<PAGE>
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box: [_]Confidential, For Use of the
[_]Preliminary Proxy Statement Commission Only (as permitted by
Rule 14a-6(e)(2))
[X]Definitive Proxy Statement
[_]Definitive Additional Materials
[_]Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
IndyMac Mortgage Holdings, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_]No fee required.
[_]Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-
11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing
fee is calculated and state how it was determined):
(4)Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5)Total fee paid:
- --------------------------------------------------------------------------------
[X]Fee paid previously with preliminary materials.
- --------------------------------------------------------------------------------
[_]Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1)Amount Previously Paid:
- --------------------------------------------------------------------------------
(2)Form, Schedule or Registration Statement No.:
- --------------------------------------------------------------------------------
(3)Filing Party:
- --------------------------------------------------------------------------------
(4)Date Filed:
November 5, 1999
- --------------------------------------------------------------------------------
<PAGE>
Joint Proxy Statement
for the Special Meetings SGVBancorp
of Stockholders of [LOGO OF SGV BANCORP]
IndyMac Mortgage Holdings, Inc.
and
SGV Bancorp, Inc.
PROPOSED MERGER
(TO BE VOTED UPON BY INDYMAC AND SGV STOCKHOLDERS)
Your boards of directors have agreed to a transaction which will result in
the acquisition of SGV Bancorp, Inc., a thrift holding company headquartered in
West Covina, California, by IndyMac Mortgage Holdings, Inc., a real estate
investment trust, or REIT, headquartered in Pasadena, California. IndyMac will
acquire SGV by forming a new, wholly-owned subsidiary of IndyMac and merging it
into SGV.
SGV's common stock is traded on the Nasdaq National Market under trading
symbol "SGVB." If we complete the proposed merger, each SGV stockholder will
receive the per share purchase price of approximately $25.00 in cash for each
share of SGV common stock the stockholder owns. This cash payment amount is
subject to adjustment under certain circumstances, as described in this joint
proxy statement.
PROPOSED TERMINATION OF INDYMAC'S STATUS AS A REIT
(TO BE VOTED UPON BY INDYMAC STOCKHOLDERS)
IndyMac's Board of Directors has approved IndyMac's termination of its
status as a REIT under the Internal Revenue Code of 1986, as amended. If
approved by the IndyMac stockholders, IndyMac will terminate its REIT status
and IndyMac will not be a REIT effective January 1, 2000. If IndyMac terminates
its status as a REIT, the IndyMac stockholders will no longer receive at least
95% of IndyMac's taxable income in the form of dividends.
PROPOSED AMENDMENTS TO INDYMAC'S CERTIFICATE OF INCORPORATION
(TO BE VOTED UPON BY INDYMAC STOCKHOLDERS)
In connection with the proposals described above, IndyMac's Board of
Directors has also approved certain amendments to IndyMac's Certificate of
Incorporation. These amendments would change IndyMac's name to IndyMac Bancorp,
Inc. and would delete certain provisions of IndyMac's Certificate of
Incorporation which were included in IndyMac's Certificate to enable IndyMac
(1) to preserve its status as a REIT, and (2) to prohibit entities that are
exempt from federal income taxes from acquiring or holding IndyMac capital
stock which, because of IndyMac's REIT status, could have adverse tax
consequences on real estate mortgage investment conduits or taxable mortgage
pools in which IndyMac has an interest. These amendments will be effected only
if the IndyMac stockholders approve the amendments by the required vote.
If you are an IndyMac stockholder, you should consider carefully the risk
factors beginning on page 14 of this joint proxy statement.
The date of this joint proxy statement is November 5, 1999. It is first
being mailed to you on or about November 5, 1999.
Neither the SEC nor any state securities commission has determined
if this joint proxy statement is accurate or complete. Any
representation to the contrary is a criminal offense.
<PAGE>
INDYMAC MORTGAGE HOLDINGS, INC.
155 North Lake Avenue
Pasadena, California 91101
Notice of Special Meeting of Stockholders
to be held on December 14, 1999
IndyMac Mortgage Holdings, Inc. will hold a special meeting of stockholders
at the Pasadena Hilton, located at 168 South Los Robles Avenue in Pasadena,
California, at 10:00 a.m. local time on December 14, 1999, to vote on:
(1) Termination of REIT Status. IndyMac terminating its status as a real
estate investment trust, or REIT, under the Internal Revenue Code of
1986, as amended, so that IndyMac will not be a REIT effective January
1, 2000.
(2) Merger. The Amended and Restated Agreement and Plan of Merger, dated
as of July 12, 1999, and amended and restated as of October 25, 1999,
by and between IndyMac Mortgage Holdings, Inc. and SGV Bancorp, Inc.,
and the transactions contemplated by that agreement and plan of
merger, including IndyMac's formation of a new, wholly-owned
subsidiary and the merger of that subsidiary with and into SGV
Bancorp, Inc.
(3) Amendments to IndyMac's Certificate of Incorporation.
(a) Amending Article I of IndyMac's Certificate of Incorporation to
change the name of the corporation from IndyMac Mortgage Holdings,
Inc. to IndyMac Bancorp, Inc.
(b) Deleting Article VI of IndyMac's Certificate of Incorporation.
Article VI contains certain restrictions on the acquisition and
transfer of shares of IndyMac common stock designed to preserve
IndyMac's status as a REIT under the Internal Revenue Code of
1986, as amended.
(c) Deleting Article VII of IndyMac's Certificate of Incorporation.
Article VII prohibits holding of IndyMac capital stock by entities
that could result in the imposition of a penalty tax on IndyMac or
endanger the tax status of real estate mortgage investment
conduits or taxable mortgage pools in which IndyMac has an
interest.
(4) Other Proposals. Such other proposals as may properly come before the
special meeting, including adjourning the special meeting to permit,
if necessary, further solicitation of proxies.
Record holders of IndyMac common stock at the close of business on November
3, 1999, will receive notice of and may vote at the special meeting, including
any adjournments or postponements. The termination of IndyMac's status as a
REIT, effective January 1, 2000, and the merger agreement require approval by
the holders of a majority of all shares present, in person or by proxy, at the
special meeting. The amendments to IndyMac's Certificate of Incorporation
require approval by the holders of a majority of the shares of IndyMac common
stock outstanding and entitled to vote.
<PAGE>
Your vote is very important. Whether or not you plan to attend the special
meeting, please take the time to vote by completing and mailing the enclosed
proxy card or by submitting your voting instructions electronically or via
telephone in the manner indicated on the enclosed proxy card. If you sign,
date, and mail your proxy card without indicating how you want to vote, we will
vote your proxy in favor of the termination of REIT status, the merger
agreement and each amendment to IndyMac's Certificate of Incorporation. If you
do not return your proxy card, vote electronically or telephonically, or attend
and vote in favor of each proposal at the special meeting, it will not affect
the vote on the termination of IndyMac's status as a REIT effective January 1,
2000 or the agreement and plan of merger, but will have the effect of a vote
against each amendment to IndyMac's Certificate of Incorporation.
By Order of the Board of Directors
/s/ Melissa K. Gerard
Melissa K. Gerard
Secretary
November 5, 1999
Your board of directors unanimously recommends that you vote for approval of
the termination of IndyMac's status as a REIT, the merger agreement and each of
the amendments to IndyMac's Certificate of Incorporation.
<PAGE>
Please Note
We have not authorized anyone to provide you with any information other
than the information included in this document and the documents we refer you
to. If someone provides you with other information, please do not rely on it as
being authorized by SGV or IndyMac.
This joint proxy statement has been prepared as of November 5, 1999. There
may be changes in the affairs of SGV or IndyMac since that date which are not
reflected in this document.
As used in this joint proxy statement, the following terms refer to the
following entities: (1) "SGV" refers to SGV Bancorp, Inc.; (2) "First Federal"
refers to First Federal Savings and Loan Association of San Gabriel Valley, the
wholly-owned, thrift subsidiary of SGV; and (3) "IndyMac" refers to IndyMac
Mortgage Holdings, Inc. Where the context requires, references to SGV and
IndyMac refer to those entities and their respective subsidiaries and
affiliates.
How to Obtain Additional Information
This joint proxy statement incorporates important business and financial
information about IndyMac that is not included in or delivered with this
document. This information is described on page 129 under "Where You Can Find
More Information." You can obtain free copies of this information by writing or
calling:
Melissa K. Gerard
Secretary
IndyMac Mortgage Holdings, Inc.
155 North Lake Avenue
Pasadena, California 91101
(Telephone: (800) 669-2300)
In order to obtain timely delivery of the documents, you must request the
information by December 7, 1999.
<PAGE>
A WARNING ABOUT FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements about IndyMac following
the merger. These statements can be identified by our use of words like
"expect," "may," "could," "intend," "project," "estimate" or "anticipate."
These forward-looking statements reflect our current views, but they are based
on assumptions and are subject to risks, uncertainties and other factors. These
factors include the following:
(1) the effect of economic and market conditions;
(2) the level and volatility of interest rates;
(3) the actions undertaken by both current and potential new competitors;
(4) the availability of funds from IndyMac's lenders to fund future
mortgage loan originations or portfolio investments;
(5) the impact of current, pending or future legislation and regulations;
(6) the timing and uncertainty of the regulatory approval process;
(7) the timing and uncertainty related to other consents and approvals
which may be required;
(8) the changing nature of IndyMac's business;
(9) the nature and size of First Federal; and
(10) other risk factors outlined in this joint proxy statement and the
reports that IndyMac files with the Securities and Exchange
Commission, or "SEC," including its Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.
The forward-looking earnings estimates included in this joint proxy
statement have not been examined or compiled by the independent public
accountants of SGV or IndyMac, nor have our independent accountants applied any
procedures to our estimates. Accordingly, such accountants do not express an
opinion or any other form of assurance on them. Further information on other
factors that could affect the financial results of IndyMac after the merger is
included in IndyMac's SEC filings incorporated by reference in this joint proxy
statement.
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MEETINGS
Q: What am I being asked to vote upon?
A: To IndyMac Stockholders. You are being asked to approve:
(1) a proposal to terminate IndyMac's status as a real estate investment
trust or REIT under the Internal Revenue Code of 1986, as amended, so
that IndyMac will not be a REIT effective January 1, 2000;
If and when IndyMac terminates its status as a REIT, the IndyMac
stockholders will no longer receive at least 95% of IndyMac's taxable income in
the form of dividends.
(2) the merger agreement which provides for IndyMac acquiring SGV by
forming a new, wholly-owned subsidiary and merging that subsidiary
with and into SGV; and
(3) the amendments to IndyMac's Certificate of Incorporation described in
the notice to IndyMac's stockholders.
If you approve the amendment to IndyMac's Certificate of Incorporation that
changes the name of the corporation by the required vote, that amendment will
become effective only if and when we complete the merger. If you approve any or
all of the other amendments, those amendments will become effective only if and
when we terminate our REIT status.
To SGV Stockholders. You are being asked to approve:
(1) the merger agreement and the related plan of merger which provides for
(a) your receipt of $25.00 in cash for each share of SGV common stock
you own, subject to certain adjustments, and (b) IndyMac acquiring SGV
by forming a new, wholly-owned subsidiary and merging that subsidiary
with and into SGV.
Q: What should I do now?
A: Just indicate on your proxy card how you want to vote, and sign and mail it
in the enclosed envelope so that it will be delivered before the voting closes
at your special meeting, and your shares will be represented at your special
meeting. If you are an IndyMac stockholder, you may also vote electronically or
telephonically as indicated on your proxy card.
