-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U4BbtA7/GmA+k2bIFi2kTSq88jPEuB1APeO6bJA6Z8dLrpAMEx78nvJmZaYkyF3G KB3a+mJe15PI5UYMRtjzZw== 0000909654-99-000107.txt : 19990217 0000909654-99-000107.hdr.sgml : 19990217 ACCESSION NUMBER: 0000909654-99-000107 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990216 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SGV BANCORP INC CENTRAL INDEX KEY: 0000940511 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 954524789 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-25664 FILM NUMBER: 99540081 BUSINESS ADDRESS: STREET 1: 225 NORTH BARRANCA AVE CITY: WEST COVINA STATE: CA ZIP: 91791 BUSINESS PHONE: 8188594200 10-Q 1 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1998 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 0-25664 SGV BANCORP, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 95-4524789 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I. R. S. Employer Identification No.) incorporation or organization) 225 NORTH BARRANCA STREET, WEST COVINA, CALIFORNIA 91791 - -------------------------------------------------------------------------------- (Address of principal executive offices) (626) 859-4200 - -------------------------------------------------------------------------------- (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 require 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 --- --- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 2,181,323 shares of common stock, par value $0.01 per share, were outstanding as of February 9, 1999. 2 SGV BANCORP, INC. FORM 10-Q INDEX PART I FINANCIAL INFORMATION PAGE ---- Item 1 Consolidated Statements of Financial Condition: December 31, 1998 (unaudited) and June 30, 1998.....................1 Consolidated Statements of Operations (unaudited): For the Six Months Ended December 31, 1998 and 1997 and for the Three Months Ended December 31, 1998 and 1997 ......................2 Consolidated Statements of Cash Flows (unaudited): For the Six Months Ended December 31, 1998 and 1997.................3 Notes to Consolidated Financial Statements..........................5 Item 2 Management's Discussion and Analysis of Results of Operations and Financial Condition.......................8 Item 3 Quantitative and Qualitative Disclosure Regarding Market Risk......21 PART II OTHER INFORMATION Item 1 Legal Proceedings..................................................22 Item 2 Changes in Securities..............................................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...................................23 SIGNATURES..................................................................24 3
SGV BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (IN THOUSANDS, EXCEPT SHARE DATA) - ------------------------------------------------------------------------------------------------------------------- DECEMBER 31, JUNE 30, 1998 1998 ---- ---- ASSETS: (Unaudited) Cash and cash equivalents, including short-term bank obligations of $3,390 at December 31, 1998 and $16,202 at June 30, 1998 $ 11,595 $ 20,008 Investment securities available for sale, amortized cost of $25,325 at December 31, 1998 and $19,241 at June 30, 1998 25,227 19,221 Mortgage-backed securities available for sale, amortized cost of $26,664 at December 31, 1998 and $29,386 at June 30, 1998 26,623 29,383 Mortgage-backed securities held to maturity, estimated fair value of $33,880 at December 31, 1998 and $30,089 at June 30, 1998 33,748 29,936 Loans receivable held for sale 1,287 391 Loans receivable held for investment, net of allowance for estimated loan losses of $1,563 at December 31, 1998 and $1,425 at June 30, 1998 346,873 295,739 Accrued interest receivable 3,071 2,774 Stock of Federal Home Loan Bank of San Francisco, at cost 5,266 4,234 Real estate acquired through foreclosure, net 814 1,902 Premises and equipment, net 3,322 3,537 Prepaid expenses and other assets, net 3,707 1,221 --------------- ----------- Total assets $ 461,533 $ 408,346 =============== =========== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Deposit accounts $ 317,564 $ 295,281 Federal Home Loan Bank advances 103,991 70,543 Securities sold under agreements to repurchase 4,300 6,000 Accrued expenses and other liabilities 4,583 4,289 --------------- ----------- Total liabilities 430,438 376,113 STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value; 2,000,000 shares authorized; none issued Common stock, $.01 par value; 10,000,000 shares authorized; 2,727,656 issued; 2,181,323 shares outstanding at December 31, 1998 and 2,348,068 shares outstanding at June 30, 1998 27 27 Additional paid-in capital 21,229 21,147 Retained earnings, substantially restricted 17,879 16,688 Accumulated other comprehensive income (81) (13) Deferred stock compensation (1,412) (1,555) Treasury stock, 546,333 shares at December 31,1998 and 379,588 shares at June 30, 1998 (6,547) (4,061) --------------- ------------ Total stockholders' equity 31,095 32,233 --------------- ------------ Total liabilities and stockholders' equity $ 461,533 $ 408,346 =============== ============
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SGV BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)(UNAUDITED) - ---------------------------------------------------------------------------------------------------------------------------- FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED DECEMBER 31, ENDED DECEMBER 31, 1998 1997 1998 1997 ---------------------------- -------------------------------- INTEREST INCOME: Interest on loans $ 6,717 $ 5,980 $ 12,656 $ 11,458 Interest on investment securities 283 263 648 576 Interest on mortgage-backed securities 980 985 2,004 2,253 Other 146 231 355 496 ------------- ------------ ------------ -------------- Total interest income 8,126 7,459 15,663 14,783 ------------- ------------ ------------ -------------- INTEREST EXPENSE: Interest on deposit accounts 3,442 3,558 6,839 7,033 Interest on borrowings 1,590 1,282 2,868 2,624 ------------- ------------ ------------ -------------- Total interest expense 5,032 4,840 9,707 9,657 ------------- ------------ ------------ -------------- Net interest income before provision for estimated loan losses 3,094 2,619 5,956 5,126 PROVISION FOR ESTIMATED LOAN LOSSES 210 268 479 343 ------------- ------------ ------------ -------------- Net interest income after provision for estimated loan losses 2,884 2,351 5,477 4,783 OTHER INCOME (EXPENSE): Loan servicing and other fees 151 137 296 263 Deposit account fees 144 136 288 264 Secondary marketing activity, net 40 14 61 9 Gain on sale or redemption of securities available for sale, net 7 37 Other income 158 40 254 81 Net (loss) gain on real estate acquired through foreclosure (10) (75) 135 (63) ------------- ------------ ------------ -------------- Total other income 483 252 1,041 591 ------------- ------------ ------------ -------------- GENERAL AND ADMINISTRATIVE EXPENSES: Compensation and other employee expenses 1,249 1,194 2,478 2,382 Office occupancy 269 272 535 541 Data Processing and Equipment 298 275 575 529 Advertising 38 26 68 78 FDIC insurance premiums 43 45 87 89 Other operating expenses 409 387 752 776 ------------- ------------ ------------ -------------- Total general and administrative expenses 2,306 2,199 4,495 4,395 ------------- ------------ ------------ -------------- EARNINGS BEFORE INCOME TAXES 1,061 404 2,023 979 INCOME TAXES 437 170 833 414 ------------- ------------ ------------ -------------- NET EARNINGS $ 624 $ 234 $ 1,190 $ 565 ============= ============ ============ ============== EARNINGS PER SHARE - Basic $ 0.28 $ 0.10 $ 0.53 $ 0.24 ============= ============ ============ ============== EARNINGS PER SHARE - Diluted $ 0.27 $ 0.09 $ 0.51 $ 0.23 ============= ============ ============ ==============
