current economic conditions,  actual loss experience, industry trends, the composition of the loan portfolio  by type and the composition of identified problem credits. In addition,  various regulatory agencies, as an integral part of their examination process,  periodically review the Bank's allowance for loan losses. Such agencies may  require the Bank to make additional provisions for loan losses based upon  information available at the time of the review. 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.

The following table sets forth activity in the Company's allowance for  loan losses.

**Three Months Ended          June 30, 2003**

**(Dollars in thousands)**
Balance at March 31, 2003
$31,121
 
Provision for loan losses

660
 
Charge-offs

(2,634

)

Recoveries

76
 
Balance at June 30, 2003

$29,223
 
The aircraft leases and jewelry store charge-offs noted above represented  $2.4 million or 92 percent of the $2.6 million of total charge-offs for the  three months ended June 30, 2003.  Those charge-offs, which, as noted  above, were fully anticipated in determining the adequacy of the allowance for  loan losses at March 31, 2003, caused total charge-offs for the three months  ended June 30, 2003, to significantly exceed the provision for loan losses  causing the allowance for loan losses to decrease $1.9 million between March  31, and June 30, 2003.  Excluding the reductions in non-accrual loans and  the allowance for loan losses arising from the final disposition of the  aircraft leases and jewelry store loan, non-accrual loans and the allowance  for loan losses would have increased $9.6 million and $521,000, respectively.

 

18

 

**PFF BANCORP, INC. AND SUBSIDIARIES   Management's Discussion and Analysis of Financial Condition and Results  of Operations  (Continued)**

Total liabilities decreased $52.1 million from $2.88 billion at March 31,  2003 to $2.83 billion at June 30, 2003. Deposits increased $15.8 million from  $2.33 billion at March 31, 2003 to $2.34 billion at June 30, 2003. Core  deposits increased $39.3 million from $1.40 billion at March 31, 2003 to $1.44  billion at June 30, 2003.  FHLB advances and other borrowings were paid  down by $42.4 million during the quarter to $443.0 million at June 30, 2003.

Total stockholders' equity was $286.1 million at June 30, 2003 compared  to $273.1 million at March 31, 2003. The $13.0 million increase in total  stockholders' equity was comprised principally of a $7.8 million increase in  retained earnings, substantially restricted, a $2.6 million increase in  additional paid-in-capital, a $2.2 million decrease in accumulated other  comprehensive losses and a $444,000 decrease in unearned stock-based  compensation. The $7.8 million increase in retained earnings, substantially  restricted, reflects the $9.3 million of net earnings for the three months  ended June 30, 2003 partially offset by $1.1 million representing a quarterly  cash dividend of $0.10 per common share paid on June 27, 2003 to shareholders  of record as of June 13, 2003. $1.6 million of the $2.6 million increase in  additional paid-in-capital reflects the exercise of 67,507 stock options  issued to employees along with the tax benefit to the Company arising  therefrom. The $2.2 million decrease in accumulated other comprehensive losses  reflects a reduction in the unrealized loss, net of tax on available-for-sale  securities from $5.0 million at March 31, 2003 to $2.8 million at June 30,  2003. The $444,000 decrease in unearned stock-based compensation reflects the  amortization of compensation expense under the Company's Employee Stock  Ownership Plan. During the three months ended June 30, 2003, the Company  repurchased 16,500 shares of its common stock at a weighted average price of  $33.96 per share.  $395,000 representing the amount paid by the Company  in excess of the original issuance price of these repurchased shares was  removed from retained earnings, substantially restricted, and $165,000  representing the original issuance price of the 16,500 shares was removed from  additional paid-in-capital.