If you sign and send in your proxy card and do not indicate how you want to
vote, your proxy will be voted in favor of the proposal to approve and adopt
the merger agreement and if you are an SGV stockholder, the plan of merger; and
if you are an IndyMac stockholder, the termination of IndyMac's REIT status,
and in favor of each amendment to IndyMac's Certificate of Incorporation.
If you are an IndyMac stockholder and you do not sign and send in your
proxy card, vote electronically or telephonically, or attend and vote at
IndyMac's special meeting, it will not affect the vote on the termination of
IndyMac's status as a REIT or the merger agreement but will have the effect of
a vote against each of the amendments to IndyMac's Certificate of
Incorporation.
<PAGE>
If you are an SGV stockholder and you do not sign and send in your proxy
card or attend and vote at SGV's special meeting, it will have the effect of a
vote against the merger agreement and the plan of merger.
Q: If my shares are held in "street name" by my broker, will my broker vote my
shares for me?
A: Your broker will vote your shares of common stock only if you provide
instructions on how to vote. You should instruct your broker how to vote your
shares, following the directions your broker provides. If you do not provide
instructions to your broker, your shares will not be voted.
Q: If I am an SGV stockholder, should I send in my stock certificates now?
A: No. After the merger is completed, we will send you written instructions for
exchanging your stock certificates for the appropriate cash payment amount.
Q: Who can help answer your questions?
A: If you want additional copies of this document, or if you want to ask any
questions about the merger, you should contact:
if you are an SGV stockholder:
Ronald A. Ott Executive Vice President, Chief Financial Officer and
Treasurer
SGV Bancorp, Inc.
225 North Barranca Street
West Covina, California 91791
(626) 859-4250
or
if you are an IndyMac stockholder:
Pam Marsh
Director of Investor and Media Relations
Investor Relations Department
IndyMac Mortgage Holdings, Inc.
155 North Lake Avenue
Pasadena, California 91101
(800) 669-2300 extension 8465
<PAGE>
TABLE OF CONTENTS
<TABLE>
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SUMMARY................................................................... 1
The Companies........................................................... 1
IndyMac's Proposal to Terminate Its REIT Status......................... 1
The Merger ............................................................. 1
Amendments to IndyMac's Certificate of Incorporation.................... 1
What SGV Stockholders Will Receive in the Merger........................ 2
What IndyMac Stockholders Will Receive in the Merger.................... 2
Effect of the Merger on SGV Options..................................... 2
Effect of the Merger on IndyMac Options and Stock Rights................ 2
Dissenters' Rights of SGV Stockholders.................................. 2
Dissenters' Rights of IndyMac Stockholders.............................. 3
Federal Income Tax Consequences of the Merger........................... 3
Comparative Market Prices of Common Stock............................... 3
SGV's Reasons for the Merger............................................ 3
IndyMac's Reasons for the Merger and for Terminating its REIT Status ... 3
Opinion of SGV's Financial Advisor...................................... 4
Special Meeting of SGV Stockholders..................................... 4
Special Meeting of IndyMac Stockholders................................. 4
SGV Stockholder Vote Required to Approve the Merger Agreement .......... 4
IndyMac Stockholder Vote Required to Approve the Termination of REIT
Status, the Merger Agreement and the Amendments to IndyMac's
Certificate of Incorporation.......................................... 5
Voting Rights at the SGV Special Meeting................................ 5
Voting Rights at the IndyMac Special Meeting............................ 5
SGV's Recommendation to its Stockholders................................ 6
IndyMac's Recommendations to its Stockholders........................... 6
Share Ownership of Management and Certain Stockholders.................. 7
Interests of SGV's Directors and Officers That May Be Different from
Yours................................................................. 7
Effective Time of the Merger............................................ 7
Exchange of SGV Stock Certificates for the Cash Payment................. 7
Regulatory Approval and Other Conditions Necessary to Complete the
Merger................................................................ 8
Waiver, Amendment, and Termination...................................... 8
Accounting Treatment.................................................... 9
Unaudited Historical and Pro Forma Comparative Per Share Data........... 9
Selected Historical Consolidated Financial Data......................... 9
RISK FACTORS.............................................................. 14
THE SGV SPECIAL MEETING................................................... 18
Purpose................................................................. 18
Date, Place, and Time................................................... 18
Record Date, Voting Rights, Required Vote, and Revocability of Proxies.. 18
Solicitation of Proxies................................................. 20
</TABLE>
i
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Dissenters' Rights..................................................... 20
Recommendation......................................................... 23
THE INDYMAC SPECIAL MEETING.............................................. 24
Purpose................................................................ 24
Date, Place, and Time.................................................. 24
Record Date, Voting Rights, Required Vote, and Revocability of
Proxies.............................................................. 24
Solicitation of Proxies................................................ 26
Dissenters' Rights..................................................... 27
Recommendations........................................................ 27
THE MERGER............................................................... 28
The Merger............................................................. 28
What SGV Stockholders Will Receive in the Merger....................... 28
What IndyMac Stockholders Will Receive in the Merger................... 30
Effect of the Merger on SGV Options.................................... 30
Effect of the Merger on IndyMac Options and Stock Rights............... 30
Certain Federal Income Tax Consequences of the Merger.................. 31
Background of and Reasons for the Merger............................... 32
Opinion of SGV's Financial Advisor..................................... 38
Effective Time of the Merger........................................... 45
Distribution of Merger Consideration to SGV Stockholders............... 45
Conditions to Completion of the Merger................................. 46
Regulatory Approval Needed to Complete the Merger...................... 48
Waiver, Amendment, and Termination..................................... 48
Conduct of Business Pending the Merger................................. 52
Management and Operations After the Merger............................. 53
Interests of Certain Persons in the Merger............................. 53
Accounting Treatment................................................... 55
Expenses and Fees...................................................... 55
TERMINATION OF INDYMAC'S REIT STATUS..................................... 56
General................................................................ 56
Consequences of Termination of REIT Status............................. 56
Sale of Ownership Interest by Countrywide.............................. 57
Recommendation......................................................... 57
DESCRIPTION OF AMENDMENTS TO INDYMAC'S CERTIFICATE OF INCORPORATION...... 58
General................................................................ 58
Article I Amendment--Changing the Name of the Corporation.............. 58
Article VI Amendment--Deletion of Acquisition and Transfer Restrictions
on IndyMac Common Stock.............................................. 58
Article VII Amendment--Deletion of Restrictions on Acquisition of
IndyMac Common Stock by Certain Organizations........................ 59
Recommendation......................................................... 59
</TABLE>
ii
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COMPARATIVE MARKET PRICES AND DIVIDENDS.................................. 60
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS.............. 62
Unaudited Pro Forma Condensed Combined Statement of Financial
Condition............................................................ 63
Unaudited Pro Forma Condensed Combined Statements of Income............ 64
Notes to Unaudited Pro Forma Financial Statements...................... 66
BUSINESS OF INDYMAC...................................................... 71
General................................................................ 71
Recent Developments.................................................... 71
BUSINESS OF SGV.......................................................... 72
General................................................................ 72
Market Area and Competition............................................ 72
Lending Activities..................................................... 73
Investment Activities.................................................. 87
Sources of Funds....................................................... 90
Borrowings............................................................. 92
Subsidiary Activities.................................................. 93
Personnel.............................................................. 94
Regulation and Supervision............................................. 94
Federal and State Taxation............................................. 104
MANAGEMENT'S DISCUSSION AND ANALYSIS OF SGV.............................. 107
Management of Interest Rate Risk....................................... 107
Average Balance Sheet.................................................. 110
Rate/Volume Analysis................................................... 111
Comparison of Operating Results for the Years Ended June 30, 1999 and
June 30, 1998........................................................ 111
Comparison of Financial Condition at June 30, 1999 and June 30, 1998... 115
Comparison of Operating Results for the Years Ended June 30, 1998 and
June 30, 1997........................................................ 116
Comparison of Financial Condition at June 30, 1998 and June 30, 1997... 120
Impact of Inflation.................................................... 121
Impact of New Accounting Standards..................................... 121
Year 2000.............................................................. 122
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........... 125
Certain Beneficial Owners.............................................. 125
Management............................................................. 126
CERTAIN REGULATORY CONSIDERATIONS........................................ 127
ADDITIONAL MATTERS RELATING TO THE SPECIAL MEETINGS...................... 127
STOCKHOLDER PROPOSALS.................................................... 128
INDEPENDENT AUDITORS..................................................... 128
</TABLE>
iii
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WHERE YOU CAN FIND MORE INFORMATION........................................ 129
INDEX TO SGV FINANCIAL STATEMENTS.......................................... F-1
</TABLE>
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APPENDICES:
Appendix A --Amended and Restated Agreement and Plan of Merger, dated as
of July 12, 1999, and amended and restated as of October 25,
1999, by and between SGV Bancorp, Inc. and IndyMac Mortgage
Holdings, Inc.
Appendix B --Plan of Merger by and between IndyMac Merger Subsidiary, Inc.
and SGV Bancorp, Inc.
Appendix C --Opinion of Sandler O'Neill & Partners, L.P.
Appendix D --Section 262 of the Delaware General Corporation Law
Appendix E --IndyMac's Certificate of Incorporation and Proposed
Amendments
Appendix F --Form of Proxy for SGV Bancorp, Inc.
Appendix G --Form of Proxy for IndyMac Mortgage Holdings, Inc.
</TABLE>
iv
<PAGE>
SUMMARY
This summary highlights selected information from this joint proxy
statement and may not contain all of the information that is important to you.
You should carefully read this entire document and the other documents we refer
to in this document. These will give you a more complete description of the
merger and the other proposals we are asking you to consider. For more
information about IndyMac, see "Where You Can Find More Information" on page
129. We have included page references in this summary to direct you to other
places in this joint proxy statement where you can find a more complete
description of the topics we have summarized.
The Companies (See page 71 for IndyMac, page 72 for SGV)
INDYMAC MORTGAGE
HOLDINGS, INC.
155 North Lake Avenue
Pasadena, California 91101
(800) 669-2300
IndyMac is a Delaware corporation and a real estate investment trust or
REIT located in Pasadena, California. As of June 30, 1999, IndyMac had total
assets of approximately $3.76 billion and stockholders' equity of approximately
$893 million.
SGV BANCORP, INC.
225 North Barranca Street
West Covina, California 91791
(626) 859-4250
SGV is a Delaware corporation and a registered thrift holding company
located in West Covina, California. As of June 30, 1999, SGV had total assets
of approximately $469 million, total deposits of approximately $324 million,
and stockholders' equity of approximately $32 million. Its thrift subsidiary,
First Federal operates eight branches in the eastern part of the greater Los
Angeles metropolitan area.
IndyMac's Proposal to Terminate Its REIT Status (See page 56)
If you are an IndyMac stockholder, you will be asked at the IndyMac special
meeting to consider a proposal to terminate IndyMac's status as a REIT under
the Internal Revenue Code of 1986, as amended, on January 1, 2000. If approved
by the IndyMac stockholders, IndyMac will not be a REIT effective January 1,
2000. When IndyMac terminates its status as a REIT, the IndyMac stockholders
will no longer receive at least 95% of IndyMac's taxable income in the form of
dividends.
The Merger (See page 28)
IndyMac will acquire SGV by means of the merger of a newly-formed, wholly-
owned subsidiary of IndyMac with and into SGV. After the merger, IndyMac will
be renamed IndyMac Bancorp, Inc., and will continue to be managed by the
directors and officers of IndyMac. As a result of the merger, IndyMac will
become a thrift holding company regulated by the Office of Thrift Supervision
or "OTS."