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SGV BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) - ----------------------------------------------------------------------------------------------------------------------------- FOR THE SIX MONTHS ENDED DECEMBER 31, --------------------------------------------- 1998 1997 ------------------ ------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 1,190 $ 565 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 320 328 Loans originated for sale (11,266) (7,258) Proceeds from sale of loans 10,455 7,055 Gain on sale of loans, net (85) (25) Gain on sale of investments available for sale, net (10) (7) Gain on sale of mortgage-backed securities available for sale, net (2) (31) Federal Home Loan Bank stock dividend (126) (126) (Increase) decrease in prepaid expenses and other assets (2,538) 20 Amortization of deferred loan fees (159) (36) Deferred loan origination costs (228) (121) Increase in accrued expenses and other liabilities 343 435 Provision for estimated loan losses 479 343 (Recapture of) provision for estimated real estate losses (45) 56 Premium amortization, net 386 118 (Increase) decrease in accrued interest receivable (297) 84 Other, net 133 (125) ---------------- --------------- Net cash provided by operating activities (1,450) 1,275 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of investment securities available for sale (65,871) (21,748) Proceeds from sale and redemption of investment securities available for sale 59,802 20,507 Purchase of mortgage-backed securities available for sale (10,153) Proceeds from sale of mortgage-backed securities available for sale 6,931 14,480 Purchase of mortgage-backed securities held to maturity (10,030) Principal repayments on mortgage-backed securities 11,939 6,328 Loans funded, net (35,521) (13,267) Loans purchased, net (63,926) (40,623) Principal repayments on loans 46,993 21,778 Proceeds from sale of real estate 2,127 1,069 Purchase of premises and equipment (71) (113) Purchase of Federal Home Loan Bank Stock (906) Other, net (37) (69) -------------- --------------- Net cash used in investing activities (58,723) (11,658)
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SGV BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)(CONTINUED) - ----------------------------------------------------------------------------------------------------------------------------- FOR THE SIX MONTHS ENDED DECEMBER 31, --------------------------------------------- 1998 1997 ------------------ ------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net decrease in certificate accounts $ (4,603) $ (5,985) Net increase in passbook, money market savings, NOW and non-interest-bearing accounts 26,886 13,197 Proceeds from Federal Home Loan Bank advances 46,500 Repayment of Federal Home Loan Bank advances (13,052) (6,686) Proceeds from securities sold under agreements to repurchase 4,300 Repayment of securities sold under agreements to repurchase (6,000) (3,430) Purchase of treasury stock (2,486) Other, net 215 233 ------------------ ------------------- Net cash provided by (used in) financing activities 51,760 (2,671) NET DECREASE IN CASH AND CASH EQUIVALENTS (8,413) (13,054) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 20,008 22,664 ------------------ ------------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 11,595 $ 9,610 ================== =================== SUPPLEMENTAL CASH FLOW DISCLOSURES Cash paid during the period for: Interest $ 9,629 $ 9,652 Income taxes, net 1,060 536 NONCASH INVESTING ACTIVITIES DURING THE PERIOD: Real estate acquired through foreclosure 951 1,312 Change in net unrealized loss on investment securities and mortgage-backed securities available for sale, net of taxes (68) 87
4 7 SGV BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 (UNAUDITED) 1. Basis of Presentation: SGV Bancorp, Inc. ("SGV") is a savings and loan holding company incorporated in the state of Delaware that was organized for the purpose of acquiring all of the capital stock of First Federal Savings and Loan Association of San Gabriel Valley ("the Association") upon its conversion from a federally chartered mutual savings and loan association to a federally chartered stock savings and loan association. On June 28, 1995, SGV completed its sale of 2,727,656 shares of its common stock through subscription and community offerings to the Association's depositors, the Employee Stock Ownership Plan and the public and used approximately 60% of the net proceeds from such sales to purchase all of the Association's common stock issued in the Association's conversion to stock form. Such business combination was accounted for at historical cost in a manner similar to a pooling of interests. SGV engages only in limited business operations primarily involving investments in federal agency securities and mortgage-backed securities, and as a result, substantially all of the net earnings and performance figures herein reflect the results of the Association. The Association is primarily engaged in attracting deposits from the general public in the areas in which its branches are located and investing such deposits and other available funds primarily in mortgage loans secured by one-to-four family residences. To a lesser extent, the Association invests in multi-family residential mortgages, commercial real estate, land and other loans. The Association's revenues are derived principally from interest on its mortgage loans, and to a lesser extent, interest and dividends on its investment and mortgage-backed securities and income from loan servicing. The Association's primary sources of funds are deposits, principal and interest payments on loans, advances from the Federal Home Loan Bank of San Francisco (the FHLB) and, to a lesser extent, proceeds from the sale of loans. As of December 31, 1998, the Association operated eight branch offices located in the San Gabriel Valley. The consolidated financial statements include the accounts of SGV Bancorp, Inc. and its wholly-owned subsidiary, First Federal Savings and Loan Association of San Gabriel Valley and its wholly-owned subsidiary, First Covina Service Company (collectively, the Company). All material intercompany balances and transactions have been eliminated in consolidation. The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management all necessary adjustments, consisting only of normal recurring adjustments necessary for a fair presentation have been included. The results of operations for the three and six-month periods ended December 31, 1998 are not necessarily indicative of the results that may be expected for the entire fiscal year. 5 8 These consolidated financial statements and the information under the heading "Management's Discussion and Analysis of Results of Operations and Financial Condition" should be read in conjunction with the audited consolidated financial statements and notes thereto of SGV Bancorp, Inc. for the year ended June 30, 1998 included in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1998. 2. Earnings Per Share Earnings per share reconciliation is as follows:
WEIGHTED AVERAGE INCOME SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT -------------- -------------- ----------- THREE MONTHS ENDED DECEMBER 31, 1998 --------------------------------------------------- BASIC EPS Income available to common stockholders $ 624,000 2,208,000 $ 0.28 EFFECT OF DILUTIVE SECURITIES Incremental shares from assumed exercise of outstanding options - 68,000 (0.01) ----------------- ------------------ ------------- DILUTED EPS Income available to common stockholders $ 624,000 2,276,000 $ 0.27 ================= ================== ============= SIX MONTHS ENDED DECEMBER 31, 1998 ----------------------------------------------------- BASIC EPS Income available to common stockholders $ 1,190,000 2,254,000 $ 0.53 EFFECT OF DILUTIVE SECURITIES Incremental shares from assumed exercise of outstanding options - 83,000 (0.02) ----------------- ------------------ ------------- DILUTED EPS Income available to common stockholders $ 1,190,000 2,337,000 $ 0.51 ================= ================== ============= THREE MONTHS ENDED DECEMBER 31, 1997 ---------------------------------------------------- BASIC EPS Income available to common stockholders $ 234,000 2,343,000 $ 0.10 EFFECT OF DILUTIVE SECURITIES Incremental shares from assumed exercise of outstanding options - 129,000 (0.01) ----------------- ------------------ ------------- DILUTED EPS Income available to common stockholders $ 234,000 2,472,000 $ 0.09 ================= ================== ============= SIX MONTHS ENDED DECEMBER 31, 1997 ---------------------------------------------------------- BASIC EPS Income available to common stockholders $ 565,000 2,343,000 $ 0.24 EFFECT OF DILUTIVE SECURITIES Incremental shares from assumed exercise of outstanding options - 123,000 (0.01) ----------------- ------------------ ------------- DILUTED EPS Income available to common stockholders $ 565,000 2,466,000 $ 0.23 ================= ================== =============