**Liquidity and Capital Resources**

The Company's primary sources of funds are deposits, principal and interest  payments on loans and securities, FHLB advances and other borrowings, proceeds  from the maturation of securities and, to a lesser extent, proceeds from the  sale of loans and securities. While maturities and scheduled amortization of  loans and securities are predictable sources of funds, deposit flows and  mortgage and security prepayments are greatly influenced by the general level  of interest rates, economic conditions and competition. OTS regulations  require that sufficient liquidity be maintained at a level which ensures safe  and sound banking practices.  Management's strategy is to invest excess  liquidity in higher yielding interest-earning assets, such as loans or other  investments, depending on market conditions. The Company has invested in  investment grade corporate securities when the yields thereon have been more  attractive than U.S. government and federal agency securities of similar  maturity.

The Company's cash flows are comprised of three primary classifications:  cash flows from operating activities, investing activities and financing  activities. Net cash flows used in operating activities were $11.5 million for  the three months ended June 30, 2003, compared to net cash flows provided by  operating activities of $17.5 million for the comparable period of the prior  year.  The change from net cash provided by operating activities in 2002,  to net cash used by operating activities in 2003, was attributable principally  to an increase in the volume of loans originated for sale from $921,000 for  the three months ended June 30, 2002 to $12.3 million for the comparable  period of 2003 and a change in accrued expenses and other liabilities from an  increase of $4.5 million during the three months ended June 30, 2002 to a  decrease of $26.4 million during the comparable period of 2003.    The $26.4 million decrease in accrued expenses and other liabilities between  March 31 and  June 30, 2003 was attributable to the Company's  application of trade date accounting to $35.8 million of securities purchased  but not yet settled as of March 31, 2003.

 

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**PFF BANCORP, INC. AND SUBSIDIARIES   Management's Discussion and Analysis of Financial Condition and Results  of Operations  (Continued)**

Investing activities consist primarily of disbursements for originations  and purchases of loans held for investment and purchases of securities, offset  by principal payments on loans, and proceeds from maturation, paydowns and  sales of securities.

The following items summarize the major components of the Company's  investing activities. For the three months ended June 30, 2003 disbursements  for originations and purchases of loans held for investment were $496.2  million and $93.3 million, respectively, compared to $392.7 million and $62.6  million, respectively, for the comparable period of 2002. For the three months  ended June 30, 2003 and 2002, disbursements for purchases of securities were  $45.3 million and $20.0 million, respectively. Proceeds from paydowns on loans  held for investment and proceeds from maturation, paydowns and sales of  securities were $573.7 million and $72.3 million, respectively for the three  months ended June 30, 2003, compared to $388.7 million and $38.7 million for  the comparable period of 2002.

Net cash provided by (used in) financing activities consisted primarily of  net activity in deposits and FHLB advances. The net increases (decreases) in  deposits and FHLB advances and other borrowings were $15.8 million and $(42.4)  million and $19.2 million and $(70.0) million for the three months ended June  30, 2003 and 2002, respectively.

At June 30, 2003, the Bank exceeded all of its regulatory capital  requirements with a tangible capital level of $258.2 million, or 8.36% of  adjusted total assets, which is above the required level of $46.3 million, or  1.5%; core capital of $258.2 million, or 8.36% of adjusted total assets, which  is above the required level of $123.5 million, or 4.0%; and total risk-based  capital of $284.2 million, or 11.96% of risk-weighted assets, which is above  the required level of $190.2 million, or 8.0%.

The Company's most liquid assets are cash and cash equivalents. The levels  of these assets are dependent on the Company's operating, financing, lending  and investing activities during any given period. At June 30, 2003, cash and  cash equivalents totaled $40.5 million.  The Company has other sources of  liquidity if a need for additional funds arises, including the utilization of  reverse repurchase agreements and FHLB advances. At June 30, 2003, the Company  had $443.0 million of FHLB advances and other borrowings outstanding. Other  sources of liquidity include investment securities maturing within one year.

