-----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, MpYToanvYN5Xwo/vo3G2aGFR6Vjeh1Q3RUxaWLzPgty1jkcUGjBsF2bqaDYxeD08 IZ0AeEATJA4p5Y0eKccpeg== 0001021408-99-001622.txt : 19990924 0001021408-99-001622.hdr.sgml : 19990924 ACCESSION NUMBER: 0001021408-99-001622 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990923 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-K405 SEC ACT: SEC FILE NUMBER: 000-25664 FILM NUMBER: 99715425 BUSINESS ADDRESS: STREET 1: 225 NORTH BARRANCA AVE CITY: WEST COVINA STATE: CA ZIP: 91791 BUSINESS PHONE: 6268594200 10-K405 1 FORM 10-K405 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K Annual report pursuant to Section 13 of the Securities Exchange Act of 1934 For the fiscal year ended June 30, 1999 Commission File No.: 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 I.D. No.) incorporation or organization) 225 North Barranca Street, West Covina, California 91791 (Address of principal executive offices) Registrant's telephone number, including area code: (626) 859-4200 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 per share (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____. --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant, i.e., persons other than the directors and executive officers of the registrant, was $42,000,000, based upon the last sales price as quoted on The NASDAQ Stock Market for September 13, 1999. The number of shares of Common Stock outstanding as of September 13, 1999: 2,176,323. INDEX
PAGE PART I Item 1. Description of Business...................................... 1 Item 2. Properties................................................... 26 Item 3. Legal Proceedings............................................ 27 Item 4. Submission of Matters to a Vote of Security Holders.......... 27 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.......................................... 28 Item 6. Selected Financial Data...................................... 28 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................... 30 Item 8. Financial Statements and Supplementary Data.................. 44 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................... 76 PART III Item 10. Directors and Executive Officers of the Registrant........... 76 Item 11. Executive Compensation....................................... 76 Item 12. Security Ownership of Certain Beneficial Owners and Management............................................... 76 Item 13. Certain Relationships and Related Transactions............... 76 PART IV Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K.................................................. 76 Signatures............................................................. 78
PART I Item 1. Description of Business - -------------------------------- General SGV Bancorp, Inc. (the "Company") completed its initial public offering of common stock on June 28, 1995, in connection with the conversion of First Federal Savings and Loan Association of San Gabriel Valley (the "Association") from the mutual to stock form of ownership. The Company utilized approximately 50% of the net proceeds of the initial public offering to acquire all of the issued and outstanding stock of the Association. The Company is headquartered in West Covina, California and its principal business currently consists of the operations of its wholly-owned subsidiary, First Federal Savings and Loan Association of San Gabriel Valley. The Company's only significant assets, other than its investment in the capital stock of the Association and a loan to the Association's ESOP, are cash, investments and mortgage-backed securities. Operational activity of the Savings and Loan Association will hereafter be referred to as "Association," where applicable. The Company had no operations prior to June 28, 1995, and accordingly, the results of operations prior to such date reflect only those of the Association and its subsidiary. The Company, as a savings and loan holding company, and the Association are subject to regulation by the Office of Thrift Supervision (the "OTS"), the Federal Deposit Insurance Corporation (the "FDIC") and the Securities and Exchange Commission (the "SEC"). The principal business of the Association 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 Association engages in secondary market activities and invests in multi-family, commercial real estate, construction, land and consumer loans. Loan sales come from loans held in the Association's portfolio designated as being held for sale or originated during the period and being so designated. The Association has historically retained all the servicing rights of loans sold, although during the past fiscal year, has begun selling loans on a servicing released basis. 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, income from loan servicing, and fee income generated from deposit accounts. 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. Market Area and Competition The Association conducts business from its administrative branch office located in West Covina, California and its seven other offices located in Covina, Hacienda Heights, La Verne, City of Industry, Arcadia, and Duarte, all of which are located in the eastern part of the greater Los Angeles metropolitan area. The Association has been and continues to be a community-oriented savings institution, which primarily originates one- to four-family residential mortgage loans within its primary market area. The Association's deposit gathering is concentrated in the communities surrounding its offices in eastern Los Angeles county. The Association makes loans secured by deeds of trust in portions of eastern Los Angeles, western San Bernardino and Riverside, and Orange counties. The Los Angeles metropolitan area is a highly competitive market. The Association faces significant competition both in making loans and in attracting deposits. The Association's share of deposits and loan originations in the Los Angeles metropolitan area amounts to less than one percent. The Association faces direct competition from a significant number of financial institutions operating in its market area, many with a statewide or regional presence and in some cases a national presence. Many of these financial institutions are significantly larger and have greater financial resources than the Association. The Association's competition for loans comes principally from commercial banks, savings and loan associations, mortgage banking companies, credit unions and insurance companies. Its most direct competition for deposits has historically come from savings and loan associations and commercial banks. In addition, the Association faces increasing competition for deposits from non-bank institutions such as brokerage firms and insurance companies in such areas as short-term money market funds, corporate and government securities funds, mutual funds and annuities. Competition may also increase as a result of the lifting of restrictions on the interstate operations of financial institutions. On March 16, 1999, the Association entered into a definitive agreement with Citibank, California, a federal savings bank, to purchase two branches located in La Verne, California and Covina, California. The two branches 1 had combined deposits of approximately $57.0 million at the time the agreement was entered into. The branch acquisition was consummated on July 25, 1999. Recent Developments - Acquisition by IndyMac Mortgage Holdings, Inc. On July 12, 1999, the Company and IndyMac Mortgage Holdings, Inc. ("IndyMac") entered into a definitive agreement pursuant to which IndyMac will acquire the Company for cash. Under the terms of the merger agreement, each share of the Company's common stock will be exchangeable for $25.00 in cash. This price may be subject to adjustment as a result of changes in the net portfolio value of certain assets and liabilities of the Company. In no event will the purchase price be reduced below $22.50 or increased above $27.50 per share. IndyMac will pay a total of approximately $62.5 million to acquire all of the Company's shares outstanding and subject to options. In accordance with the terms of the merger agreement, the Company will be the surviving entity of the merger. To this end, IndyMac's current shareholders will receive one share of the Company's common stock in exchange for each share of IndyMac common stock they own when the merger is completed. The merger is subject to shareholder approval by both companies as well as certain regulatory approvals. The merger is expected to be completed in the first half of 2000. Lending Activities Loan Portfolio Composition. The Association's loan portfolio consists primarily of conventional first mortgage loans secured by one- to four-family residences. At June 30, 1999, the Association had total loans outstanding of $356.2 million, of which $279.9 million were one- to four-family, owner-occupied residential mortgage loans, or 78.6% of the Association's total loans. The remainder of the portfolio consists of $46.4 million of multi-family mortgage loans, or 13.0% of total loans; $23.9 million of commercial real estate loans, or 6.7% of total loans; and consumer loans of $6.0 million or 1.7% of total loans. The Association had $100,000 in loans held for sale as of June 30, 1999. At that same date, 74.4% of the Association's mortgage loans had adjustable interest rates. Of the Association's adjustable-rate mortgage loans, 32.9% are indexed to the one-year Constant Maturity Treasury ("CMT") Index and 62.3% are indexed to the 11th District Cost of Funds Index ("COFI"). The COFI is a lagging market index and therefore may adjust more slowly than the cost of the Association's interest-bearing liabilities. As the determination of the COFI becomes concentrated in fewer institutions, funding decisions by a relatively few large institutions could potentially further reduce the correlation of COFI to changes in general market interest rates and the Company's cost of funds. The types of loans that the Association may originate are subject to federal and state law and regulations. Interest rates charged by the Association on loans are affected by the demand for such loans and the supply of money available for lending purposes and the rates offered by competitors. These factors are, in turn, affected by, among other things, economic conditions, monetary policies of the federal government, including the Federal Reserve Board, and legislative tax policies. The following table sets forth the composition of the Association's loan portfolio in dollar amounts and as a percentage of the portfolio at the dates indicated. 2
At June 30, ---------------------------------------------------------------------- 1999 1998 1997 --------------------- --------------------- ------------------ Percent Percent Percent Amount of Total Amount of Total Amount of Total -------- -------- -------- -------- -------- -------- (Dollars in thousands) Real estate and Other: One- to four family $279,897 78.59% $247,129 83.04% $250,303 87.29% Multi-family 46,425 13.03 29,546 9.93 27,241 9.50 Commercial 23,901 6.71 11,895 4.00 8,660 3.02 Construction and land - 0.00 - 0.00 - 0.00 Consumer 5,961 1.67 9,007 3.03 533 0.19 -------- -------- -------- -------- -------- -------- Total loans 356,184 100.00% 297,577 100.00% 286,737 100.00% ======== ======== ======== Less: Unamortized yield adjustments, net (1486) (613) 121 Deferred loan fees, net 736 635 515 Allowance for estimated loan losses 1,845 1,425 1,263 -------- -------- -------- Total loans, net 355,089 296,130 284,838 Less: Loans receivable held for sale: One- to four-family 100 391 230 -------- -------- -------- Loans receivable held for investment $354,989 $295,739 $284,608 ======== ======== ======== At June 30, ----------------------------------------------- 1996 1995 --------------------- -------------------- Percent Percent Amount of Total Amount of Total -------- -------- -------- ---------- Real estate and Other: One- to four family $226,660 87.81% $187,693 85.82% Multi-family 21,690 8.40 20,431 9.34 Commercial 9,331 3.62 9,567 4.37 Construction and land - 0.00 415 0.19 Consumer 440 0.17 602 0.28 -------- -------- -------- -------- Total loans 258,121 100.00% 218,708 100.00% ======== ======== Less: Unamortized yield adjustments, net (64) 45 Deferred loan fees, net 451 472 Allowance for estimated loan losses 1,058 792 -------- -------- Total loans, net 256,676 217,399 Less: Loans receivable held for sale: One- to four-family 723 - -------- -------- Loans receivable held for investment $255,953 $217,399 ======== ========
3 Loan Maturity. The following table shows the contractual maturity of the Association's gross loans at June 30, 1999. The table does not include principal repayments. Principal repayments on total loans totaled $94.3 million for the year ended June 30, 1999 and $61.0 million and $33.2 million for the years ended June 30, 1998 and 1997, respectively.
At June 30, 1999 --------------------------------------------------------------------------------------- One- to Total Four- Multi- Loans Family Family Commercial Consumer Receivable -------------- ------------ -------------- ---------- ------------- (In thousands) Amounts due: One year or less $ 1,170 $ 460 $ 5 $ 358 $ 1,993 After one year: More than one year to three years 357 5,064 1,451 - 6,872 More than three years to five years 4,930 6,706 555 - 12,191 More than five years to 10 years 6,535 1,517 6,400 - 14,452 More than 10 years to 20 years 58,054 8,159 12,088 - 78,301 More than 20 years 208,851 24,519 3,402 5,603 242,375 -------------- ------------ -------------- ---------- ------------ Total due after June 30, 2000 278,727 45,965 23,896 5,603 354,191 -------------- ------------ -------------- ---------- ------------ Total amount due 279,897 46,425 23,901 5,961 356,184 Less: Unamortized yield adjustments (1,253) 8 (88) (153) (1,486) Deferred loan fees 354 276 106 - 736 Allowance for loan losses 838 469 99 439 1,845 -------------- ------------ -------------- ---------- ------------ Total loans, net 279,958 45,672 23,784 5,675 355,089 Loans receivable held for sale 100 - - - 100 -------------- ------------ -------------- ---------- ------------ Loans receivable held for investment $279,858 $45,672 $23,784 $5,675 $354,989 ============== ============ ============== ========== ============
The following table sets forth at June 30, 1999, the dollar amount of gross loans receivable contractually due after June 30, 2000, and whether such loans have fixed interest rates or adjustable interest rates.
Due After June 30, 2000 ---------------------------------------------------------------------------- Fixed Adjustable Total ---------------------- ---------------------- ---------------------- (In thousands) Real estate loans: One- to four-family $82,950 $195,777 $278,727 Multi-family 4,166 41,799 45,965 Commercial real estate 2,680 21,216 23,896 Consumer - 5,603 5,603 ---------------------- --------------------- ------------------- Total loans receivable $89,796 $264,395 $354,191 ====================== ===================== ===================
Origination, Sale, Servicing and Purchase of Loans. The Association's mortgage lending activities are conducted primarily by commissioned loan representatives and through its eight branch offices. The Association originates both adjustable-rate and fixed-rate mortgage loans. The Association's ability to originate loans is dependent upon the relative customer demand for fixed-rate or adjustable-rate mortgage loans, which is affected by the current and expected future level of interest rates. It is the general policy of the Association to sell the majority 4 of the fixed-rate mortgage loans that it originates. The Association may also sell the adjustable-rate mortgage loans that it originates. The Association utilizes forward sales contracts to hedge the risks associated with a change in interest rates between origination and sale of loans. At June 30, 1999, the Association did not have any forward sales contracts outstanding. The Association retains virtually all servicing of the loans sold. See "Loan Servicing." The Association recognizes, at the time of sale, the cash gain or loss on the sale of the loans sold. At June 30, 1999, there was $100,000 in fixed-rate mortgage loans categorized as held for sale. From time to time, the Association has purchased loans originated by other institutions based upon the Association's investment needs and market opportunities. During the year ended June 30, 1999, the Association purchased $80.8 million of one- to four-family mortgage loans with adjustable interest rates indexed primarily to COFI, which are secured by principal properties located in Southern California. The Association has purchased loans during the past three years as a supplement to its internal origination process in order to meet internal goals. The Association has reviewed each loan it purchases to ensure it meets the Association's underwriting guidelines. The loans were purchased in several transactions consummated during the year ended June 30, 1999. The following table sets forth the Association's loan originations, purchases, sales and principal repayments for the periods indicated:
For the Years Ended June 30, --------------------------------------------------------------- 1999 1998 1997 ----------------- ----------------- ----------------- (In thousands) Gross loans (1): $297,555 $286,101 $257,734 Beginning balance Loans originated: 74,082 46,787 33,108 One- to four-family (2) 14,507 3,977 3,242 Multi-family 6,010 3,540 160 Commercial ----------------- ----------------- ----------------- Total loans originated 94,599 54,304 36,510 Loans purchased: Mortgage loans 80,754 29,941 33,320 Consumer loans - 10,682 - ----------------- ----------------- ----------------- Total 472,908 381,028 327,564 Less: Principal repayments 94,343 61,019 33,216 Sales of loans 19,366 19,526 5,644 Transfer to REO 2,265 2,928 2,603 ----------------- ----------------- ----------------- 356,934 297,555 286,101 Total loans 100 391 230 Loans held for sale ----------------- ----------------- ----------------- Ending balance, loans held for investment $356,834 $297,164 $285,871 ================= ================= =================
---------------------------------------------------------------- (1) Gross loans includes loans receivable held for investment and loans held for sale, net of deferred loan fees, undisbursed loan funds and unamortized premiums and discounts. (2) Consumer loans originated are included in one- to four-family loans. One- to Four-Family Mortgage Lending. The Association offers both fixed- rate and adjustable-rate mortgage loans secured by one- to four-family residences located in the Association's primary market area, with maturities up to forty years. Substantially all of such loans are secured by property located in the Association's primary market area. Loan originations are generally obtained from the Association's commissioned loan representatives and their contacts with the local real estate industry, existing or past customers, and members of the local communities. At June 30, 1999, the Association's total loans outstanding were $356.1 million, of which $279.9 million or 78.6% were one- to four-family residential mortgage loans. Of the one-to four-family residential mortgage loans 5 outstanding at that date, 25.6% were fixed-rate loans, and 74.4% were adjustable-rate mortgage loans. The Association's adjustable-rate mortgage loans are generally indexed to COFI and the CMT. The Association currently offers a number of adjustable-rate mortgage loan programs with interest rates which adjust monthly, semi-annually, or annually. A portion of the Association's adjustable-rate mortgage loans have introductory terms of three or five years and at the end of such period will adjust either monthly or annually according to their terms. The Association's adjustable-rate mortgage loans generally provide for periodic and overall caps on the increase or decrease in interest rate at any adjustment date and over the life of the loan. At June 30, 1999, the Association had no one- to four-family adjustable-rate mortgage loans with interest rates that were between 0 to 200 basis points below their lifetime caps, $31.8 million that were between 200 to 400 basis points below their lifetime caps, with the remainder having interest rates that were more than 400 basis points below their lifetime caps. The Association currently has $75.6 million in mortgage loans that may be subject to negative amortization. The negative amortization is currently capped at up to 115% of the original loan amount. Negative amortization involves a greater risk to the Association because during a period of high interest rates, the loan principal may increase above the amount originally advanced. However, the Association believes that the risk of default may be reduced by negative amortization caps, underwriting criteria and the stability provided by payment schedules. Of the Association's one- to four-family mortgage loans, $55.8 million, or 19.9%, were secured by non-owner-occupied residences. Loans secured by non- owner-occupied properties are generally considered to involve a higher degree of credit risk than loans secured by owner-occupied properties because payment is generally dependent upon the property producing sufficient income to cover debt service and any operating expenses. The Association's policy is to originate one- to four-family residential mortgage loans in amounts up to 80% of the lower of the appraised value or the selling price of the property securing the loan and up to 95% of the appraised value or selling price if private mortgage insurance is obtained. The Association currently has a limited program which is designed to promote home ownership and allows potential borrowers the ability to receive a mortgage loan with loan-to-values up to 100% with no private mortgage insurance. This program is capped at $1 million in loans outstanding. Mortgage loans originated by the Association generally include due-on-sale clauses, which provide the Association with the contractual right to deem the loan immediately due and payable in the event the borrower transfers ownership of the property without the Association's consent. Due-on-sale clauses are an important means of adjusting the rates on the Association's fixed-rate mortgage loan portfolio and the Association has generally exercised its rights under these clauses. Multi-Family Lending. The Association originates multi-family mortgage loans generally secured by five- to thirty-six unit apartment buildings located in the Association's primary market area. As a result of uncertain market conditions in its primary market area, the Association currently originates multi-family loans on a limited and highly selective basis. In reaching its decision on whether to make a multi-family loan, the Association considers the qualifications of the borrower as well as the underlying property. Some of the factors to be considered are: the net operating income of the mortgaged premises before debt service and depreciation; the debt service ratio (the ratio of net earnings to debt service); and the ratio of loan amount to appraised value. Pursuant to the Association's current underwriting policies, a multi- family adjustable-rate mortgage loan may only be made in an amount up to 75% of the appraised value of the underlying property. Subsequent declines in the real estate values in the Association's primary market area have resulted in some increase in the loan-to-value ratio on some mortgage loans. In addition, the Association generally requires a minimum debt service ratio of 115%. Properties securing a loan are appraised by an independent appraiser and title insurance is required on all loans. The Association's multi-family loan portfolio at June 30, 1999 totaled $46.4 million. When evaluating the qualifications of the borrower for a multi-family loan, the Association considers the financial resources and income level of the borrower, the borrower's experience in owning or managing similar property, and the Association's lending experience with the borrower. The Association's underwriting policies require that the borrower be able to demonstrate strong management skills and the ability to maintain the property from current rental income. The borrower is required to present evidence of the ability to repay the mortgage and a history of making mortgage payments on a timely basis. In making its assessment of the creditworthiness of the borrower, the Association generally reviews the financial statements, employment and credit history of the borrower, as well as other related documentation. The Association's largest multi-family loan at June 30, 1999, had an outstanding balance of $1.5 million, was current at that date and is secured by a 24-unit apartment complex. 6 Loans secured by apartment buildings and other multi-family residential properties are generally larger and involve a greater degree of risk than one- to four-family residential mortgage loans. Because payments on loans secured by multi-family properties are often dependent on successful operation or management of the properties, repayment of such loans may be subject to a greater extent to adverse conditions in the real estate market or the economy. The Association seeks to minimize these risks through its underwriting policies, which require such loans to be qualified at origination on the basis of the property's income and debt coverage ratio. Commercial Real Estate Lending. The Association originates commercial real estate loans that are generally secured by properties used for business purposes such as small office buildings or retail facilities located in the Association's primary market area. The Association's underwriting procedures provide that commercial real estate loans be made in amounts up to the lesser of 75% of the appraised value of the property, or at the Association's current loans-to-one borrower limit. These loans may be made with terms up to thirty years for adjustable-rate loans and are indexed to CMT or COFI. The Association's underwriting standards and procedures are similar to those applicable to its multi-family loans, whereby the Association considers the net operating income of the property and the borrower's expertise, credit history and profitability. The Association has generally required that the properties securing commercial real estate loans have debt service coverage ratios of at least 115%. The largest commercial real estate loan in the Association's portfolio at June 30, 1999, had an outstanding balance of $1.7 million, was current at that date and is secured by an office building. At June 30, 1999, the Association's commercial real estate loan portfolio was $23.9 million or 6.7% of total loans. The Association currently originates commercial real estate loans on a limited and highly selective basis in its primary market area. Loans secured by commercial real estate properties, like multi-family loans, are generally larger and involve a greater degree of risk than one- to four-family residential mortgage loans. Because payments on loans secured by commercial real estate properties are often dependent on successful operation or management of the properties, repayment of such loans may be subject to a greater extent to adverse conditions in the real estate market or the economy. The Association seeks to minimize these risks through its underwriting standards, which require such loans to be qualified on the basis of the property's income and debt service ratio. The Association may purchase or participate in multi-family loans from other financial institutions. As part of the review process, the loans being purchased or the loan participations being entered into are appraised and must meet the same underwriting standards as loans processed internally. During the year ended June 30, 1999, the Association purchased $5.3 million of multi-family loans from another financial institution, and currently has $2.9 million in multi-family loan participations with other financial institutions. Construction and Land Lending. The Association has in the past originated loans for the acquisition and development of property to contractors and individuals in its primary market area. The Association's construction loans primarily have been made to finance the construction of one- to four-family, owner-occupied residential properties. These loans were primarily adjustable- rate loans with maturities of one year or less. The Association is not currently originating construction and land loans but may in the future depending on market conditions. At June 30, 1999, the Association had no construction or land loans outstanding. Construction and land financing is generally considered to involve a higher degree of credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property's value at completion of construction or development compared to the estimated cost (including interest) of construction. If the estimate of value proves to be inaccurate, the Association may be confronted with a project, when completed, having a value which is insufficient to assure full repayment. Consumer Lending. The Association originates consumer loans such as lines of credit and loans secured by savings accounts. The total amount comprising these two product types is less than 0.1% of the Association's loan portfolio. The Association purchased a portfolio of home equity lines of credit (HELOCs) from another financial institution in December 1997 which were primarily approved based upon the credit worthiness of the borrower and also had a lien placed on the borrower's property, usually as a second lien. The loan-to-values of this portfolio of loans generally were in excess of 100%. Loans which met the Association's underwriting requirements were selected for purchase. The HELOCs have interest rates indexed primarily to COFI and LIBOR, with margins of 9.95% and adjust monthly. The maximum lines granted were generally for $25,000. The borrower is generally 7 allowed to draw on the line of credit for a period of ten year to fifteen years after which time the loan is converted to a fixed term loan with no further access to the line. The Association's HELOC portfolio of $5.6 million represents approximately 1.6% of its total loan portfolio. The Association's HELOC portfolio has a higher degree of credit risk than loans secured by real estate property with loan-to-values less than 70% as the payment as to interest and principal is generally dependent upon the capacity of the borrower and not upon the collateral. For loans which have become non- accrual, the Association would generally not initiate foreclosure proceedings on any property which has been determined to have a current combined loan-to-value in excess of 100%. Loans in this category would generally be charged-off although, in certain circumstances, collection efforts may continue. The Association has set aside general valuation allowances which management believes reflect the risk of the portfolio. If future loss experience or other factors change management's expectations, management will adjust the general valuation allowance to reflect such expectations. Loan Servicing. The Association also services mortgage loans for others. All of the loans currently being serviced for others are loans which have been sold by the Association. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, making inspections as required of mortgaged premises, contacting delinquent mortgagors, supervising foreclosures and property dispositions in the event of unremedied defaults, making certain insurance and tax payments on behalf of the borrowers and generally administering the loans. At June 30, 1999, the Association was servicing $87.4 million of loans for others. Delinquencies and Classified Assets. The Board of Directors performs a monthly review of all delinquent loans 90 days or more past due. In addition, management reviews on an ongoing basis all loans 15 or more days delinquent. The procedures taken by the Association with respect to delinquencies vary depending on the nature of the loan and period of delinquency. When a borrower fails to make a required payment on a loan, the Association takes a number of steps to have the borrower cure the delinquency and restore the loan to current status. The Association generally sends the borrower a written notice of non- payment after the loan is first past due. In the event payment is not then received, additional letters and phone calls generally are made. If the loan is still not brought current and it becomes necessary for the Association to take legal action, which typically occurs after a loan is delinquent at least 30 days or more, the Association will commence foreclosure proceedings against any real property that secures the loan. If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the real property securing the loan generally is sold at foreclosure. Federal regulations and the Association's Classification of Assets Policy require that the Association utilize an internal asset classification system as a means of reporting problem and potential problem assets. The Association has incorporated the OTS internal asset classifications as a part of its credit monitoring system. The Association currently classifies problem and potential problem assets as "Substandard," "Doubtful," or "Loss" assets. An asset is considered "Substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the insured institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as "Doubtful" have all of the weaknesses inherent in those classified "Substandard" with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as "Loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated "Special Mention." When an insured institution classifies one or more assets, or portions thereof, as Substandard or Doubtful, it is required to establish a general valuation allowance for loan losses in an amount deemed prudent by management. General valuation allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies one or more assets, or portions thereof, as "Loss," it is required either to establish a specific allowance for losses equal to 100% of the amount of the net exposure of the asset so classified or to charge off the amount of the asset, taking into consideration the collateral value, if any, of the asset. 8 A savings institution's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OTS which can order the establishment of additional general or specific loss allowances. The OTS, in conjunction with the other federal banking agencies, adopted an interagency policy statement on the allowance for loan and lease losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines. Generally, the policy statement recommends that management has analyzed all significant factors that affect the collectibility of the portfolio in a reasonable manner; and that management has established acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. As a result of the declines in local and regional real estate market values and the significant losses experienced by many financial institutions, there has been a greater level of scrutiny by regulatory authorities of the loan portfolios of financial institutions undertaken as part of the examination of institutions by the OTS and the FDIC. While the Association believes that it has established an adequate allowance for loan losses, there can be no assurance that regulators, in reviewing the Association's loan portfolio, will not request the Association to materially increase at that time its allowance for loan losses, thereby negatively affecting the Association's financial condition and earnings at that time. Although management believes that adequate specific and general loan loss allowances have been established, actual losses are dependent upon future events and, as such, further additions to the level of specific and general loan loss allowances may become necessary. The Association's Internal Asset Review is conducted by an employee independent of the loan origination and loan servicing functions. This individual reviews and classifies the Association's assets monthly and reports the results of its review to the Board of Directors. The Association classifies assets in accordance with the management guidelines described above. Real Estate Owned ("REO") is classified as Substandard. At June 30, 1999, the Association had $1.2 million of assets classified as Special Mention, $5.1 million of assets classified as Substandard, and $37,000 in assets classified as Loss. Loans classified as Special Mention are a result of past delinquencies or other identifiable weaknesses. At June 30, 1999, the largest loan classified as Special Mention had a loan balance of $230,000. The Association generally requires appraisals on an annual basis on foreclosed properties and, to the extent necessary, on impaired loans. The Association conducts external inspections on foreclosed properties and certain other properties as deemed necessary. 9 The following table sets forth delinquencies in the Association's loan portfolio as of the dates indicated:
At June 30, 1999 At June 30, 1998 ----------------------------------------------- --------------------------------------------------- 60-89 Days 90 Days or More 60-89 Days 90 Days or More ---------------------- ---------------------- ------------------------ ------------------------ Principal Principal Principal Principal Number Balance Number Balance Number Balance Number Balance of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans ---------- ----------- ---------- ----------- ---------- ----------- ---------- ----------- (Dollars in thousands) One- to four-family 1 $ 94 7 $ 1,406 1 $ 206 9 $ 1,215 Multi-family - - - - - - 1 570 Commercial - - - - - - - - Consumer loans 3 30 7 118 3 59 9 126 ------ -------- ------ --------- ------ -------- ------ --------- Total 4 $ 124 14 $ 1,524 4 $ 265 19 $ 1,911 ====== ======== ====== ========= ====== ======== ====== ========= Delinquent loans to total gross loans 0.13% 0.03% 0.44% 0.43% 0.13% 0.09% 0.63% 0.64%
At June 30, 1997 ----------------------------------------------------- 60-89 Days 90 Days or More ----------------------------------------------------- Principal Principal Number Balance Number Balance of Loans of Loans of Loans of Loans ---------- ---------- ---------- ---------- (Dollars in thousands) One- to four-family 3 $ 834 12 $ 1,699 Multi-family - - - - Commercial - - - - Consumer loans - - - - -------- ------- --------- --------- Total 3 $ 834 12 $ 1,699 ======== ======= ========= ========= Delinquent loans to total gross loans 0.11% 0.29% 0.46% 0.59%
10 Non-Accrual and Past-Due Loans. The following table sets forth information regarding non-accrual loans, troubled-debt restructurings and REO. There were two troubled-debt restructured loans within the meaning of SFAS 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings, and 5 REO properties at June 30, 1999. It is the policy of the Association to cease accruing interest on loans 90 days or more past due. For the years ended June 30, 1999, 1998, 1997, 1996 and 1995, respectively, the amount of interest income that would have been recognized on nonaccrual loans if such loans had continued to perform in accordance with their contractual terms was $80,000, $101,000, $77,000, $118,000 and $126,000, none of which was recognized. For the same periods, the amount of interest income recognized on troubled debt restructurings was $35,000, $55,000, $55,000, $58,000 and $55,000, respectively.