6 9 3. Comprehensive Income -------------------- The Company adopted Statement of Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME, effective July 1, 1998. The standard requires that comprehensive income and its components be disclosed in the financial statements. The Company's comprehensive income includes all items which comprise net income plus the unrealized holding losses on available-for-sale securities. For the three months and six months ended December 1998 and 1997, the Company's comprehensive income was as follows:
FOR THE THREE MONTHS ENDED: ---------------------------------------------------------------- DECEMBER 31, 1998 DECEMBER 31, 1997 --------------------------- --------------------------- (Dollars in thousands) Net income $ 624 $ 234 Other comprehensive income (loss) (21) (18) =========================== =========================== Total comprehensive income $ 603 $ 216 =========================== =========================== FOR THE SIX MONTHS ENDED: ---------------------------------------------------------------- DECEMBER 31, 1998 DECEMBER 31, 1997 --------------------------- --------------------------- (Dollars in thousands) Net income $ 1,190 $ 565 Other comprehensive income (loss) (68) 87 =========================== =========================== Total comprehensive income $ 1,122 $ 652 =========================== ===========================
4. Accounting Principles --------------------- In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 establishes standards of reporting by publicly held business enterprises and disclosure of information about operating segments in annual financial statements to a lesser extent, in interim financial reports issued to shareholders. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. Since the primary business of the Company is performed through the Association, there is no material difference in the information already presented in the financial statements contained herein and those required under SFAS No. 131 for information about operating segments. At this time, no additional disclosure is required. SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, was issued in June 1998 and establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Earlier application is encouraged, but it is permitted only as of the beginning of any fiscal quarter that begins after June 1998. The adoption of the provisions of SFAS No. 133 is not expected to have a material impact on the results of operations or the financial position of the Company. 7 10 5. Use of Estimates in the Preparation of Financial Statements ----------------------------------------------------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Item 2. Management's Discussion and Analysis of Results of Operations and ------------------------------------------------------------------ Financial Condition ------------------- This Management's Discussion and Analysis should be read in conjunction with the Management's Discussion and Analysis contained in the Company's Annual Report on Form 10-K, which focuses upon relevant matters occurring during the year ended June 30, 1998. Accordingly, the ensuing discussion focuses upon the material matters at and for the three months and six months ended December 31, 1998. GENERAL - ------- The principal business of the Company is attracting retail deposits from the general public and investing those deposits, together with funds generated from operations and borrowings, primarily in one- to four-family residential mortgage loans. To a lesser extent, the Company engages in secondary marketing activities and invests in multi-family, commercial real estate, construction, land and consumer loans. Loan sales come from loans held in the Company's portfolio designated as being held for sale or originated during the period and being so designated. The Company retains virtually all the servicing rights of loans sold. The Company's revenues are derived principally from interest on its mortgage loans, and to a lesser extent, interest and dividends on its investment and mortgage-backed securities and income from loan servicing. The Company's primary sources of funds are deposits, principal and interest payments on loans, advances from the FHLB, securities sold under agreements to repurchase and, to a lesser extent, proceeds from the sale of loans. RESULTS OF OPERATIONS - --------------------- The Company posted net earnings of $624,000 for the three months ended December 31, 1998 compared to net earnings of $234,000 for the three months ended December 31, 1997. For the six months ended December 31, 1998, the Company's net earnings were $1.2 million, as compared to net earnings of $565,000 for the six months ended December 31, 1997. For the three months ended December 31, 1998, the net earnings were $0.28 per share - basic, compared to $0.10 per share - basic for the three months ended December 31, 1997. For the six months ended December 31, 1998, the net earnings were $0.53 per share - basic, compared to net earnings of $0.24 per share - basic for the six months ended December 31, 1997. A discussion of the specific components of net earnings per share is set forth in the Notes to Consolidated Financial Statements. 8 11 Net Interest Income - ------------------- Net interest income before the provision for estimated loan losses was $3.1 million for the three months ended December 31, 1998 compared to $2.6 million for the three months ended December 31, 1997. For the six months ended December 31, 1998, net interest income was $6.0 million compared to $5.1 million for the six months ended December 31, 1997. Interest Income - --------------- Total interest income for the three months ended December 31, 1998 was $8.1 million, an increase of $0.6 million from the comparable period a year ago. The increase in interest income was primarily due to the $41.4 million increase in the average balance of interest-earning assets to $438.9 million for the three months ended December 31, 1998 from $397.5 million for the three months ended December 31, 1997. This increase was partially offset by the ten basis point decrease in the average yield on interest-earning assets to 7.41% for the three months ended December 31, 1998 as compared to 7.51% for the comparable period a year ago. The interest income on loans increased to $6.7 million for the three months ended December 31, 1998 from $6.0 million for the three months ended December 31, 1997. The increase in interest on loans was due primarily to the increase in the average balance of loans receivable outstanding to $345.1 million for the three months ended December 31, 1998 from $310.0 million for the three months ended December 31, 1997. The increase in interest on loans was also due to the increase in the yield on loans to 7.79% for the three months ended December 31, 1998 from 7.72% for the three months ended December 31, 1997 primarily due to the acquisition of loans with higher yields. The interest income on mortgage-backed securities was relatively unchanged as it totaled $980,000 for the three months ended December 31, 1998 compared to $985,000 for the three months ended December 31, 1997 as the $6.8 million increase in the average balance of mortgage-backed securities to $63.9 million was offset by the 78 basis point decline to 6.13% in the average yield on the securities. This decline in yield on the mortgage-backed securities portfolio was partially due to the faster amortization of premiums on purchased securities resulting from increased prepayments as a result of the lower interest rate environment. The interest income on investment securities and other declined by $65,000 to $429,000 for the three months ended December 31, 1998 primarily as a result of the declining interest rate environment. This was due primarily to the decline in the average yield to 5.74% for the current period versus 6.49% for the same period a year ago and partially to the decrease in the average balance of investment securities and other to $29.9 million for the three months ended December 31, 1998 from $30.5 million for the same period a year ago. The total yield on total interest-earning assets decreased to 7.41% for the three months ended December 31, 1998 as compared to 7.51% for the three months ended December 31, 1997 primarily as a result of the decline in the interest rate environment resulting in lower yields and faster amortization of premiums on mortgage-backed securities. Total interest income for the six months ended December 31, 1998 was $15.7 million, an increase of $880,000 from the comparable period a year ago. The increase in interest income was primarily due to the $25.5 million increase in the average balance of interest-earning assets