Amendments to IndyMac's Certificate of Incorporation (See page 58)
If you are an IndyMac stockholder, you will be asked at the IndyMac special
meeting to consider and approve certain
1
<PAGE>
amendments to IndyMac's Certificate of Incorporation. These amendments, if
approved, would change IndyMac's name to IndyMac Bancorp, Inc. and delete
certain provisions of IndyMac's Certificate of Incorporation which contain
restrictions on the acquisition and transfer of shares of IndyMac common stock
which were designed (1) to preserve IndyMac's status as a REIT under the
Internal Revenue Code of 1986, as amended, and (2) to prohibit entities that
are exempt from federal income taxes from acquiring or holding IndyMac capital
stock which, because of IndyMac's REIT status, could have adverse tax
consequences on real estate mortgage investment conduits or taxable mortgage
pools in which IndyMac has an interest. If approved, the amendment changing
IndyMac's name will become effective when and only if the merger is completed,
and the other amendments will become effective when and if IndyMac terminates
its status as a REIT. IndyMac's Certificate of Incorporation containing the
full text of these amendments is attached to this joint proxy statement as
Appendix E.
What SGV Stockholders Will Receive in the Merger (See page 28)
If we complete the merger and you are an SGV stockholder, you will receive
a cash payment in an amount of $25.00, subject to adjustment, for each share of
SGV common stock you own. The $25.00 per share cash payment may increase to as
much as $27.50 or decrease to as little as $22.50 due to changes in SGV's net
portfolio value. The per share cash payment also may increase if IndyMac
extends the time for completion of the merger because the OTS has not approved
the merger.
What IndyMac Stockholders Will Receive in the Merger (See page 30)
If we complete the merger and you are an IndyMac stockholder, you will
retain the shares of IndyMac common stock you own and will not receive any
additional consideration.
Effect of the Merger on SGV Options (See page 30)
SGV has granted certain options and other rights to acquire its common
stock. If the merger is completed, these options and rights, whether or not
exercisable, will be cancelled in exchange for a cash payment equal to the
difference between the per share purchase price and the exercise price of the
option or right.
Effect of the Merger on IndyMac Options and Stock Rights (See page 30)
IndyMac has granted options and other rights to acquire IndyMac common
stock under its stock incentive plans and stock option plans. The merger will
have no effect on these options or rights.
Dissenters' Rights of SGV Stockholders (See page 20)
If you are an SGV stockholder, you have certain dissenters' rights in the
merger under the Delaware General Corporation Law. This means that if you are
not satisfied with the amount you are receiving in the merger, you are legally
entitled to have the value of your shares independently determined and to
receive payment based on that valuation. To exercise your appraisal rights, you
must (1) deliver a written objection to the merger to SGV at or before the
special meeting, and (2) not vote in favor of the merger. Objections to
2
<PAGE>
the merger should be addressed to SGV's Corporate Secretary and sent to SGV at
225 North Barranca Street, West Covina, California 91791. Your failure to
follow exactly the procedures specified under Delaware law will result in the
loss of your appraisal rights. A copy of the appraisal rights provisions of
Delaware law is attached to this joint proxy statement as Appendix D.
Dissenters' Rights of IndyMac Stockholders (See page 27)
If you are an IndyMac stockholder you do not have dissenters' rights in
connection with the merger or in connection with IndyMac terminating its status
as a REIT or in connection with any of the amendments to IndyMac's Certificate
of Incorporation.
Federal Income Tax Consequences of the Merger (See page 31)
For federal income tax purposes, the merger will be treated as a taxable
sale or exchange of shares of SGV common stock for cash by each holder of SGV
common stock (including any holder of dissenting shares). The amount of gain or
loss to be recognized by each stockholder of SGV will be measured by the
difference between the amount of cash received by such stockholder in
connection with the merger for his or her shares of SGV common stock (including
dissenting shares) and such stockholder's tax basis in such shares of common
stock at the effective time of the merger.
Comparative Market Prices of Common Stock (See page 60)
Shares of IndyMac common stock are traded on the New York Stock Exchange
under the symbol "NDE." Shares of SGV common stock are traded on the Nasdaq
National Market under the symbol "SGVB." The table shows you the closing sales
prices for IndyMac and SGV common stock on July 12, 1999, the last trading day
before we announced the execution of the merger agreement, and on November 3,
1999, the latest practicable date before the mailing of this joint proxy
statement.
<TABLE>
<CAPTION>
IndyMac SGV
Common Stock Common Stock
------------ ------------
<S> <C> <C>
July 12, 1999......................................... $16.5625 $21.25
November 3, 1999...................................... $13.00 $21.75
</TABLE>
You should obtain current stock price quotations for IndyMac common stock
and SGV common stock.
SGV's Reasons for the Merger (See page 37)
SGV believes that the merger is in the best interests of SGV and its
stockholders for a variety of reasons including:
(1) the amount of the per share purchase price compared to the market value
of SGV common stock;
(2) the opinion of SGV's financial advisor as to the fairness, from a
financial point of view, of the per share purchase price; and
(3) the increased competition facing financial services companies such as
SGV.
IndyMac's Reasons for the Merger and for Terminating its REIT Status (See page
36)
IndyMac believes that the merger will provide an enhanced opportunity to
its stockholders. The merger and IndyMac's termination of its REIT status are
both part of IndyMac's strategy to become a growth-
3
<PAGE>
oriented company by converting from a REIT to a depository institution with
additional and more stable funding sources. Over the long term, IndyMac
believes that the benefits from becoming a growth oriented company will be
greater than the tax obligation it will incur as a result of terminating its
REIT status, thereby increasing the returns to stockholders.
Opinion of SGV's Financial Advisor (See page 38)
SGV has received an opinion of Sandler O'Neill & Partners, L.P., that the
per share purchase price is fair, from a financial point of view, to SGV's
stockholders. The full text of this opinion is attached to this joint proxy
statement as Appendix C. We encourage you to read this opinion.
Special Meeting of SGV Stockholders (See page 18)
The special meeting of the SGV stockholders will be held at the Radisson
Hotel San Gabriel Valley, located at 14635 Baldwin Park Center in Baldwin Park,
California at 10:00 a.m., local time on December 14, 1999. At the SGV special
meeting, SGV will ask the SGV stockholders:
(1) to approve the merger agreement and the plan of merger and the
transactions contemplated thereby; and
(2) to act on any other matters that may be put to a vote at the SGV
special meeting.
In order for the SGV special meeting to be held, a quorum must be present.
A quorum is established when a majority of the outstanding shares of SGV common
stock are represented at the special meeting either in person or by proxy.
Special Meeting of IndyMac Stockholders (See page 24)
The special meeting will be held at the Pasadena Hilton, located at 168
South Los Robles Avenue in Pasadena, California, at 10:00 a.m., local time, on
December 14, 1999. At the IndyMac special meeting, IndyMac will ask the IndyMac
stockholders:
(1) to approve the termination of IndyMac's REIT status effective January
1, 2000;
(2) to approve the merger agreement and the transactions contemplated
thereby;
(3) to approve the amendments to IndyMac's Certificate of Incorporation
described in the notice to IndyMac's stockholders; and
(4) to act on any other matters that may be put to a vote at the IndyMac
special meeting.
In order for the IndyMac special meeting to be held, a quorum must be
present. A quorum is established when a majority of the outstanding shares of
IndyMac common stock are represented at the IndyMac special meeting either in
person or by proxy.
SGV Stockholder Vote Required to Approve the Merger Agreement (See page 19)
Assuming that a quorum is present at the SGV special meeting, to approve
the merger agreement and the plan of merger, stockholders who own a majority of
the outstanding shares of SGV common stock
4
<PAGE>
entitled to vote must vote for the merger agreement and the plan of merger.
IndyMac Stockholder Vote Required to Approve the Termination of REIT Status,
the Merger Agreement and the Amendments to IndyMac's Certificate of
Incorporation (See page 25)
Assuming that a quorum is present at the IndyMac special meeting, to
approve the termination of IndyMac's status as a REIT effective January 1, 2000
and the merger agreement, stockholders who own a majority of the shares of
IndyMac common stock present, in person or by proxy, at the IndyMac special
meeting must vote for these proposals.
To approve the amendments to IndyMac's Certificate of Incorporation,
stockholders who own a majority of the outstanding shares of IndyMac common
stock entitled to vote must vote for these proposals.
Voting Rights at the SGV Special Meeting (See page 18)
You are entitled to vote at the SGV special meeting if you owned any shares
of SGV common stock as of the close of business on November 1, 1999, the SGV
record date. On the SGV record date, 2,176,373 shares of SGV common stock were
issued and outstanding. You will be entitled to one vote for each share of SGV
common stock that was validly issued and outstanding and that you owned on the
SGV record date. You may vote either by attending the SGV special meeting and
voting your shares or by completing the enclosed proxy card and mailing it to
SGV in the enclosed envelope for delivery prior to the close of voting at the
SGV special meeting.
SGV's Board of Directors seeks your proxy to use at the SGV special
meeting. SGV has prepared this joint proxy statement to assist you in deciding
how to vote and whether or not to grant your proxy. If you are an SGV
stockholder and you have elected not to attend the meeting, please indicate on
your proxy card how you want to vote. Then sign, date and mail it to SGV as
soon as possible so that your shares will be represented at the SGV special
meeting. If you sign, date and mail your proxy card without indicating how you
wish to vote, your proxy will be counted as a vote for the merger agreement and
the plan of merger. If you fail to return your proxy card and fail to vote at
the meeting, the effect will be a vote against the merger agreement and the
plan of merger. If you have elected to attend the meeting, you do not need to
do anything at this time. If you sign a proxy, you may revoke it at any time
before the SGV special meeting or by attending and voting at the meeting. You
cannot vote shares held in "street name;" only your broker can. If you do not
provide your broker with instructions on how to vote your shares, your shares
will not be voted.
Voting Rights at the IndyMac Special Meeting (See page 24)
You are entitled to vote at the IndyMac special meeting if you owned any
shares of IndyMac common stock as of the close of business on November 3, 1999,
the IndyMac record date. On the IndyMac record date, 80,622,835 shares of
IndyMac common stock were issued and outstanding. You will be entitled to one
vote for each share of IndyMac common stock that was validly issued and
outstanding and that you owned on the IndyMac record date. You may vote
5
<PAGE>
either by attending the IndyMac special meeting and voting your shares, voting
electronically or telephonically, in the manner indicated on the enclosed proxy
card, or by completing the enclosed proxy card and mailing it to IndyMac in the
enclosed envelope for delivery prior to the close of voting at the IndyMac
special meeting.
If you are an IndyMac stockholder, IndyMac's Board of Directors seeks your
proxy to use at the IndyMac special meeting. IndyMac has prepared this joint
proxy statement to assist you in deciding how to vote and whether or not to
grant your proxy. If you are an IndyMac stockholder and you have elected not to
attend the meeting, please vote electronically or telephonically or indicate on
your proxy card how you want to vote. If you choose to use your proxy card,
sign, date and mail it to IndyMac as soon as possible so that your shares will
be represented at the IndyMac special meeting. If you sign, date and mail your
proxy card without indicating how you wish to vote, your proxy will be counted
as a vote for:
(1) the termination of IndyMac's REIT status effective January 1, 2000;
(2) the merger agreement and the transactions contemplated thereby; and
(3) the amendments to IndyMac's Certificate of Incorporation described in
the notice to IndyMac's stockholders.