At June 30, -------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 -------------- -------------- -------------- -------------- -------------- (Dollars in thousands) Non-accrual loans: Residential real estate: One- to four-family $ 1,406 $1,215 $1,699 $ 821 $1,507 Multi-family - 570 - 473 - Construction and land - - - - 415 Commercial - - - 668 - Consumer 118 126 - - - -------------- -------------- -------------- -------------- -------------- Total 1,524 1,911 1,699 1,962 1,922 REO, net(3) 827 1,902 1,150 1,489 822 -------------- -------------- -------------- -------------- -------------- Total non-performing assets $ 2,351 $3,813 $2,849 $3,451 $2,744 -------------- -------------- -------------- -------------- -------------- Restructured loans $ 446 $ 761 $ 771 $1,130 $1,545 ============== ============== ============== ============== ============== Allowance for loan losses as a percent of gross loans receivable(1) 0.52% 0.48% 0.44% 0.41% 0.36% Allowance for loan losses as a percent of total non-performing loans(2) 121.06% 74.56% 74.34% 53.92% 41.21% Non-performing loans as a percent of gross loans receivable(1)(2) 0.43% 0.64% 0.59% 0.76% 0.88% Non-performing assets as a percent of total Company assets(2) 0.50% 0.93% 0.70% 1.03% 1.00%
- ------------------------------------------ (1) Gross loans includes loans receivable held for investment and loans receivable held for sale, less undisbursed loan funds, deferred loan fees and unamortized premiums and discounts. (2) Non-performing assets consist of non-performing loans and REO. Non- performing loans consist of non-accrual loans. (3) REO balances are shown net of related loss allowances. 11 Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses based on management's evaluation of the risks inherent in its loan portfolio and the general economy. The allowance for 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. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Association's allowance for loan losses. Such agencies may require the Association to make additional provisions for loan losses based upon judgments different from those of management. As of June 30, 1999, the Association's allowance for loan losses was 0.52% of gross loans as compared to 0.48% as of June 30, 1998. The Association had non-accrual loans of $1.5 million and $1.9 million at June 30, 1999 and June 30, 1998, respectively. The Association will continue to monitor and modify its allowances for loan losses as conditions dictate. 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 evaluates all loans in its portfolio on an individual basis with the exception of one- to four-family residential mortgage loans and consumer lines of credit which are evaluated on a collective basis. 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 permanent, a charge-off is recorded; 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 principal and interest in accordance with the terms of the loan. At June 30, 1999, for those loans which are reviewed individually for impairment, the Company had classified none of such loans as impaired with no specific reserves as determined in accordance with SFAS No. 114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures. At June 30, 1998, for those loans which are reviewed individually for impairment, the Company had classified $569,000 of its loans as impaired with $100,000 in specific reserves and none with no specific reserves. In addition, the Company has $1.5 million and $1.3 million at June 30, 1999 and 1998, respectively, in impaired loans which were collectively evaluated for impairment with $238,000 in reserves set aside as of June 30, 1999 and no reserves as of June 30, 1998. The average recorded investment in impaired loans, inclusive of those evaluated collectively, during the years ended June 30, 1999, 1998, and 1997 was approximately $1.9 million, $2.9 million, and $1.6 million, respectively. Interest income on impaired loans of $34,000, $28,000, and $28,000 was recognized for cash payments received in the years ended June 30, 1999, 1998, and 1997. The following table sets forth activity in the Association's allowance for loan losses for the periods set forth in the table.
At or For the Year Ended June 30, ------------------------------------------------------------------------------------ 1999 1998 1997 1996 1995 ------------ ------------ ------------ ------------ ------------ (In thousands) Balance at beginning of period $ 1,425 $ 1,263 $ 1,058 $ 792 $ 562 Provision for loan losses 969 735 557 575 483 Charge-offs: Real Estate: One- to four-family (98) (545) (343) (299) (247) Multi-family (142) - - - - Commercial - - - - - Construction and land - - - - - Consumer (324) (28) (9) (11) (11) ---------- --------- --------- ---------- --------- Total (564) (573) (352) (310) (258) Recoveries 15 - - 1 5 ---------- --------- --------- ---------- --------- Balance at end of period $ 1,845 $ 1,425 $ 1,263 $ 1,058 $ 792 ========== ========= ========= ========== =========
12 The following table sets forth the Association's percent of allowance for loan losses to total allowance for loan losses and the percent of loans to total loans in each of the categories listed at the dates indicated.
At June 30, ------------------------------------------------------------------------------- 1999 1998 --------------------------------------- ------------------------------------- Percent of Percent of Percent of Loans in Percent of Loans in Allowance Each Allowance Each to Total Category to to Total Category to Amount Allowance Total Loans Amount Allowance Total Loans ---------- ----------- ------------- ---------- ------------ ------------ One- to four-family $ 734 39.79% 78.59% $ 616 43.23% 85.04% Multi-family 469 25.42 13.03 397 27.86 9.93 Commercial 99 5.37 6.71 89 6.25 4.00 Construction and land - 0.00 0.00 - 0.00 0.00 Consumer 439 23.79 1.67 162 11.37 3.03 Unallocated 104 5.63 - 161 11.29 - ----------- ------------ ------------ ----------- ----------- ----------- Total $ 1,845 100.00% 100.00% $ 1,425 100.00% 100.00% =========== ============ ============ =========== =========== =========== At June 30, -------------------------------------------------------------------------------- 1997 1996 ---------------------------------------- ------------------------------------- Percent of Percent of Percent of Loans in Percent of Loans in Allowance Each Allowance Each to Total Category to to Total Category to Amount Allowance Total Loans Amount Allowance Total Loans --------- ------------- -------------- ---------- ------------ ------------ (Dollars in thousands) One- to four-family $ 994 78.70% 87.29% $ 696 65.79% 87.82% Multi-family 164 12.99 9.50 195 18.43 8.40 Commercial 95 7.52 3.02 153 14.46 3.61 Construction and land - 0.00 0.00 - 0.00 0.00 Consumer 10 0.79 0.19 14 1.32 0.17 Unallocated - - - - - - ---------- ----------- ----------- ----------- ----------- ----------- Total $ 1,263 100.00% 100.00% $ 1,058 100.00% 100.00% ========== =========== =========== =========== =========== =========== ------------------------------------ 1995 ------------------------------------ Percent of Percent of Loans in Allowance Each to Total Category to Amount Allowance Total Loans --------- ----------- ------------ One- to four-family $ 466 58.84% 85.82% Multi-family 105 13.26 9.34 Commercial 166 20.96 4.37 Construction and land 42 5.30 0.19 Consumer 13 1.64 0.28 Unallocated - - - ---------- ----------- ----------- Total $ 792 100.00% 100.00% ========== =========== ===========
13 Real Estate Owned. At June 30, 1999, the Association had $827,000 of real estate owned ("REO") as compared to $1,902,000 of REO, net of reserves at June 30, 1998. The $1.1 million decrease was due primarily to the sale of REO during the year ended June 30, 1999. If the Association acquires any REO, it is initially recorded at the fair value of the related assets at the date of foreclosure, less costs to sell. Thereafter, if there is a further deterioration in value, the Association provides for a specific valuation allowance and charges operations for the diminution in value. It is the policy of the Association to obtain an appraisal on all real estate acquired through foreclosure at the time of possession. Investment Activities Federally chartered savings institutions have the authority to invest in various types of liquid assets, including United States Treasury obligations, securities of various federal agencies, certificates of deposit of insured banks and savings institutions, bankers' acceptances, repurchase agreements and federal funds. Subject to various restrictions, federally chartered savings institutions may also invest their assets in commercial paper, investment-grade corporate debt securities and mutual funds whose assets conform to the investments that a federally chartered savings institution is otherwise authorized to make directly. Additionally, the Association must maintain minimum levels of investments that qualify as liquid assets under OTS regulations. See "Regulation - Federal Savings Institution Regulation - Liquidity." Historically, the Association has maintained liquid assets above the minimum OTS requirements and at a level considered to be adequate to meet its normal daily activities. The investment policy of the Company as established by the Board of Directors attempts to provide and maintain liquidity, generate a favorable return on investments without incurring undue interest rate and credit risk, and complement the Company's lending activities. Specifically, the Company's policies generally limit investments to government and federal agency-backed securities and other non-government guaranteed securities, including corporate debt obligations, that are investment grade. The Company's policies provide the authority to invest in marketable equity securities meeting the Company's guidelines and in mortgage-backed securities guaranteed by the U.S. government and agencies thereof and other financial institutions. The Company's policies provide that all investment purchases must be approved by two officers (either a Senior Vice President, Executive Vice President or the President) and be ratified by the Board of Directors. At June 30, 1999, the Company had federal funds sold and other short-term investments, investment securities and mortgage- backed securities in the aggregate amount of $93.3 million with a market value of $92.6 million. At June 30, 1999, the Company had $25.8 million in investment securities consisting primarily of U.S. agency securities and investments in an adjustable rate mortgage-backed mutual fund and a money market fund investing in short-term securities. At June 30, 1999, the majority of the Company's $62.6 million of mortgage-backed securities were insured or guaranteed by either FNMA, GNMA or FHLMC, including $24.9 million in mortgage-backed securities available for sale. Investments in mortgage-backed securities involve a risk that actual prepayments will be greater than estimated prepayments over the life of the security which may require adjustments to the amortization of any premium or accretion of any discount relating to such instruments thereby reducing the net yield on such securities. There is also reinvestment risk associated with the cash flows from such securities. In addition, the market value of such securities may be adversely affected by changes in interest rates. 14 The following table sets forth the composition of the Company's mortgage- backed securities portfolio in dollar amounts and in percentages of the portfolio at the dates indicated.
At June 30, -------------------------------------------------------------------------- 1999 1998 1997 -------------------------- ---------------------- --------------------- Percent Percent Percent Amount of Total Amount of Total Amount of Total ------------- ------------ --------- ------------ ---------- ---------- (Dollars in thousands) Mortgage-backed securities: FHLMC $ 3,360 5.43% $11,163 19.16% $29,236 39.00% FNMA 2,024 3.27 7,118 12.22 13,449 17.94 GNMA 47,394 76.62 38,106 65.42 29,213 38.97 Other 9,082 14.68 1,863 3.20 3,061 4.09 ------------- ------------ ---------- ------------ ---------- ---------- Total mortgage-backed securities 61,860 100.00% 58,250 100.00% 74,959 100.00% ============ ============ ========== Plus: Unamortized premium, net 728 1,069 1,277 ------------- ---------- ---------- Total mortgage-backed securities, net 62,588 59,319 76,236 Less: Mortgage-backed securities available for sale: FHLMC 361 5,311 21,908 FNMA 1,984 7,965 13,445 GNMA 22,526 15,050 - Other - 1,057 1,811 ------------- ---------- ---------- Mortgage-backed securities available for sale 24,871 29,383 37,164 ------------- ---------- ---------- Mortgage-backed securities held to maturity $37,717 $29,936 $39,072 ============= ========== ==========
The following table sets forth the Company's mortgage-backed securities activities for the periods indicated:
For the Year Ended June 30, ------------------------------------------------------ 1999 1998 1997 -------------- -------------- -------------- (In thousands) Beginning balance $ 59,319 $ 76,236 $44,315 Mortgage-backed securities purchased - held to maturity 20,004 - 15,451 Mortgage-backed securities purchased - available for sale 15,106 15,281 35,229 Less: Principal repayments (24,036) (15,510) (8,935) Sale of mortgage-backed securities available for sale (6,928) (16,566) (9,866) (Loss) gain on sale of mortgage-backed securities (1) 33 161 Amortization of (premium) discount, net (424) (311) (209) Change in net unrealized (loss) gain on available for sale (452) 156 90 -------------- -------------- -------------- Ending balance $ 62,588 $ 59,319 $76,236 ============== ============== ==============
15 The following table sets forth certain information regarding the carrying and market value of the Company's mortgage-backed securities at the dates indicated:
At June 30, --------------------------------------------------------------------------------------- 1999 1998 1997 --------------------------- --------------------------- --------------------------- Carrying Market Carrying Market Carrying Market Value Value Value Value Value Value ------------ ------------ ------------ ------------ ------------ ------------ (In thousands) Mortgage-backed securities: Held to maturity: FNMA $ 67 $ 68 $ 106 $ 109 $ 208 $ 211 FHLMC 3,071 3,046 5,178 5,187 7,745 7,715 GNMA 25,424 24,917 23,829 23,973 29,842 29,575 Other 9,155 8,953 823 820 1,277 1,282 ------------ ------------ ------------ ------------ ------------ ------------ Total held to maturity 37,717 36,984 29,936 30,089 39,072 38,783 ------------ ------------ ------------ ------------ ------------ ------------ Available for sale: FNMA 1,984 1,984 7,965 7,965 13,445 13,445 FHLMC 361 361 5,311 5,311 21,908 21,908 GNMA 22,526 22,526 15,050 15,050 - - Other - - 1,057 1,057 1,811 1,811 ------------ ------------ ------------ ------------ ------------ ------------ Total available for sale 24,871 24,871 29,383 29,383 37,164 37,164 ------------ ------------ ------------ ------------ ------------ ------------ Total mortgage-backed securities $62,588 $61,855 $59,319 $59,472 $76,236 $75,947 ============ ============ ============ ============ ============ ============
The following table sets forth certain information regarding the carrying and market values of the Company's federal funds sold and other short-term investments and investment securities at the dates indicated:
At June 30, --------------------------------------------------------------------------------------- 1999 1998 1997 --------------------------- --------------------------- --------------------------- Carrying Market Carrying Market Carrying Market Value Value Value Value Value Value ------------ ------------ ------------ ------------ ------------ ------------ (In thousands) Federal funds sold and other short-term investments $ 4,940 $ 4,940 $16,202 $16,202 $18,600 $18,600 ------------ ------------ ------------ ------------ ------------ ------------ Investment securities: Available for sale: U.S. government and federal agency obligations 8,831 8,831 8,239 8,239 9,473 9,473 Mutual and money market funds 12,467 12,467 10,982 10,982 2,994 2,994 Other equities and bonds 4,518 4,518 - - - - ------------ ------------ ------------ ------------ ------------ ------------ Total available for sale 25,816 25,816 19,221 19,221 12,467 12,467 ------------ ------------ ------------ ------------ ------------ ------------ Total investment securities $30,756 $30,756 $35,423 $35,423 $31,067 $31,067 ============ ============ ============ ============ ============ ============
The following table sets forth certain information regarding the carrying value, weighted average yields and contractual maturities of the Company's federal funds sold and other short-term investments and investment securities as of June 30, 1999. 16
At June 30, 1999 --------------------------------------------------------------------------------------- More than One Year More than Five Years One Year or Less to Five Years to Ten Years More than Ten Years -------------------- ------------------- -------------------- ------------------- Weighted Weighted Weighted Weighted Carrying Average Carrying Average Carrying Average Carrying Average Value Yield Value Yield Value Yield Value Yield -------- -------- -------- -------- --------- -------- -------- --------- (Dollars in thousands) Federal funds sold and other short-term investments $ 4,940 5.12% $ - 0.00% $ - 0.00% $ 0.00% -------- -------- --------- -------- Investment securities: Held to maturity: U.S. government and federal agency obligations - - - - -------- -------- --------- -------- Total held to maturity - 0.00% - 0.00% - 0.00% - 0.00% -------- -------- --------- -------- Available for sale: Money market funds and adjustable interest rate mutual funds 12,467 4.95% - - - U.S. government and federal agency obligations - 6,875 6.02% 1,956 6.13% - Other - - 2,283 7.01% 2,235 6.22% Total available for sale 12,467 4.95% 6,875 6.02% 4,239 6.60% 2,235 6.22% -------- -------- --------- -------- Total investment securities $ 12,467 4.95% $ 6,875 6.02% $ 4,239 6.60% $ 2,235 6.22% ======== ======== ========= ======== --------------------- Total --------------------- Weighted Carrying Average Value Yield -------- -------- Federal funds sold and other short-term investments $ 4,940 5.12% -------- Investment securities: Held to maturity: U.S. government and federal agency obligations - -------- Total held to maturity - 0.00% -------- Available for sale: Money market funds and adjustable interest rate mutual funds 12,467 4.95% U.S. government and federal agency obligations 8,831 6.04% Other 4,518 6.62% -------- Total available for sale 25,816 5.62% -------- Total investment securities $ 25,816 5.62% ========
17 Sources of Funds General. Deposits, loan repayments and prepayments, proceeds from sales of loans, cash flows generated from operations and FHLB advances are primary sources of the Association's funds for use in lending, investing and for other general purposes. Deposits. The Association offers a variety of deposit accounts with a range of interest rates and terms. The Association's deposits consist of passbook savings, NOW accounts, checking accounts, money market accounts and certificates of deposit. For the year ended June 30, 1999, certificates of deposit constituted 61.9% of total average deposits. The flow of deposits is influenced significantly by general economic conditions, changes in money market rates, prevailing interest rates and competition. The Association's deposits are obtained predominantly from the areas in which its branch offices are located. During the year ended June 30, 1997, the Association acquired $20.2 million in deposits from another institution. The Association relies primarily on customer service and long-standing relationships with customers to attract and retain these deposits; however, market interest rates and rates offered by competing financial institutions significantly affect the Association's ability to attract and retain deposits. Certificate accounts in excess of $100,000 are not actively solicited by the Association nor has the Association since 1992 used brokers to obtain deposits. The following table presents the deposit activity of the Association for the periods indicated:
For the Year Ended June 30, -------------------------------------------------------------------- 1999 1998 1997 ------------------- ------------------- ------------------- (Dollars in thousands) Net deposits (withdrawals) $16,385 $(5,429) $23,345 Deposits acquired by branch purchase - - 20,159 Interest credited on deposit accounts 12,440 12,371 10,796 ------------------- ------------------- ------------------- Total increase in deposit accounts $28,825 $ 6,942 $54,300 =================== =================== ===================
At June 30, 1999, the Association had $57.0 million in certificate accounts in amounts of $100,000 or more maturing as follows:
Weighted Maturity Period Amount Average Rate - -------------------------------------------------- ------------------- ------------------------ (Dollars in thousands) Three months or less $13,418 5.08% Over three through six months 12,957 4.83% Over six through 12 months 26,737 4.94% Over 12 months 3,914 5.56% ------------------- ------------------------ Total $57,026 4.99% =================== ========================
18 The following table sets forth the distribution of the Association's average deposit accounts for the periods indicated and the weighted average interest rates on each category of deposits presented.
For the Year Ended June 30, -------------------------------------------------------------------------------------------------- 1999 1998 1997 -------------------------------------------------------------------------------------------------- Percent Percent Percent of Total Weighted of Total Weighted of Total Weighted Average Average Average Average Average Average Average Average Average Balance Deposits Rate Balance Deposits Rate Balance Deposits Rate ----------- ----------- -------- --------- ---------- --------- -------- --------- -------- (Dollars in thousands) Money market savings account $ 67,399 21.7% 4.55% $ 31,291 10.7% 4.37% $ 13,334 5.2% 3.70% Passbook accounts 18,413 5.9 1.99 18,516 6.3 2.04 17,432 6.7 2.00 NOW accounts 21,165 6.8 1.13 21,171 7.3 1.46 20,249 7.8 1.38 Non interest-bearing accounts 11,408 3.7 0.00 7,879 2.7 0.00 3,998 1.6 0.00 -------- -------- -------- ------ -------- ------ Total 118,385 38.1% 3.10% 78,857 27.0% 2.60% 55,013 21.3% 2.04% -------- -------- -------- ------ -------- ------ Certificate accounts: Less than six months 8,596 2.8% 4.09% 9,941 3.4% 4.28% 14,487 5.6% 4.09% Over six through 12 months 36,627 11.8 4.78 46,615 16.0 5.27 54,112 20.9 5.45 Over 12 through 24 months 120,774 38.8 5.16 126,606 43.4 5.54 99,151 38.3 5.49 Over 24 months 26,406 8.5 5.73 29,144 10.0 5.80 34,987 13.5 5.77 Local agency certificates 92 0.0 5.10 438 0.2 5.19 1,007 0.4 5.26 -------- -------- -------- ------ -------- ------- Total certificate accounts 192,495 61.9% 5.13% 212,744 73.0% 5.44% 203,744 78.7% 5.44% -------- -------- -------- ------ -------- ------- Total average deposits $310,880 100.0% 4.36% $291,601 100.0% 4.67% $258,757 100.0% 4.71% ======== ======== ======== ====== ======== ======
The following table presents, by various rate categories, the amount of certificate accounts outstanding at the dates indicated and the periods to maturity of the certificate accounts outstanding at June 30, 1999.