to $422.0 million for the six months ended December 31, 1998 from $396.5 million for the six 9 12 months ended December 31, 1997. The interest income on loans increased to $12.7 million for the six months ended December 31, 1998 from $11.5 million for the six months ended December 31, 1997. The increase in interest on loans receivable was due to the increase in the average balance of loans receivable outstanding to $326.7 million for the six months ended December 31, 1998 from $298.6 million for the six months ended December 31, 1997. The increase in interest on loans was also due to the increase in the yield on loans to 7.75% for the six months ended December 31, 1998 from 7.68% for the six months ended December 31, 1997 resulting from the origination and purchase of loans with higher yields such as the December 1997 purchase of equity lines of credit with yields in excess of 13%. The interest income on mortgage-backed securities decreased to $2.0 million for the six months ended December 31, 1998 compared to $2.3 million for the six months ended December 31, 1997 primarily as a result of the decline in the average yield to 6.33% for the current period versus 6.94% for the same period a year ago. The decline is primarily due to the lower interest rate environment resulting in an increase in prepayment speeds and faster amortization of the related premiums. The interest income on investment securities and other securities declined slightly to $1.0 million for the six months ended December 31, 1998 as compared to $1.1 million for the same period a year ago. The decline in investment securities and other income was due to the decline in the average yield to 6.28% for the current period from 6.49% for the same period a year ago as well as due to a decrease in the average balance to $31.9 million for the current period versus $33.1 million for the same period a year ago. The total yield on total interest-earning assets decreased to 7.42% for the six months ended December 31, 1998 as compared to 7.46% for the six months ended December 31, 1997. Interest Expense - ---------------- Total interest expense for the three months ended December 31, 1998 was $5.0 million, an increase of $192,000 from $4.8 million for the three months ended December 31, 1997. The increase in interest expense was primarily due to the increase in the average balance of interest-bearing liabilities to $406.6 million for the three months ended December 31, 1998 from $368.5 million for the three months ended December 31, 1997. This increase was substantially offset by the 30 basis point decline in the average cost of interest-bearing liabilities to 4.95% for the three months ended December 31, 1998 compared to 5.25% for the three months ended December 31, 1997. Interest expense on interest-bearing savings accounts decreased to $3.4 million for the three months ended December 31, 1998 from $3.6 million for the same period a year ago. The decrease in interest expense on interest-bearing savings accounts was due to the 29 basis points decline in the average cost of funds to 4.65% for the current period versus 4.94% for the same period a year ago, partially offset by the $7.8 million increase in average savings accounts to $296.1 million for the current period versus $288.3 million for the same period a year ago. The decline in the average cost of funds on savings accounts was due to the lower interest rate environment and to the shift in deposit mix to a higher concentration of core savings accounts (comprised of money market, checking and savings accounts). The average balance of core savings accounts increased by $26.8 million to $93.8 million for the three months ended December 31, 1998 from $67.0 million for the same period a year ago. Conversely, the Company's dependence on certificates of deposit declined as the average balance of certificates of deposit decreased by $19.0 million to $202.3 million for the current period versus $221.3 million for the same period a year ago. The interest expense on borrowings increased to $1.6 million for the three months ended December 31, 1998 from $1.3 million for the three months ended December 31, 1997. The increase was primarily due to the increase in the average balance of 10 13 borrowings to $110.6 million for the current period versus $80.2 million for the same period a year ago, partially offset by the decline in the average cost of borrowings to 5.75% for the current period versus 6.39% for the same period a year ago. The decline in the average cost of borrowings was due to the addition of new borrowings at substantially lower rates and the maturity during the past twelve months of approximately $23 million in borrowings with an average rate in excess of 6.20%. Total interest expense was relatively unchanged at $9.7 million for the six months ended December 31, 1998 and for the six months ended December 31, 1997. Although the interest expense was unchanged from period to period, the average balance of interest-bearing liabilities increased to $389.0 million for the six months ended December 31, 1998 as compared to $368.2 million for the six months ended December 31, 1997. The increase in the average balance of interest-bearing liabilities was offset by the decrease in the average cost of interest-bearing liabilities to 4.99% for the six months ended December 31, 1998 as compared to 5.25% for the same period a year ago. Interest expense on savings accounts decreased to $6.8 million for the six months ended December 31, 1998 from $7.0 million for the same period a year ago. The decrease in interest expense was due to the decline in the average cost of savings accounts to 4.68% for the current period from 4.92% for the same period a year ago, partially offset by the increase in the average balance of savings accounts to $292.1 million for the current period from $368.2 million for the same period a year ago. As stated above, the decline in the average cost of funds was due to the lower interest environment and the change in composition of the savings portfolio to a higher concentration of core savings accounts. The interest expense on borrowings increased to $2.9 million for the six months ended December 31, 1998 from $2.6 million for the six months ended December 31, 1997. The increase in interest expense on borrowings was due to the increase in the average balance of borrowings to $97.0 million for the current period from $82.4 million for the same period a year ago, partially offset by the decrease in the average cost of borrowings to 5.91% for the current period versus 6.37% for the same period a year ago. 11 14 Analysis of Net Interest Income - ------------------------------- The following table sets forth average interest rates on the Company's interest-earning assets and interest-bearing liabilities for the three month and six month periods ended December 31, 1998 and December 31, 1997 (dollars are in thousands and average balances are primarily based on month-end amounts except in certain situations where a daily average is necessary to properly reflect average balances):
Three Months Ended December 31, Six Months Ended December 31, ------------------------------- ----------------------------------- 1998 1997 1998 1997 ---- ---- ---- ---- Average Yield Average Yield Average Yield Average Yield Balance Rate Balance Rate Balance Rate Balance Rate -------------- ------------- --------------- ----------------- ASSETS: Interest-earning assets: Loans receivable $345,125 7.79% $309,957 7.72% $326,667 7.75% $298,555 7.68% Mortgage-backed securities 63,924 6.13 57,057 6.91 63,360 6.33 64,890 6.94 Investment securities and other 29,886 5.74 30,468 6.49 31,931 6.28 33,052 6.49 -------- -------- -------- -------- Total interest-earning assets 438,935 7.41% 397,482 7.51% 421,958 7.42% 396,497 7.46% Noninterest-earning assets 14,296 13,269 13,848 13,288 -------- -------- -------- -------- Total assets $453,231 $410,751 $435,806 $409,785 ======== ======== ======== ======== LIABILITIES AND EQUITY: Interest-bearing liabilities: Savings accounts $296,091 4.65% $288,287 4.94% $292,063 4.68% $285,773 4.92% Borrowings 110,553 5.75 80,194 6.39 96,967 5.91 82,377 6.37 -------- -------- -------- -------- Total interest-bearing liabilities 406,644 4.95% 368,481 5.25% 389,030 4.99% 368,150 5.25% Noninterest-bearing liabilities 15,497 11,678 15,335 11,255 Stockholders' equity 31,090 30,592 31,441 30,380 -------- -------- -------- -------- Total liabilities and equity $453,231 $410,751 $435,806 $409,785 ======== ======== ======== ======== Net interest rate spread 2.46% 2.26% 2.43% 2.21% Net interest margin 2.82% 2.64% 2.82% 2.59% Ratio of interest-earning assets to interest-bearing liabilities 107.94% 107.87% 108.46% 107.70%