If you fail to return your proxy card and fail to vote either
electronically or telephonically, or at the special meeting, it will not affect
the vote on the termination of IndyMac's REIT status effective January 1, 2000
or the merger agreement, but will have the effect of a vote against each of the
amendments to IndyMac's Certificate of Incorporation.
If you have elected to attend the meeting, you need to do nothing at this
time. If you sign a proxy, you may revoke it at any time before the IndyMac
special meeting or by attending and voting at the meeting. You cannot vote
shares held in "street name;" only your broker can. If you do not provide your
broker with instructions on how to vote your shares, your shares will not be
voted.
SGV's Recommendation to its Stockholders (See page 23)
SGV's Board of Directors unanimously approved the merger agreement and the
plan of merger. SGV believes that the merger agreement and the plan of merger
and the transactions contemplated thereby, are fair to you and in your best
interests. SGV's Board of Directors unanimously recommend that each SGV
stockholder votes to approve the merger agreement and the plan of merger.
IndyMac's Recommendations to its Stockholders (See page 27)
IndyMac's Board of Directors unanimously approved the termination of REIT
status, the merger agreement and the amendments to IndyMac's Certificate of
Incorporation. IndyMac believes that the proposed termination of IndyMac's REIT
status effective January 1, 2000, the merger agreement and the transactions
contemplated by the merger agreement, and the proposed amendments to IndyMac's
Certificate of Incorporation are fair to you and in your best
6
<PAGE>
interests. IndyMac's directors unanimously recommend that each IndyMac
stockholder votes to approve the termination of IndyMac's REIT status effective
January 1, 2000, the merger agreement, and each of the amendments to IndyMac's
Certificate of Incorporation.
Share Ownership of Management and Certain Stockholders (See pages 19 and 26)
On the SGV record date, SGV's directors and executive officers, their
immediate family members and entities they control owned 246,714 shares, or
approximately 11.34% of the issued and outstanding shares of SGV common stock.
This number does not include stock that SGV's directors and executive officers
may acquire through exercising stock options. On the IndyMac record date, SGV's
directors and executive officers, their immediate family members and entities
they control owned 300 shares of IndyMac common stock and SGV held no shares of
IndyMac common stock for its own account, although it may hold shares of
IndyMac common stock in a fiduciary capacity for others or as a result of debts
previously contracted.
On the IndyMac record date, IndyMac's directors and executive officers,
their immediate family members and entities they control owned 733,121 shares,
or approximately .91% of the issued and outstanding shares of IndyMac common
stock. This number does not include stock that IndyMac's directors and
executive officers may acquire through exercising stock options. On the SGV
record date, IndyMac directors and executive officers, their immediate family
members and entities they control owned no shares of SGV common stock and
IndyMac held no shares of SGV common stock.
Interests of SGV's Directors and Officers That May Be Different from Yours (See
page 53)
SGV's directors and certain officers have employment agreements, stock
options and other benefit plans and other arrangements that may provide them
with interests in and benefits from the merger that are different from yours.
The SGV Board of Directors was aware of these interests and considered them in
approving and recommending the merger and the related proposals.
Effective Time of the Merger (See page 45)
The merger will become final at the time specified in the certificate of
merger reflecting the merger to be filed with the Delaware Secretary of State.
If the IndyMac and the SGV stockholders approve the merger agreement at the
special meetings, and IndyMac obtains all required regulatory approvals, we
currently anticipate that the merger will be completed by the end of the first
quarter of 2000. If approved, the amendment to IndyMac's Certificate of
Incorporation that changes the name of the corporation will become effective at
the effective time of the merger and only if the merger is completed.
IndyMac and SGV cannot assure you that they can obtain the necessary
stockholder and regulatory approvals or that the other conditions necessary to
complete the merger can or will be satisfied.
Exchange of SGV Stock Certificates for the Cash Payment (See page 45)
If you are an SGV stockholder, promptly after the merger is completed, you
7
<PAGE>
will receive a letter and instructions on how to surrender your stock
certificates in exchange for the appropriate cash payment. You will need to
carefully review and complete these materials and return them as instructed
along with your stock certificates for SGV common stock. If you do not have
stock certificates but hold shares of SGV common stock in the form of a book
entry with SGV's transfer agent, the transfer agent will automatically exchange
the shares.
Do not send in your stock certificates until you receive a letter and
instructions on how to surrender your SGV stock certificates.
Regulatory Approval and Other Conditions Necessary to Complete the Merger (See
pages 48 and 46)
IndyMac is required to notify and obtain approvals from certain government
regulatory agencies before the merger may be completed, including the OTS and
other federal and state banking regulators. We expect that IndyMac will obtain
all required regulatory approvals, but we cannot assure you that this will
happen.
In addition to the required regulatory approvals, the merger will be
completed only if certain conditions, including, but not limited to the
following, are met or waived, if waivable:
(1) the IndyMac and the SGV stockholders approve the merger agreement at
the special meetings; and
(2) neither IndyMac nor SGV has breached any of its representations or
obligations under the merger agreement.
In addition to these conditions, the merger agreement, attached to this
joint proxy statement as Appendix A, describes other conditions that must be
met before the merger may be completed.
Waiver, Amendment, and Termination (See page 48)
IndyMac and SGV may agree to terminate the merger agreement and elect not
to complete the merger at any time before the merger is completed.
Each of the parties also can terminate the merger in certain other
circumstances, including if the merger is not completed by July 12, 2000. But a
party may not terminate the merger agreement if (1) it breached the merger
agreement, and (2) its breach is the reason the merger has not been completed.
If the merger is not completed by July 12, 2000 because regulatory approval has
been received but the date falls during a regulatory waiting period, the July
12, 2000 termination date will automatically be extended to a date 10 days
after the date the waiting period will expire. In certain other circumstances,
IndyMac may extend the termination date to a date on or before October 12,
2000, if regulatory approval has not been received by July 12, 2000.
In addition, the parties may also terminate the merger if other
circumstances occur which are described in the merger agreement, attached to
this joint proxy statement as Appendix A.
The merger agreement may be amended by the written agreement of IndyMac and
SGV. The parties can amend the merger agreement without stockholder
8
<PAGE>
approval, even if you have already approved the merger. However, you must
approve any amendments that would require your approval under the Delaware
General Corporation Law.
Accounting Treatment (See page 55)
It is anticipated the merger will be accounted for as a "purchase." This
means that the earnings of SGV will be included in the earnings of IndyMac only
after the closing of the merger, and SGV's assets and liabilities will be
valued at their fair value at the time of the merger. The excess consideration
IndyMac is paying over the fair value of SGV's assets and liabilities will be
recorded as "goodwill" on IndyMac's financial statements. The goodwill will be
amortized as an expense on IndyMac's financial statements, initially for a
period of 20 years.
Unaudited Historical and Pro Forma Comparative Per Share Data
The following table shows comparative historical and pro forma information
about IndyMac's and SGV's net income per share, cash dividends per share and
book value per share, and you should read this information with the historical
consolidated financial statements of IndyMac and SGV, and the notes to them.
IndyMac's historical financials are incorporated by reference into this
joint proxy statement. SGV's are included in this document. You should also
read the unaudited pro forma financial statements and the notes to them,
appearing elsewhere in this document.
<TABLE>
<CAPTION>
Six Months
Year Ended Ended
December 31, June 30,
1998 1999
------------ ----------
<S> <C> <C>
Net Income
IndyMac
Basic................................................. $0.48 $0.65
Diluted............................................... 0.48 0.64
SGV
Basic................................................. 0.92 0.62
Diluted............................................... 0.88 0.60
Pro forma (IndyMac and SGV)
Basic................................................. (0.20) 0.69
Diluted............................................... (0.20) 0.68
Cash Dividends Per Share
IndyMac................................................ 1.79 0.76
SGV.................................................... 0.00 0.00
Pro Forma (IndyMac and SGV)............................ 1.79 0.76
</TABLE>
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ --------
<S> <C> <C>
Book Value Per Common Share
IndyMac................................................. $10.85 $11.09
SGV..................................................... 14.26 14.87
Pro Forma Combined...................................... $ 9.61 $10.20
</TABLE>
Selected Historical Consolidated Financial Data
The following tables present for IndyMac and for SGV, selected consolidated
financial data for:
. the six-month periods ended and as of June 30, 1998 and 1999, in the
case of IndyMac;
. the five-year period ended and as of December 31, 1998, in the case of
IndyMac; and
. the five-year period ended and as of June 30, 1999 in the case of SGV.
IndyMac's information is based on the consolidated historical financial
statements
9
<PAGE>
contained in reports IndyMac has filed with the SEC, including its June 30,
1999 Quarterly Report on Form 10-Q, which are incorporated by reference in this
joint proxy statement. See "Where You Can Find More Information" on page 129.
SGV's information is derived from the historical consolidated financial
statements of SGV, which SGV has filed with the SEC and are included in this
joint proxy statement. See "Index To Financial Statements" on page F-1.
You should read the following tables in conjunction with the historical
consolidated financial statements of IndyMac and SGV described above and with
the notes to them.
Historical results are not necessarily indicative of results to be expected
for any future period. The management of IndyMac believes that all adjustments
(which include only normal recurring adjustments) necessary to arrive at a fair
statement of interim results of operations of IndyMac have been included.
Results for IndyMac for the interim period ended June 30, 1999 are not
necessarily indicative of results which may be expected for any other interim
period or for the year as a whole.
10
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF INDYMAC
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
-------------------------------------------------------- ---------------------
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- ---------- ---------- ---------- ---------
(Dollars in thousands, except per share data) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Results for
the Year:
Interest income....... $ 92,119 $ 180,465 $ 242,303 $ 360,901 $ 528,825 $ 268,563 $ 177,146
Interest expense...... 66,700 131,910 159,365 242,372 355,359 176,839 98,184
--------- --------- --------- ---------- ---------- ---------- ---------
Net interest
income............. 25,419 48,555 82,938 118,529 173,466 91,724 78,962
Provision for loan
losses............... 500 4,037 12,991 18,622 35,892 15,607 7,898
Equity in earnings
(loss) of IndyMac
Operating............ 5,624 13,801 19,533 18,414 (58,232) 4,891 (4,306)
Net gain (loss) on
mortgage loans and
securities........... -- (591) (906) 997 (19,088) (1,510) (900)
Other income.......... 885 2,018 3,376 7,318 2,822 2,363 3,624
--------- --------- --------- ---------- ---------- ---------- ---------
Net revenues........ 31,428 59,746 91,950 126,636 63,076 81,861 69,482
Salaries, general and
administrative....... 2,402 4,213 14,202 21,935 29,286 13,365 16,768
Management fees to
affiliates........... 1,195 5,522 8,761 4,406 -- -- --
Non-recurring
charges.............. -- -- -- 76,000(1) -- -- --
--------- --------- --------- ---------- ---------- ---------- ---------
Total expenses...... 3,597 9,735 22,963 102,341 29,286 13,365 16,768
--------- --------- --------- ---------- ---------- ---------- ---------
Net earnings.......... $ 27,831 $ 50,011 $ 68,987 $ 24,295 $ 33,790 $ 68,496 $ 52,714
========= ========= ========= ========== ========== ========== =========
Per Share Data:
Basic................. $ 0.86 $ 1.25 $ 1.51 $ 0.43 $ 0.48 $ 1.03 $ 0.66
Diluted............... 0.86 1.25 1.50 0.43 0.48 1.03 0.65
Dividends declared per
share................ 0.87 1.25 1.52 1.79 1.79 1.03 0.76
Book value per share
at December 31....... 7.99 8.55 9.53 11.11 10.85 12.03 11.09
Average Common Shares:
Basic................. $ 32,184 $ 39,903 $ 45,644 $ 56,125 $ 69,983 $ 66,404 $ 79,807
Diluted............... 32,327 39,941 45,806 56,454 70,093 66,742 80,980
Shares Outstanding: 32,281 42,414 50,200 63,352 75,794 70,314 80,476
Balance Sheet Data (at
period end):
Loans held for sale,
net.................. $ 608,240 $ 409,584 $ 657,208 $1,458,271 $1,555,656 $2,251,054 $ 936,907
Loans held for
investment, net...... 899,672 1,424,583 1,236,713 1,831,047 668,523 1,393,706 501,733
Other loans, net...... 75,961 320,028 711,578 1,459,264 1,891,149 1,828,562 1,604,727
Mortgage securities... 121,441 124,975 231,780 558,445 235,032 912,520 275,688
Collateral for
collateralized
mortgage
obligations.......... 233,690 184,111 289,054 245,474 162,726 184,220 121,984
Total assets.......... 1,997,644 2,643,360 3,356,059 5,849,110 4,851,152 6,939,447 3,759,930
Short-term
borrowings........... 1,534,189 2,037,834 2,531,509 4,826,656 3,785,549 5,815,860 2,672,872
Collateralized
mortgage
obligations.......... 202,259 164,760 264,080 221,154 140,810 184,220 140,810
Senior unsecured
notes................ -- 59,649 59,759 59,888 60,031 59,958 60,108
Shareholders' equity.. 257,917 362,731 478,424 703,894 822,103 846,050 892,561
</TABLE>
- --------
(1)Represents costs of acquisitions of IndyMac's management company from
Countrywide Credit Industries, Inc. This transaction was accounted for as
the settlement of a management contract by IndyMac.