Period to Maturity from June 30, 1999 At June 30, ------------------------------------------------------------------------------------------------------------ Less than One to Two to Three to Four to One Year Two years Three years Four years Five years 1999 1998 1997 ------------- ---------- ------------ ---------- ---------- ---------- ---------- ---------- (In thousands) Certificate accounts: 0 to 4.00% $ 5,591 $ - $ - $ - $ - $ 5,591 $ 3,946 $ - 4.01 to 5.00% 118,767 4,706 272 - 631 124,376 34,212 25,557 5.01 to 6.00% 38,734 3,865 2,756 2,746 836 48,937 141,728 176,487 6.01 to 7.00% 4,656 494 1,410 382 - 6,942 19,192 19,748 7.01 to 8.00% 75 146 - - - 221 374 604 ------------- --------- ----------- ---------- --------- ---------- ---------- ---------- Total $ 167,823 $ 9,211 $ 4,438 $ 3,128 $ 1,467 $ 186,067 $ 199,452 $ 222,396 ============= ========= =========== ========== ========= ========== ========== ==========
19 Borrowings From time to time the Association has obtained advances from the FHLB as an alternative to retail deposit funds and may do so in the future as part of its operating strategy. FHLB advances may also be used to acquire certain other assets as may be deemed appropriate for investment purposes. These advances are collateralized primarily by certain of the Association's mortgage loans and mortgage-backed securities and secondarily by the Association's investment in capital stock of the FHLB. Such advances are made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. The maximum amount that the FHLB will advance to member institutions, including the Association, fluctuates from time to time in accordance with the policies of the OTS and the FHLB. During the year ended June 30, 1999, the Association repaid approximately $38.0 million in FHLB advances. At June 30, 1999, the Association had $108.0 million in outstanding advances from the FHLB. The following table sets forth certain information regarding the Association's borrowed funds from the FHLB at or for the periods ended on the dates indicated:
At or For the Years Ended June 30, ------------------------------------------------------------------------- 1999 1998 1997 ------------------- ------------------- ------------------- (Dollars in thousands) FHLB advances: Average balance outstanding $ 97,110 $72,722 $73,513 Maximum amount outstanding at any month-end during the period 108,017 75,876 78,172 Balance outstanding at end of period 108,002 70,543 77,907 Weighted average interest rate during the period 5.68% 6.28% 6.25% Weighted average interest rate at end of period 5.41% 6.21% 6.27%
As part of its funding strategy, the Company may obtain funds from approved securities dealers through securities sold under agreements to repurchase. The collateral used in such borrowings is normally agency securities or mortgage- backed securities. At June 30, 1999, the Company had no outstanding borrowings. During the year ended June 30, 1999, the Company repaid approximately $10.3 million of such borrowings. The following table sets forth certain information regarding the Association's borrowed funds from securities sold under agreements to repurchase at or for the periods ended on the dates indicated:
At or For the Years Ended June 30, ------------------------------------------------------------------------- 1999 1998 1997 ------------------- ------------------- ------------------- (Dollars in thousands) Securities sold under agreements to repurchase Average balance outstanding $ 3,831 $6,528 $8,729 Maximum amount outstanding at any month-end during the period 10,300 9,450 9,600 Balance outstanding at end of period - 6,000 9,430 Weighted average interest rate during the period 5.62% 6.04% 5.93% Weighted average interest rate at end of period - 6.05% 5.95%
Subsidiary Activities First Covina Service Company, a wholly-owned subsidiary of the Association, acts as trustee for deeds of trust on behalf of the Association and offers non- insured investment products such as tax-deferred annuities and mutual funds through licensed representatives. The assets of First Covina primarily consist of a $625,000 loan to the Association. Other than interest on the note to the Association, First Covina Service Company earns commissions on the sale of tax- deferred annuities and mutual funds. 20 Personnel As of June 30, 1999, the Company had 83 full-time employees and 32 part-time employees. The employees are not represented by a collective bargaining unit and the Company considers its relationship with its employees to be good. REGULATION AND SUPERVISION General As a savings and loan holding company, the Company is required by federal law to file reports with, and otherwise comply with, the rules and regulations of the OTS. The Association is subject to extensive regulation, examination and supervision by the OTS, as its primary federal regulator, and the FDIC, as the deposit insurer. The Association is a member of the Federal Home Loan Bank ("FHLB") and its deposit accounts are insured up to applicable limits by the Savings Association Insurance Fund ("SAIF") managed by the FDIC. The Association must file reports with the OTS and the FDIC concerning its activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other savings institutions. The OTS and/or the FDIC conduct periodic examinations to test the Association's safety and soundness and compliance with various regulatory requirements. This regulation and supervision established a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulatory requirements and policies, whether by the OTS, the FDIC or the Congress, could have a material adverse impact on the Company, the Association and their operations. Certain of the regulatory requirements applicable to the Association and to the Company are referred to below or elsewhere herein. The description of statutory provisions and regulations applicable to savings institutions and their holding companies set forth in this proxy statement does not purport to be a complete description of such statutes and regulations and their effects on the Company and the Association. Holding Company Regulation The Company is a nondiversified unitary savings and loan holding company within the meaning of federal law. As a unitary savings and loan holding company, the Company generally is not restricted under existing laws as to the types of business activities in which it may engage, provided that the Association continues to be a qualified thrift lender. See "Federal Savings Institution Regulation--QTL Test." Upon any non-supervisory acquisition by the Company of another savings institution or savings bank that meets the qualified thrift lender test and is deemed to be a savings institution by the OTS, the Company would become a multiple savings and loan holding company (if the acquired institution is held as a separate subsidiary) and would generally be limited to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject to the prior approval of the OTS, and certain activities authorized by OTS regulation. A savings and loan holding company is prohibited from, directly or indirectly, acquiring more than 5% of the voting stock of another savings institution or savings and loan holding company, without prior written approval of the OTS and from acquiring or retaining control of a depository institution that is not insured by the FDIC. In evaluating applications by holding companies to acquire savings institutions, the OTS considers the financial and managerial resources and future prospects of the Company and institution involved, the effect of the acquisition on the risk to the deposit insurance funds, the convenience and needs of the community and competitive factors. The OTS may not approve any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions: (i) the approval of interstate supervisory acquisitions by savings and loan holding companies and (ii) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions. 21 Although savings and loan holding companies are not subject to specific capital requirements or specific restrictions on the payment of dividends or other capital distributions, federal regulations do prescribe such restrictions on subsidiary savings institutions, as described below. The Association must notify the OTS 30 days before declaring any dividend to the Company. In addition, the financial impact of a holding company on its subsidiary institution is a matter that is evaluated by the OTS and the agency has authority to order cessation of activities or divestiture of subsidiaries deemed to pose a threat to the safety and soundness of the institution. Federal Savings Institution Regulation Business Activities. The activities of federal savings institutions are governed by federal law and regulations. These laws and regulations delineate the nature and extent of the activities in which federal associations may engage. In particular, many types of lending authority for a federal association, e.g., commercial, non-residential real property loans and consumer loans, are limited to a specified percentage of the institution's capital or assets. Capital Requirements. The OTS capital regulations require savings institutions to meet three minimum capital standards: a 1.5% tangible capital ratio, a 3% leverage ratio and an 8% risk-based capital ratio. In addition, the prompt corrective action standards discussed below also establish, in effect, a minimum 2% tangible capital standard, a 4% leverage ratio (3% for institutions receiving the highest rating on the CAMEL financial institution rating system), and, together with the risk-based capital standard itself, a 4% Tier I risk- based capital standard. The OTS regulations also require that, in meeting the tangible, leverage and risk-based capital standards, institutions must generally deduct investments in and loans to subsidiaries engaged in activities as principal that are not permissible for a national bank. The risk-based capital standard for savings institutions requires the maintenance of Tier I (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%, assigned by the OTS capital regulation based on the risks believed inherent in the type of asset. Core (Tier I) capital is defined as common stockholders' equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus, and minority interests in equity accounts of consolidated subsidiaries less intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock and the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and up to 45% of unrealized gains on available-for-sale equity securities with readily determinable fair values. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital. The capital regulations also incorporate an interest rate risk component. Savings institutions with "above normal" interest rate risk exposure are subject to a deduction from total capital for purposes of calculating their risk-based capital requirements. For the present time, the OTS has deferred implementation of the interest rate risk component. At June 30, 1999, the Association met each of its capital requirements. The following table presents the Association's capital position at June 30, 1999.
Excess Capital ---------------------------------- Actual Required (Deficiency) Actual Required Capital Capital Amount Percent Percent --------------- --------------- --------------- --------------- --------------- (Dollars in thousands) Tangible $30,994 $ 7,034 $23,960 6.61% 1.50% Core (Leverage) 30,994 14,068 16,926 6.61 3.00 Risk-based 32,601 19,544 13,057 13.34 8.00
22 Prompt Corrective Regulatory Action. The OTS is required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution's degree of undercapitalization. Generally, a savings institution that has a ratio of total capital to risk-weighted assets of less than 8%, a ratio of Tier I (core) capital to risk-weighted assets of less than 4% or a ratio of core capital to total assets of less than 4% (3% or less for institutions with the highest examination rating) is considered to be "undercapitalized." A savings institution that has a total risk-based capital ratio less than 6%, a Tier I capital ratio of less than 3% or a leverage ratio that is less than 3% is considered to be "significantly undercapitalized" and a savings institution that has a tangible capital to assets ratio equal to or less than 2% is deemed to be "critically undercapitalized." Subject to a narrow exception, the OTS is required to appoint a receiver or conservator for an institution that is "critically undercapitalized." The regulation also provides that a capital restoration plan must be filed with the OTS within 45 days of the date a savings institution receives notice that it is "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." Compliance with the plan must be guaranteed by any parent holding company. In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion. The OTS could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. Insurance of Deposit Accounts. Deposits of the Association are presently insured by the SAIF. The FDIC maintains a risk-based assessment system by which institutions are assigned to one of three categories based on their capitalization and one of three subcategories based on examination ratings and other supervisory information. An institution's assessment rate depends upon the categories to which it is assigned. Assessment rates for SAIF member institutions are determined semiannually by the FDIC and currently range from zero basis points for the healthiest institutions to 27 basis points for the riskiest. In addition to the assessment for deposit insurance, institutions are required to make payments on bonds issued in the late 1980s by the Financing Corporation ("FICO") to recapitalize the predecessor to the SAIF. During 1998, FICO payments for SAIF members, including the Association, approximated 6.10 basis points, while Bank Insurance Fund ("BIF") members paid 1.22 basis points. By law, there will be equal sharing of FICO payments between SAIF and BIF members on the earlier of January 1, 2000 or the date the SAIF and BIF are merged. The FDIC has authority to increase insurance assessments. A significant increase in SAIF insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Association. Management cannot predict what insurance assessment rates will be in the future. Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the OTS. The management of the Association does not know of any practice, condition or violation that might lead to termination of deposit insurance. Thrift Rechartering Legislation. Legislation enacted in 1996 provided that the BIF and SAIF were to have merged on January 1, 1999 if there are no more savings associations as of that date. Various proposals to eliminate the federal savings association charter, create a uniform financial institutions charter, abolish the OTS and restrict savings and loan holding company activities have been introduced in Congress. The Association is unable to predict whether such legislation will be enacted or the extent to which the legislation would restrict or disrupt its operations. Loans to One Borrower. Federal law provides that savings institutions are generally subject to the limits on loans to one borrower applicable to national banks. A savings institution may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if secured by specified readily-marketable collateral. At June 30, 1999, the Association's limit on loans to one borrower was $4.6 million, and the Association's largest aggregate outstanding balance of loans to one borrower totaled $3.1 million. QTL Test. The HOLA requires savings institutions to meet a qualified thrift lender test. Under the test, a savings association is required to either quality as a "domestic building and loan association" under the Internal Revenue Code or maintain at least 65% of its "portfolio assets" (total assets less (i) specified liquid assets up to 20% of total assets; (ii) intangibles, including goodwill; and (iii) the value of property used to conduct business) in certain 23 "qualified thrift investments" (primarily residential mortgages and related investments, including certain mortgage-backed securities) in at least nine months out of each 12 month period. A savings institution that fails the qualified thrift lender test is subject to certain operating restrictions and may be required to convert to a bank charter. As of June 30, 1999, the Association met the qualified thrift lender test. Recent legislation has expanded the extent to which education loans, credit card loans and small business loans may be considered "qualified thrift investments." Limitation on Capital Distributions. OTS regulations impose limitations upon all capital distributions by a savings institution, including cash dividends, payments to repurchase its shares and payments to shareholders of another institution in a cash-out merger. The rule effective in 1998 established three tiers of institutions based primarily on an institution's capital level. An institution that exceeded all capital requirements before and after a proposed capital distribution ("Tier I Bank") and had not been advised by the OTS that it was in need of more than normal supervision, could, after prior notice but without obtaining approval of the OTS, make capital distributions during the calendar year equal to the greater of (i) 100% of its net earnings to date during the calendar year plus the amount that would reduce by one-half the excess capital over its capital requirements at the beginning of the calendar year or (ii) 75% of its net income for the previous four quarters. Any additional capital distributions required prior regulatory approval. At June 30, 1999, the Association was a Tier I Bank. Effective April 1, 1999, the OTS's capital distribution regulation changed. Under the new regulation, an application to and the prior approval of the OTS will be required prior to any capital distribution if the institution does not meet the criteria for "expedited treatment" of applications under OTS regulations (i.e., generally, examination ratings in the two top categories), the total capital distributions for the calendar year exceed net income for that year plus the amount of retained net income for the preceding two years, the institution would be undercapitalized following the distribution or the distribution would otherwise be contrary to a statute, regulation or agreement with OTS. If an application is not required, the institution must still provide prior notice to OTS of the capital distribution. In that it was in need of more than normal supervision, the Association's ability to make capital distributions could be restricted. In addition, the OTS could prohibit a proposed capital distribution by any institution, which would otherwise be permitted by the regulation, if the OTS determines that such distribution would constitute an unsafe or unsound practice. Liquidity. The Association is required to maintain an average daily balance of specified liquid assets equal to a monthly average of not less than a specified percentage of its net withdrawable deposit accounts plus short-term borrowings. This liquidity requirement is currently 4%, but may be changed from time to time by the OTS to any amount within the range of 4% to 10%. Monetary penalties may be imposed for failure to meet these liquidity requirements. The Association has never been subject to monetary penalties for failure to meet its liquidity requirements. Assessments. Savings institutions are required to pay assessments to the OTS to fund the agency's operations. The general assessments, paid on a semi-annual basis, are computed upon the savings institution's total assets, including consolidated subsidiaries, as reported in the Association's latest quarterly thrift financial report. Transactions with Related Parties. The Association's authority to engage in transactions with "affiliates" (e.g., any company that controls or is under common control with an institution, including the Company and its non-savings institution subsidiaries) is limited by federal law. The aggregate amount of covered transactions with any individual affiliate is limited to 10% of the capital and surplus of the savings institution. The aggregate amount of covered transactions with all affiliates is limited to 20% of the savings institution's capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of a type described in federal law. The purchase of low quality assets from affiliates is generally prohibited. The transactions with affiliates must be on terms and under circumstances that are at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. In addition, savings institutions are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings institution may purchase the securities of any affiliate other than a subsidiary. The Association's authority to extend credit to executive officers, directors and 10% shareholders ("insiders"), as well as entities such persons control, is also governed by federal law. Such loans are required to be made on terms substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment. Recent legislation created an exception for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to 24 insiders over other employees. The law limits both the individual and aggregate amount of loans the Association may make to such insiders based, in part, on the Association's capital position and requires certain board approval procedures to be followed. Enforcement. The OTS has primary enforcement responsibility over savings institutions and has the authority to bring actions against the institution and all institution-affiliated parties, including stockholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors to institution of receivership, conservatorship or termination of deposit insurance. Civil penalties cover a wide range of violations and can amount to $25,000 per day, or even $1 million per day in especially egregious cases. The FDIC has the authority to recommend to the Director of the OTS that enforcement action to be taken with respect to a particular savings institution. If action is not taken by the Director, the FDIC has authority to take such action under certain circumstances. Federal law also establishes criminal penalties for certain violations. Standards for Safety and Soundness. The federal banking agencies have adopted Interagency Guidelines prescribing Standards for Safety and Soundness. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the OTS determines that a savings institution fails to meet any standard prescribed by the guidelines, the OTS may require the institution to submit an acceptable plan to achieve compliance with the standard. Federal Reserve System The Federal Reserve Board regulations require savings institutions to maintain non-interest earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The regulations generally provide that reserves be maintained against aggregate transaction accounts as follows: for accounts aggregating $46.5 million or less (subject to adjustment by the Federal Reserve Board), the reserve requirement is 3%; and for accounts aggregating greater than $46.5 million, the reserve requirement is $1.395 million plus 10% (subject to adjustment by the Federal Reserve Board between 8% and 14%) against that portion of total transaction accounts in excess of $46.5 million. The first $4.9 million of otherwise reservable balances (subject to adjustments by the Federal Reserve Board) are exempted from the reserve requirements. The Association complies with the foregoing requirements. FEDERAL AND STATE TAXATION Federal Taxation General. The Company and the Association report their income on a fiscal year ending June 30 using the accrual method of accounting and are subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly the Association's reserve for bad debts discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Association or the Company. Bad Debt Reserve. For tax years beginning prior to January 1, 1996, savings institutions such as the Association which met certain definitional tests primarily related to their assets and the nature of their business ("qualified institutions") were permitted to establish a reserve for bad debts ("reserve method"). Annual additions to the reserve, within specified formula limits, may be deducted in arriving at taxable income. Under the reserve method, qualifying institutions were generally allowed to use either of two alternative computations: Under the "percentage of taxable income" method computation, qualifying institutions could claim a bad debt deduction computed as a percentage of taxable income adjusted for certain items. Alternatively, a qualifying institution could elect to utilize its own bad debt loss experience to compute its annual addition to its bad debt reserves (the "experience method"). 25 Under Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, savings associations were not required to provide a federal deferred tax liability for the bad debt reserves that arose in tax years beginning before January 1, 1988. Such reserves were, however, subject to recapture in whole or in part upon the occurrence of certain events such as failure to remain a qualified institution, distributions to shareholders in excess of the association's current and accumulated earnings and profits, a redemption of shares, or upon a partial or complete liquidation of the association. Upon the occurrence of such events, the association would be required to provide federal deferred taxes in their financial statements for the recaptured portion of the tax reserve. Legislation enacted in 1996 repealed the special bad debt rules applicable to savings associations for taxable years beginning after December 31, 1995. Under these provisions, savings associations will follow the same rules for purposes of computing allowable bad debt deductions as banks, which allows an annual addition to the association's bad debt reserve under the experience method as long as total assets do not exceed $500 million, but does not allow for an addition based on the percentage of taxable income method. Under the 1996 Legislation, if a savings association converts to a bank or is merged into a bank, the association's bad debt reserve will not automatically be subject to recapture. Recapture of the grandfathered bad debt reserve would still occur in the event of certain distributions, redemptions or partial liquidations, as previously discussed. As of June 30, 1999, the Association's tax bad debt reserve grandfathered under the new law for which federal deferred taxes have not been provided totaled approximately $2.7 million. The Association does not intend to pay dividends or enter into any other type of transaction as noted above, that would result in the recapture of any portion of its grandfathered bad debt reserve. State and Local Taxation State of California. The California franchise tax rate applicable to the Association equals the franchise tax rate applicable to corporations generally, plus an "in lieu" rate approximately equal to personal property taxes and business license taxes paid by such corporations (but not generally paid by banks or financial corporations such as the Association); however, the total tax rate is approximately 10.84%. Under California regulations, bad debt deductions are available in computing California franchise taxes using a three or six year weighted average loss experience method. The Association and its California subsidiary file California state franchise tax returns on a combined basis. Delaware Taxation. As a Delaware holding company not earning income in Delaware, the Company is exempted from Delaware corporate income tax but is required to file an annual report with and pay an annual franchise tax to the State of Delaware. Item 2. Properties - ------------------ The Company neither owns nor leases any real property. For the time being, it utilizes the property and equipment of the Association without payment to the Association. The Association conducts its business through an administrative and full service office located in West Covina and seven other full service offices. The Company believes that the Association's current facilities are adequate to meet the present and immediately foreseeable needs of the Association and the Company. 26
Original Net Book Value Year of Property or Leased Leased Date of Leasehold or or Lease Improvements at Location Owned Acquired Expiration June 30, 1999 - --------------------------------------------- -------------- --------------- ----------------- ------------------------ Administrative/Branch Office: 225 North Barranca Street Owned 1984 - $1,347,000 West Covina, California 91791 Branch Offices: Covina: 144 North Second Avenue Owned 1952 - 107,000 Covina, California 91723 Hacienda Heights: 2233 South Hacienda Boulevard Owned 1970 - 454,000 Hacienda Heights, California 91745 La Verne: 2111 Bonita Avenue Owned 1972 - 176,000 La Verne, California 91750 City of Industry: 220 North Hacienda Boulevard Leased 1977 9/30/03(1) - City of Industry, California 91744 Arcadia: One East Foothill Boulevard Leased 1986 12/31/05 18,000 Arcadia, California 91006 North La Verne: 1413 Foothill Boulevard Leased 1997 1/31/00 7,000 La Verne, California 91750 Duarte: 1475 East Huntington Drive Leased 1997 6/30/05 41,000 Duarte, California 91010
- --------------------------------------------- (1) The Association has options to extend the lease term for four consecutive five-year periods. Item 3. Legal Proceedings - -------------------------- The Company is not involved in any pending legal proceeding other than routine proceedings occurring in the ordinary course of business, which in the aggregate are believed by management to be immaterial to the Company's financial condition or results of operations of the Company. Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ None. 27 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters - ------------------------------------------------------------------------------ The Common Stock of SGV Bancorp, Inc., is traded over-the-counter on the NASDAQ Stock Market under the symbol "SGVB." To date, the Company has not paid a dividend to its shareholders. As of June 30, 1999, there were 192 holders of record of the Common Stock of the Company (not including the number of persons holding stock in nominee or street name through various nominee holders), and 2,176,323 shares outstanding. The following table sets forth for the quarters indicated the range of high and low bid price information for the common stock of the Company as reported on the NASDAQ National Market.