The Company's average net interest spread increased to 2.46% for the three months ended December 31, 1998 from 2.26% for the three months ended December 31, 1997. The increase in the average net interest spread was primarily due to the decrease in the average cost of interest-bearing liabilities to 4.95% for the three months ended December 31, 1998 from 5.25% for the three months ended December 31, 1997 partially offset by the decrease in the average yield on interest-earning assets to 7.41% for the current period from 7.51% for the same period a year ago. In regards to the six months ended December 31, 1998, the average net interest spread increased by 22 basis points to 2.43% from 2.21% for the six months ended December 31, 1997. The increase in the average net interest spread for current period was due primarily to the 26 basis point decline in the average cost of funds to 4.99% for the six months ended December 31, 1998 versus 5.25% for the same period a year ago. The Company's yield on its interest-earning assets declined by 10 basis points to 7.41% for the three months ended December 31, 1998 from 7.51% for the three months ended December 31, 1997. The decline was primarily due to the substantial decline in the yield for mortgage-backed securities which decreased by 78 basis points to 6.13% for the three months 12 15 ended December 31, 1998 from 6.91% for the same period a year ago. As stated above, the decline in yield was primarily the result of the increase in the prepayment speeds resulting from the lower interest rate environment. The increase in prepayment speeds required the Company to increase the amortization of the premiums on purchased securities producing lower overall yields. Also, the yield on investment income and other securities declined substantially to 5.74% for the three months ended December 31, 1998 from 6.49% for the same period a year ago due primarily to lower interest rates. The average yield for loans receivable reflects an increase in the average yield to 7.79% for the three months ended December 31, 1998 as compared to 7.72% for the same period a year ago due primarily to the purchase of loans with higher yields. The average yield on interest-earning assets declined to 7.42% for the six months ended December 31, 1998 from 7.46% for the six months ended December 31, 1997. The decline in the average yield was due to the same overall issues discussed above with the primary decrease being the result of the lower yields on the mortgage-backed securities portfolio and the investment securities and other securities portfolio, partially offset by the increase in the improved yield on the loans receivable portfolio. The improvement in the net interest margins for both the three and six month periods ended December 31, 1998 as compared to the same periods a year ago were primarily due to the reduction in the respective average cost of funds. As stated above, the Company has increased the percentage of core savings accounts during the past year with a corresponding reduction in the percentage of certificates of deposits. The increase in core deposits to approximately 39% of total savings accounts at December 31, 1998 from approximately 27% at December 31, 1997 combined with the renewal of maturing certificates of deposit at lower interest rates have produced the substantial decrease in the average cost of savings accounts for the three and six months ended December 31, 1998 in comparison to the same periods a year ago. The result of this process was a decline in the average cost of savings accounts to 4.65% and 4.68% for the three and six months ended December 31, 1998, respectively from 4.94% and 4.92% for the three and six months ended December 31, 1997, respectively. In regards to the Company's borrowings, the cost of borrowings for both the three and six month periods ended December 31, 1998 have reflected significant decreases in comparison to the same periods a year ago. For the three months and six months ended December 31, 1998, the average cost of borrowings declined to 5.75% and 5.91%, respectively, from 6.39% and 6.37% for the three and six months ended December 31, 1997, respectively. The decline for both periods was primarily due to the Company borrowing $41.5 million from the Federal Home Loan Bank in September 1998 with an average rate below 5.0% and an average term of approximately 39 months. This new borrowing coupled with the maturity of several individual borrowings with rates in excess of 6% contributed to the decline in the average cost of borrowings. Provision for Estimated Loan Losses - ----------------------------------- The provision for estimated loan losses for the three months ended December 31, 1998 was $210,000 compared with $268,000 for the three months ended December 31, 1997. The decrease in the provision for estimated loan losses was due primarily to the decrease in loan charge-offs during the three months ended December 31, 1998 to approximately $100,000 from approximately $200,000 for the three months ended December 31, 1997. For the six months ended December 31, 1998, the provision for estimated loan losses totaled $479,000 as compared to $343,000 for the same period a year ago. The increase was due to a slight increase in fair value 13 16 writedowns and line of credit charge-offs during the six months ended December 31, 1998 as compared to the same period a year ago. See "Financial Condition." Other Income - ------------ Other income increased to $483,000 for the three months ended December 31, 1998 from $252,000 for the three months ended December 31, 1997. This was due primarily to an increase in commissions earned on the sale of non-insured products such as tax-deferred annuities of approximately $78,000 for the three months ended December 31, 1998 compared to virtually none for the same period a year ago. Also, the Company increased its net gain on loan sales to the secondary market to $40,000 for the three months ended December 31, 1998 compared to $14,000 for the same period a year ago. The Company's net losses on real estate owned activities declined to $10,000 for the current period compared to a net loss of $75,000 for the same period a year ago. For the six months ended December 31, 1998, other income increased to $1.0 million from $591,000 primarily as a result of the $125,000 increase in commissions earned on the sale of non-insured products, a net gain on real estate owned activities of $135,000 for the period as compared to a $63,000 net loss for the same period a year ago and a slight increase in fee income on deposit account activities. See "Financial Condition." General and Administrative Expenses - ----------------------------------- For the three months ended December 31, 1998, general and administrative expenses increased to $2.3 million from $2.2 million for the three months ended December 31, 1997. The increase was due primarily to an increase in commissions paid resulting from the increase in sales of non-insured products, the initial costs of commencing the Company's debit card program and expenses incurred for Year 2000 matters. For the six months ended December 31, 1998, the general and administrative expenses increased to $4.5 million from $4.4 million for the same period a year ago. Income Taxes - ------------ The Company recorded $437,000 in income taxes for the three months ended December 31, 1998 compared to $170,000 for the three months ended December 31, 1997. The effective tax rates for the three months ended December 31, 1998 and December 31, 1997 were approximately 41.2% and 42.1%, respectively. For the six months ended December 31, 1998, the income taxes recorded was $833,000 as compared to income taxes of $414,000 for the same period a year ago. The increase in taxes for the three months and six months ended December 31, 1998 was due to the improvement in pre-tax income. FINANCIAL CONDITION - ------------------- The Company's total assets were $461.5 million at December 31, 1998, an increase of $53.2 million from the $408.3 million in total assets at June 30, 1998. The Company's loans receivable held for investment increased by $51.2 million to $346.9 million at December 31, 1998 as compared to $295.7 million at June 30, 1998. The Company's mortgage-backed securities portfolio remained approximately the same with a total investment of approximately $60.4 million at December 31, 1998 compared to $59.3 million at June 30, 1998. 