11
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF SGV
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(Dollars in thousands, except per share
data)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition
Data (at period end):
Total assets................ $273,396 $336,055 $409,340 $408,346 $468,730
Investment securities
available for sale......... 1,000 14,904 12,467 19,221 25,816
Investment securities held
to maturity................ 3,200 -- -- -- --
Mortgage-backed securities
available for sale......... 3,614 16,614 37,164 29,383 24,871
Mortgage-backed securities
held to maturity........... 15,735 27,701 39,072 29,936 37,717
Loans receivable held for
sale....................... -- 723 230 391 100
Loans receivable held for
investment, net............ 217,399 255,953 284,608 295,739 354,989
Deposit accounts............ 204,264 234,039 288,339 295,281 324,106
FHLB advances............... 33,447 67,509 77,907 70,543 108,002
Stockholders' equity,
substantially restricted... 33,006 31,586 29,903 32,233 32,371
Selected Operating Data:
Interest income............. $ 17,855 $ 21,259 $ 26,700 $ 29,602 $ 31,778
Interest expense............ 10,900 13,304 17,138 18,661 19,370
-------- -------- -------- -------- --------
Net interest income before
provision for loan
losses................... 6,955 7,955 9,562 10,941 12,408
Provision for loan losses... 483 575 557 735 969
-------- -------- -------- -------- --------
Net interest income after
provision for loan
losses................... 6,472 7,380 9,005 10,206 11,439
Other income................ 755 883 1,061 1,368 1,933
Other expenses.............. 6,922 7,237 8,801 9,043 9,081
-------- -------- -------- -------- --------
Earnings before income
taxes...................... 305 1,026 1,265 2,531 4,291
Income taxes................ 128 432 534 1,044 1,743
-------- -------- -------- -------- --------
Net earnings................ $ 177 $ 594 $ 731 $ 1,487 $ 2,548
======== ======== ======== ======== ========
Earnings per base--basic.... n/a $ 0.22 $ 0.29 $ 0.63 $ 1.16
======== ======== ======== ======== ========
Earnings per share--
diluted.................... n/a $ 0.22 $ 0.29 $ 0.60 $ 1.13
======== ======== ======== ======== ========
Performance Ratios:
Return on average assets.... 0.07% 0.20% 0.20% 0.37% 0.57%
Return on average equity.... 1.16 1.81 2.38 4.80 8.04
Average equity to average
assets..................... 5.86 11.00 8.22 7.62 7.06
Equity to total assets at
end of period.............. 12.07 9.40 7.31 7.89 6.91
Average interest rate
spread..................... 2.61 2.28 2.27 2.40 2.54
Net interest margin......... 2.79 2.76 2.65 2.78 2.88
Average interest-earning
assets to average interest-
bearing liabilities........ 103.97 110.37 107.98 108.22 107.59
General and administrative
expenses to average
assets..................... 2.58 2.33 2.40 2.19 2.08
</TABLE>
12
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF SGV (continued)
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
----------------------------------
1995 1996 1997 1998 1999
----- ----- ----- ----- ------
(Dollars in thousands, except
per share data)
<S> <C> <C> <C> <C> <C>
Regulatory Capital Ratios:
Tangible capital......................... 9.04% 7.63% 6.34% 6.86% 6.61%
Core capital............................. 9.04 7.63 6.34 6.86 6.61
Risk-based capital....................... 18.56 16.51 14.43 15.08 13.34
Asset Quality Ratios:
Non-performing loans as a percent of
gross loans receivable.................. 0.88% 0.76% 0.59% 0.64% 0.43%
Non-performing assets as a percent of
total assets............................ 1.00 1.03 0.70 0.93 0.50
Allowance for loan losses as a percent of
gross loans receivable.................. 0.36 0.41 0.44 0.48 0.52
Allowance for loan losses as a percent of
non-performing loans.................... 41.21 53.92 74.34 74.56 121.06
Number of Full-Service Customer
Facilities................................ 6 6 8 8 8
</TABLE>
13
<PAGE>
RISK FACTORS
If IndyMac terminates its status as a REIT and the merger is completed and
you are an IndyMac stockholder, you will retain your shares of IndyMac common
stock. You should be aware of particular risks and uncertainties that are
applicable to a continuing investment in this common stock. Specifically, there
are risks and uncertainties that bear on IndyMac's future financial results and
that may cause IndyMac's future earnings and financial condition to be less
than our expectations.
Some of the risks and uncertainties relate to economic conditions generally
and would affect other financial institutions in similar ways. These aspects
are discussed above under the heading "A Warning About Forward-looking
Statements." This section addresses particular risks and uncertainties that are
specific to IndyMac.
The risks and uncertainties that may affect the IndyMac's future earnings
and financial condition include the following:
(1) Integration Difficulties. The merger involves the combination of
two companies that have previously operated independently. The
successful combination of IndyMac and SGV's operations will depend
primarily on the companies' ability to consolidate different
operations, systems and procedures and to eliminate redundancies
and reduce costs. IndyMac and SGV may not be able to integrate
their operations without encountering difficulties including,
without limitation, the loss of key employees and customers,
including depositors, the disruption of their businesses, or
possible inconsistencies in standards, controls, procedures, and
policies.
(2) New Business. IndyMac's management may have difficulty managing
aspects of SGV's business that are new to it such as the retail
banking business. Additionally, IndyMac intends to grow the retail
deposit base of the surviving corporation substantially. To
achieve this proposed growth rate, First Federal may need to offer
higher deposit rates which could substantially increase First
Federal's cost of funds.
(3) Termination of REIT Status. As a result of IndyMac terminating its
status as a REIT, IndyMac will not distribute at least 95% of its
taxable income to its stockholders. In addition, IndyMac will be
subject to federal and state income taxes. IndyMac's new status as
a taxable entity may also cause its return on equity to decline.
(4) Regulation. As a result of the merger, IndyMac will be a thrift
holding company regulated by the OTS. For more information on the
scope of regulations that will or may be imposed on IndyMac see
"Business of SGV--Regulation and Supervision" on page 94.
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(5) Competition. After the merger, IndyMac will continue to face
substantial competition in purchasing and originating loans and in
attracting deposits. Competitors include other thrifts and thrift
holding companies, national and state banks, trust companies,
insurance companies, mortgage banking operations, credit unions,
financial companies, money market funds, government sponsored
entities such as Government National Mortgage Association or
"GNMA," Federal National Mortgage Association or "Fannie Mae" and
Federal Home Loan Mortgage Corporation or "Freddie Mac," and other
financial and non-financial companies which may offer products
similar to those to be offered by IndyMac.
Many competing providers may have greater financial resources than
IndyMac, offer additional products and services, have wider
geographic presence or more accessible branch and loan production
offices, and may more effectively maximize the use of technology.
For example, the government sponsored entities have made and will
continue to make significant technological and economic advances
to broaden their customer bases. Currently, Fannie Mae and Freddie
Mac are not permitted to purchase mortgage loans with original
principal balances above $240,000 (effective January 1, 1999). If
this dollar limitation increases, Fannie Mae and Freddie Mac may
be able to purchase a greater percentage of the loans in the
secondary market than they currently acquire, and IndyMac's
ability to maintain or increase its current loan acquisition
levels could be adversely affected. Because their potential growth
is constrained somewhat by legal limits on their product
offerings, government sponsored entities have sought to expand in
other ways, such as relaxing their borrower credit and loan
documentation requirements. Consequently, IndyMac may experience
substantial competition from government-sponsored entities.
(6) Interest Rate Changes. Changes in interest rates affect, and will
continue to affect, IndyMac's business in a variety of ways,
including
(a) decreased demand for loans during periods of higher interest
rates, which may decrease the volume of loans IndyMac can
purchase or originate,
(b) decreased demand to purchase mortgages during periods of lower
interest rates, which may negatively affect IndyMac's ability
to sell loans,
(c) fluctuations in profits derived from the difference between
short-term and long-term interest rates,
(d) increases in prepayment rates during periods of lower interest
rates which may negatively affect the value of IndyMac's
portfolio of collateralized mortgage obligations, interest-
only securities and mortgage servicing rights, and
(e) delinquency rates on adjustable rate loans may increase in
periods of increasing interest rates as borrowers face higher
mortgage payments.
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The profits earned by IndyMac from loans will continue to be, in
part, related to the difference between fixed long-term interest
rates, at which IndyMac originates its loans, and adjustable
short-term interest rates, at which IndyMac finances such loans
until the closing of the sale of such loans. Generally, short-term
rates are lower than long-term rates and IndyMac will benefit from
the positive differences in interest rates during the time the
loans are held by IndyMac pending the closing of the sale of such
loans. IndyMac engages in, and will continue to engage in, hedging
techniques to attempt to offset the effect of negative differences
in interest rates. However, these hedges are less effective in
times of rapid interest rate fluctuation.
(7) Credit Risk. IndyMac incurs, and will continue to incur, credit
risk in investing in loans held for sale and investment,
construction lending, warehouse lines of credit, and certain
securities in its mortgage securities portfolio. IndyMac's loans
held for investment and sale portfolio, as well as IndyMac's
construction loan portfolio, and warehouse lines of credit all
expect to incur normal levels of credit losses. However, increases
in interest rates or a deterioration in general economic
conditions, and any number of borrower, loan, or project specific
problems, could result in IndyMac experiencing higher than
expected credit loss rates.
IndyMac also incurs and will continue to incur credit risk in its
investment in non-investment grade securities, particularly non-
rated and the lowest noninvestment grade rated securities. In
general, the non-investment grade securities in a deal bear all
(or substantially all) losses before the more senior securities in
the same deal, with non-rated and the lowest non-investment grade
rated securities bearing losses before higher rated securities.
IndyMac incurs and will continue to incur substantially greater
credit risks on its investments in non-investment grade securities
than it would were it investing only in the related more senior
securities, and still greater credit risks from its investments in
non-rated and the lowest non-investment grade rated securities.