Year Ended June 30, 1999 ------------------------------------------------------------------------------------------------- 4/th/ Quarter 3/rd/ Quarter 2/nd/ Quarter 1/st/ Quarter -------------------- -------------------- -------------------- ---------------------- High 19 3/4 13 1/2 13 1/4 17 1/16 Low 10 3/8 10 12 11 1/2
Year Ended June 30, 1998 ------------------------------------------------------------------------------------------------- 4/th/ Quarter 3/rd/ Quarter 2/nd/ Quarter 1/st/ Quarter -------------------- -------------------- -------------------- ---------------------- High 19 18 1/4 19 3/4 17 7/8 Low 17 1/4 16 17 1/8 13 3/4
Item 6. Selected Financial Data - -------------------------------- SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE COMPANY
At June 30, ----------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ----------------------------------------------------------------------------- (In thousands) Selected Financial Condition Data: Total assets $468,730 $408,346 $409,340 $336,055 $273,396 Investment securities available for sale 25,816 19,221 12,467 14,904 1,000 Investment securities held to maturity - - - - 3,200 Mortgage-backed securities available for sale 24,871 29,383 37,164 16,614 3,614 Mortgage-backed securities held to maturity 37,717 29,936 39,072 27,701 15,735 Loans receivable held for sale 100 391 230 723 - Loans receivable held for investment, net (1) 354,989 295,739 284,608 255,953 217,399 Deposit accounts 324,106 295,281 288,339 234,039 204,264 FHLB advances 108,002 70,543 77,907 67,509 33,447 Stockholders' equity, substantially restricted 32,371 32,233 29,903 31,586 33,006
28
For the Year Ended June 30, ----------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ----------------- --------------- --------------- --------------- --------------- Selected Operating Data: Interest income $ 31,778 $ 29,602 $ 26,700 $ 21,259 $ 17,855 Interest expense 19,370 18,661 17,138 13,304 10,900 ----------------- --------------- --------------- --------------- --------------- Net interest income before provision for loan losses 12,408 10,941 9,562 7,955 6,955 Provision for loan losses 969 735 557 575 483 ----------------- --------------- --------------- --------------- --------------- Net interest income after provision for loan losses 11,439 10,206 9,005 7,380 6,472 Other income 1,933 1,368 1,061 883 755 Other expenses 9,081 9,043 8,801 7,237 6,922 ----------------- --------------- --------------- --------------- --------------- Earnings before income taxes 4,291 2,531 1,265 1,026 305 Income taxes 1,743 1,044 534 432 128 ================= =============== =============== =============== =============== Net earnings $ 2,548 $ 1,487 $ 731 $ 594 $ 177 ================= =============== =============== =============== =============== Earnings per share - basic $ 1.16 $ 0.63 $ 0.29 $ 0.22 N/A ================= =============== =============== =============== =============== Earnings per share - diluted $ 1.13 $ 0.60 $ 0.29 $ 0.22 N/A ================= =============== =============== =============== ===============
Selected Financial Ratios and Other Data (2): Performance Ratios: Return on average assets 0.57% 0.37% 0.20% 0.20% 0.07% Return on average equity 8.04 4.80 2.38 1.81 1.16 Average equity to average assets 7.06 7.62 8.22 11.00 5.86 Equity to total assets at end of period 6.91 7.89 7.31 9.40 12.07 Average interest rate spread (3) 2.54 2.40 2.27 2.28 2.61 Net interest margin (4) 2.88 2.78 2.65 2.76 2.79 Average interest-earning assets to average interest-bearing liabilities 107.59 108.22 107.98 110.37 103.97 General and administrative expenses to average assets (5)(8) 2.08 2.19 2.40 2.33 2.58 Regulatory Capital Ratios: Tangible capital 6.61% 6.86% 6.34% 7.63% 9.04% Core capital 6.61 6.86 6.34 7.63 9.04 Risk-based capital 13.34 15.08 14.43 16.51 18.56 Asset Quality Ratios: Non-performing loans as a percent of gross loans receivable (6)(7) 0.43% 0.64% 0.59% 0.76% 0.88% Non-performing assets as a percent of total assets (7) 0.50 0.93 0.70 1.03 1.00 Allowance for loan losses as a percent of gross loans receivable (6) 0.52 0.48 0.44 0.41 0.36 Allowance for loan losses as a percent of non-performing loans (7) 121.06 74.56 74.34 53.92 41.21 Number of full-service customer facilities 8 8 8 6 6
- ------------------------------------------------------------- (1) The allowance for loan losses at June 30, 1999, 1998, 1997, 1996 and 1995 was $1,845,000, $1,425,000, $1,263,000, $1,058,000, and $792,000, respectively. (2) Asset Quality Ratios and Regulatory Capital Ratios are end of period ratios. With the exception of end of period ratios, all ratios are based on average monthly balances during the indicated periods and are annualized where appropriate. (3) The average interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. (4) The net interest margin represents net interest income as a percent of average interest-earning assets. (5) Includes the one-time special assessment to recapitalize SAIF of $1.3 million in 1997. (6) Gross loans receivable include loans receivable held for investment and loans held for sale, less undisbursed loan funds, deferred loan fees and unamortized discounts/premiums. (7) Non-performing assets consist of non-performing loans and real estate acquired through foreclosure ("REO"). Non-performing loans consist of all loans 90 days or more past due. It is the Association's policy to cease accruing interest on all such loans. (8) Excludes net gain (loss) on real estate acquired through foreclosure for periods ended June 30, 1999, 1998, 1997, 1996 and 1995 of $255,000, $(109,000), $157,000, $(271,000) and $(217,000), respectively. 29 Item 7. Management's Discussion and Analysis of Financial Condition and Results - ------------------------------------------------------------------------------- of Operations - ------------- Management of Interest Rate Risk The principal objective of the Association's interest rate risk management function is to evaluate the interest rate risk included in certain balance sheet accounts, determine the level of risk appropriate given the Association's business focus, operating environment, capital and liquidity requirements and performance objectives, and manage the risk consistent with Board approved guidelines. Through such management, the Association seeks to reduce the vulnerability of its operations to changes in interest rates. The Association monitors its interest rate risk as such risk relates to its operating strategies. The Association's Board of Directors has established an Asset/Liability Committee, responsible for reviewing its asset/liability policies and interest rate risk position, which meets monthly and reports trends to the Board of Directors on a monthly basis and the Association's interest rate risk position on a quarterly basis. The extent of the movement of interest rates, higher or lower, is an uncertainty that could have a negative impact on the earnings of the Association. In recent years, the Association has utilized the following strategies to manage rate risk: (i) emphasizing the origination or purchase of adjustable-rate one- to four-family mortgage loans for portfolio; (ii) selling to the secondary market the majority of fixed-rate mortgage loans originated; and, (iii) attempting to reduce the overall interest rate sensitivity of liabilities emphasizing core and longer-term deposits and utilizing FHLB advances. Net Portfolio Value. The Association's interest rate sensitivity is monitored by management through the use of an internally generated model which estimates the change in net portfolio value ("NPV") over a range of interest rate scenarios. NPV is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts. An NPV Ratio, in any interest rate scenario, is defined as the NPV in that scenario divided by the market value of assets in the same scenario. The Sensitivity Measure is the decline in the NPV Ratio, in basis points, caused by a 2% increase or decrease in rates, whichever produces a larger decline. The higher an institution's Sensitivity Measure is, the greater its exposure to interest rate risk is considered to be. The OTS also produces a similar analysis using its own model, based upon data submitted on the Association's quarterly Thrift Financial Reports. As of June 30, 1999, the Association's Sensitivity Measure, as measured by the OTS, was 2.13%. At that same date, the Sensitivity Measure as measured by the Association, was 1.62%. The differences between the two measurements is partially attributed to differences in assigning various prepayment rates, decay rates and discount rates. The Association compares the results from the OTS with its internally generated results and provides the Board of Directors a comparison to determine if there is any additional risk. In addition to monitoring selected measures of NPV, management also monitors effects on net interest income resulting from changes in interest rates. These measures are used in conjunction with NPV measures to identify potential interest rate risk. The Association projects net interest income for the next 12 month period, based upon certain specific assumptions. For the years ended June 30, 1999, 1998 and 1997, the forecasted net interest income in the existing rate environment (held constant for the period) for interest rate risk management purposes was $11.5 million, $10.2 million, and $8.1 million, respectively, compared to the actual net interest income recorded of $12.4 million, $10.9 million, and $9.6 million, respectively. Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in NPV requires the making of certain assumptions which may tend to oversimplify the manner in which actual yields and costs respond to changes in market interest rates. First, the models assume that the composition of the Association's interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured. Second, the models assume that a particular change in interest rates is reflected uniformly across the yield curve regardless of duration to maturity or repricing of specific assets and liabilities. Third, the model does not take into account the Association's business or strategic plans. Accordingly, although the NPV measurements and interest income models do provide an indication of the Association's interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on the Association's net interest income and will differ from actual results. 30 The following table sets forth, at June 30, 1999 and June 30, 1998, an analysis of the Association's internal report of its interest rate risk measured by the estimated changes in the NPV resulting from instantaneous and sustained parallel shifts in the yield curve (300 basis points, measured in 100 basis point increments).
Change in Interest Rates Net Portfolio Value - June 30, 1999 ----------------------------------------------------------------------- In Basis Points Change Change (Rate Shock) Amount $ % - ---------------------------------- -------------------- -------------------- -------------------- (Dollars in thousands) 300 $26,429 $(14,378) (35.2)% 200 32,065 (8,742) (21.4) 100 36,939 (3,868) (9.5) -- 40,807 - - (100) 39,691 (1,115) (2.7) (200) 39,976 (831) (2.0) (300) 41,642 836 2.1
Change in Interest Rates Net Portfolio Value - June 30, 1998 ----------------------------------------------------------------------- In Basis Points Change Change (Rate Shock) Amount $ % - ---------------------------------- -------------------- -------------------- -------------------- (Dollars in thousands) 300 $29,977 $(10,133) (25.2)% 200 35,258 (4,852) (12.1) 100 38,861 (1,250) (3.1) -- 40,111 - - (100) 39,419 (692) (1.7) (200) 40,939 828 2.1 (300) 40,943 832 2.1
At June 30, 1999, the Association was generally more sensitive to rising interest rates than was evident at June 30, 1998. The increased sensitivity was due to an overall increase in rates at June 30, 1999 as compared to June 30, 1998, the increase in the amount of fixed-rate loans in the Association's portfolio and the additional amount of short-term borrowings held at June 30, 1999 versus June 30, 1998. In regards to the higher level of short-term borrowings, the intent of the Association was to payoff a significant portion of such borrowings with the proceeds received from the acquisition of two branches from Citibank Savings. The deposits acquired from Citibank include approximately 36% in core deposits which are less sensitive to changes in interest rates and are expected to reduce the Association's change in NPV in rising rate environments. 31 The following table provides information regarding the Company's primary categories of assets and liabilities which are sensitive to changes in interest rates. The information presented reflects the expected cash flows of the primary categories by year including the related weighted average interest rate. The cash flows for loans and mortgage-backed securities are based on maturity date and are adjusted for expected prepayments which are based on historical and current market information. The loans and mortgage-backed securities which have adjustable rate features are presented in accordance with their next interest- repricing date. Cash flow information on interest-bearing liabilities such as passbooks, NOW accounts and money market accounts also is adjusted for expected decay rates which are based on historical information. Also, for purposes of cash flow presentation, premiums or discounts on purchased assets, mark-to- market adjustments and loans on non-accrual are excluded from the amounts presented. Investment securities are presented as to maturity date as are all certificates of deposit and borrowings.
(Dollars in thousands) Year 1 Year 2 Year 3 Year 4 Year 5 Thereafter --------- --------- --------- --------- --------- ------------ Interest Sensitive Assets: Investments and Fed Funds $ 21,440 $ - $ 2,000 $ 2,000 $ 5,000 $ - Average interest rate 5.11% - 6.52% 6.88% 6.65% - Mortgage-backed securities - fixed-rate 6,698 5,842 5,085 4,433 3,758 23,586 Average interest rate 7.07% 7.07% 7.08% 7.08% 7.10% 7.17% Mortgage-backed securities - adjustable rate 12,911 - - - - - Average interest rate 5.63% - - - - - Loans - fixed rates 14,313 11,537 9,575 13,347 5,989 37,057 Average interest rate 7.79% 7.74% 7.70% 7.97% 7.55% 7.53% Loans - adjustable rates 226,727 18,795 8,207 - - 9,074 Average interest rate 7.61% 7.77% 7.74% - - 8.17% Interest Sensitive Liabilities: Interest-bearing NOW passbook and MMDAs 34,307 24,400 17,427 12,511 9,037 27,357 Average interest rate 3.83% 3.76% 3.67% 3.58% 3.47% 2.80% Certificates of deposit 167,823 9,211 4,438 3,128 1,467 - Average interest rate 4.78% 5.03% 5.74% 5.57% 4.95% - FHLB advances 46,071 24,154 26,639 1,138 10,000 - Average interest rate 5.65% 5.52% 4.96% 6.49% 5.07% -
The Company does not have any foreign exchange exposure nor any commodity exposure and therefore does not have any market risk exposure for these issues. 32 Average Balance Sheet The following table sets forth certain information relating to the Company for the fiscal years ended June 30, 1999, 1998 and 1997. 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 month-end balances. Management does not believe that the use of average monthly balances instead of average daily balances has caused any material differences in the information presented. The yields and costs include fees which are considered adjustments to yields.
Year Ended June 30, ------------------------------------------------------------------------------ 1999 1998 -------------------------------- ------------------------------------- Average Average Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost ---------- -------- -------- --------- -------- ------------ (Dollars in thousands) Assets: Interest-earning assets: Interest earning deposits and short-term investments $ 5,675 $ 295 5.20% $ 10,109 $ 609 6.02% Investment securities, net 22,543 1,425 6.32 16,705 1,073 6.42 Loans receivable 336,311 25,978 7.72 301,984 23,641 7.83 Mortgage-backed securities, net 61,841 3,813 6.17 60,413 4,032 6.67 FHLB stock 5,082 267 5.25 4,130 247 5.98 --------- ------- -------- ------- Total interest-earning assets 431,452 $31,778 7.37% 393,341 $29,602 7.53% ======= ======= Non-interest-earning assets 17,416 13,710 --------- -------- Total assets $ 448,868 $407,051 ========= ======== Liabilities and Equity: Interest-bearing liabilities: Money market savings accounts $ 67,399 $ 3,069 4.55% $ 31,291 $ 1,367 4.37% Passbook accounts 18,413 367 1.99 18,516 377 2.04 NOW accounts 21,165 240 1.13 21,171 309 1.46 Certificate accounts 192,496 9,856 5.12 212,744 11,574 5.44 --------- ------- -------- ------- Total savings accounts 299,473 13,532 4.52 283,722 13,627 4.80 FHLB advances 97,110 5,572 5.74 72,722 4,615 6.35 Securities sold under agreements to repurchase 3,831 237 6.18 6,528 397 6.08 Impounds & other borrowings 615 29 4.72 485 22 4.54 --------- ------- -------- ------- Total interest-bearing liabilities 401,029 $19,370 4.83% 363,457 $18,661 5.13% ======= ======= Non-interest bearing liabilities 16,147 12,596 --------- -------- Total liabilities 417,176 376,053 Equity 31,692 30,998 --------- -------- Total liabilities and equity $ 448,868 $407,051 ========= ======== Net interest rate spread 2.54% 2.40% Net interest margin 2.88% 2.78% Ratio of interest-earning assets to interest-bearing liabilities 107.59% 108.22% ---------------------------------- 1997 ---------------------------------- Average Average Yield/ Balance Interest Cost ----------- -------- ------- Assets: Interest-earning assets: Interest earning deposits and short-term investments $ 7,176 $ 389 5.42% Investment securities, net 17,222 1,133 6.58 Loans receivable 273,469 20,890 7.64 Mortgage-backed securities, net 59,733 4,051 6.78 FHLB stock 3,884 237 6.10 -------- ------- Total interest-earning assets 361,484 $26,700 7.39% ======= Non-interest-earning assets 11,773 -------- Total assets $373,257 ======== Liabilities and Equity: Interest-bearing liabilities: Money market savings accounts $ 13,334 $ 493 3.70% Passbook accounts 17,432 348 2.00 NOW accounts 20,249 280 1.38 Certificate accounts 203,744 11,074 5.44 -------- ------- Total savings accounts 254,759 12,195 4.79 FHLB advances 73,513 4,569 6.22 Securities sold under agreements to repurchase 6,043 349 5.78 Impounds & other borrowings 443 25 5.64 -------- ------- Total interest-bearing liabilities 334,758 $17,138 5.12% ======= Non-interest bearing liabilities 7,821 -------- Total liabilities 342,579 Equity 30,678 -------- Total liabilities and equity $373,257 ======== Net interest rate spread Net interest margin 2.27% Ratio of interest-earning assets 2.65% to interest-bearing liabilities to interest-bearing liabilities 107.98%
33 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); and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
Year Ended June 30, 1999 Year Ended June 30, 1998 Compared to Compared to Year Ended June 30, 1998 Year Ended June 30, 1997 ------------------------------------ --------------------------------- Increase (decrease) due to Increase (decrease) due to Average Average Volume Rate Net Volume Rate Net ---------- ---------- ---------- ---------- --------- ---------- (In thousands) Interest-earning assets: Interest-earning deposits and short-term investments $ (240) $ (74) $ (314) $ 173 $ 47 $ 220 Investment securities, net (1) 369 (17) 352 (33) (27) (60) Loans receivable, net (1) 2,666 (329) 2,337 2,221 530 2,751 Mortgage-backed securities, net (1) 101 (320) (219) 44 (63) (19) FHLB stock 42 (22) 20 15 (5) 10 ---------- ---------- ---------- ---------- --------- ---------- Total interest-earning assets 2,938 (762) 2,176 2,420 482 2,902 ---------- ---------- ---------- ---------- --------- ---------- Interest-bearing liabilities: Money market savings accounts 1,644 58 1,702 771 103 874 Passbook accounts (2) (8) (10) 22 7 29 NOW accounts - (69) (69) 13 16 29 Certificate accounts (1,061) (657) (1,718) 500 - 500 FHLB advances 1,342 (385) 957 (48) 94 46 Securities sold under agreement to repurchase (167) 7 (160) 29 19 48 Impounds & other borrowings 6 1 7 2 (5) (3) ---------- ---------- ---------- ---------- --------- --------- Total interest-bearing liabilities 1,762 (1,053) 709 1,289 234 1,523 ---------- ---------- ---------- ---------- --------- --------- Net change in net interest income $ 1,176 $ 291 $ 1,467 $ 1,131 $ 248 $ 1,379 ========== ========== ========== ========== ========= =========
_______________________ (1) Includes assets available for sale. Comparison of Operating Results for the Years Ended June 30, 1999 and June 30, 1998 General The net earnings for the year ended June 30, 1999 were $2,548,000, an increase of $1,061,000, or 71.4%, from the $1,487,000 in net earnings for the year ended June 30, 1998. The improvement in operating results was due to the increase in average interest-earning assets which resulted in a $1.5 million net increase in net interest income. Although total other expenses were relatively unchanged over the two fiscal years, the year ended June 30, 1999 included a net gain on real estate owned activity of approximately $255,000 versus a net loss of $109,000 for the year ended June 30, 1998. 34 Interest Income Interest income for the year ended June 30, 1999 was $31.8 million compared to $29.6 million for the year ended June 30, 1998, an increase of $2.2 million, or 7.4%. The increase in interest income was primarily due to the increase in average balance of interest-earning assets to $431.5 million for the year ended June 30, 1999 from $393.3 million for the year ended June 30, 1998. The increase in the average balance of interest-earning assets was the result of a continuation of the growth strategy begun in the fiscal year ended June 30, 1997 to enhance the Company's earning ability. Key elements of the growth strategy continued to be the purchase of mortgage loans funded primarily by the growth in deposits and the growth in borrowings. Interest income on loans receivable increased $2.4 million to $26.0 million for the year ended June 30, 1999 from $23.6 million for the year ended June 30, 1998. The increase in interest income was primarily the result of the $34.3 million increase in the average balance of loans receivable for the year ended June 30, 1999 primarily as a result of the purchase of $80.8 million of adjustable rate loans and the origination of $75.7 million in mortgage loans. The loans purchased were indexed to the Eleventh District Cost of Funds Index (COFI) and to the one year Constant Maturity Treasury Index (CMT) and were primarily seasoned, fully-indexed loans. Although the Company was able to purchase and originate a total of $156.5 million in mortgage loans during this fiscal year, the continuation of a lower interest rate environment for the majority of the year contributed to a substantial increase in prepayments of mortgage loans. In this regard, principal repayments on loans increased to $94.3 million for the year ended June 30, 1999 compared to $61.0 million for the year ended June 30, 1998. The lower interest rate environment also resulted in a decline in the indices to which the Company's adjustable rate loans are indexed to. For example, the COFI index declined approximately 40 basis points from June 1998 to June 1999. Partially offsetting this decline in yields due to the decline in the overall indices, was the increase in the origination of non- residential loans in the year ended June 30, 1999 to approximately $20.5 million. The yields on non-residential loans generally have higher rates and margins. Overall, the Company's average yield on loans receivable for the year ended June 30, 1999 declined to 7.72% from 7.83% for the year ended June 30, 1998. Interest income on mortgage-backed securities for the year ended June 30, 1999 declined slightly to $3.8 million as compared to $4.0 million for the year ended June 30, 1998. The slight decrease in interest income was primarily due to the decrease in the average yield to 6.17% for the year ended June 30, 1999 from 6.67% for the year ended June 30, 1998. The decrease in the average yield was primarily due to the increase in prepayments on the portfolio as a result of the downward trend in interest rates resulting in a faster amortization of related premiums on purchased securities. Also contributing to the decrease in yield and interest income was the purchase of $35 million in mortgage-backed securities with overall lower yields than the balances lost through the increase in prepayments. Interest income on investment securities increased $352,000 to $1.4 million for the year ended June 30, 1999 from $1.1 million for the year ended June 30, 1998. The increase was primarily due to the $5.8 million increase in the average balance of investment securities to $22.5 million for the year ended June 30, 1999 from $16.7 million for the year ended June 30, 1998, partially offset by the 10 basis point decrease in the average yield to 6.32% for the year ended June 30, 1999 from 6.42% for the year ended June 30, 1998. The decrease in yield was primarily due to the decrease in overall interest rate environment during the year ended June 30, 1999 as compared to June 30, 1998. Interest income on interest-earning deposits and short-term investments decreased by $314,000 to $295,000 for the year ended June 30, 1999 from $609,000 for the year ended June 30, 1998. The decrease in interest income on interest-earning deposits and daily investments was due to the decrease in the average balance to $5.7 million for the year ended June 30, 1999 from $10.1 million for the year ended June 30, 1998 and to the decrease in the average yield to 5.20% for the year ended June 30, 1999 from 6.02% for the year ended June 30, 1998 as a result of the lower interest rate environment. Interest Expense Interest expense for the year ended June 30, 1999 was $19.4 million compared to $18.7 million for the year ended June 30, 1998, an increase of $0.7 million, or 3.8%. The increase in interest expense was due to the $37.6 million increase in the average balances of interest-bearing liabilities to $401.0 million for the year ended June 30, 1999 from $363.4 million for the year ended June 30, 1998, partially offset by the 30 basis point decrease in the Company's overall average cost of interest-bearing liabilities to 4.83% for the year ending June 30, 1999 as compared to 5.13% for the year ending June 30, 1998. Interest expense on deposit accounts fell slightly to $13.5 million for the year ended June 30, 1999 from $13.6 million for the year ended June 30, 1998. The decrease in interest expense on savings accounts reflects the 28 basis point decrease in the average cost of savings accounts to 4.52% for the year ending June 30, 1999 as compared to 4.80% for the year ending June 30, 1998. Partially offsetting this was the $15.8 million increase in the average balance of deposit accounts to $299.5 million for the 35 year ending June 30, 1999 from $283.7 million for the year ending June 30, 1998. The growth in average savings accounts was due primarily to the growth in money market savings accounts during the current year to $67.4 million from $31.3 million in the prior year, partially offset by the decrease in the average balance of certificates of deposit which declined to $192.5 million for the year ending June 30, 1999 from $212.7 million for the year ending June 30, 1998. The Company's use of borrowed funds, including FHLB advances and securities sold under agreements to repurchase increased during the year ended June 30, 1999 as compared to the year ended June 30, 1998. Interest expense on borrowings increased to $5.8 million for the year ended June 30, 1999 from $5.0 million for the year ended June 30, 1998. The increase in interest expense was primarily due to the increase in the average balance of borrowings to $101.6 million for the year ended June 30, 1999 as compared to $79.7 million for the year ended June 30, 1998, partially offset by the decline in the average cost of borrowings to 5.75% for the year ended June 30, 1999 as compared to 6.31% for the year ended June 30, 1998. The decline in the average cost of borrowings was primarily due to the overall reduction in the interest rate environment and the replacement of higher cost borrowings which matured during the year ended June 30, 1999 with those of lower rates. Provision for Loan Losses The Company's provision for loan losses increased to $969,000 for the year ended June 30, 1999 from $735,000 for the year ended June 30, 1998. The increase in the provision for loan losses was due primarily to the growth in the loan portfolio, to the overall increase in non-residential mortgage loans as compared to the total loan portfolio (Non-residential loans generally have higher allowance for loan loss factors) and to the increase in the allowance designated for the consumer loan portfolio which has experienced higher losses than initially forecast. The current year's allowance for loan losses reflects a slight decrease in loan charge-offs to $564,000 as compared to $573,000 for the year ended June 30, 1998. In regards to the consumer loan portfolio, specifically, the home equity lines of credit, charge-offs increased to $324,000 for the year ended June 30, 1999 from $28,000 for the year ended June 30, 1998. The increase in consumer charge-offs was primarily due to the aging of the portfolio as the bulk of the loans were purchased in December 1997 and the year ended June 30, 1999 represents the first full year the Company owned these receivables. As stated above, the allowance for loan losses for this portfolio has been increased to reflect higher expected losses in the future. The allowance for loan losses increased to $1.8 million, or 