14 17 The Company's loan portfolio increase for the six months ended December 31, 1998 was due primarily to the origination and purchase of approximately $100 million in mortgage loans for the held for investment portfolio during the six month period ending December 31, 1998. Of the loans originated and purchased during this period, approximately $69 million had adjustable rate features. The loans originated and purchased with adjustable rate features were indexed to COFI, the one year constant maturity index, LIBOR and the 12 MAT (a lagging index based upon the rolling average of the one year treasury yield). The Company also originated $11.3 million of mortgage loans for sale to the secondary market and sold approximately $10.4 million during the six months ended December 31, 1998 for a net gain of $61,000. The Company's non-performing assets totaled $2.8 million at December 31, 1998 compared to $3.8 million at June 30, 1998. The decrease in non-performing assets was due primarily to the decrease in the amount of real estate acquired through foreclosure to $814,000 at December 31, 1998 compared to $1.9 million at June 30, 1998. Total loans on non-accrual increased slightly to $2.0 million at December 31, 1998 compared to $1.9 million at June 30, 1998. The overall result was a decrease in the Company's ratio of non-performing assets to total assets to 0.61% at December 31, 1998 from 0.93% at June 30, 1998. The following table sets forth the non-performing assets at December 31, 1998 and June 30, 1998:
December 31, 1998 June 30, 1998 ----------------- -------------- (dollars in thousands) Non-accrual loans $2,002 $1,911 Real estate acquired through foreclosure 814 1,902 ------ ------ Non-performing assets $2,816 $3,813 ====== ====== Non-performing assets as a percent of total assets 0.61% 0.93% Non-performing loans as a percent of gross loans receivable 0.58% 0.64%
The Company considers a loan impaired when it is probable that the Company will be unable to collect all contractual principal and interest payments under the terms of the loan agreement. Loans are evaluated for impairment as part of the Company's normal internal asset review process. The Company applies the measurement provisions of SFAS No. 114 to all loans in its portfolio with the exception of one- to four-family residential mortgage loans and consumer lines of credit which are evaluated on a collective basis for impairment. Also, loans which have delays in payments of less than four months are not necessarily considered impaired unless other factors apply to the loans. The accrual of interest income on impaired loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due. When the interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received. Where impairment is considered temporary, an allowance is established. Impaired loans which are performing under the contractual terms are reported as performing loans, and cash payments are allocated to 15 18 principal and interest in accordance with the terms of the loan. At December 31, 1998, the Company had classified $403,000 of its loans as impaired with no specific reserves set aside as of December 31, 1998 as determined in accordance with SFAS No. 114. In comparison, as of June 30, 1998, the Company had classified $569,000 of its loans as impaired with $100,000 in specific reserves. In addition, as of December 31, 1998, the Company had $1.6 million in loans which were collectively evaluated for impairment with $62,000 in specific reserves established compared to $1.3 million at June 30, 1998 collectively evaluated for impairment with no specific reserves set aside. The average recorded investment in impaired loans, inclusive of those evaluated collectively, during the six months ended December 31, 1998, was $2.0 million, whereas, the average for the twelve months ended June 30, 1998 was $2.9 million. The Company, in consideration of the current local economic environment and the condition of the loan portfolio, maintained the allowance for estimated loan losses at December 31, 1998 at $1.6 million. Although loans on non-accrual status have increased slightly to $2.0 million at December 31, 1998 from $1.9 million at June 30, 1998, the allowance for estimated loan losses is maintained at an amount management considers adequate to cover estimated losses in loans receivable which are deemed probable and estimable. The allowance is based upon a number of factors, including current economic conditions, actual loss experience and industry trends. The Company's non-performing loans are primarily made up of one- to four-family residential mortgage loans. The following table sets forth the activity in the Company's allowance for estimated loan losses for the six months ended December 31, 1998:
Activity for the six months ended December 31, 1998 ----------------- Balance at June 30, 1998 $1,425,000 Add: Provision for estimated loan losses 479,000 Recoveries of previous charge-offs - Less: Charge-offs of consumer loans 172,000 Charge-offs of real estate loans 169,000 ---------- Balance at December 31, 1998 $1,563,000 ==========
The Company's total liabilities increased to $430.4 million at December 31, 1998 from $376.1 million at June 30, 1998. Total deposit accounts increased $22.3 million to $317.6 million at December 31, 1998 from $295.3 million at June 30, 1998 due primarily to the growth in the Company's core savings accounts. Core savings accounts, comprised of money market, checking and passbook accounts, increased to approximately $122.7 million at December 31, 1998 from approximately $95.8 million at June 30, 1998. The growth in core deposits was partially offset by the $4.6 million decrease in certificates of deposit to $194.9 million at December 31, 1998 from $199.5 million at June 30, 1998. As a result of the increase in core savings accounts, the percentage of core savings accounts represents 38.6% of total deposits as of December 31, 1998. The Company increased its borrowings during the six months ended December 31, 1998 to $104.0 million from $70.5 million at June 30, 1998. The increase in borrowings was part of the funding strategy of the overall growth in total assets. In September 1998, the Company borrowed approximately $41.5 million from the Federal Home Loan Bank with an average rate slightly 16 19 below 5.0% and an average term of approximately 39 months. The Company continues to utilize FHLB advances and securities sold under agreements to repurchase as part of its asset and liability management strategy. The Company's stockholders' equity decreased to $31.1 million at December 31, 1998 from $32.2 million at June 30, 1998 due primarily to the repurchase of 166,745 shares of the Company's common stock at a total cost of $2.5 million. This reduction in stockholders' equity was partially offset by the $1.2 million in net earnings from operations. LIQUIDITY - --------- The Company's primary sources of funds are deposits, principal and interest payments on loans and mortgage-backed securities, FHLB advances, securities sold under agreements to repurchase, increases in deposits and, to a lesser extent, proceeds from the sale of loans and investments. While maturities and scheduled amortization of loans are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. The Association, by regulation, must maintain its liquidity ratio at no less than 4.0% of deposits and short-term borrowings. Liquidity represents cash and certain investments which are not committed or pledged to specific liabilities. The Association's average liquidity ratio for December 31, 1998 and December 31, 1997 was 15.56% and 8.18%, respectively. COMMITMENTS AND CONTINGENT LIABILITIES - -------------------------------------- At December 31, 1998, there were no material changes to the Company's commitments or contingent liabilities from the period ended June 30, 1998 as discussed in the Company's notes to the consolidated financial statements reflected in the audited consolidated financial statements of SGV Bancorp, Inc., for the year ended June 30, 1998 included in the Annual Report on Form 10-K for the year ended June 30, 1998. At December 31, 1998, the Company had outstanding commitments to originate or purchase mortgage loans of $5.0 million as compared to $3.0 million at June 30, 1998. REGULATORY CAPITAL - ------------------ The Office of Thrift Supervision (OTS) capital regulations require savings institutions to meet three minimum capital requirements: a 1.5% tangible capital ratio, a 3% leverage (core capital) ratio and an 8% risk-based capital ratio. The core capital requirement has been effectively increased to 4% because the prompt corrective action legislation provides that institutions with less than 4% core capital will be deemed "undercapitalized". In addition, the OTS, under the prompt corrective action regulation can impose various constraints on institutions depending on their level of capitalization ranging from well-capitalized to critically undercapitalized. At December 31, 1998, the Association was considered "well-capitalized". 17 20