The Company currently has no material contractual obligations or  commitments for capital expenditures. At June 30, 2003, the Company had  outstanding commitments to originate and purchase loans of $105.5 million and  $54.8 million, respectively. The Company anticipates that it will have  sufficient funds available to meet these commitments. At June 30, 2003, and  2002 the Company had no outstanding commitments to purchase securities. CDs  that are scheduled to mature in less than one year from June 30, 2003 totaled  $651.4 million. The Company expects that a substantial portion of the monies  represented by maturing CDs will be retained at maturity. FHLB advances and  other borrowings maturing in less than one year from June 30, 2003 totaled  $283.0 million. The Company expects that the majority of these maturing  advances will be rolled into new advances upon maturity.

**Segment Reporting**

The Company, through its subsidiaries, 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; cash management; trust and  investment advisory 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.

 

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**PFF BANCORP, INC. AND SUBSIDIARIES   Management's Discussion and Analysis of Financial Condition and Results  of Operations  (Continued)**

**Item 3. Qualitative and Quantitative  Disclosures about Market Risk**

Readers should refer to the qualitative and quantitative disclosures  (consisting primarily of interest rate risk) in the Company's March 31, 2003  Annual Report on Form 10-K, as there have been no significant changes in these  disclosures during the three months ended June 30, 2003.

**Item 4. Controls and Procedures**

The Company's Chief Executive Officer and Chief Financial Officer have  carried out an examination of the effectiveness of the Company's disclosure  controls and procedures (as defined in Exchange Act Rules 13a-15(e) and  15d-15(e)) as of the end of the period covered by this report.  Based  upon that evaluation, the Chief Executive Officer and Chief Financial Officer  concluded that the Company's disclosure controls and procedures are effective  in timely alerting them to material information relating to the Company  required to be included in the Company's periodic Securities and Exchange  Commission filings.  There have been no significant changes in the  Company's internal controls over financial reporting in connection with this  evaluation that has materially affected, or is reasonably likely to materially  affect, the company's internal control over financial reporting.
 
21

 

**PART II - OTHER INFORMATION**

**PFF BANCORP, INC. AND SUBSIDIARIES**
**Item 1.****Legal Proceedings.**
 
The Company and subsidiaries have been named as defendants in various        lawsuits arising in the normal course of business.  The outcome of        the lawsuits cannot be predicted, but the Company intends to vigorously        defend the actions and is of the opinion that the lawsuits will not have        a material adverse effect on the Company.

 
**Item 2.****Changes in Securities and Use of Proceeds.**
 
None

 
**Item 3.****Defaults Upon Senior Securities.**
 
None

 
**Item 4.****Submission of Matter to a Vote of Security Holders.**
 
None

 
**Item 5.****Other Information.**
 
None

 
**Item 6.****Exhibits and Reports on Form 8-K**
**.**
(a)(3)

(a)

The following exhibits are filed as part of this report:

3.1

Certificate of Incorporation of PFF Bancorp, Inc. *

 

3.2

Bylaws of PFF Bancorp, Inc. *

 

31.1

Certifications pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

 

32.1

Certifications pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

 

(b)

Reports on Form 8-K

 

Form 8-K filed April 18, 2003, announcing the Company's earnings        for the year ended March 31, 2003, under Item 9.   A copy of        the press release dated April 17, 2003, describing annual earnings was        attached under Item 7.

_________________________

*Incorporated herein by reference to Form S-1, Registration        Statement, as amended, filed on December 8, 1995, SEC Registration        Number 33-94860.

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**PFF BANCORP, INC. AND SUBSIDIARIES        SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,        the Registrant has duly caused this report to be signed on its behalf by        the undersigned, thereunto duly authorized.

 

PFF BANCORP, INC.

 

DATED: August 14, 2003

BY: /s/ LARRY M. RINEHART

Larry M. Rinehart        President, Chief Executive Officer        and Director

 

DATED: August 14, 2003

BY: /s/ GREGORY C. TALBOTT

Gregory C. Talbott        Executive Vice President, Chief        Financial Officer and Treasurer

 

 

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