(8) Originating, Acquiring, and Holding Mortgage Loans. IndyMac
continually originates and acquires large quantities of mortgage
loans. When IndyMac accumulates assets for sale it also incurs
interest rate risk. When a sufficient volume of loans with similar
characteristics has been accumulated, generally $100 million to
$500 million in principal amount, these loans are either sold in
bulk whole loan sales, or securitized or sold through the issuance
of mortgage-backed securities. The length of time between when
IndyMac commits to originate or purchase a mortgage loan and when
IndyMac sells or securitizes the mortgage loan generally ranges
from ten to ninety days, depending on certain factors. These
factors include the length of the origination/purchase commitment
period, the loan volume by product type, market fluctuations in
the prices of mortgage-backed securities, and variations in the
loan sale and the securitization process. This holding period
generally
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will be longer for sub-prime, manufactured housing, and home
improvement loans due to an overall smaller market combined with
IndyMac's relatively low activity level in these programs. IndyMac
encounters various risks from potential interest rate fluctuations
during the time after it commits to originate or purchase a
mortgage loan at a predetermined price until the mortgage loan is
sold. There may be times when, because of a combination of market
conditions, IndyMac is unable to sell or securitize its loans at
prices that will recoup its investment in them.
(9) Risk-Based Pricing System. IndyMac has invested substantial
capital and time in the development of its electronic risk-based
pricing systems, including its electronic-Mortgage Information and
Transaction System known as e-MITS(R) (patent pending), and has
integrated, or is currently integrating, these systems into all of
its various lending businesses. It is IndyMac's intent to continue
to integrate these risk-based pricing systems into the businesses
it acquires through the merger. IndyMac could be adversely
affected by these efforts if the risk-based pricing systems do not
accurately price risk as intended, or if the industry does not
fully accept these pricing systems.
(10) Capital Commitments. Certain of IndyMac's material businesses
require and will continue to require significant continuing
commitments of capital resources. Although after the merger
IndyMac will be able to access deposits and Federal Home Loan
Bank loans to fund its businesses to some extent. Because First
Federal's deposit base will be fairly small compared to IndyMac's
capital requirements, IndyMac will continue to rely on credit
facilities and the capital markets to fund its businesses. If
IndyMac is unable to expand its sources of capital at the rate
necessary to keep up with its business expansion, its business
would be adversely affected. Additionally, IndyMac's ability to
renew credit facilities and access the capital markets on
favorable terms may be affected by market events over which it
has no control.
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THE SGV SPECIAL MEETING
Purpose
IndyMac and SGV are furnishing this joint proxy statement to you as a
holder of SGV common stock, $.01 par value per share, in connection with the
proxy solicitation by SGV's Board of Directors. SGV's Board of Directors will
use the proxies at the SGV special meeting of stockholders to be held on
December 14, 1999, and at any adjournments.
At the SGV special meeting, if you are a holder of SGV common stock, you
will be asked to vote upon a proposal to approve the merger agreement, dated as
of July 12, 1999, and amended and restated as of October 25, 1999 by and
between SGV and IndyMac, attached to this joint proxy statement as Appendix A
and the plan of merger by and between IndyMac Merger Subsidiary, Inc. and SGV,
a form of which is attached to this joint proxy statement as Appendix B. Under
the terms of the merger agreement and the plan of merger, each share of SGV
common stock you hold will be converted automatically into the right to receive
$25.00 in cash after the merger is completed, subject to adjustment under
certain circumstances described in more detail in the merger agreement. Under
no circumstances will SGV stockholders receive less than $22.50 per share as a
result of any such adjustment, assuming the merger is completed. Additionally,
unless IndyMac pays an extension fee to complete the merger, SGV stockholders
will not receive more than $27.50 per share as the result of such adjustment.
See "The Merger--What SGV Stockholders Will Receive in the Merger" on page 28
for an explanation of how an adjustment to the purchase price would occur.
Date, Place, and Time
The SGV special meeting of the SGV stockholders will be held at the
Radisson Hotel San Gabriel Valley, located at 14635 Baldwin Park Town Center,
Baldwin Park, California, at 10:00 a.m., local time on December 14, 1999.
Record Date, Voting Rights, Required Vote, and Revocability of Proxies
SGV's Board of Directors fixed the close of business on November 1, 1999,
as the SGV record date for determining those SGV stockholders who are entitled
to notice of and to vote at the SGV special meeting. Only holders of SGV common
stock of record on the books of SGV at the close of business on the SGV record
date have the right to receive notice of and to vote at the SGV special
meeting. On the SGV record date, there were 2,176,373 shares of SGV common
stock issued and outstanding held by approximately 187 holders of record.
SGV stockholders will have one vote for each share of SGV common stock
owned on the SGV record date. In order for the SGV special meeting to be held,
a quorum must be present. A quorum is established when a majority of the
outstanding shares of SGV common stock are represented at the special meeting
either in person or by proxy.
To determine if a quorum is present, SGV intends to count the following:
(1) shares of SGV common stock present at the SGV special meeting
either in person or by proxy;
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(2) shares of SGV common stock present in person at the SGV special
meeting but not voting; and
(3) shares of SGV common stock for which it has received proxies but
with respect to which holders of shares have abstained on any
matter.
Approval of the merger agreement and the plan of merger requires the
affirmative vote of a majority of the outstanding shares of SGV common stock
entitled to vote at the SGV special meeting.
Brokers who hold shares in street name for customers who are the beneficial
owners of such shares may not give a proxy to vote those shares without
specific instructions from their customers. Any abstention, non-voting share or
"broker non-vote" will have the same effect as a vote against the approval of
the merger agreement and the plan of merger.
Properly executed proxies that SGV receives before the vote at the special
meeting that are not revoked will be voted in accordance with the instructions
indicated on the proxies. If no instructions are indicated, such proxies will
be voted FOR the proposal to approve the merger agreement and the plan of
merger, and the proxy holder may vote the proxy in its discretion as to any
other matter which may come properly before the special meeting. If necessary,
the proxy holder may vote in favor of a proposal to adjourn the special meeting
in order to permit further solicitation of proxies if there are not sufficient
votes to approve the proposal at the time of the special meeting. However, no
proxy holder will vote any proxies voted against approval of the merger
agreement and the plan of merger in favor of a proposal to adjourn the special
meeting.
An SGV stockholder who has given a proxy solicited by SGV's Board of
Directors may revoke it at any time prior to its exercise at the SGV special
meeting by:
(1) giving written notice of revocation to the Secretary of SGV;
(2) properly submitting to SGV a duly executed proxy bearing a later
date; or
(3) attending the SGV special meeting and voting in person.
All written notices of revocation and other communications with respect to
revocation of proxies should be sent to SGV Bancorp, Inc.; 225 North Barranca
Street, West Covina, California 91791, Attention: Edie Beachboard, Corporate
Secretary. If you are a stockholder whose shares are not registered in your own
name, you will need additional documentation from your recordholder in order to
be admitted to the meeting. Examples of such documentation include a broker's
statement, letter or other document confirming your ownership of shares.
On the SGV record date, SGV's directors and executive officers, including
their immediate family members and entities they control owned 246,714 shares
or approximately 11.34% of the issued and outstanding shares of SGV common
stock. This number does not include stock that SGV's directors and executive
officers may acquire through exercising stock options. We expect that the
directors and executive officers of SGV will vote their shares in favor of the
merger agreement and the plan of merger.
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On the SGV record date, IndyMac's directors and executive officers owned no
shares of SGV common stock. On the SGV record date, IndyMac held no shares of
SGV common stock.
Solicitation of Proxies
Directors, officers and employees of SGV may solicit proxies by mail, in
person, or by telephone or telegraph. They will receive no additional
compensation for such services. SGV may, however, hire a professional proxy
solicitor who will receive a fee for its services. SGV may also make
arrangements with brokerage firms and other custodians, nominees, and
fiduciaries, if any, for the forwarding of solicitation materials to the
beneficial owners of SGV common stock held of record by such persons. SGV will
reimburse any such brokers, custodians, nominees, and fiduciaries for the
reasonable out-of-pocket expenses incurred by them for such services. IndyMac
and SGV will share all expenses associated with the solicitation of proxies,
including the fees and expenses of any professional proxy solicitor, and the
other expenses associated with the special meeting, except that IndyMac will
pay expenses related to the printing and mailing of this joint proxy statement,
as provided in the merger agreement. See "The Merger--Expenses and Fees" on
page 55.
Dissenters' Rights
Under Delaware law, if you do not wish to accept the cash payment provided
for in the merger agreement you have the right to dissent from the merger and
to receive payment in
cash for the fair value of your SGV common stock. SGV stockholders electing to
exercise dissenters' rights must comply with the provisions of Section 262 of
the Delaware General Corporation Law in order to perfect their rights. SGV will
require strict compliance with the statutory procedures.
The following is intended as a brief summary of the material provisions of
the Delaware statutory procedures required to be followed by a stockholder in
order to dissent from the merger and perfect the stockholder's dissenters'
rights. This summary, however, is not a complete statement of all applicable
requirements and is qualified in its entirety by reference to Section 262 of
the Delaware General Corporation Law, the full text of which is attached to
this joint proxy statement as Appendix D.
Section 262 requires that stockholders be notified not less than 20 days
before the special meeting to vote on the merger that dissenters' appraisal
rights will be available. A copy of Section 262 must be included with such
notice. This joint proxy statement constitutes SGV's notice to its stockholders
of the availability of dissenters' rights in connection with the merger in
compliance with the requirements of Section 262. If you wish to consider
exercising your dissenters' rights you should carefully review the text of
Section 262 contained in Appendix D because failure to timely and properly
comply with the requirements of Section 262 will result in the loss of your
dissenters' rights under Delaware law.
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If you elect to demand appraisal of your shares, you must satisfy each of
the following conditions:
(1) You must deliver to SGV a written demand for appraisal of your
shares before the vote with respect to the merger agreement and
the plan of merger is taken. This written demand for appraisal
must be in addition to and separate from any proxy or vote
abstaining from or against the merger agreement and the plan of
merger. Voting against or failing to vote for the merger agreement
and the plan of merger by itself does not constitute a demand for
appraisal within the meaning of Section 262.
(2) You must not vote in favor of the merger agreement and the plan of
merger. An abstention or failure to vote will satisfy this
requirement, but a vote in favor of the merger agreement and the
plan of merger, by proxy or in person, will constitute a waiver of
your dissenters' rights in respect of the shares so voted and will
nullify any previously filed written demands for appraisal.
If you fail to comply with either of these conditions and the merger is
completed, you will be entitled to receive the cash payment for your shares of
SGV common stock as provided for in the merger agreement, but you will have no
dissenters' rights with respect to your shares of SGV common stock.
All demands for appraisal should be addressed to SGV Bancorp, Inc., 225
North Barranca Street, West Covina, California 91791; Attention: Edie
Beachboard, Corporate Secretary, before the vote on the merger agreement and
the plan of merger is taken at the special meeting and should be executed by,
or on behalf of, the record holder of the shares of SGV common stock. The
demand must reasonably inform SGV of the identity of the stockholder and the
intention of the stockholder to demand appraisal of his or her shares.
To be effective, a demand for appraisal by a holder of SGV common stock
must be made by or in the name of such registered stockholder, fully and
correctly, as the stockholder's name appears on his or her stock certificate(s)
and cannot be made by the beneficial owner if he or she does not also hold the
shares of record. The beneficial holder must, in such cases, have the
registered owner submit the required demand in respect of such shares.