0.52% of gross loans receivable, at June 30, 1999 from $1.4 million, or 0.48% of gross loans receivable at June 30, 1998. As a percentage of non-performing loans, the allowance for loan losses increased to 121.1% at June 30, 1999 compared to 74.6% at June 30, 1998. The amount of the provision and allowance for loan losses is influenced by current economic conditions, actual loss experience, industry trends and other factors such as adverse economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Association's allowance for loan losses. Such agencies may require the Association to recognize additions to the allowance based upon judgments which differ from those of management. Although management uses the best information available, future adjustments to the allowance may be necessary due to economic, operating, regulatory and other conditions that may be beyond management's control. Other Income Other income for the Company increased to $1.9 million for the year ended June 30, 1999 compared to $1.4 million for the year ended June 30, 1998, an increase of $565,000, or 41.3%. The increase in non-interest income was due to the improvement in the fees related to deposit accounts which increased $72,000 to $594,000, an increase in the net income from secondary marketing activities to $105,000 as compared to zero for the prior year and a $128,000 increase in commissions on the sales of non-insured products such as annuities and mutual funds. The increase in deposit-related fees was primarily due to the continued growth in core deposits (primarily non-interest bearing checking accounts) which generate higher fee income such as non-sufficient fee income and fees related to ATM transactions. Income from loan servicing and related fees increased slightly to $549,000 for the year ended June 30, 1999 as compared to $532,000 for the year ended June 30, 1998. The Company also posted $71,000 in net gains in regards to sales of investments and mortgage-backed securities during the year ended June 30, 1999 as compared to a net gain of $45,000 for the year ended June 30, 1998. Other Expenses Other expenses totaled $9.1 million for the year ended June 30, 1999 as compared to $9.0 million for the year ended June 30, 1998. Compensation and other employee benefits increased by $383,000 to $5.3 million for the year ended June 30, 1999 from $4.9 million for the year ended June 30, 1998. The increase in compensation costs was primarily attributable to the increase in staff during the year to enhance the Company's lending operations and 36 to the overall annual adjustments in compensation for the entire employee base. The increase in compensation and employee benefits costs was offset by the improvement in net gains on real estate owned activities which reflected $255,000 in net gains for the year ended June 30, 1999 as compared to a net loss of $109,000 for the year ended June 30, 1998. The improvement in the net gains on real estate owned activity was due to the gains on sales of foreclosed properties. Income Tax Income tax expense was $1.7 million for the year ended June 30, 1999 compared to $1.0 million for the year ended June 30, 1998, representing an increase of $699,000. This increase is principally due to the increase in taxable income in fiscal 1999 as compared to fiscal 1998. See Note 11 of the Notes to the Consolidated Financial Statements for additional information on the Company's income taxes. Comparison of Financial Condition at June 30, 1999 and June 30, 1998 The Company's total assets increased to $468.7 million at June 30, 1999 from $408.3 million at June 30, 1998, an increase of $60.4 million primarily due to the increase in the loans receivable. During the year, the Company increased its loans receivable held for investment by $59.3 million to $355.0 million at June 30, 1999 from $295.7 million at June 30, 1998 primarily as a result of the $80.8 million in loans purchased and $75.7 million in loans originated throughout the year. With the exception of approximately $5.4 million in fixed rate loans, all of the loans purchased were adjustable rate mortgage loans indexed to COFI, the CMT and LIBOR. The properties securing all loans purchased are located throughout California (primarily in southern California) and are dispersed throughout a wider area than the Company's normal lending area. Also, of the loans purchased, approximately $12.2 million was secured by multi-family and commercial real estate properties with all of these loans having adjustable rate features. Although the Company originated and purchased a total of $156.5 million in loans for portfolio during the year ended June 30, 1999, the increase in prepayments resulting from the continuation of lower interest rates, prevented the Company from increasing its portfolio significantly more. During the year ended June 30, 1999, the Company experienced an 55% increase in prepayments to $94.3 million as compared to $61.0 million for the year ended June 30, 1998. During the year ended June 30, 1999, the Company increased its investment in non-residential mortgage loans (multi-family and commercial real estate) to approximately 19.7% of total loans from 13.9% at June 30, 1998. This increase was to provide a measure of diversification to the Company's loan portfolio and to provide improvement in overall yields. The Company still remains focused on being a single-family lender as evidenced by the 78.6% of its loan portfolio being in this category. The Company's investment in mortgage-backed securities increased to $62.6 million at June 30, 1999 from $59.3 million at June 30, 1998. The increase in this portfolio was primarily the result of the $35.1 million in purchases during the year offset by substantial increase in prepayments, to $24.0 million for the year, and the sale of approximately $6.9 million in securities. Investment securities available for sale increased to $25.8 million at June 30, 1999 from $19.2 million at June 30, 1998 due primarily to the $10.5 decrease in cash and short-term investments (including overnight investments). The Company's investment in real estate acquired through foreclosure decreased to $0.8 million at June 30, 1999 from $1.9 million at June 30, 1998 as a result of the sales of previously owned foreclosed properties and to the decrease in the number of foreclosures in the year ended June 30, 1999 to eleven versus eighteen in the prior year. The total liabilities of the Company increased to $436.4 million at June 30, 1999 from $376.1 million at June 30, 1998 primarily due to increases in the Company's deposit accounts and to increases in FHLB advances, partially offset by the repayment in full of the securities sold under agreements to repurchase. Total deposit accounts increased to $324.1 million at June 30, 1999 from $295.3 million. Core deposits (excluding certificates of deposit) increased to $138.0 million, or 42.6% of total deposits, at June 30, 1999 from $95.8 million, or 32.4% of total deposits, at June 30, 1998. The growth of core deposits is an integral part of management's strategy to enhance net interest income and build customer relationships. The majority of growth in the Company's core deposits was in the growth of money market savings accounts which increased to $85.2 million at June 30, 1999 from $47.5 million at June 30, 1998. The growth in this account was aided by direct mail solicitations which offered higher rates although the rates offered were lower than comparative rates on certificates of deposit. Also, the Company's noninterest-bearing checking accounts increased significantly in the year ended June 30, 1999 to $13.0 million from $9.7 million in the year ended June 30, 1998. The overall increase in core deposits benefits the Company in terms of lower cost of funds, the ability to generate additional fee income and the ability to build multiple relationships. In July 1999, the Company completed its acquisition of two Citibank savings branches in La Verne and Covina which 37 combined had total deposits of $36.8 million. This acquisition enables the Company to enhance its market share of deposits in both communities. The Company continues to utilize borrowings as a means to enhance net interest income and provide for longer-term financing of its asset base, although at June 30, 1999, approximately $28 million in borrowings matured within three months. These relatively short-term borrowings were purposely left as short-term rather than rolled into longer-terms with the expectation of paying a significant portion off with the proceeds received with the completed branch acquisition. As of June 30, 1999, the Company's borrowings from the FHLB totaled $108.0 million as compared to $70.5 million at June 30, 1998. Also, the Company's borrowings through securities sold under agreements to repurchase were brought to zero at June 30, 1999 as compared to $6.0 million at June 30, 1998. The Company's stockholders' equity was $32.4 million at June 30, 1999, a increase of $0.2 million from the $32.2 million in stockholders' equity at June 30, 1998. The increase in stockholders' equity in fiscal 1999 was due primarily to the net earnings of $2.5 million primarily offset by the repurchase of 171,745 shares of common stock for a total of $2.5 million. Comparison of Operating Results for the Years Ended June 30, 1998 and June 30, 1997 General The net earnings for the year ended June 30, 1998 were $1,487,000, an increase of $756,000, or 103.4%, from the $731,000 in net earnings for the year ended June 30, 1997. The improvement in operating results was due to the increase in average interest-earning assets which resulted in a $1.4 million net increase in net interest income. Although the total general and administrative expenses were relatively unchanged over the two fiscal years, the year ended June 30, 1998 included higher expenses related to higher staff levels primarily related to two additional branches for a full year and higher compensation costs related to stock compensation plans. In regards to the year ended June 30, 1997, the Association paid a special assessment totaling $1.3 million for the recapitalization of the insurance fund (SAIF). Interest Income Interest income for the year ended June 30, 1998 was $29.6 million compared to $26.7 million for the year ended June 30, 1997, an increase of $2.9 million, or 10.9%. The increase in interest income was primarily due to the increase in average balance of interest-earning assets to $393.3 million for the year ended June 30, 1998 from $361.5 million for the year ended June 30, 1997. The increase in the average balance of interest-earning assets was the result of a continuation of the growth strategy begun in the previous fiscal year to enhance the Company's earning ability. Key elements of the growth strategy continued to be the purchase of mortgage loans funded primarily by the growth in deposits. Interest income on loans receivable increased $2.8 million to $23.6 million for the year ended June 30, 1998 from $20.9 million for the year ended June 30, 1997. The increase in interest income was the result of the $28.5 million increase in the average balance of loans receivable for the year ended June 30, 1998 primarily as a result of the purchase of $40.6 million of adjustable rate loans from other financial institutions. The loans purchased were primarily indexed to the Eleventh District Cost of Funds Index (COFI) and were primarily seasoned, fully-indexed loans. Furthermore, the loans purchased included $10.6 million in home equity lines of credit with yields in excess or 10%. These home equity lines of credit are considered consumer loans as they were primarily funded based upon the credit worthiness of the borrower and, therefore, have more credit risk. The average yield on loans receivable for the year ended June 30, 1998 was 7.83%, which exceeded the 7.64% yield for loans receivable for the year ended June 30, 1997. The increase in the yield on loans receivable was substantially enhanced with the acquisition of the home equity lines of credit. Interest income on mortgage-backed securities for the year ended June 30, 1998 was relatively unchanged at $4.0 million for the year ended June 30, 1998 as compared to $4.1 million for the year ended June 30, 1997. The slight decrease in interest income was due to the decrease in the average yield to 6.67% for the year ended June 30, 1998 from 6.78% for the year ended June 30, 1997 partially offset by the increase in the average balances to $60.4 million for the year ended June 30, 1998 from $59.7 million for the year ended June 30, 1997. The decrease in the average yield was primarily due to the increase in prepayments on the portfolio as a result of the downward trend in interest rates resulting in a faster amortization of related premiums on purchased securities. 38 Interest income on investment securities decreased $60,000 to $1.07 million for the year ended June 30, 1998 from $1.13 million for the year ended June 30, 1997. The increase was primarily due to the $0.5 million decrease in the average balance of investment securities to $16.7 million for the year ended June 30, 1998 from $17.2 million for the year ended June 30, 1997 and to the decrease in the average yield to 6.42% for the year ended June 30, 1998 from 6.58% for the year ended June 30, 1997. The decrease in yield was primarily due to the decrease in overall interest rate environment during the year ended June 30, 1998 as compared to June 30, 1997. Interest income on interest-earning deposits and short-term investments increased by $220,000 to $609,000 for the year ended June 30, 1998 from $389,000 for the year ended June 30, 1997. The increase in interest income on interest-earning deposits and daily investments was due to the increase in the average balance to $10.1 million for the year ended June 30, 1998 from $7.2 million for the year ended June 30, 1997 and to the increase in the average yield to 6.02% for the year ended June 30, 1998 from 5.42% for the year ended June 30, 1997. Interest Expense Interest expense for the year ended June 30, 1998 was $18.7 million compared to $17.1 million for the year ended June 30, 1997, an increase of $1.6 million, or 9.4%. The increase in interest expense was due to the $28.7 million increase in the average balances of interest-bearing liabilities to $363.5 million for the year ended June 30, 1998 from $334.7 million for the year ended June 30, 1997. The Company's overall average cost of interest-bearing liabilities was virtually unchanged for the year ending June 30, 1998 as compared to the year ending June 30, 1997. Interest expense on deposit accounts increased to $13.6 million for the year ended June 30, 1998 from $12.2 million for the year ended June 30, 1997. The increase in interest expense on deposit accounts reflects the $28.9 million increase in the average balance of deposit accounts to $283.7 million for the year ending June 30, 1998 from $254.8 million for the year ending June 30, 1997 due primarily to the growth in the Company's money market savings accounts during the current year, the growth of the deposits in its de novo branch opened on March 31, 1997 and to the deposits from an office purchased in February 1997 being outstanding for a full year. The Company's use of borrowed funds, including FHLB advances and securities sold under agreements to repurchase, was relatively unchanged for the year ended June 30, 1998 as compared to the year ended June 30, 1997. Interest expense on borrowings increased slightly to $5.0 million for the year ended June 30, 1998 from $4.9 million for the year ended June 30, 1997. The increase in interest expense was primarily due to the increase in the average cost of borrowings to 6.31% for the year ended June 30, 1998 compared to 6.18% for the year ended June 30, 1997 as a result of the lengthening of the average maturities of the Company's liabilities. Provision for Loan Losses The Company's provision for loan losses increased to $735,000 for the year ended June 30, 1998 from $557,000 for the year ended June 30, 1997. The current year's allowance for loan losses reflects $573,000 in loan charge-offs as compared to $352,000 for the year ended June 30, 1997. The difference between the actual amount of charge-offs for the current year and the amount reflected in the provision represents an allocation for the growth in the consumer loan portfolio during the year ended June 30, 1998 and management's concerns regarding the general market conditions. The allowance for loan losses increased to $1.4 million, or 0.48% of gross loans receivable, at June 30, 1998 from $1.3 million, or 0.44% of gross loans receivable at June 30, 1997. As a percentage of non-performing loans, the allowance for loan losses increased to 74.56% at June 30, 1998 compared to 74.34% at June 30, 1997. Other Income Other income for the Company increased to $1.4 million for the year ended June 30, 1998 compared to $1.0 million for the year ended June 30, 1997, an increase of $307,000, or 28.9%. The increase in non-interest income was primarily due to the improvement in the fees related to deposit accounts which increased to $522,000 for the year ended June 30, 1998 as compared to $306,000 for the year ended June 30, 1997. The increase in deposit related fees was primarily due to the continued growth in core deposits (primarily non-interest bearing checking accounts) which generate higher fee income such as non- sufficient fee income and fees related to ATM transactions. Income from loan servicing and related fees increased by $82,000 to $532,000 for the year ended June 30, 1998 as compared to $450,000 for the year ended June 30, 1997 The Company also posted only $45,000 in net gains in regards to sales of investments and mortgage-backed securities during the year ended June 30, 1998 as compared to a net gain of $148,000 for the year ended June 30, 1997. 39 Other Expenses Other expenses increased by $0.2 million to $9.0 million for the year ended June 30, 1998 from $8.8 million for the year ended June 30, 1997. Included in other expenses for the year ended June 30, 1997 was the $1.3 million one-time special assessment to recapitalize SAIF which did not recur in the year ended June 30, 1998. Compensation and other employee benefits increased by $780,000 to $4.9 million for the year ended June 30, 1998 from $4.1 million for the year ended June 30, 1997. The increase in compensation costs was primarily attributable to the increase in staff primarily due to the addition of two branches for a full year. Employee benefits increased as a result of the costs related to the employee stock ownership and the stock compensation plans which increased to $724,000 for the year ended June 30, 1998 from $472,000 for the year ended June 30, 1997. Equipment and data processing costs increased to $1.1 million for the year ended June 30, 1998 from $932,000 for the year ended June 30, 1997 primarily related to the addition of two branches in February and March of 1997. Also, the increase in costs was due to the replacement of outdated equipment with data processing equipment which is Year 2000 ready. The regular insurance assessments paid to the FDIC decreased to $180,000 for the year ended June 30, 1998 from $313,000 for the year ended June 30, 1997 as a result of the lowering of the assessment rate as of January 1, 1997, following the recapitalization of SAIF. During the year ended June 30, 1998, the Company recorded a net loss on real estate owned activity of $109,000 as compared to the net gain of $157,000 for the year ended June 30, 1997. The net gain in the year ended June 30, 1997 was primarily the result of a $344,000 favorable litigation settlement culminating a settlement process relating to a land development foreclosure which occurred in 1992. Income Tax Income tax expense was $1.0 million for the year ended June 30, 1998 compared to $534,000 for the year ended June 30, 1997, representing an increase of $510,000. This increase is principally due to the increase in taxable income in fiscal 1998 as compared to fiscal 1997. See Note 11 of the Notes to the Consolidated Financial Statements for additional information on the Company's income taxes. Comparison of Financial Condition at June 30, 1998 and June 30, 1997 The Company's total assets decreased slightly to $408.3 million at June 30, 1998 from $409.3 million at June 30, 1997, a decrease of $1.0 million primarily due to decreases in the Association's mortgage-backed securities, which were partially offset by increases in the Association's loans receivable. During the year, the Company increased its loans receivable held for investment by $11.1 million to $295.7 million at June 30, 1998 from $284.6 million at June 30, 1997 primarily as a result of the $40.6 million in loans purchased throughout the year. All of the loans purchased were adjustable rate mortgage loans primarily indexed to COFI, with $10.7 million in home equity lines of credit which are considered consumer loans as they are underwritten primarily on the credit worthiness of the individual. These home equity lines of credit loans have a significantly higher yield, in excess of 10%, but also have a higher credit risk profile. The Association recognizes this higher credit risk and has assigned a higher general allowance loss factor to them. To date, these loans have generally performed as expected. The properties securing all loans purchased are located primarily in southern California, but are dispersed throughout a wider area than the Company's normal lending area. Although the Company originated and purchased a total of $75.1 million in loans for portfolio during the year ended June 30, 1998, the increase in prepayments from lower interest rates significantly reduced the ability to increase the Company's loan portfolio. During the year ended June 30, 1998, the Company experienced an 84% increase in prepayments to $61.0 million as compared to $33.2 million for the year ended June 30, 1997. The Company's investment in mortgage-backed securities decreased to $59.3 million at June 30, 1998 from $76.2 million at June 30, 1997. The decrease in this portfolio was primarily the result of the increase in prepayments, to $15.5 million for the year, and the sale of approximately $16.4 million in securities used to fund the increase in the loan portfolio. Investment securities available for sale increased to $19.2 million at June 30, 1998 from $12.5 million at June 30, 1997 due primarily to the additional cash generated by the substantial increase in prepayments related to the Company's loan and mortgage- backed securities portfolios. The Company's investment in real estate acquired through foreclosure increased to $1.9 million at June 30, 1998 from $1.2 million at June 30, 1997 as a result of the higher foreclosures experienced during the year. The higher foreclosures were the primary result of the depressed real estate market which resulted in lower home values in the Company's general lending area throughout most of the current year. The total liabilities of the Company decreased to $376.1 million at June 30, 1998 from $379.4 million at June 30, 1997 primarily due to decreases in the Association's FHLB advances and securities sold under agreements 40 to repurchase, which was partially offset by increases in the Association's deposits. Total deposit accounts increased to $295.3 million at June 30, 1998 from $288.3 million. Core deposits (excluding certificates of deposit) increased to $95.8 million, or 32.4% of total deposits, at June 30, 1998 from $65.9 million, or 22.9% of total deposits, at June 30, 1997. The growth of core deposits is an integral part of management's strategy to enhance net interest income and build customer relationships. The majority of growth in the Company's core deposits was in the growth of money market savings accounts which increased to $47.5 million at June 30, 1998 from $19.6 million at June 30, 1997. The growth in this account was aided by direct mail solicitations which offered higher rates although the rates offered were lower than comparative rates on certificates of deposit. Also, the Company's noninterest-bearing checking accounts increased significantly in the year ended June 30, 1998 to $9.7 million from $5.9 million in the year ended June 30, 1997. The overall increase in core deposits benefits the Company in terms of lower cost of funds, the ability to generate additional fee income and the ability to build multiple relationships. The Company continues to utilize borrowings as a means to enhance net interest income and provide for longer-term financing of its asset base. As of June 30, 1998, the Company's borrowings from the FHLB totaled $70.5 million as compared to $77.9 million at June 30, 1997. Also, the Company's borrowings through securities sold under agreements to repurchase totaled $6.0 million at June 30, 1998 as compared to $9.4 million at June 30, 1997. The Company's stockholders' equity was $32.2 million at June 30, 1998, an increase of $2.3 million from the $29.9 million in stockholders' equity at June 30, 1997. The increase in stockholders' equity in fiscal 1998 was due primarily to the net earnings of $1.5 million and the $686,000 change related to the deferred stock compensation plans. Impact of Inflation The Consolidated Financial Statements and Notes thereto presented herein have been prepared in accordance with GAAP, which require the measurement of financial position and operating results in terms of historical dollar amounts without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company's operations. Unlike industrial companies, nearly all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Company's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services. Impact of New Accounting Standards Comprehensive Income - Effective July 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive Income. Under the provisions of SFAS No. 130, an entity that provides a full set of financial statements is required to report comprehensive income in the presentation of its financial statements. The term "comprehensive income" describes the total of all components of comprehensive income including net income. "Other comprehensive income" refers to revenues, expenses, and gains and losses that are included in comprehensive income but are excluded from net income as they have been recorded directly in equity under the provisions of other Financial Accounting Standard Board statements. The Company presents the comprehensive income disclosure as a part of the statements of changes in stockholders' equity, by identifying each element of other comprehensive income, including net income. All comparative financial statements presented reflect the application of the provisions of SFAS No. 130. Recent Accounting Developments - 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 was effective for all fiscal quarters of fiscal years beginning after June 15, 1999. In July 1999, the FASB issued SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, which delays the effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. 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 as amended by SFAS No. 137 are not expected to have a material impact on the results of operations or the financial position of the Company. 41 Year 2000 In recent years the Company has been executing a formal plan to address year 2000 issues ("Y2K"). The Y2K issues relate to the way software was programmed through much of this Century. Specifically, years were coded with two digits. The Company's Y2K plan has been designed to address potential problems that could arise from software, hardware and equipment both within the Company's direct control and outside of the Company's control, yet which the Company relies upon, in that it electronically or operationally interfaces with such software, hardware and equipment. The Company principally utilizes third-party data processors and third- party software for its information technology (IT) needs. As a result, the year 2000 compliance of the company's information technology assets, such as computer hardware, software and systems, is primarily dependent upon the year 2000 compliance efforts and results of its third-party vendors. The year 2000 compliance of the Company's non-IT assets, such as automated teller machines, telecommunication systems, copiers, fax machines, elevators, and HVAC systems, is also primarily dependent upon the year 2000 compliance efforts and results of third parties. Financial institution regulators have focused their attention on year 2000 issues and have published guidance concerning the responsibilities of senior management and directors. Year 2000 testing and certification, liquidity risk, customer awareness, and contingency planning are being addressed as key safety and soundness issues in conjunction with regulatory Y2K examinations. The Company has appointed a year 2000 team that 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, which is divided into the following major components: . awareness . assessment . renovation . validation . implementation The Company has completed all phases of this plan. 