The Association was in compliance with the capital requirements in effect as of December 31, 1998. The following table reflects the required ratios and the actual capital ratios of the Association at December 31, 1998: CAPITAL -------------------------------- ACTUAL REQUIRED EXCESS ACTUAL REQUIRED CAPITAL CAPITAL AMOUNT PERCENT PERCENT -------------- -------------- -------------- -------------- -------------- (Dollars in thousands) Tangible $ 29,416 $ 6,921 $ 22,495 6.38% 1.50% Core $ 29,416 $ 13,843 $ 15,573 6.38% 3.00% Risk-based $ 30,917 $ 18,146 $ 12,771 13.63% 8.00%
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT - -------------------------------------------------------------- In addition to historical information, this Form 10-Q may include forward looking statements based on current management expectations. The Company's actual results could differ materially from those management expectations. Factors that could cause future results to vary from current management expectations include, but are not limited to, general economic conditions, legislative and regulatory changes, monetary and fiscal policies of the federal government, changes in tax policies, rates and regulations of federal, state and local tax authorities, changes in interest rates, deposit flows, the cost of funds, demand for loan products, demand for financial services, competition, changes in the quality or composition of the Company's loan and investment portfolios, changes in accounting principles, policies or guidelines, and other economic, competitive, governmental and technological factors affecting the Company's operations, markets products, services and prices. Further description of the risks and uncertainties to the business of the Company are included in detail in the Company's Form 10-K for the fiscal year ended June 30, 1998. YEAR 2000 READINESS DISCLOSURE - ------------------------------ The year 2000 issue concerns the potential impact of historic computer software code that only utilizes two digits to represent the calendar year (e.g., "98" for "1998"). Software so developed could produce inaccurate or unpredictable results upon January 1, 2000, when current and future dates present a lower two digit year number than dates in the prior century. The Company, similar to most financial services providers, is subject to the potential impact of the year 2000 issue due to the nature of financial information. Potential impacts to the Company may arise from software, hardware, and equipment both within the Company's direct control and outside of the Company's ownership, yet with which the Company electronically or operationally interfaces (i.e., vendors providing or receiving service bureau information). Financial institution regulators have recently increased their focus upon year 2000 issues, issuing guidance concerning the responsibilities of senior management and directors. Year 2000 18 21 testing and certification is being addressed as a key safety and soundness issue in conjunction with regulatory exams. The Company has appointed a year 2000 team which includes officers and staff from all operational areas. The team is responsible for the development, implementation and monitoring of the Company's year 2000 plan. Also, the Company has enlisted the services of outside contractors to assist in the attainment of year 2000 readiness. In order to address the year 2000 issue, the Company has developed and implemented a five phase plan divided into the following major components: awareness assessment renovation validation implementation The Company has completed the first two phases of the plan and is currently working internally and with external vendors on the final three phases. The Company believes it has significantly completed the renovation and validation phases through the completion of testing and review of the Company's data processor's year 2000 readiness. Because the Company outsources its data processing and item processing operations, a significant component of the Year 2000 Plan is to work with external vendors to test and certify their systems as year 2000 compliant. The Company replaced its internal retail branch computer system and its back office computer systems in 1997 with personal computers which are year 2000 ready. The majority of software used in these systems, both purchased and related to our external data processing vendors, has been tested for year 2000 readiness with minimal issues detected. Any issues detected have been reported to the respective vendor or service provider for corrective action. None of the issues noted during the testing, if not corrected by year 2000, are expected to provide any concerns to the Company. Also, the Company completed its testing of its primary data processing service bureau for year 2000 readiness. The Company's primary third-party service bureau provides data processing for all of the Company's savings accounts, lending operations and general ledger. Upon completion of the review of the tests results, the few issues detected were forwarded to the data processor for corrective actions. Again, none of the issues detected are expected to have any material impact to the Company's successful transition to year 2000 if they have not been corrected. The Company also completed testing with the Federal Reserve Bank of San Francisco and detected no issues which woums to the Company at year 2000. The Company has contacted its primary vendors and others with whom it relies on to assure their systems will be year 2000 ready. Of the vendors the Company considers critical to its operations, all have responded that they are year 2000 ready or are in process of being ready. Vendors the Company considers mission critical include its primary data processor, item processor, ATM provider, the Federal Reserve Bank and the Federal Home Loan Bank, as well as all utility providers. As stated above, completed year 2000 testing with its primary data processor and the Federal Reserve Bank and detected no material issues which would be expected to materially affect the Company. The ATM provider and ATM network will undergo testing by March 31, 1999. If the critical vendors the Company is able to test are not 19 22 compliant by March 31, 1999, the Company will seek to switch to a new vendor. However, due to the timing required to change to another vendor, if mission critical vendors are not year 2000 ready (all have stated that they are or expect to be year 2000 ready), the Company may be unable to obtain an alternative and therefore may be adversely affected. Further, the Company will be unable to seek alternative service providers with respect to some critical vendors such as utility providers. The Company has endeavored to determine such vendors will be year 2000 compliant and at this time, based upon information supplied by such vendors, has no information suggesting utility services will be disrupted. However, any disruption in utility service would directly affect the Company's ability to operate. In regards to vendors or service providers the Company deems are important for the normal operations of the Company, but not considered critical, approximately 53% have responded that they are year 2000 ready or are working towards readiness. The Company is performing follow-up work on those vendors or service providers who have not responded. If the Company believes that one of these important vendors will not be year 2000 ready by June 30, 1999, the Company will review other solutions, including changing vendors. However, there can be no assurance that these systems or other vendors will be year 2000 ready or that any such failure in readiness by such vendors would not have an adverse effect on the Company's operations. Another important segment of the Year 2000 Plan is to identify those loan customers or deposit customers whose possible lack of year 2000 preparedness might expose the Company to financial loss. The