If shares are owned of record in a fiduciary capacity, such as by a
trustee, guardian or custodian, execution of a demand for appraisal should be
made in such capacity; and if the shares are owned of record by more than one
person, as in a joint tenancy or tenancy in common, the demand should be
executed by or for all joint owners. An authorized agent, including one for two
or more joint owners, may execute the demand for appraisal for a stockholder of
record; however, the agent must identify the record owner or owners and
expressly disclose the fact that, in executing the demand, he or she is acting
as agent for the record owner. A record owner, such as a broker, who holds
shares as a nominee for others, may exercise his or her right of appraisal with
respect to the shares held for one or more beneficial owners, while not
exercising this right for other beneficial owners. In such case, the written
demand should state the number of shares as to which appraisal is sought. Where
no number of shares is expressly mentioned, the demand will be presumed to
cover all shares held in the name of such record owner.
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If you hold your shares of SGV common stock in a brokerage account or in
other nominee form and you wish to exercise appraisal rights, you should
consult with your broker or such other nominee to determine the appropriate
procedures for the making of a demand for appraisal by such nominee.
Within 10 days after the effective date of the merger, SGV or IndyMac must
give written notice that the merger has become effective to each SGV
stockholder who has properly filed a written demand for appraisal and who did
not vote in favor of the merger agreement and the plan of merger. Within 120
days after the effective date, either IndyMac or any stockholder who has
complied with the requirements of Section 262 may file a petition in the
Delaware Court of Chancery demanding a determination of the fair value of the
shares held by all stockholders entitled to appraisal. IndyMac does not
presently intend to file such a petition in the event there are dissenting
stockholders and has no obligation to do so. Accordingly, the failure of a
stockholder to file such a petition within the period specified could nullify
such stockholder's previously written demand for appraisal.
At any time within 60 days after the effective date, any stockholder who
has demanded an appraisal has the right to withdraw the demand and to accept
the cash payment specified by the merger agreement for his or her shares of SGV
common stock. If a petition for appraisal is duly filed by a stockholder and a
copy of the petition is delivered to IndyMac, they will then be obligated
within 20 days after receiving service of a copy of the petition to provide the
Chancery Court with a duly verified list containing the names and addresses of
all stockholders who have demanded an appraisal of their shares. After notice
to dissenting stockholders, the Chancery Court is empowered to conduct a
hearing upon the petition, to determine those stockholders who have complied
with Section 262 and who have become entitled to the appraisal rights provided
thereby. The Chancery Court may require the stockholders who have demanded
payment for their shares to submit their stock certificates to the Register in
Chancery for notation thereon of the pendency of the appraisal proceedings; and
if any stockholder fails to comply with such direction, the Chancery Court may
dismiss the proceedings as to such stockholder.
After determination of the stockholders entitled to appraisal of their
shares of SGV common stock, the Chancery Court will appraise the shares,
determining their fair value exclusive of any element of value arising from the
accomplishment or expectation of the merger, together with a fair rate of
interest. When the value is determined, the Chancery Court will direct the
payment of such value, with interest thereon accrued during the pendency of the
proceeding if the Chancery Court so determines, to the stockholders entitled to
receive the same, upon surrender by such holders of the certificates
representing such shares.
In determining fair value, the Chancery Court is required to take into
account all relevant factors. You should be aware that the fair value of your
shares as determined under Section 262 could be more, the same, or less than
the value that you are entitled to receive pursuant to the merger agreement.
Costs of the appraisal proceeding may be imposed upon IndyMac and the
stockholders participating in the appraisal proceeding by the Chancery Court as
the Chancery Court
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deems equitable in the circumstances. Upon the application of a stockholder,
the Chancery Court may order all or a portion of the expenses incurred by any
stockholder in connection with the appraisal proceeding, including, without
limitation, reasonable attorneys' fees and the fees and expenses of experts, to
be charged pro rata against the value of all shares entitled to appraisal. Any
stockholder who had demanded appraisal rights will not, after the effective
date, be entitled to vote shares subject to such demand for any purpose or to
receive payments of dividends or any other distribution with respect to such
shares (other than with respect to payment as of a record date prior to the
effective date); however, if no petition for appraisal is filed within 120 days
after the effective date, or if such stockholder delivers a written withdrawal
of his or her demand for appraisal and an acceptance of the merger within 60
days after the effective date, then the right of such stockholder to appraisal
will cease and such stockholder will be entitled to receive the cash payment
for shares of his or her SGV common stock pursuant to the merger agreement. Any
withdrawal of a demand for appraisal made more than 60 days after the effective
date of the merger may only be made with the written approval of IndyMac and
must, to be effective, be made within 120 days after the effective date.
In view of the complexity of Section 262, SGV stockholders who may wish to
dissent from the merger and pursue appraisal rights should consult their legal
advisors.
In general, any dissenting stockholder who perfects such holder's right to
be paid the "fair value" of such holder's SGV common stock in cash will
recognize taxable gain or loss for federal income tax purposes upon receipt of
such cash. See "The Merger--Certain Federal Income Tax Consequences of the
Merger" on page 31.
Recommendation
SGV's Board of Directors has unanimously approved the merger agreement and
the plan of merger and believes that the proposal to approve the merger
agreement and the plan of merger is in the best interests of SGV and its
stockholders. SGV's Board of Directors recommends that you vote for approval of
the merger agreement and the plan of merger.
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THE INDYMAC SPECIAL MEETING
Purpose
SGV and IndyMac are furnishing this joint proxy statement to you as a
holder of IndyMac common stock, $.01 par value per share, in connection with
the proxy solicitation by IndyMac's Board of Directors. IndyMac's Board of
Directors will use the proxies at the IndyMac special meeting of stockholders
to be held on December 14, 1999, and at any adjournments.
At the IndyMac special meeting, if you are a holder of IndyMac common stock
you will be asked to vote upon a proposal to terminate IndyMac's status as a
REIT effective January 1, 2000.
If IndyMac terminates its status as a REIT, either at January 1, 2000 or
through the merger, the IndyMac stockholders will no longer receive at least
95% of IndyMac's taxable income in the form of dividends. See "Termination of
IndyMac's REIT Status" on page 56.
At the IndyMac special meeting, you will also be asked to vote upon a
proposal to approve the merger agreement, dated as of July 12, 1999, and
amended and restated as of October 25, 1999, by and between SGV and IndyMac,
attached to this joint proxy statement as Appendix A, and the transactions
contemplated by the merger agreement.
At the IndyMac special meeting, you will also be asked to vote upon
proposals to amend certain provisions of IndyMac's Certificate of
Incorporation. These amendments, if approved, would change IndyMac's name to
IndyMac Bancorp, Inc. and delete certain provisions of IndyMac's Certificate of
Incorporation which contain restrictions on the acquisition and transfer of
shares of IndyMac common stock which were designed (1) to preserve IndyMac's
status as a REIT and (2) to prohibit entities that are exempt from federal
income taxes from acquiring or holding IndyMac capital stock which, because of
IndyMac's REIT status, could have adverse tax consequences on real estate
mortgage investment conduits or taxable mortgage pools in which IndyMac has an
interest. See "Description of Amendments to IndyMac's Certificate of
Incorporation" on page 58.
Date, Place, and Time
The special meeting of the IndyMac stockholders will be held at the
Pasadena Hilton, located at 168 South Los Robles Avenue, Pasadena, California
at 10:00 a.m., local time, on December 14, 1999.
Record Date, Voting Rights, Required Vote, and Revocability of Proxies
IndyMac's Board of Directors fixed the close of business on November 3,
1999, as the IndyMac record date for determining those IndyMac stockholders who
are entitled to notice of and to vote at the IndyMac special meeting. Only
holders of IndyMac common stock of record on the books of IndyMac at the close
of business on the IndyMac record date have the right to receive notice of and
to vote at the IndyMac special meeting. On the IndyMac record date, there were
80,622,835 shares of IndyMac common stock issued and outstanding held by
approximately 5200 holders of record.
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At the IndyMac special meeting, the IndyMac stockholders will have one vote
for each share of IndyMac common stock owned on the IndyMac record date. In
order for the IndyMac special meeting to be held, a quorum must be present. A
quorum is established when a majority of the outstanding shares of IndyMac
common stock are represented at the IndyMac special meeting either in person or
by proxy.
To determine if a quorum is present, IndyMac intends to count the
following:
. shares of IndyMac common stock present at the IndyMac special meeting
either in person or by proxy;
. shares of IndyMac common stock present in person at the IndyMac
special meeting but not voting; and
. shares of IndyMac common stock for which it has received proxies but
with respect to which holders of shares have abstained on any matter.
Approval of IndyMac's termination of its status as a REIT effective January
1, 2000 and the merger agreement require the affirmative vote of a majority of
the shares of IndyMac common stock present, in person or by proxy, at the
IndyMac special meeting. Approval of the amendments to IndyMac's Certificate of
Incorporation requires the affirmative vote of a majority of the outstanding
shares of IndyMac common stock entitled to vote at the IndyMac special meeting.
Brokers who hold shares in street name for customers who are the beneficial
owners of such shares may not give a proxy to vote those shares without
specific instructions from their customers. Any abstention, non-voting share or
"broker non-vote" will have the same effect as a vote against the approval of
each of the amendments to IndyMac's Certificate of Incorporation, but will not
affect the vote on the termination of IndyMac's status as a REIT effective
January 1, 2000 or on the merger agreement.
Properly executed proxies that IndyMac receives before the vote at the
IndyMac special meeting that are not revoked will be voted in accordance with
the instructions indicated on the proxies. If no instructions are indicated,
such proxies will be voted FOR the proposal to terminate IndyMac's status as a
REIT effective January 1, 2000, FOR the proposal to approve the merger
agreement, and FOR each proposal to amend IndyMac's Certificate of
Incorporation and the proxy holder may vote the proxy in its discretion as to
any other matter which may come properly before the IndyMac special meeting. If
necessary, the proxy holders may vote in favor of a proposal to adjourn the
IndyMac special meeting in order to permit further solicitation of proxies if
there are not sufficient votes to approve a proposal at the time of the IndyMac
special meeting. However, no proxy holder will vote any proxies voted against
the proposal to terminate IndyMac's status as a REIT effective January 1, 2000,
the proposal to approve the merger agreement or any of the proposals to amend
IndyMac's Certificate of Incorporation, in favor of a proposal to adjourn the
IndyMac special meeting.
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An IndyMac stockholder who has given a proxy solicited by IndyMac's Board
of Directors may revoke it at any time prior to its exercise at the IndyMac
special meeting by:
(1) giving written notice of revocation to the Secretary of IndyMac,
(2) properly submitting to IndyMac a duly executed proxy bearing a later
date, or
(3) attending the IndyMac special meeting and voting in person.
All written notices of revocation and other communications with respect to
revocation of proxies should be sent to: IndyMac Mortgage Holdings, Inc., 155
North Lake Avenue, Pasadena, California 91101; Attention: Melissa K. Gerard,
Secretary. If you are a stockholder whose shares are not registered in your own
name, you will need additional documentation from your record holder in order
to be admitted to the meeting. Examples of such documentation include a
broker's statement, letter or other document confirming your ownership of
shares.
On the IndyMac record date, IndyMac's directors and executive officers,
including their immediate family members and entities they control owned
733,121 shares or approximately .91% of the issued and outstanding shares of
IndyMac common stock. This number does not include stock that IndyMac's
directors and executive officers may acquire through exercising stock options.