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 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 have any material effect on the Company. The Company's primary third-party service bureau provides data processing for all of the Company's savings accounts, lending operations and its general ledger. Upon review of the test results, the few issues detected were forwarded to the data processor for corrective action. Although the Company is confident these issues will be resolved, none of the issues detected are expected to have any material impact to the Company's successful transition to year 2000 even if they have not been corrected by year 2000. The Company also completed testing with the Federal Reserve Bank of San Francisco, its primary ATM processor, primary ATM interchange provider, its accounting sub-systems, its front-end loan origination system and Fannie Mae and detected no date-related issues which would be expected to present any material Y2K problems to the Company. The Company surveyed 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 becoming ready. Vendors the Company considers mission critical include its primary data processor, item processor, ATM provider, the Federal Reserve Bank and the FHLB, as well as all utility providers. Of the critical vendors the Company tested, no material year 2000 date-related issues were identified. In addition, the majority of critical vendors not tested (primarily utility providers) have represented that they are Y2K ready. If any mission critical vendor were to fall out of Y2K compliance, 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 represented that they are or expect to be year 2000 ready), the Company 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 42 suggesting utility services will be interrupted. However, any disruption in utility service would directly affect the Company's ability to operate. In regard to vendors or service providers the Company deems are important for the normal operations of the Company, but not considered critical, approximately 87% have represented that they are year 2000 ready or are working towards readiness. The Company is continuing to perform follow-up work on those vendors or service providers (primarily title companies and appraisal firms) who have not responded. For those vendors the Company believes will not be year 2000 ready, the Company will evaluate the potential impact on the operations of the Company by such vendor to determine if changing vendors or other solutions are necessary. 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. The Company has completed proxy testing with its data processor in third-party interfaces for year 2000 readiness. 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 completes a risk analysis of their large dollar fund users and fund providers quarterly and has 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 regard 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. Management believes that loans secured by real estate are less likely to be impacted by any year 2000 issues. The Company has completed its Year 2000 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 provides a basis for identifying and allocating resources in the event of year 2000 disruptions and the timely resumption and recovery of critical functions. The contingency plan has been reviewed by an independent outside consultant for feasibility with management's stated business resumption goals and other plans adopted by the Company. Recommendations made by the consultant were reviewed by management and incorporated into the contingency plan. The Company will conduct testing of its contingency plan during the three months ended September 30, 1999. The results of this testing will assist in updating, if necessary, the contingency plan throughout the remainder of calendar 1999. Also, the contingency plan will be updated as new information becomes available on the Company's vendors and service providers. 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. 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 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. Through the fiscal year ended June 30, 1999, the Company has spent approximately $168,000 for year 2000 related issues which included approximately $131,000 of internal staff resources. Management does not expect the total costs of the year 2000 project to exceed $260,000 (excluding the $700,000 in hardware and software discussed above), the majority of 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. As discussed above, 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. 43 Item 8. Financial Statements and Supplementary Data - --------------------------------------------------- Index to Consolidated Financial Statements Independent Auditors' Report.............................................................................. 45 Consolidated Statements of Financial Condition as of June 30, 1999 and 1998............................... 46 Consolidated Statements of Operations for Each of the Three Years in the Period Ended June 30, 1999....... 47 Consolidated Statements of Stockholders' Equity for Each of the Three Years in the Period Ended June 30, 1999..................................................................................... 48 Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended June 30, 1999....... 49 Notes to Consolidated Financial Statements for Each of the Three Years in the Period Ended June 30, 1999.. 51
44 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders SGV Bancorp, Inc. West Covina, California We have audited the accompanying consolidated statements of financial condition of SGV Bancorp, Inc. and subsidiary (the Company) as of June 30, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended June 30, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of SGV Bancorp, Inc. and subsidiary as of June 30, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1999, in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP Costa Mesa, California August 31, 1999 45 SGV BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STAEMENTS OF FINANCIAL CONDITION AS OF JUNE 30, 1999 AND 1998 - --------------------------------------------------------------------------------
1999 1998 ---------- ----------- (Dollars in thousands) ASSETS Cash, including short-term bank obligations of $4,940 and $16,202 at June 30, 1999 and 1998, respectively $ 9,515 $ 20,008 Investment securities available for sale, amortized cost of $26,109 and $19,241 at June 30, 1999 and 1998, respectively (Note 3) 25,816 19,221 Mortgage-backed securities available for sale, amortized cost of $25,326 and $29,386 at June 30, 1999 and 1998, respectively (Notes 3 and 10) 24,871 29,383 Mortgage-backed securities held to maturity, estimated fair value of $36,984 and $30,089 at June 30, 1999 and 1998, respectively (Notes 4 and 10) 37,717 29,936 Loans receivable held for investment, net of allowance for loan losses of $1,845 and $1,425 at June 30, 1999 and 1998, respectively (Notes 5 and 10) 354,989 295,739 Loans receivable held for sale (Note 5) 100 391 Accrued interest receivable (Note 6) 2,979 2,774 Stock of Federal Home Loan Bank of San Francisco, at cost (Note 10) 5,407 4,234 Real estate acquired through foreclosure, net (Note 7) 827 1,902 Premises and equipment, net (Note 8) 3,166 3,537 Prepaid expenses and other assets, net 3,343 1,221 ---------- ----------- Total assets $468,730 $408,346 ========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Deposit accounts (Note 9) $324,106 $295,281 Federal Home Loan Bank advances (Note 10) 108,002 70,543 Securities sold under agreements to repurchase (Note 10) - 6,000 Accrued expenses and other liabilities (Note 11) 4,251 4,289 ---------- ----------- Total liabilities 436,359 376,113 COMMITMENTS AND CONTINGENT LIABILITIES (Note 13) STOCKHOLDERS' EQUITY (Notes 1, 2, 11, 13 and 15): 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 shares issued (1999 and 1998); 2,176,323 (1999) and 2,348,068 (1998) shares outstanding 27 27 Additional paid-in capital 21,297 21,147 Retained earnings, substantially restricted 19,236 16,688 Accumulated other comprehensive loss (440) (13) Deferred stock compensation (1,141) (1,555) Treasury stock, 551,333 (1999) and 379,588 (1998) shares (6,608) (4,061) ---------- ----------- Total stockholders' equity 32,371 32,233 ---------- ----------- Total liabilities and stockholders' equity $468,730 $408,346 ========== ===========
See notes to consolidated financial statements 46 SGV BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999 - --------------------------------------------------------------------------------
1999 1998 1997 --------------- --------------- --------------- (In thousands, except per share data) INTEREST INCOME: Interest on loans $ 25,978 $ 23,641 $ 20,890 Interest on investment securities 1,425 1,073 1,133 Interest on mortgage-backed securities 3,813 4,032 4,051 Other 562 856 626 --------------- -------------- -------------- Total interest income 31,778 29,602 26,700 INTEREST EXPENSE: Interest on deposit accounts (Note 9) 13,532 13,627 12,195 Interest on borrowings 5,838 5,034 4,943 --------------- --------------- -------------- Total interest expense 19,370 18,661 17,138 --------------- --------------- -------------- NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 12,408 10,941 9,562 PROVISION FOR LOAN LOSSES (Note 5) 969 735 557 --------------- --------------- -------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 11,439 10,206 9,005 OTHER INCOME: Loan servicing and other fees 549 532 450 Deposit account fees 594 522 306 Secondary market activity, net 105 - (42) Gain on sale or redemption of securities available for sale, net (Note 3) 71 45 148 Other income 614 269 199 --------------- --------------- -------------- Total other income 1,933 1,368 1,061 OTHER EXPENSES: General and administrative expenses: Compensation and other employee expenses 5,292 4,909 4,129 Office occupancy 1,034 1,064 834 Data processing/equipment 1,141 1,117 932 Advertising 139 157 137 FDIC insurance premiums 178 180 313 SAIF special assessment - - 1,332 Other operating expenses 1,552 1,507 1,281 --------------- --------------- -------------- Total general and administrative expenses 9,336 8,934 8,958 Net (gain) loss on real estate acquired through foreclosure (Note 7) (255) 109 (157) --------------- --------------- -------------- Total other expenses 9,081 9,043 8,801 --------------- --------------- -------------- EARNINGS BEFORE INCOME TAXES 4,291 2,531 1,265 INCOME TAXES (Note 11) 1,743 1,044 534 --------------- --------------- -------------- NET EARNINGS $ 2,548 $ 1,487 $ 731 =============== =============== ============== EARNINGS PER SHARE - Basic (Note 12) $ 1.16 $ 0.63 $ 0.29 =============== =============== ============== EARNINGS PER SHARE - Diluted (Note 12) $ 1.13 $ 0.60 $ 0.29 =============== =============== ==============
See notes to consolidated financial statements 47 SGV BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999 - -------------------------------------------------------------------------------- (In thousands)
Accumulated Additional Other Preferred Common Paid-in Retained Comprehensive Stock Stock Capital Earnings Income(loss) ------------- --------- ------------- ------------ ---------------- BALANCE, July 1, 1996 $ - $ 27 $ 20,684 $ 14,470 $ (202) Comprehensive income Net earnings - - - 731 - Other comprehensive income, net of tax Net change in unrealized losses on securities, net of reclassification adjustment - - - - 92 Comprehensive income Amortization of deferred compensation - - 105 - - Repurchase of stock (249,100 shares) - - - - - ------------- --------- ------------- ------------ ---------------- BALANCE, June 30, 1997 - 27 20,789 15,201 (110) Comprehensive income Net earnings - - - 1,487 - Other comprehensive income, net of tax Net change in unrealized losses on securities, net of reclassification adjustment - - - - 97 Comprehensive income Exercise of stock options (5,892 shares) - - (3) - - Amortization of deferred compensation - - 361 - - ------------- --------- ------------- ------------ ---------------- BALANCE, June 30, 1998 - 27 21,147 16,688 (13) Comprehensive income Net earnings - - - 2,548 - Other comprehensive income, net of tax Net change in unrealized losses on securities, net of reclassification adjustment - - - - (427) Comprehensive income Amortization of deferred compensation - - 150 - - Repurchase of stock (171,745 shares) - - - - - ------------- --------- ------------- ------------ ---------------- BALANCE, June 30, 1999 $ - $ 27 $ 21,297 $ 19,236 $ (440) ============= ========= ============= ============ ================ Deferred Total Stock Treasury Comprehensive Stockholders' Compensation Stock Income Equity -------------- ----------- --------------- --------------- BALANCE, July 1, 1996 $ (2,153) $ (1,240) $ 31,586 Comprehensive income Net earnings - - $ 731 731 Other comprehensive income, net of tax Net change in unrealized losses on securities, net of reclassification adjustment - - 92 92 --------------- Comprehensive income $ 823 =============== Amortization of deferred compensation 273 - 378 Repurchase of stock (249,100 shares) - (2,884) (2,884) -------------- ----------- --------------- BALANCE, June 30, 1997 (1,880) (4,124) 29,903 Comprehensive income Net earnings - - $1,487 1,487 Other comprehensive income, net of tax Net change in unrealized losses on securities, net of reclassification adjustment - - 97 97 --------------- Comprehensive income $ 1,584 =============== Exercise of stock options (5,892 shares) - 63 60 Amortization of deferred compensation 325 - 686 -------------- ----------- ------------- BALANCE, June 30, 1998 (1,555) (4,061) 32,233 Comprehensive income Net earnings - - $ 2,548 2,548 Other comprehensive income, net of tax Net change in unrealized losses on securities, net of reclassification adjustment - - (427) (427) --------------- Comprehensive income $ 2,121 =============== Amortization of deferred compensation 414 - 564 Repurchase of stock (171,745 shares) - (2,547) (2,547) -------------- ----------- ------------- BALANCE, June 30, 1999 $ (1,141) $ (6,608) $ 32,371 ============== =========== =============
Disclosure of reclassification amount for June 30: 1999 1998 1997 --------- -------- --------- Unrealized holding (losses) gains during period, net of tax (benefit) expense of ($263) in 1999, $86 in 1998, and $129 in 1997 $ (385) $ 123 $ 178 Less: Reclassification adjustment for gains included in net earnings, net of tax expense of $29 in 1999, $19 in 1998, and $62 in 1997 (42) (26) (86) --------- -------- --------- Net change in unrealized (losses) gains on securities, net of tax (benefit) expense of ($292) in 1999, $67 in 1998, and $67 in 1997 $ (427) $ 97 $ 92 ========= ======== =========
See notes to consolidated financial statements 48 SGV BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999 - --------------------------------------------------------------------------------
1999 1998 1997 ---------------- ---------------- ---------------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 2,548 $ 1,487 $ 731 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 675 683 430 Loans originated for sale (19,075) (19,687) (5,644) Proceeds from sale of loans 19,501 19,567 5,657 Gain on sale of loans, net (135) (41) (13) (Gain) loss on sale or redemption of investment securities available for sale, net (72) (12) 13 Loss (gain) on sale of mortgage-backed securities available for sale, net 1 (33) (161) Federal Home Loan Bank stock dividend (267) (247) (237) Increase in prepaid expenses and other assets (2,227) (116) (835) Amortization of deferred loan fees (273) (111) (74) Deferred loan origination costs (420) (344) (147) Increase in accrued expenses and other liabilities 521 641 267 Deferred income taxes (259) (185) 266 Provision for loan losses 969 735 557 (Recapture of) provision for real estate losses (40) 124 95 Premium amortization on securities, net 839 458 235 (Increase) decrease in accrued interest receivable (205) 137 (323) Other, net 170 (357) 164 ---------------- ---------------- ---------------- Net cash provided by operating activities 2,251 2,699 981 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of investment securities available for sale $ (111,273) $ (29,739) $ (57,451) Proceeds from sale and redemption of investment securities available for sale 104,488 23,012 59,936 Purchase of mortgage-backed securities available for sale (15,106) (15,281) (35,229) Proceeds from sale of mortgage-backed securities available for sale 6,928 16,566 9,866 Purchase of mortgage-backed securities held to maturity (20,004) - (15,451) Principal repayments on mortgage-backed securities 24,036 15,510 8,935 Loans funded, net (75,698) (34,512) (30,955) Loans purchased, net (80,754) (40,623) (33,320) Principal repayments on loans 94,343 61,019 33,216 Proceeds from sale of real estate 3,596 2,161 2,935 Purchase of premises and equipment (197) (248) (1,242) Purchase of FHLB stock (906) - (3) Other, net (487) (114) - ---------------- ----------------- ------------------ Net cash used in investing activities (71,034) (2,249) (58,763)
See notes to consolidated financial statements 49 SGV BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999 (Continued) - --------------------------------------------------------------------------------
1999 1998 1997 --------------- --------------- --------------- (In thousands) CASH FLOWS FROM FINANCING ACTIVITIES: Net (decrease) increase in certificate accounts $ (13,385) $ (22,944) $ 21,347 Net increase in passbook, money market savings, NOW, and noninterest-bearing accounts 42,210 29,886 12,794 Purchase of deposit accounts - - 20,159 Proceeds from Federal Home Loan Bank advances 75,500 5,000 73,800 Repayment of Federal Home Loan Bank advances (38,041) (12,364) (63,402) Proceeds from securities sold under agreements to repurchase 4,300 - 9,600 Repayment of securities sold under agreements to repurchase (10,300) (3,430) (170) Purchase of treasury stock (2,547) - (2,884) Exercise of stock options - 60 - Other, net 553 686 318 --------------- --------------- --------------- Net cash provided by (used in) financing activities 58,290 (3,106) 71,562 --------------- --------------- --------------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS $ (10,493) $ (2,656) $ 13,780 CASH AND CASH EQUIVALENTS, beginning of year 20,008 22,664 8,884 --------------- --------------- --------------- CASH AND CASH EQUIVALENTS, end of year $ 9,515 $ 20,008 $ 22,664 =============== =============== =============== SUPPLEMENTAL CASH FLOW DISCLOSURES - Cash paid during the year for: Interest $ 19,411 $ 18,610 $ 17,214 Income taxes 2,205 941 188 NONCASH INVESTING ACTIVITIES DURING THE YEAR: Real estate acquired through foreclosure $ 2,265 $ 2,928 $ 2,603 Change in net unrealized loss on securities available for sale, net (427) 97 92
See notes to consolidated financial statements 50 SGV BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999 - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis for 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, Board of Directors, management, employees 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. Description of Business - The business of SGV consists principally of the business of the Association. SGV's only significant assets are cash, investments and mortgage-backed securities, the capital stock of the Association and SGV's loan to the Association's employee stock ownership plan (ESOP) (Notes 13 and 16). SGV has no significant liabilities. 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, consumer and other loans. As of June 30, 1999, the Association operated eight branch offices located in the San Gabriel Valley. Principles of Consolidation - 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. Investment Securities and Mortgage-Backed Securities - The Company classifies investments in debt and equity securities into three categories: held to maturity, trading, and available for sale. Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held to maturity securities and reported at amortized cost. Debt and equity securities that are bought and held principally for the purpose of selling them in the near-term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings. The Company has no trading securities. Debt and equity securities not classified as either held to maturity securities or trading securities are classified as available for sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of other comprehensive income, net of deferred taxes. The Company designates investment securities and mortgage-backed securities as held to maturity or available for sale upon acquisition. Gains or losses on the sales of investment securities and mortgage-backed securities available for sale are determined on the specific identification method. Premiums and discounts on investment securities and mortgage-backed securities are amortized or accreted using the interest method over the expected lives of the related securities. Loans Receivable - The Company originates mortgage loans for both portfolio investment and sale in the secondary market. During the period of origination, mortgage loans are designated as held for sale or held for investment. Loans receivable held for sale are carried at the lower of cost or estimated market value determined on an aggregate basis and include loan origination costs and related fees. Any transfers of loans held for sale to the investment portfolio are recorded at the lower of cost or estimated market value on the transfer date. 51 SGV BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999 (Continued) - -------------------------------------------------------------------------------- Loans receivable held for investment are carried at amortized cost adjusted for unamortized premiums and discounts and net of deferred loan origination fees and allowance for estimated loan losses. Premiums and discounts on loans are amortized or accreted using the interest method over the expected lives of the loans. These loans are not adjusted to the lower of cost or estimated market value because it is management's intention, and the Company has the ability, to hold these loans to maturity. 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 evaluates all loans in its portfolio on an individual basis with the exception of one- to four-family residential mortgage loans and consumer lines of credit, which are evaluated on a collective basis. Also, loans which have delays in payments of less than four months are not necessarily considered impaired unless other factors apply to the loans such as the knowledge that the collection of the loan will only come from the collateral and that collateral is known to have deteriorated. 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 permanent, a charge-off is recorded; 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 principal and interest in accordance with the terms of the loan. Interest on loans is credited to income as earned. Interest receivable is accrued only if deemed collectible. Generally, interest is not accrued on loans delinquent three payments or more. Loan origination and commitment fees and certain incremental direct loan origination costs are deferred, and the net fees or costs for loans held for investment are amortized into interest income over the contractual lives of the related loans. Other loan fees and charges representing service costs for the repayments of loans, delinquent payments or miscellaneous loan services are recorded as income when collected. The Company may hedge its interest rate exposure on loans held for sale and commitments to originate loans by entering into forward sales contracts. Realized and unrealized gains and losses on forward sales contracts are deferred and recognized as adjustments to the gain or loss on sale of loans. Real Estate Acquired Through Foreclosure - Properties acquired through foreclosure are initially recorded at the lower of cost or fair value less estimated costs to sell through a charge to the allowance for estimated loan losses. Subsequent declines in value are charged to operations. Allowances for Loan and Real Estate Losses - Valuation allowances for loan and real estate losses are provided when any significant decline in value is deemed to have occurred. Specific loss allowances are established for loans that are deemed impaired, if the fair value of the loan or the collateral is estimated to be less than the gross carrying value of the loan. In estimating losses, management considers the estimated sales price, cost of refurbishment, payment of delinquent taxes, cost of holding the property (if an extended period is anticipated) and cost of disposal. Additionally, general valuation allowances for loan and real estate losses have been established. The estimates for these allowances are normally influenced by current economic conditions, actual loss experience, industry trends and other factors such as the current adverse economic conditions experienced (including declining real estate values) in the area in which the Company's lending and real estate activities are based. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Association's allowance for loan losses. Such agencies may require the Association to recognize additions to the allowance based on judgments different from those of management. 52 SGV BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999 (Continued) - -------------------------------------------------------------------------------- Although management uses the best information available to make these estimates, future adjustments to the allowances may be necessary due to economic, operating, regulatory and other conditions that may be beyond the Company's control. Premises and Equipment - Premises and equipment are stated at cost less accumulated depreciation and amortization. The Company depreciates its premises and equipment primarily by use of the straight-line method over the estimated useful lives as follows Office buildings 20 to 40 years Furniture, fixtures and equipment 3 to 10 years Income Taxes - Deferred tax assets and liabilities represent the tax effects of the temporary differences in the bases of certain assets and liabilities for tax and financial statement purposes, calculated at currently effective tax rates, of future deductible or taxable amounts attributable to events that have been recognized on a cumulative basis in the financial statements. The Company files its tax returns on a fiscal year basis. Comprehensive Income - Effective July 1, 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income. Under the provisions of SFAS No. 130, an entity that provides a full set of financial statements is required to report comprehensive income in the presentation of its financial statements. The term "comprehensive income" describes the total of all components of comprehensive income including net income. "Other comprehensive income" refers to revenues, expenses, and gains and losses that are included in comprehensive income but are excluded from net income as they have been recorded directly in equity under the provisions of other Financial Accounting Standard Board (FASB) statements. The Company presents the comprehensive income disclosure as a part of the statements of changes in stockholders' equity, by identifying each element of other comprehensive income, including net income. All comparative financial statements presented reflect the application of the provisions of SFAS No. 130. Segment Reporting - Effective July 1, 1998, the Company adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, and operates as one segment. Recent Accounting Developments - 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 was effective for all fiscal quarters of fiscal years beginning after June 15, 1999. In July 1999, the FASB issued SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, which delays the effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. 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 as amended by SFAS No. 137 is not expected to have a material impact on the results of operations or the financial position of the Company. Use of Estimates in the Preparation of Consolidated Financial Statements - The preparation of the consolidated 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 years. Actual results could differ from those estimates. Presentation of Cash Flows - All highly liquid instruments with original maturities of three months or less are considered to be cash equivalents. 53 SGV BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999 (Continued) - -------------------------------------------------------------------------------- Reclassifications - Certain amounts in the 1998 and 1997 financial statements have been reclassified to conform with classifications in 1999. 2. REGULATORY CAPITAL REQUIREMENTS AND OTHER REGULATORY MATTERS The Association is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Association's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Association must meet specific capital guidelines that involve quantitative measures of the Association's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Association's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures that have been established by regulation to ensure capital adequacy require the Association to maintain minimum capital amounts and ratios (set forth in the table below). The Federal Deposit Insurance Corporation (FDIC) requires the Association to maintain a minimum of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier I capital (as defined) to average assets (as defined). Management believes, that as of June 30, 1999 and 1998, the Association meets all capital adequacy requirements to which it is subject. As of June 30, 1999 and June 30, 1998, the most recent notification from the Office of Thrift Supervision (OTS) categorized the Association as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Association must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Association's category. The Association's actual capital amounts and ratios are also presented in the table.