Company completed a risk analysis of their large dollar fund users and fund providers and determined that such customers are not expected to expose the Company to any material impact by a lack of year 2000 preparedness. Also, the analysis of fund users indicates that the Company does not expect to have any material financial exposure in regards to its loan portfolio as the portfolio is comprised primarily of loans to individuals and, to a lessor extent, to businesses secured by real estate. In management's estimation, loans secured by real estate are less likely to be impacted by any year 2000 issues. The Company is participating, through proxy testing, with its data processor in third party interfaces for year 2000 readiness. In March 1999, the Company will participate with its data processor in proxy testing of FHLMC and FNMA, agencies for whom the Company services loans. The Company has substantially completed its initial draft of its contingency plan for handling issues which may present concern to the Company if certain processes or vendors are unable to provide services. The contingency plan is currently undergoing a review by an outside consultant to determine areas in which the plan may need modification. It is expected this review and any subsequent revisions to the contingency plan will be completed by February 28, 1999. This plan is expected to be amended throughout 1999 as new information on the Company's vendors year 2000 readiness becomes available. During the execution of this project, the Company will incur internal staff costs as well as consulting and other expenses related to enhancements necessary to prepare the systems for the year 2000. Since the Company replaced many of the internal systems with year 2000 compliant personal computers in 1997, the expenses incurred to bring the Company to year 2000 compliance will be expensed as incurred, with the majority of such costs being the reallocation of current staff to bring about this readiness. As stated earlier, the Company replaced the majority of its internal computer hardware and software in early 1997. The capitalized costs of this replacement were in excess of $700,000 and are being amortized over several years in compliance 20 23 with the Company's normal depreciation of such hardware or software. The future expenses of the year 2000 project as well as the related potential effect on the Company's earnings is not expected to have a material effect on its financial position or results of operations. Management does not expect the future costs of the year 2000 project to exceed $200,000, which is primarily related to the reallocation of internal staff resources. The Company believes it has developed an effective and prudent plan to review, renovate and resolve any potential year 2000 issues. In respect to operations under the Company's direct control and due to management's year 2000 readiness efforts and those of its strategic business partners, management does not expect that Year 2000 failures will have a material effect on the financial condition or results of operations of the Company. However, the impact of disruptions in the local or national economy as a result of year 2000 issues is not quantifiable at this time and could adversely and materially affect the Company. In addition, the Company is heavily dependent on the year 2000 readiness of infrastructure suppliers such as utilities, communication and other such services. If such infrastructure suppliers would have year 2000 disruptions, this could adversely and materially affect the Company's ability to provide services to its customers. Item 3. Quantitative and Qualitative Disclosure about Market Risk --------------------------------------------------------- MANAGEMENT OF INTEREST RATE RISK - -------------------------------- The Company's profitability is dependent to a large extent upon its net interest income, which is the difference between its interest income on interest-earning assets, such as loans and investments, and its interest expense on interest-bearing liabilities, such as deposits and borrowings. To manage its interest rate risk, the Company has utilized the following strategies: (i) emphasizing the origination and/or purchase of adjustable-rate one- to four-family mortgage loans for portfolio; (ii) selling to the secondary market substantially all fixed-rate mortgage loans originated; (iii) holding primarily short-term mortgage-backed and investment securities; and (iv) attempting to reduce the overall interest rate sensitivity of liabilities by emphasizing core and longer-term deposits, utilizing FHLB advances and securities sold under agreements to repurchase. The Company's interest rate sensitivity is monitored by management through the use of an interest rate risk (IRR) model. Based on internal IRR modeling, management does not believe that there has been a material change in the Company's interest rate sensitivity from June 30, 1998 to December 31, 1998. All methods used to measure interest rate sensitivity involve the use of assumptions, which may tend to oversimplify the manner in which actual yields and costs respond to changes in market interest rates. The Company's interest rate sensitivity should be reviewed in conjunction with the financial statements and notes thereto contained in the Company's Annual Report for the fiscal year ended June 30, 1998. 21 24 PART II. OTHER INFORMATION Item 1. Legal Proceedings ----------------- The Company is involved as plaintiff or defendant in various legal actions incident to its business, none of which is believed by management to be material to the financial condition of the Company. Item 2. Changes in Securities --------------------- None. Item 3. Defaults in Securities ---------------------- None. Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- The Company held its Annual Meeting of Shareholders on November 19, 1998. At the Annual Meeting, the shareholders elected Irven G. Reynolds and Benjamin S. Wong to three-year terms. Directors Royce A. Stutzman, Barrett G. Andersen, Thomas A. Patronite and John D. Randall have terms of office that continued after the Annual Meeting. The shareholders also ratified the SGV Bancorp, Inc. 1995 Amended and Restated Stock-Based Incentive Plan and ratified the appointment of Deloitte & Touche LLP as independent auditors of the Company for the year ending June 30, 1999. The vote on each matter was as follows:
1. For Directors: BROKER FOR WITHHELD ABSTAIN NON-VOTES Irven G. Reynolds 2,157,947 41,951 -- -- Benjamin S. Wong 2,157,497 42,401 -- -- 2. Other Matters: Ratification of SGV Bancorp, Inc. 1995 Amended and Restated Stock-Based Incentive Plan 1,401,823 210,346 9,575 578,154 Ratification of the appointment of Deloitte & Touche LLP as independent auditors for the Company 2,178,343 16,780 4,775 --
Item 5. Other Information ----------------- None. 22 25 Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) The following exhibits are filed as part of this report: 3.1 Certificate of Incorporation of SGV Bancorp, Inc. * 3.2 Bylaws of SGV Bancorp, Inc. * 11.0 Computation of per share earnings (filed herewith). 27.0 Financial data schedule (filed herewith). (b) Reports on Form 8-K None. - ------------------- * Incorporated herein by reference from the Exhibits to the Registration Statement on Form S-1, as amended, filed on March 6, 1995 and declared effective on May 9, 1995, Registration No. 33-90018. 23 26 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SGV BANCORP, INC. February 11, 1999 /s/ Barrett G. Andersen - ---------------------------------- ------------------------------------- Date Barrett G. Andersen President and Chief Executive Officer February 11, 1999 /s/ Ronald A. Ott - ---------------------------------- ------------------------------------- Date Ronald A. Ott Executive Vice President Chief Financial Officer and Treasurer 24 EX-27 2 FDS --
9 This schedule contains summary information extracted from the Form 10-Q and is qualified in its entirety by reference to such financial statements. 0000940511 SGV Bancorp, Inc. 1 U.S. Dollars 3-MOS JUN-30-1999 JUL-01-1998 DEC-31-1998 1 8,205,000 0 3,390,000 0 51,850,000 33,748,000 33,880,000 349,723,000 1,563,000 461,533,000 317,564,000 0 4,583,000 108,291,000 0 0 27,000 31,068,000 461,533,000 12,656,000 2,652,000 355,000 15,663,000 6,839,000 9,707,000 5,956,000 479,000 7,000 3,461,000 2,023,000 0 0 0 1,190,000 0.53 0.51 7.42 2,002,000 0 852,000 0 1,425,000 341,000 0 1,563,000 1,563,000 0 0
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