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ---------------------- ------------------------- ------------------------ Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) As of June 30, 1999: Total Capital (to Risk Weighted Assets) $ 32,601 13.34% $ 19,544 8.00% $ 24,430 10.00% Core Capital (to Adjusted Tangible Assets) $ 30,994 6.61% $ 18,757 4.00% $ 23,446 5.00% Tangible Capital (to Tangible Assets) $ 30,994 6.61% $ 7,034 1.50% N/A N/A Tier I Capital (to Risk Weighted Assets) $ 30,994 12.69% N/A N/A $ 14,658 6.00% As of June 30, 1998: Total Capital (to Risk Weighted Assets) $ 29,255 15.08% $ 15,520 8.00% $ 19,400 10.00% Core Capital (to Adjusted Tangible Assets) $ 27,930 6.86% $ 16,296 4.00% $ 20,369 5.00% Tangible Capital (to Tangible Assets) $ 27,930 6.86% $ 6,117 1.50% N/A N/A Tier I Capital (to Risk Weighted Assets) $ 27,930 14.40% N/A N/A $ 11,640 6.00%
54 SGV BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999 (Continued) - -------------------------------------------------------------------------------- The OTS issued final regulations which set forth the methodology for calculating an interest rate risk component that is being incorporated into the OTS regulatory capital rules. Under the new regulations, only savings institutions with above normal interest rate risk exposure are required to maintain additional capital. This additional capital would increase the amount of a savings institution's otherwise required risk-based capital requirement. The final rule became effective January 1, 1994 and implementation will not begin until the Association has been notified by the OTS. Management believes that, under current regulations, the Association will continue to meet its minimum capital requirements in the foreseeable future. However, events beyond the control of the Association, such as changing interest rates or a further downturn in the economy in areas where the Association has most of its loans, could adversely affect future earnings and, consequently, the ability of the Association to meet its future minimum capital requirements. At periodic intervals, both the OTS and the FDIC routinely examine the Association's financial statements as part of their legally prescribed oversight of the savings and loan industry. Based on these examinations, the regulators can direct that the Association's financial statements be adjusted in accordance with their findings. As of August 31, 1999, the OTS is in the process of examining the Association. This examination and future examinations by the OTS or FDIC could include a review of certain transactions or other amounts reported in the Association's 1999 financial statements. Adjustments, if any, cannot presently be determined. On September 30, 1996, the President signed into law the Deposit Insurance Funds Act of 1996 (the Funds Act), which, among other things, imposes a special one-time assessment on Savings Association Insurance Fund (SAIF) member institutions, including the Association, to recapitalize the SAIF. As required by the Funds Act, the FDIC imposed a special assessment of 65.7 basis points on SAIF-assessable deposits held as of March 31, 1995, payable November 27, 1996. The special assessment was recognized as an expense in the quarter ended September 30, 1996 and is tax deductible. The Association took a pre-tax charge of $1,332,000 as a result of the SAIF special assessment. 3. INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE A summary of investment securities and mortgage-backed securities available for sale at June 30 follows:
1999 ------------------------------------------------------------------------------ Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value (In thousands) Money market funds and adjustable interest rate mutual funds $ 12,500 $ - $ 33 $ 12,467 U.S. Government and federal agency obligations 9,000 - 169 8,831 Other investment securities 4,609 21 112 4,518 ------------------ ---------------- ---------------- ---------------- Total investment securities 26,109 21 314 25,816 ------------------ ---------------- ---------------- ---------------- FHLMC mortgage-backed securities 358 6 3 361 FNMA mortgage-backed securities 2,014 - 30 1,984 GNMA mortgage-backed securities 22,954 - 428 22,526 ------------------ ---------------- ---------------- ---------------- Total mortgage-backed securities 25,326 6 461 24,871 ------------------ ---------------- ---------------- ---------------- Total $ 51,435 $ 27 $ 775 $ 50,687 ================== ================ ================ ================
55 SGV BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999 (Continued) - ---------------------------------------------------------------------------
1998 ------------------------------------------------------------------------------ Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value (In thousands) Money market funds and adjustable interest rate mutual funds $ 11,000 $ - $ 18 $ 10,982 U.S. Government and federal agency obligations 7,991 - 9 7,982 Other investment securities 250 7 - 257 ------------------ ---------------- ---------------- ---------------- Total investment securities 19,241 7 27 19,221 ------------------ ---------------- ---------------- ---------------- FHLMC mortgage-backed securities 5,320 6 15 5,311 FNMA mortgage-backed securities 7,972 10 17 7,965 GNMA mortgage-backed securities 15,025 32 7 15,050 Other mortgage-backed securities 1,069 - 12 1,057 ------------------ ---------------- ---------------- ---------------- Total mortgage-backed securities 29,386 48 51 29,383 ------------------ ---------------- ---------------- ---------------- Total $ 48,627 $ 55 $ 78 $ 48,604 ================== ================ ================ ================
During the year ended June 30, 1999, the Company sold $6.9 million in mortgage-backed securities, which resulted in total gains of $1,000 and total losses of $2,000. Also, the Company sold $6.1 million in investment securities resulting in gains totaling $72,000 and had $3.0 million in investment securities called during the year at par. During the year ended June 30, 1998, the Company sold $16.6 million in mortgage-backed securities resulting in $44,000 in total gains and $11,000 in total losses. Also, the Company sold $14.0 million in investment securities resulting in total gains of $13,000 and total losses of $1,000 and had $9.0 million in investment securities called during the year at par. During the year ended June 30, 1997, the Company sold $9.9 million in mortgage-backed securities resulting in total gains of $161,000. Also, the Company sold $1.5 million in investment securities resulting in total losses of $13,000 and had $2.0 million in investment securities called during the year at par. The weighted average interest rates on investment securities available for sale were 5.54% and 5.92% at June 30, 1999 and 1998, respectively. The weighted average interest rates on mortgage-backed securities available for sale were 6.33% and 6.87% at June 30, 1999 and 1998, respectively. At June 30, 1999, $11.9 million of mortgage-backed securities available for sale had adjustable interest rates, with the remaining $13.0 million having fixed interest rates. The weighted average remaining years to maturity of the mortgage-backed securities available for sale is 27.0 years at June 30, 1999. 56 SGV BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999 (Continued) - ------------------------------------------------------------------------- 4. MORTGAGE-BACKED SECURITIES HELD TO MATURITY A summary of mortgage-backed securities held to maturity at June 30 follows:
1999 -------------------------------------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value (In thousands) FHLMC mortgage-backed securities $ 3,071 $ 11 $ 36 $ 3,046 FNMA mortgage-backed securities 67 1 - 68 GNMA mortgage-backed securities 25,424 - 507 24,917 Other mortgage-backed securities 9,155 - 202 8,953 ----------------- --------------- --------------- --------------- Total mortgage-backed securities $ 37,717 $ 12 $ 745 $ 36,984 ================= =============== =============== =============== 1998 -------------------------------------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value (In thousands) FHLMC mortgage-backed securities $ 5,178 $ 40 $ 31 $ 5,187 FNMA mortgage-backed securities 106 3 - 109 GNMA mortgage-backed securities 23,829 144 - 23,973 Other mortgage-backed securities 823 - 3 820 ----------------- --------------- --------------- --------------- Total mortgage-backed securities $ 29,936 $ 187 $ 34 $ 30,089 ================= =============== =============== ===============
Mortgage-backed securities totaling approximately $16.5 million were pledged at June 30, 1999 as collateral for FHLB borrowings. The Company did not sell any mortgage-backed securities held to maturity during the years ended June 30, 1999, 1998 and 1997. The weighted average interest rate on mortgage-backed securities held to maturity was 7.14% and 7.82% at June 30, 1999 and 1998, respectively. At June 30, 1999, $1.1 million of the Company's mortgage-backed securities held to maturity had adjustable interest rates with the remaining $36.6 million having fixed interest rates. At June 30, 1998, $2.0 million of the Company's mortgage- backed securities held to maturity had adjustable interest rates, with the remaining $27.9 million having fixed interest rates. The weighted average remaining years to maturity of the mortgage-backed securities held to maturity is 23.2 years at June 30, 1999. 57 SGV BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999 (Continued) - -------------------------------------------------------------------------------- 5. LOANS RECEIVABLE A summary of loans receivable at June 30 follows:
1999 1998 ----------- ------------ (Dollars in thousands) Conventional trust deed loans on real estate: Single family 1-4 units $ 279,897 $ 247,129 Multifamily 46,425 29,546 Commercial loans secured by trust deeds 23,901 11,895 Consumer 5,961 9,007 ----------- ------------ Total 356,184 297,577 Less (plus): Unamortized yield adjustments (1,486) (613) Deferred loan fees 736 635 Allowance for loan losses 1,845 1,425 ----------- ------------ Total 355,089 296,130 Less - Loans held for sale 100 391 ----------- ------------ Loans receivable held for investment, net $ 354,989 $ 295,739 =========== ============ Weighted average interest rate at end of period 7.62% 8.03% =========== ============
At June 30, 1999, adjustable rate loans approximated $265.0 million. The adjustable rate loans have interest rate adjustment limitations and are generally indexed to the Eleventh District Cost of Funds and the one-year Constant Maturity Treasury index. Future market factors may affect the correlation of the interest rate adjustment with the rates the Company pays on short-term deposits that have been utilized primarily to fund these loans. Activity in the allowance for loan losses is summarized as follows for the year ended June 30:
1999 1998 1997 -------------- -------------- -------------- (In thousands) Balance, beginning of year $ 1,425 $ 1,263 $ 1,058 Provision for estimated loan losses 969 735 557 Charge-offs (564) (573) (352) Recoveries 15 - - -------------- -------------- -------------- Balance, end of year $ 1,845 $ 1,425 $ 1,263 ============== ============== ==============
58 SGV BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999 (Continued) - -------------------------------------------------------------------------------- At June 30, 1999, for those loans which are reviewed individually for impairment, the Company had classified none of such loans as impaired and there were no specific reserves determined in accordance with SFAS No. 114, as amended by SFAS No. 118. At June 30, 1998, for those loans which are reviewed individually for impairment, the Company had classified $569,000 of its loans as impaired with $100,000 in specific reserves and none with no specific reserves. In addition, the Company has $1.5 million and $1.3 million at June 30, 1999 and 1998, respectively, in impaired loans, which were collectively evaluated for impairment with $238,000 in reserves set aside as of June 30, 1999 and no reserves as of June 30, 1998. The average recorded investment in impaired loans, inclusive of those evaluated collectively, during the years ended June 30, 1999, 1998 and 1997 was approximately $1.9 million, $2.9 million and $1.6 million, respectively. Interest income on impaired loans of $34,000, $28,000 and $28,000 was recognized for cash payments received in the years ended June 30, 1999, 1998 and 1997. Generally, loans delinquent three payments or more are placed on nonaccrual status, meaning that the Company stops accruing interest on such loans and reverses any interest previously accrued but not collected. A nonaccrual loan may be restored to accrual status when delinquent principal and interest payments are brought current and future monthly principal and interest payments are expected to be collected. For the years ended June 30, 1999, 1998 and 1997, contractually due interest of approximately $80,000, $101,000 and $77,000, respectively, was not recognized in income. At June 30, 1999, 1998 and 1997, nonaccrual loans approximated $1,524,000, $1,911,000 and $1,699,000, respectively. At June 30, 1999, the Company had two troubled-debt restructured loans with a net balance outstanding of approximately $446,000. The Company is engaged in attracting deposits from the general public and using those deposits together with borrowings and other funds primarily to originate permanent residential mortgage loans in its normal lending areas in Los Angeles, San Bernardino, Riverside and Orange counties. At June 30, 1999, 1998 and 1997, the Company was servicing loans for others amounting to approximately $87,000,000, $100,000,000 and $94,000,000, respectively. Under FIRREA, a federally chartered savings and loan association's aggregate commercial real estate loans may not exceed 400% of its capital as determined under the capital standards provisions of FIRREA. FIRREA does not require divestiture of any loan that was lawful when it was originated. At June 30, 1999, the Association estimates that, while complying with this limitation, it may originate an additional $99.4 million of commercial real estate loans. The Association is subject to numerous lending-related regulations. Under FIRREA, the Association may not make real estate loans to one borrower in excess of 15% of its unimpaired capital and surplus, plus an additional 10% for loans secured by readily marketable collateral. This 15% limitation results in a dollar limitation of approximately $4,624,000 at June 30, 1999. Transactions in loans to officers, directors and employees are as follows for the years ended June 30:
1999 1998 1997 ------------------- ------------------- ------------------- (In thousands) Balance, beginning of year $ 1,726 $ 788 $ 1,010 New loans to employees 1,676 966 92 Principal paydowns and payoffs (135) (28) (314) ------------------- ------------------- ------------------- Balance, end of year $ 3,267 $ 1,726 $ 788 =================== =================== ===================
59 SGV BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999 (Continued) - -------------------------------------------------------------------------------- 6. ACCRUED INTEREST RECEIVABLE A summary of accrued interest receivable at June 30 follows:
1999 1998 ------------------ ------------------ (In thousands) Loans receivable $ 2,447 $ 2,286 Mortgage-backed securities 371 378 Investment securities and other 161 110 ------------------ ------------------ Total $ 2,979 $ 2,774 ================== ==================
7. REAL ESTATE ACQUIRED THROUGH FORECLOSURE A summary of real estate acquired through foreclosure at June 30 follows:
1999 1998 ------------------ ------------------ (In thousands) One- to four-unit properties $ 827 $ 1,728 Multifamily - 274 Allowance for real estate losses - (100) ------------------ ------------------ Total $ 827 $ 1,902 ================== ==================
Activity in the allowance for estimated real estate losses is as follows for the years ended June 30:
1999 1998 1997 ------------------ ------------------ ------------------ (In thousands) Balance, beginning of year $ 100 $ 60 $ 557 (Recapture of) provision for real estate losses (40) 124 95 Charge-offs (60) (84) (592) ------------------ ------------------ ------------------ Balance, end of year $ - $ 100 $ 60 ================== ================== ==================
Net gain (loss) on real estate acquired through foreclosure is summarized as follows for the years ended June 30:
1999 1998 1997 --------------- --------------- --------------- (In thousands) Net gain on sales of real estate $ 297 $ 153 $ 49 Other (expenses) income, net (82) (138) 203 Recapture of (provision for) real estate losses 40 (124) (95) --------------- --------------- --------------- Net gain (loss) on real estate acquired through foreclosure $ 255 $ (109) $ 157 =============== =============== ===============
60 SGV BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999 (Continued) - -------------------------------------------------------------------------------- 8. PREMISES AND EQUIPMENT A summary of premises and equipment at June 30 follows:
1999 1998 ------------ ----------- (In thousands) Land $ 523 $ 523 Office buildings 5,066 5,055 Furniture, fixtures and equipment 3,688 3,519 ------------ ----------- Total 9,277 9,097 Less accumulated depreciation and amortization (6,111) (5,560) ------------ ----------- Total $ 3,166 $ 3,537 ============ ===========
9. DEPOSIT ACCOUNTS Deposit accounts are summarized as follows at June 30:
1999 1998 ----------------------- -------------------- Interest Interest Balance rate* Balance rate* (Dollars in thousands) Passbook accounts $ 19,466 2.00% $ 17,892 2.00% Money market savings accounts 85,176 4.47% 47,469 4.64% NOW accounts 20,397 1.00% 20,808 1.23% Noninterest-bearing accounts 13,000 - 9,660 - ----------- ---------- Total 138,039 3.19% 95,829 2.94% Certificates of deposit:** Less than three months 3,203 3.92% 2,637 3.97% Three to six months 4,706 4.06% 6,490 4.42% Six to twelve months 47,835 4.63% 29,861 4.91% Twelve months and greater 130,323 4.96% 160,464 5.49% ----------- ---------- Total 186,067 4.83% 199,452 5.35% ----------- ---------- Total $ 324,106 4.14% $ 295,281 4.57% =========== ========== * Based on weighted average stated interest rates. ** Based on original maturity. Also, at June 30, 1999, included in certificate accounts are 414 accounts totaling $57,026,000, with balances of $100,000 or more
Certificate accounts are scheduled to mature as follows at June 30, 1999:
(In thousands) Within one year $ 167,823 One to two years 9,211 Two to three years 4,438 Three to four years 3,128 Four to five years 1,467 ------------- Total $ 186,067 =============
61 SGV BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999 (Continued) - -------------------------------------------------------------------------------- Interest expense on deposit accounts is summarized as follows for the year ended June 30:
1999 1998 1997 ------------ ------------ ------------ (In thousands) Passbook accounts $ 367 $ 377 $ 348 NOW accounts 240 309 280 Money market savings accounts 3,069 1,367 493 Certificate accounts 9,856 11,574 11,074 ------------ ------------ ------------ Total $ 13,532 $ 13,627 $ 12,195 ============ ============ ============
10. OTHER BORROWED FUNDS Advances from the Federal Home Loan Bank (FHLB) are scheduled to mature as follows at June 30, 1999:
(In thousands) Year ending June 30: 2000 $ 46,071 2001 24,154 2002 26,639 2003 1,138 2004 10,000 ------------- Total $ 108,002 =============
At June 30, 1999 and 1998, the weighted average interest rate on FHLB advances was 5.41% and 6.21%, respectively. At June 30, 1999, the advances, all of which are fixed rate, were collateralized by certain real estate loans with aggregate unpaid principal balances of approximately $166.9 million and by certain mortgage-backed securities with an aggregate remaining principal balance of approximately $16.5 million and the Company's investment in the capital stock of the FHLB of San Francisco. The following summarizes activities in advances from the FHLB for the year ended June 30:
1999 1998 1997 ------------ ----------- ----------- (Dollars in thousands) Average amount outstanding during the period $ 97,110 $ 72,722 $ 73,513 =========== =========== =========== Maximum amount outstanding at any month-end during the period $ 108,017 $ 75,876 $ 78,172 =========== =========== =========== Weighted average interest rate during the period 5.68% 6.28% 6.25% =========== =========== ===========
62 SGV BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999 (Continued) - -------------------------------------------------------------------------------- The following summarizes activities in securities sold under agreements to repurchase as of June 30:
1999 1998 1997 --------------- --------------- --------------- (Dollars in thousands) Average amount outstanding during the period $ 3,831 $ 6,528 $ 8,729 =============== =============== =============== Maximum amount outstanding at any month-end during the period $ 10,300 $ 9,450 $ 9,600 =============== =============== =============== Weighted average interest rate during the period 5.62% 6.04% 5.93% =============== =============== ===============
At June 30, 1999, there were no securities sold under agreements to repurchase outstanding. The Company enters into these agreements only with primary government securities dealers. The lender maintains possession of the collateral securities for these agreements. 11. INCOME TAXES Income taxes are summarized as follows for the year ended June 30:
1999 1998 1997 ------------ ------------- ------------ (In thousands) Current: Federal $ 1,499 $ 978 $ 225 State 503 251 43 ------------ ------------- ------------ Total current 2,002 1,229 268 Deferred: Federal (215) (209) 173 State (44) 24 93 ------------ ------------- ------------ Total deferred (259) (185) 266 ------------ ------------- ------------ Total $ 1,743 $ 1,044 $ 534 ============ ============= ============
A reconciliation from the statutory federal income tax rate to the consolidated effective income tax rate follows for the year ended June 30:
1999 1998 1997 ---------- ---------- ---------- Federal income tax rate 35.0% 35.0% 35.0% State taxes, net of federal benefit 7.1 7.2 7.1 Other, net (1.5) (1.0) 0.1 ---------- ---------- ---------- Total 40.6% 41.2% 42.2% ========== ========== ==========
63 SGV BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999 (Continued) - -------------------------------------------------------------------------------- At June 30, 1999 and 1998, the deferred components of the Company's total income tax liabilities (assets), as included in the consolidated statements of financial condition, are summarized as follows:
1999 1998 ------------ ------------ (In thousands) Deferred tax liabilities: Federal Home Loan Bank stock dividends $ 1,022 $ 903 Depreciation 285 344 Loan fees 727 817 Prepaid expenses 120 56 Other - - ------------ ------------ Gross deferred tax liabilities 2,154 2,120 Deferred tax assets: Bad debt reserve (680) (538) State taxes (277) (230) Deferred compensation (358) (269) Capital loss carryforward (20) (20) Unrealized losses on securities (308) (9) Amortization of deposit premium (74) (43) Other (15) (31) ------------ ------------ Gross deferred tax assets (1,732) (1,140) Valuation allowance - - ------------ ------------ Net deferred tax liability $ 422 $ 980 ============ ============
The Association's financial statement retained earnings includes tax bad debt deductions for which no provision for federal income taxes has been made. If distributions to shareholders are made in excess of current or accumulated earnings and profits or if stock of the Association is partially redeemed, this tax bad debt reserve, which approximates $2,700,000 at June 30, 1999, will be recaptured into income at the then prevailing federal income tax rate. The related unrecognized deferred tax liability is approximately $945,000. It is not contemplated that the Association will make any disqualifying distributions that would result in the recapture of these reserves. 64 SGV BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999 (Continued) - -------------------------------------------------------------------------------- 12. EARNINGS PER SHARE RECONCILIATION
Weighted Average Income Shares Per Share (Numerator) (Denominator) Amount ------------------- -------------------- ------------------- June 30, 1999 ------------------------------------------------------------------ Basic EPS Income available to common stockholders $ 2,548,000 2,190,000 $ 1.16 Effect of Dilutive Securities Incremental shares from assumed exercise of outstanding options - 73,000 (0.03) ------------------- -------------------- ------------------- Diluted EPS Income available to common stockholders $ 2,548,000 2,263,000 $ 1.13 =================== ==================== =================== June 30, 1998 ------------------------------------------------------------------ Basic EPS Income available to common stockholders $ 1,487,000 2,345,000 $ 0.63 Effect of Dilutive Securities Incremental shares from assumed exercise of outstanding options - 124,000 (0.03) ------------------- -------------------- ------------------- Diluted EPS Income available to common stockholders $ 1,487,000 2,469,000 $ 0.60 =================== ==================== =================== June 30, 1997 ------------------------------------------------------------------ Basic EPS Income available to common stockholders $ 731,000 2,482,000 $ 0.29 Effect of Dilutive Securities Incremental shares from assumed exercise of outstanding options - 37,000 - ------------------- -------------------- ------------------- Diluted EPS Income available to common stockholders $ 731,000 2,519,000 $ 0.29 =================== ==================== ===================
13. COMMITMENTS AND CONTINGENT LIABILITIES The Company conducts a portion of its operations from premises under operating leases. Rental expense, net of sublease payments, was $309,000, $307,000 and $206,000 for the years ended June 30, 1999, 1998 and 1997, respectively. Sublease payments were $158,000, $158,000 and $121,000 for the years ended June 30, 1999, 1998 and 1997, respectively. Minimum rental commitments for noncancelable leases follow at June 30, 1999:
(In thousands) First year $ 417 Second year 215 Third year 217 Fourth year 217 Fifth year 181 Thereafter 217 ------------ Total $ 1,464 ============
65 SGV BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999 (Continued) - -------------------------------------------------------------------------------- The Company becomes involved in claims and litigation arising from its normal business activities. After consultation with legal counsel, management is of the opinion that the ultimate liability, if any, resulting from the disposition of such claims and litigation would not be material to the consolidated financial statements of the Company. The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Moreover, the total commitment amounts do not necessarily represent future cash requirements. Collateral generally includes residential or commercial real estate. For forward sales contracts, the contract or notional amounts do not represent exposure to credit loss. The Company controls the credit risk of its forward sales contracts through limits and monitoring procedures. At June 30, 1999 and 1998, the Company had loan funding commitments of approximately $4.8 million and $3.0 million, respectively. Loan funding commitments are generally for a period of 15 to 45 days. The loan commitments outstanding at June 30, 1999 were primarily for adjustable rate mortgage loans, whereas they were predominantly for fixed rate mortgages as of June 30, 1998. The Company uses forward sales contracts to hedge interest rate exposure generally on secondary mortgage market operations. As of June 30, 1999, the Company had no open forward sales contracts. As of June 30, 1998, the Company had $1.0 million in open forward sales contracts. The Company provides a profit-sharing plan and a 401(k) plan, which are offered to officers and full-time employees meeting the eligibility requirements specified in the plans. The plans provide for optional annual contributions by the Company at the discretion of the Board of Directors. The 401(k) plan is a defined contributory plan which allows employee contributions. Total profit- sharing and 401(k) plan expenses were $100,000, $79,000 and $68,000 for the years ended June 30, 1999, 1998 and 1997, respectively. The Company's maximum annual contribution is 15% of the amount of eligible compensation. The Company previously maintained a separate defined benefit plan covering only outside Board of Director members. Such plan was terminated during the year ended June 30, 1995. Participants currently remaining in the plan will be paid out according to existing plan terms. No further contributions will be made by the Company. Pension expense was $18,000, $13,000 and $15,000 for the years ended June 30, 1999, 1998 and 1997, respectively. The accrued pension liability cost was approximately $150,000 at June 30, 1999. The Association established for eligible employees an ESOP and related trust that became effective upon the conversion of the Association from a mutual to a stock savings and loan association (the Conversion). Full-time employees employed with the Association as of January 1, 1995 and full-time employees of the Company or the Association employed after such date, who have been credited with at least 1,000 hours during a 12-month period and who have attained the age of 21 will become participants. The ESOP purchased 7% of the common stock issued by SGV Bancorp, Inc. (See Note 1). The ESOP borrowed $1,528,000 from the Company in order to purchase the common stock. The loan will be repaid principally from the Association's contributions to the ESOP over a period of seven years, and the collateral for the loan will be the common stock purchased by the ESOP. The interest rate for the loan is 8%. At June 30, 1999 the outstanding balance of the loan was $764,000 and a total of 95,470 shares of common stock has been allocated to employee accounts. 66 SGV BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999 (Continued) - -------------------------------------------------------------------------------- Shares purchased by the ESOP are pledged as collateral for the loan and will be held in a suspense account until released for allocation among participants as the loan is repaid. The pledged shares will be released annually from the suspense account in an amount proportional to the repayment of the ESOP loan for each plan year. The released shares will be allocated among the accounts of participants on the basis of the participant's compensation for the year of allocation. Participants generally become 100% vested in their ESOP account after six years of credited service or if their service was terminated due to death, early retirement, permanent disability or a change in control. Prior to the completion of two years of credited service, a participant who terminates employment for reasons other than death, retirement, disability, or change of control of the Association or Company will not receive any benefit. Forfeitures will be reallocated among remaining participating employees, in the same proportion as contributions. Benefits may be payable upon death, retirement, disability or separation from service. The contributions to the ESOP are not fixed, so benefits payable under the ESOP cannot be estimated. The expense related to the ESOP for the year ended June 30, 1999 was approximately $367,000. At June 30, 1999, unearned compensation related to the ESOP approximated $655,000 and is shown as a reduction of stockholders' equity in the accompanying consolidated statements of financial condition. The Association maintains a non-qualified Supplemental Executive Retirement Plan (SERP) to provide certain officers and highly compensated employees with additional retirement benefits. The benefits provided under the SERP will make up the benefits lost to the SERP participants due to application of limitations on compensation and maximum benefits applicable to the Association's tax- qualified 401(k) plan and the ESOP. Benefits will be provided under the SERP at the same time and in the same form as the benefits will be provided under the 401(k) plan and the ESOP. Included in other assets at June 30, 1999 are $32,000 in investment securities accounted for as trading securities related to the SERP. Included in accrued expenses at June 30, 1999 is $97,000 of benefits related to the SERP. The Association has implemented a Directors' Deferred Fee Stock Unit Plan (Deferred Fee Plan) for its directors. The Deferred Fee Plan permits directors to defer receipt of directors' fees paid by the Association until their service with the Board of Directors terminates. The Deferred Fee Plan also permits directors to defer receipt of the vested accrued benefit otherwise payable from the terminated Director's Retirement Plan into the director's account under the terms of the Deferred Fee Plan. The directors' deferred fees are credited to the account of participating directors under the terms of the Deferred Fee Plan and are credited with earnings based on several investment choices, including Company stock. If a participant chooses to have deferred fees credited to a stock unit account with the Deferred Fee Plan, the participant will receive a benefit based on the value and appreciation in the stock of the Company. Included in other assets at June 30, 1999 is $298,000 in investment securities accounted for as trading securities related to the Deferred Fee Plan. Included in accrued expenses at June 30, 1999 is $572,000 of deferrals related to the Deferred Fee Plan. At the Company's Annual Meeting of Stockholders on January 17, 1996, the stockholders approved the First Federal Savings and Loan Association of San Gabriel Valley 1995 Master Stock Compensation Plan (the Stock Compensation Plan). The Stock Compensation Plan, which is a non-qualified plan, was authorized to acquire up to 81,829 shares of the Company common stock either directly for the Company or through purchases in the open market to be used for the granting of plan share grants and plan share allocations. The Association contributed funds to the Stock Compensation Plan to enable the Stock Compensation Plan trustees to acquire the necessary shares of the common stock. The 81,829 shares were acquired in several transactions at an average market price of $9.469 per share. These shares represent deferred compensation and have been accounted for as a reduction in stockholders' equity in the accompanying consolidated statement of financial condition. Such shares are held in trust. The Stock Compensation Plan allocated 16,366 shares to current and future directors with the remaining shares allocated to employees. The shares allocated to directors are granted in equal installments over a five-year period. The shares allocated to employees are granted over a five-year period, with a percentage considered as a 67 SGV BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999 (Continued) - -------------------------------------------------------------------------------- base grant and the remaining percentages granted if the Company achieves certain performance levels. The percentages are determined by the Company's compensation committee. The expense related to the Stock Compensation Plan for the year ended June 30, 1999 was approximately $203,000. At the Company's Annual Meeting of Stockholders on January 17, 1996, the stockholders approved the SGV Bancorp, Inc. 1995 Master Stock Option Plan (the 1995 Stock Option Plan). The Stock Option Plan authorizes the granting of options equal to 272,765 shares of common stock. All officers and other employees of the Company and its affiliates, and directors who are not also serving as employees of the Company or any of its affiliates are eligible to receive awards under the Stock Option Plan. Options granted under the 1995 Stock Option Plan will be made at an exercisable price equal to the fair market value on the date of grant. Options expire ten years from the date of the grant. Awards granted to employees may include incentive stock options, nonstatutory stock options and limited rights which are exercisable only upon a change in control of the Company. Awards granted to nonemployee directors are nonstatutory options. Options are exercisable in five equal annual installments of 20%, commencing one year from the date of the grant. Also, at the Company's Annual Meeting of Stockholders on November 20, 1997, the stockholders approved the SGV Bancorp, Inc. 1997 Stock-Based Incentive Plan (the 1997 Stock-Based Incentive Plan). This plan authorizes the granting of options to purchase common stock, option-related awards and awards of common stock equivalent to one percent of the adjusted average common stock outstanding used to calculate diluted earnings per share as reported in the annual report for the preceding year for each calendar year from 1997 to 2006. In no event will more than 230,000 shares be granted under this plan which is available to all officers, other employees and outside Directors. Options granted under the 1997 Stock-Based Incentive Plan will be made at an exercisable price equal to fair market value on the date of grant. Options expire ten years from the date of the grant. In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based Compensation, which establishes financial accounting and reporting standards for stock-based employee compensation plans. This statement establishes a fair value based method of accounting for stock-based compensation plans. It encourages, but does not require, entities to adopt that method in place of the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, for all arrangements under which employees receive shares of stock or other equity instruments of the employer or the employer incurs liabilities to employees in amounts based on the price of its stock. SFAS No. 123 also applies to transactions in which an entity issues its equity instruments to acquire goods or services from nonemployees. Those transactions must be accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The Company has elected to continue to apply the accounting provisions of APB No. 25 to its stock-based compensation awards to employees. Under APB No. 25, compensation cost for stock options is measured as the excess, if any, of the fair market value of the Company's stock at the date of grant over the amount the director or employee must pay to acquire the stock. Because the plan provides for the issuance of options at a price of no less than the fair market value at the date of grant, no compensation cost has been recognized for the stock option components of the plans. 68 SGV BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999 (Continued) - -------------------------------------------------------------------------------- Had compensation costs for the stock option components of the 1995 Stock Option and 1997 Stock-Based Incentive Plans been determined based upon the fair value at the date of grant consistent with SFAS No. 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated as follows as of June 30 for the years indicated:
1999 1998 1997 ---------------- ---------------- ---------------- (In thousands, except per share data) Net earnings: As reported $ 2,548 $ 1,487 $ 731 Pro forma 2,252 1,218 469 Earnings per common share - Basic: As reported $ 1.16 $ 0.63 $ 0.29 Pro forma $ 1.03 $ 0.52 $ 0.19 Earnings per common share - Diluted: As reported $ 1.13 $ 0.60 $ 0.29 Pro forma $ 1.00 $ 0.49 $ 0.19
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: dividend yield of 0% for all years; risk-free interest rate of 6.00% for 1999, 5.50% for 1998 and 6.50% for 1997; expected life of 7 years for 1999 and 10 years for 1998 and 1997; and a volatility factor of 25.72% for 1999, 23.37% for 1998 and 18.79% for 1997. Stock options granted, exercised or forfeited were as follows:
Weighted Average Weighted Average Number of Exercise Price Fair Value of Option Shares of Option Shares Option Shares Granted Outstanding June 30, 1996 261,850 $ 9.63 Granted during year 15,275 12.88 $ 12.88 Forfeited during year (2,182) 9.63 ---------- -------------- Outstanding June 30, 1997 274,943 9.81 Granted during year 20,100 17.13 17.13 Exercised during year (5,892 9.63 Forfeited during year (1,746 9.63 ---------- -------------- Outstanding June 30, 1998 287,405 10.33 Granted during year 37,425 12.22 12.22 Forfeited during year (1,400 17.13 ---------- -------------- Outstanding June 30, 1999 323,430 $ 10.52 ==========
69 SGV BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999 (Continued) - -------------------------------------------------------------------------------- Financial data pertaining to outstanding stock options as of June 30, 1999 were as follows:
Weighted Weighted Weighted Average Number Average Average Number of Exercise Price Exercise of Option Remaining Exercise Price Exercisable of Exercisable Price Shares Contractual Life of Option Shares Option Shares Option Shares - -------------- ---------------- -------------------- -------------------- ------------------ ------------------- $ 9.63 252,030 6.5 $ 9.63 149,032 $ 9.63 $ 12.88 15,275 7.7 $ 12.88 7,638 $ 12.88 $ 17.13 18,700 8.6 $ 17.13 10,167 $ 17.13 $ 11.75 14,025 9.2 $ 11.75 - - $ 12.50 23,400 9.6 $ 12.50 - - ---------------- -------------------- -------------------- ------------------ ------------------- 323,430 7.1 $ 10.52 166,837 $ 10.24 ================ ==================
During the year ended June 30, 1995, the Company entered into employment agreements (Agreements) with its president/chief executive officer and its executive vice president/chief financial officer. The Agreements provide for three-year terms for both individuals commencing on June 28, 1995 which have been extended through June 28, 2002. The Agreements provide that, commencing on the first anniversary date and continuing each anniversary date thereafter, the Board of Directors may extend the Agreements for an additional year so that the remaining term shall be three years. The Agreements provide for the payment of severance benefits upon termination. 14. FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosures of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, Disclosures About Fair Value of Financial Instruments. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts at June 30, 1999 and 1998:
1999 -------------------------------------- Carrying Estimated amount fair value (In thousands) Assets: Cash, including short-term bank obligations $ 9,515 $ 9,515 Investment securities available for sale 25,816 25,816 Mortgage-backed securities available for sale 24,871 24,871 Mortgage-backed securities held to maturity 37,717 36,984 Loans receivable: Fixed 91,164 90,199 Variable 263,496 263,496 Federal Home Loan Bank stock 5,407 5,407 Liabilities: Term deposit accounts 186,067 186,374 Other deposit accounts 138,039 138,039 Borrowings 108,002 106,948 Off-balance sheet unrealized gains (losses): Loan funding commitments - - Forward sales contracts - -
70 SGV BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999 (Continued) - --------------------------------------------------------------------------------
1998 --------------------------------------- Carrying Estimated amount fair value (In thousands) Assets: Cash, including short-term bank obligations $ 20,008 $ 20,008 Investment securities available for sale 19,221 19,221 Mortgage-backed securities available for sale 29,383 29,383 Mortgage-backed securities held to maturity 29,936 30,089 Loans receivable: Fixed 62,516 63,914 Variable 233,150 233,150 Federal Home Loan Bank stock 4,234 4,234 Liabilities: Term deposit accounts 199,452 200,130 Other deposit accounts 95,829 95,829 Borrowings 76,543 77,232 Off-balance sheet unrealized gains (losses): Loan funding commitments - 6 Forward sales contracts - (2)
The estimated fair values of investment securities and mortgage-backed securities available for sale and held to maturity are based on quoted market prices or dealer quotes. The fair value of loans receivable with fixed interest rates is estimated by discounting future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings for the same remaining maturities. The fair value of nonperforming loans with a carrying value of approximately $1,524,000 and $1,911,000 at June 30, 1999 and 1998, respectively, was not estimated because it is not practicable to reasonably assess the credit adjustment that would be applied in the market place for such loans. These nonperforming loans are primarily residential real estate loans. The fair value of Federal Home Loan Bank stock is based on its redemption value. The fair value of term deposit accounts is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value of other deposit accounts is the amount payable on demand at June 30, 1999 and 1998. Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value of borrowings. For fixed-rate loan funding commitments, the fair value is estimated based on the difference between current levels of interest rates and the committed rates. The fair value of forward sales contracts is based on dealer quotes. The fair value estimates presented herein are based on pertinent information available to management as of June 30, 1999 and 1998. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these consolidated financial 71 SGV BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999 (Continued) - -------------------------------------------------------------------------------- statements since that date, and therefore, current estimates of fair value may differ significantly from the amounts presented herein. 15. CONVERSION TO CAPITAL STOCK FORM OF OWNERSHIP On June 28, 1995, the Association converted from a federally chartered mutual savings and loan association to a federally chartered stock savings and loan association. At that time, the Association established a liquidation account in an amount equal to its equity as reflected in the latest statement of financial condition used in the final conversion prospectus. The amount of the liquidation account as of March 31, 1995 was $13,763,000. The liquidation account will be maintained for the benefit of eligible account holders and supplemental eligible account holders who continue to maintain their accounts at the Association after the conversion. The liquidation account will be reduced annually to the extent that eligible account holders and supplemental eligible account holders have reduced their qualifying deposits as of each anniversary date. Subsequent increases will not restore an eligible account holder's or supplemental eligible account holder's interest in the liquidation account. In the event of a complete liquidation of the Association, each eligible account holder and supplemental eligible account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the current adjusted qualifying balances for accounts then held. Subsequent to the conversion, the Association may not declare or pay cash dividends on or repurchase any of its shares of common stock if the effect thereof would cause equity to be reduced below applicable regulatory capital maintenance requirements or if such declaration and payment would otherwise violate regulatory requirements. 72 SGV BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999 (Continued) - -------------------------------------------------------------------------------- 16. PARENT COMPANY FINANCIAL INFORMATION The following presents the unconsolidated financial statements of the parent company only, SGV Bancorp, Inc. (Note 1). SGV BANCORP, INC. (Parent company only) STATEMENTS OF FINANCIAL CONDITION AS OF JUNE 30, 1999 AND 1998
1999 1998 ------------------ ------------------ (In thousands) ASSETS: Cash and cash equivalents $ 608 $ 1,995 Investment securities available for sale 725 258 Mortgage-backed securities available for sale - 862 Investment in subsidiary 30,489 27,769 Receivable from subsidiary 764 982 Other assets 38 367 -------------------- -------------------- Total assets $ 32,624 $ 32,233 ==================== ==================== LIABILITIES AND STOCKHOLDERS' EQUITY: Accrued expenses and other liabilities $ 253 $ - -------------------- -------------------- Total liabilities 253 - Stockholders' equity 32,371 32,233 -------------------- -------------------- Total liabilities and stockholders' equity $ 32,624 $ 32,233 ==================== ====================
SGV BANCORP, INC. (Parent company only) STATEMENTS OF OPERATIONS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999
1999 1998 1997 --------------- --------------- --------------- (In thousands) Interest income $ 124 $ 266 $ 360 Other expenses (190) (249) (212) Income taxes 27 (7) (62) --------------- --------------- --------------- Earnings before equity in net earnings of subsidiary (39) 10 86 Equity in net earnings of subsidiary 2,587 1,477 645 --------------- --------------- --------------- Net earnings $ 2,548 $ 1,487 $ 731 =============== =============== ===============
73 SGV BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999 (Continued) - -------------------------------------------------------------------------------- SGV BANCORP, INC. (Parent company only) SUMMARY STATEMENTS OF CASH FLOWS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999
1999 1998 1997 ------------- ------------- -------------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 2,548 $ 1,487 $ 731 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: (Gain) loss on sale or redemption of investment securities available for sale (64) (5) 13 Equity in net earnings of subsidiary (2,587) (1,477) (645) Premium amortization on securities 4 15 19 Increase in accrued expenses and other liabilities 253 - - Decrease (increase) in other assets 329 (228) 74 --------------- --------------- ---------------- Net cash provided by (used in) operating activities 483 (208) 192 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of investment securities available for sale (586) (750) - Proceeds from sale or redemption of investment securities available for sale 187 2,005 1,487 Principal repayments on mortgage-backed securities 858 461 363 Principal repayment on loan to subsidiary 218 218 218 --------------- --------------- ---------------- Net cash provided by investing activities 677 1,934 2,068 CASH FLOWS FROM FINANCING ACTIVITIES: Exercise of stock options - 60 - Purchase of treasury stock (2,547) - (2,884) Other, net - 5 - --------------- --------------- ---------------- Net cash (used in) provided by financing activities (2,547) 65 (2,884) --------------- --------------- ---------------- Net (decrease) increase in cash and cash equivalents (1,387) 1,791 (624) CASH AND CASH EQUIVALENTS, beginning of year 1,995 204 828 --------------- --------------- ---------------- CASH AND CASH EQUIVALENTS, end of year $ 608 $ 1,995 $ 204 =============== =============== ================ NONCASH INVESTING ACTIVITIES DURING THE YEAR: 1999 1998 1997 --------------- --------------- ---------------- Change in net unrealized gain/loss on securities available for sale, net of taxes $ 3 $ (12) $ (39)
74 SGV BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999 (Continued) - -------------------------------------------------------------------------------- 17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of quarterly results for the years ended June 30, 1999 and 1998:
First Second Third Fourth (In thousands, except per share data) Quarter Quarter Quarter Quarter 1999 Interest income $7,537 $8,126 $8,095 $8,020 Interest expense 4,675 5,032 4,878 4,785 Provision for loan losses 269 210 280 210 Net earnings 566 624 701 657 Earnings per share - basic 0.25 0.28 0.32 0.30 Earnings per share - diluted 0.24 0.27 0.31 0.29 1998 Interest income $7,324 $7,459 $7,434 $7,385 Interest expense 4,817 4,840 4,533 4,471 Provision for loan losses 75 268 115 277 Net earnings 331 234 491 431 Earnings per share - basic 0.14 0.10 0.21 0.18 Earnings per share - diluted 0.14 0.09 0.20 0.17
18. SUBSEQUENT EVENTS On July 12, 1999, SGV and IndyMac Mortgage Holdings, Inc. (IndyMac) entered into an Agreement and Plan of Merger pursuant to which IndyMac would acquire SGV for cash. Under the terms of the merger agreement, each share of SGV common stock would be exchanged for $25.00 in cash. This price may be subject to adjustment as a result of changes in the net portfolio value of assets and liabilities of SGV. In no event will the purchase price per share be reduced below $22.50 or increased above $27.50 per share. IndyMac will acquire all of the shares outstanding and subject to options of SGV. The transaction is subject to the approval of the stockholders of both SGV and IndyMac as well as certain regulatory approvals including the OTS. The merger is expected to be completed in the first half of 2000. On July 25, 1999, the Association completed its acquisition of two branches of Citibank, California, a federal savings bank. The branch located in La Verne was combined with an existing branch located in the same shopping center. The second branch is located in Covina in a freestanding branch building at 100 North Azusa Avenue. The Association acquired approximately $37 million in total deposits from Citibank. The Association paid a one-time premium of 3.50% of the deposits acquired and purchased the branch in Covina for $475,000. 75 Item 9. Change in and Disagreements with Accountants on Accounting and - ----------------------------------------------------------------------- Financial Disclosure - -------------------- None. PART III Item 10. Directors and Executive Officers of the Registrant - ------------------------------------------------------------ Incorporated herein by this reference is the information set forth in the section entitled "Information with Respect to Nominees, Continuing Directors and Executive Officers" contained in the Company's Proxy Statement for its 1999 Annual Meeting of Stockholders (the "1999 Proxy Statement"). Pursuant to General Instruction G(3) to the Form 10-K, the Company's Proxy Statement for its 1999 Annual Meeting of Stockholders will be filed with the Commission not later than (20 days) after the end of the fiscal year covered by this Form 10-K. Item 11. Executive Compensation - -------------------------------- Incorporated herein by this reference is the information set forth in the section entitled "Executive Compensation" contained in the 1999 Proxy Statement. Pursuant to General Instruction G(3) to the Form 10-K, the Company's Proxy Statement for its 1999 Annual Meeting of Stockholders will be filed with the Commission not later than (20 days) after the end of the fiscal year covered by this Form 10-K. Item 12. Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------ Incorporated herein by this reference is the information set forth in the sections entitled "Security Ownership of Certain Beneficial Owners" and "Information with Respect to Nominees, Continuing Directors and Executive Officers" contained in the 1999 Proxy Statement. Pursuant to General Instruction G(3) to the Form 10-K, the Company's Proxy Statement for its 1999 Annual Meeting of Stockholders will be filed with the Commission not later than (20 days) after the end of the fiscal year covered by this Form 10-K. Item 13. Certain Relationships and Related Transactions - -------------------------------------------------------- Incorporated herein by this reference is the information set forth in the section entitled "Transactions with Certain Related Persons" contained in the 1999 Proxy Statement. Pursuant to General Instruction G(3) to the Form 10-K, the Company's Proxy Statement for its 1999 Annual Meeting of Stockholders will be filed with the Commission not later than (20 days) after the end of the fiscal year covered by this Form 10-K. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K - ------------------------------------------------------------------------- (a)(1) Financial Statements Description ----------- Independent Auditors' Report Consolidated Statements of Financial Condition as of June 30, 1999 and 1998 Consolidated Statements of Operations for Each of the Three Years in the Period Ended June 30, 1999 Consolidated Statements of Stockholders' Equity for Each of the Three Years in the Period Ended June 30, 1999 Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended June 30, 1999 Notes to Consolidated Financial Statements for Each of the Three Years in the Period Ended June 30, 1999 (a)(2) Financial Statement Schedules All schedules are omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or the notes thereto. 76 (a)(3) Exhibits (a) The following exhibits are filed as part of this report: 2.1 Agreement to Purchase Assets and Assume Liabilities by and between First Federal Savings and Loan Association of San Gabriel Valley and Citibank, Federal Savings Bank*** 2.2 Agreement and Plan of Merger dated as of July 12, 1999 by and between SGV Bancorp, Inc. and IndyMac Mortgage Holdings, Inc.**** 3.1 Certificates of Incorporation of SGV Bancorp, Inc.* 3.2 Bylaws of SGV Bancorp, Inc.* 4.0 Stock Certificate of SGV Bancorp, Inc.* 10.1 Employment Agreement between First Federal Savings and Loan Association of San Gabriel Valley and Barrett G. Andersen***** 10.2 Employment Agreement between SGV Bancorp, Inc. and Barrett G. Andersen***** 10.3 Employment Agreement between First Federal Savings and Loan Association of San Gabriel Valley and Ronald A. Ott***** 10.4 Employment Agreement between SGV Bancorp, Inc. and Ronald A. Ott (filed electronically with the SEC)***** 10.5 Form of Two-year Change in Control Agreement between First Federal Savings and Loan Association of San Gabriel Valley and certain executive officers***** 10.6 Form of Two-year Change in Control Agreement between SGV Bancorp, Inc. and certain executive officers***** 10.7 Form of One-year Change in Control Agreement between First Federal Savings and Loan Association of San Gabriel Valley and certain officers***** 10.8 Form of One-year Change in Control Agreement between SGV Bancorp, Inc. and certain officers***** 10.9 Form of Proposed First Federal Savings and Loan Association of San Gabriel Valley Employee Severance Compensation Plan* 10.10 First Federal Savings and Loan Association of San Gabriel Valley Employees' Savings & Profit Sharing Plan and Trust* 10.11 Form of First Federal Savings and Loan Association of San Gabriel Valley 1995 Supplemental Executive Retirement Plan* 10.12 First Federal Savings and Loan Association of San Gabriel Valley 1995 Directors Deferred Stock Unit Plan** 10.13 SGV Bancorp, Inc. Amended 1997 Stock-Based Incentive Plan***** 10.14 SGV Bancorp, Inc. 1995 Amended and Restated Stock-Based Incentive Plan***** 11.0 Computation of Earnings Per Share (filed herewith under Item 8) 21.0 Subsidiary Information is incorporated herein by reference to "Part I - Subsidiary Activities" 23.0 Consent of Independent Accountant 27.0 Financial Data Schedule (filed electronically with the SEC) (b) Reports on Form 8-K i. On July 14, 1999, the Company filed a Current Report on Form 8-K to announce that it had entered into a definitive merger agreement with IndyMac Mortgage Holdings, Inc. ii. On April 5, 1999, the Company filed a Current Report on Form 8-K to announce that the Association had entered into a definitive agreement with Citibank, California to acquire two of Citibank's branches. ________________ * Incorporated herein by reference from the Exhibits to the Registration Statement on Form S-1, as amended, filed on March 6, 1995, Registration No. 33- 90018. ** Incorporated herein by reference from the Definitive Proxy material for the Registrant's 1995 Annual Meeting of Stockholders, filed on December 7, 1995. *** Incorporated herein by reference from the Exhibits to the Current Report on Form 8-K filed on April 5, 1999, Registration No. 33-90018. **** Incorporated herein by reference from the Exhibits to the Current Report on Form 8-K filed on July 14, 1999, Registration No. 33-90018. ***** Incorporated herein by reference from the Exhibits to the Annual Report on Form 10-K filed on September 28, 1998, Registration No. 33-90018. 77 CONFORMED SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SGV BANCORP, INC. By: /s/ Barrett G. Andersen ----------------------- Barrett G. Andersen DATED: September 22, 1999 President, Chief Executive Officer and Director Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dated indicated.
Name Title Date ---- ----- ---- /s/ Barrett G. Andersen President, Chief Executive Officer September 22, 1999 - ----------------------------------------- Barrett G. Andersen and Director (principal executive officer) /s/ Ronald A. Ott Executive Vice President, Chief September 22, 1999 - ----------------------------------------- Ronald A. Ott Financial Officer and Treasurer (principal accounting officer) /s/ John D. Randall Chairman of the Board September 22, 1999 - ----------------------------------------- John D. Randall of Directors /s/ Royce A. Stutzman Director September 22, 1999 - ----------------------------------------- Royce A. Stutzman /s/ Irven G. Reynolds Director September 22, 1999 - ----------------------------------------- Irven G. Reynolds /s/ Benjamin S. Wong Director September 22, 1999 - ----------------------------------------- Benjamin S. Wong /s/ Thomas A. Patronite Director September 22, 1999 - ----------------------------------------- Thomas A. Patronite
78 CORPORATE INFORMATION Executive Offices Special Counsel Transfer Agent and Registrar SGV Bancorp, Inc. Muldoon, Murphy & Faucette Chase Mellon 225 North Barranca Street 400 South Hope Street West Covina, CA 91791 4th Floor Los Angeles, CA 90071 Certified Public Accountants Deloitte & Touche, LLP Financial Information Annual Meeting For Information about SGV Bancorp, The Annual Meeting of Stockholders Inc. and its subsidiaries, contact: will be held at 2:00 p.m. Ronald A. Ott Market Information on November 18, 1999, at the 225 North Barranca Street Radisson Hotel West Covina, CA 91791 Symbol: SGVB San Gabriel Valley (626)859-4210 Quoted: NASDAQ-NMS 14635 Baldwin Park Town Ctr Baldwin Park, CA 91706 Branch Locations Corporate Office 225 North Barranca Street West Covina, CA 91791 Covina Hacienda Heights La Verne 144 North Second Avenue 2233 South Hacienda Boulevard 2111 Bonita Avenue Covina, CA 91723 Hacienda Heights, CA 91745 La Verne, CA 91750 City of Industry Arcadia North La Verne 220 North Hacienda Boulevard One East Foothill Boulevard 1413 Foothill Boulevard City of Industry, CA 91744 Arcadia, CA 91006 La Verne, CA 91750 Duarte 1475 East Huntington Drive Duarte, CA 91010
79 SGV BANCORP, INC. Directors Benjamin S. Wong, Ph.D. General Manager Barrett Andersen Irven G. Reynolds The Great Wall Restaurant President Owner Chief Executive Officer Reynolds Buick/GMC Trucks Royce A. Stutzman, CPA Managing Partner John D. Randall, Ed.D. Thomas A. Patronite Vicente, Lloyd, & Stutzman Educational Consultant President CPAs Azusa Engineering, Inc. Officers Barrett Andersen President Ronald A. Ott Edie J. Beachboard Chief Executive Officer Executive Vice President Corporate Secretary Chief Financial Officer Vice President Human Resources FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF SAN GABRIEL VALLEY Barrett Andersen President Ronald A. Ott Jeanne R. Thompson Chief Executive Officer Executive Vice President Senior Vice President Chief Financial Officer Retail Banking Michael A. Quigley Senior Vice President Dale J. Schiering Edie J. Beachboard Retail Banking, Marketing Senior Vice President Corporate Secretary Administrative Services Chief Lending Officer Vice President Human Resources Douglas E. Nigbor Vice President Raymond A. Spirko Jeffrey E. Foreman Marketing and Corporate Vice President Vice President Communications Asset/Liability Management Director of Internal Audit Information Systems M. Douglass Barry Vice President Loan Origination
80 EX-23 2 EXHIBIT 23 EXHIBIT 23.0 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 333-06913 and 333-62977 of SGV Bancorp, Inc. on Form S-8 of our report dated August 31, 1999, appearing in the Annual Report on Form 10-K of SGV Bancorp, Inc. for the year ended June 30, 1999. /s/ Deloitte & Touche LLP Costa Mesa, California September 17, 1999 EX-27 3 EXHIBIT 27
9 THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR JUN-30-1999 JUL-01-1998 JUN-30-1999 4,575,000 0 4,940,000 0 50,687,000 37,717,000 33,984,000 356,934,000 1,845,000 468,730,000 324,106,000 0 4,251,000 108,002,000 0 0 27,000 32,344,000 468,730,000 25,978,000 5,238,000 562,000 31,778,000 13,532,000 19,370,000 12,408,000 969,000 71,000 7,219,000 4,291,000 0 0 0 2,548,000 1.16 1.13 7.37 1,524,000 0 446,000 0 1,425,000 564,000 15,000 1,845,000 1,845,000 0 0
-----END PRIVACY-ENHANCED MESSAGE-----