We expect that the directors and executive officers of IndyMac will vote their
shares in favor of the proposal to approve the termination of IndyMac's status
as a REIT effective January 1, 2000, the proposal to approve the merger
agreement, and each proposal to amend IndyMac's Certificate of Incorporation.
On the IndyMac record date, SGV's directors and executive officers, their
immediate families and entities they control owned 300 shares of IndyMac common
stock. On the IndyMac record date, SGV held no shares of IndyMac common stock
for its own account although it may hold shares of IndyMac common stock in a
fiduciary capacity for others or as a result of debts previously contracted.
Solicitation of Proxies
Directors, officers and employees of IndyMac may solicit proxies by mail,
in person, or by telephone or telegraph. They will receive no additional
compensation for such services. IndyMac may, however, hire a professional proxy
solicitor who will receive a fee for its services. IndyMac may also make
arrangements with brokerage firms and other custodians, nominees, and
fiduciaries, if any, for the forwarding of solicitation materials to the
beneficial owners of IndyMac common stock held of record by such persons.
IndyMac will reimburse any such brokers, custodians, nominees, and fiduciaries
for the reasonable out-of-pocket expenses incurred by them for such services.
SGV and IndyMac will share all expenses associated with the solicitation of
proxies, including the fees and expenses of any professional proxy solicitor,
and the other expenses associated with the special meeting, except that IndyMac
will pay expenses related to the printing and mailing of this joint proxy
statement, as provided in the merger agreement. See "The Merger--Expenses and
Fees" on page 55.
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Dissenters' Rights
If you are an IndyMac stockholder you do not have dissenters' rights in
connection with IndyMac terminating its status as a REIT either on January 1,
2000, in connection with the merger, or in connection with any of the
amendments to IndyMac's Certificate of Incorporation.
Recommendations
IndyMac's Board of Directors has unanimously approved the termination of
IndyMac's status as a REIT effective January 1, 2000, and believes that the
proposal to approve the termination of IndyMac's status as a REIT effective
January 1, 2000, is in the best interests of IndyMac and its stockholders.
IndyMac's Board of Directors recommends that you vote for IndyMac terminating
its status as a REIT effective January 1, 2000.
IndyMac's Board of Directors has unanimously approved the merger agreement
and believes that the proposal to approve the merger agreement is in the best
interests of IndyMac and its stockholders. IndyMac's Board of Directors
recommends that you vote for approval of the merger agreement.
IndyMac's Board of Directors has unanimously approved each of the proposed
amendments to IndyMac's Certificate of Incorporation and believes that each
proposal to amend IndyMac's Certificate of Incorporation is in the best
interests of IndyMac and its stockholders. IndyMac's Board of Directors
recommends that you vote for approval of each proposed amendment to IndyMac's
Certificate of Incorporation.
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THE MERGER
(To be voted upon by the IndyMac and SGV Stockholders)
The following information describes material aspects of the merger. This
description does not provide a complete description of all the terms and
conditions of the merger agreement. It is qualified in its entirety by the
Appendices hereto, including the text of the merger agreement, which is
attached as Appendix A to this joint proxy statement. The merger agreement is
incorporated into this joint proxy statement by reference. You are urged to
read Appendix A and the other Appendices to this joint proxy statement in their
entirety.
The Merger
The merger agreement provides for the acquisition of SGV by IndyMac. To
accomplish this, SGV stockholders will receive cash for their shares of SGV
common stock and IndyMac will form a new, wholly-owned subsidiary that will
merge with and into SGV. SGV will become a wholly-owned subsidiary of IndyMac
and IndyMac will continue its business under the new name, IndyMac Bancorp,
Inc., as a taxable growth-oriented depository institution.
What SGV Stockholders Will Receive in the Merger
General. If we complete the merger, and you are an SGV stockholder, you
will receive a cash payment of $25.00 without interest for each of your shares
of SGV common stock, unless this per share purchase price is adjusted as
described below.
Possible Adjustments. After the parties select the date when they will
complete the merger, SGV will prepare and deliver to IndyMac a certified
calculation of SGV's pre-closing net portfolio value and pre-closing book
stockholders' equity or net worth as of the end of the month before the month
in which the effective time of the merger will occur. SGV will deliver these
calculations no later than 10 business days after the end of the month for
which the calculations are to be made, which is one month before the month in
which the merger will become effective. SGV will calculate SGV's net portfolio
value and book net worth based on assumptions, line items and methods
previously used by SGV as noted in the merger agreement.
The pre-closing net portfolio value and pre-closing book net worth
calculations will be deemed final on the fifth business day after SGV delivers
the calculations to IndyMac unless:
(1) the parties jointly agree that the calculations are final on an
earlier date; or
(2) IndyMac has delivered a notice of disagreement with the
calculations prior to the fifth business day after their delivery,
in which case
. the parties will use their reasonable efforts to reach agreement
on the disputed items or amounts or, if they are unable to reach
agreement,
. the parties will cause an independent accounting firm to
calculate the disputed items or amounts.
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Once the pre-closing net portfolio value and book net worth calculations
are final, the parties will determine whether the per share purchase price
should be adjusted pursuant to the following formulas:
(1) if the pre-closing net portfolio value is less than 110% of SGV's
book net worth at June 30, 1999 (calculated in accordance with the
terms set forth in the merger agreement) or "baseline net worth,"
then the per share purchase price will be decreased by subtracting
from the per share purchase price the following result:
. the product of 1.5 multiplied by the difference between 110% of
SGV's baseline net worth and the pre-closing net portfolio
value, divided by
. the total number of shares of SGV common stock outstanding or
issuable under options immediately before the effective time of
the merger;
For example, assume SGV's baseline net worth is $32.0 million. The per
share purchase price will be reduced if SGV's pre-closing net portfolio value
is less than 110% of $32.0 million (which is $35.2 million). Now assume that
SGV's pre-closing net portfolio value is $34.2 million. SGV's pre-closing net
portfolio value is $1.0 million less than 110% of its baseline net worth.
Therefore, SGV's stockholders would receive, in the aggregate, $1.5 million
less merger consideration (1.5 times the $1.0 million difference).
The decrease in consideration would be divided on a per share basis by the
number of shares of SGV common stock outstanding plus the number of shares of
SGV common stock that could be purchased from the exercise of all outstanding
options to purchase SGV common stock. Because there are 2,176,323 shares
outstanding and 323,430 shares of common stock that could be issued in
connection with the exercise of stock options, the $1.5 million would be
divided by 2,499,753. This would result in the purchase price per share being
decreased by $0.60.
(2) if the pre-closing net portfolio value is more than 125% of
baseline net worth, the per share purchase price will be increased
by adding to the per share purchase price the following result:
. the difference between the pre-closing net portfolio value and
125% of baseline book net worth, divided by
. the total number of shares of SGV common stock outstanding or
issuable under options immediately before the effective time of
the merger.
For example, assume that SGV's baseline net worth is $32.0 million.
The per share purchase price will be increased if SGV's pre-closing net
portfolio value is more than 125% of $32.0 million (which is $40.0
million). Also assume that SGV's pre-closing net portfolio value is $41.0
million. In this case, SGV's stockholders would receive, in the aggregate,
an additional $1.0 million of merger consideration ($41.0 million less
$40.0 million). The per share increase would be calculated the same way as
the decrease described above, which would be $0.40 per share.
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If the per share purchase price is adjusted because of a change in SGV's
net portfolio value, the per share purchase price will not be increased above
$27.50 per share or decreased below $22.50 per share. In the event that but for
this limitation, the per share purchase price would be decreased below $22.50,
IndyMac may terminate the merger agreement. See "--Waiver, Amendment and
Termination" on page 48.
Additionally, if the OTS has not approved the merger by July 12, 2000,
IndyMac has the right to extend the automatic termination date of the merger
until October 12, 2000. In exchange for this extension, IndyMac will pay a fee
to SGV of $1.0 million. In the event the merger is completed, the $1.0 million
will be added to the total merger consideration to be paid to SGV stockholders.
The additional consideration would be divided on a per share basis by the
number of shares of SGV common stock outstanding plus the number of shares of
SGV stock that could be purchased from the exercise of all outstanding options
to purchase SGV common stock. This increase in the purchase price is not
affected by the $27.50 per share limitation described above. It is therefore
possible that the per share purchase price could be increased to up to $27.90.
What IndyMac Stockholders Will Receive in the Merger
If we complete the merger, and you are an IndyMac stockholder, you will
retain the shares of IndyMac common stock that you own and will not receive any
additional consideration.
Effect of the Merger on SGV Options
When the merger is completed, each option or stock option plan granted
under the SGV stock-based equity compensation plans that is outstanding,
whether or not exercisable, will be cancelled in exchange for a cash payment
equal to:
(1) the difference between the per share purchase price and the
exercise price of such option or right; multiplied by
(2) the number of shares of SGV common stock subject to the SGV option
or right.
A holder of SGV options or rights will be entitled to receive the cash
payment for such options or rights at the effective time, directly from
IndyMac, not from the paying agent.
For information with respect to stock options and rights held by SGV's
management, see "--Interests of Certain Persons in the Merger" on page 53.
Effect of the Merger on IndyMac Options and Stock Rights
IndyMac has granted options and other rights to acquire IndyMac common
stock under its stock incentive plans and stock option plans. The merger will
have no effect on these options or rights.
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Certain Federal Income Tax Consequences of the Merger
This section summarizes material U.S. federal income tax considerations
relevant to the merger that apply to the SGV and the IndyMac stockholders. This
discussion is based on existing provisions of the Internal Revenue Code, as
amended, existing Treasury regulations and current administrative rulings and
court decisions, all of which are subject to change. Any such change, which may
or may not be retroactive, could alter the tax consequences of the merger to
you. The Internal Revenue Service or "IRS" may adopt a contrary position.
We do not discuss all U.S. federal income tax considerations that may be
relevant to you in light of your particular circumstances. Factors that could
alter the tax consequences of the merger to you include:
(1) if you are a dealer in securities;
(2) if you are a tax-exempt organization;
(3) if you are subject to the alternative minimum tax provisions of
the Internal Revenue Code;
(4) if you are a foreign person or entity;
(5) if you are a financial institution or insurance company;
(6) if you do not hold your shares as capital assets;
(7) if you acquired your shares in connection with stock option or
stock purchase plans or in other compensatory transactions;
(8) if you hold your shares as part of an integrated investment,
including a "straddle";
(9) if you hold shares subject to the constructive sale provisions of
Section 1259 of the Internal Revenue Code.
In addition, we do not discuss the tax consequences of the reorganization
described under "--Management and Operations after the Merger" on page 53 under
foreign, state or local tax laws, the tax consequences of transactions
effectuated prior or subsequent to, or concurrently with, the merger, whether
or not any such transactions are undertaken in connection with the
reorganization. Accordingly, we urge you to consult your own tax advisors as to
the specific consequences to you of the merger.
For federal income tax purposes, the merger will be treated as a taxable
sale or exchange of shares of the SGV common stock for cash by each holder of
the SGV common stock (including any dissenting stockholder). The amount of gain
or loss to be recognized by each stockholder will be measured by the difference
between the amount of cash received by such stockholder in connection with the
merger for his or her shares of SGV common stock (including dissenting shares)
and such stockholder's tax basis in such shares of SGV common stock at the
effective time of the merger. Assuming the SGV stockholder held his or her
shares of SGV common stock as a capital asset as defined in the Internal
Revenue Code (generally property held for investment) at the effective time of
the merger, such stockholder's gain or loss will be capital gain or loss, and
will be long-term with respect to shares of SGV common stock held for more than
12 months as of the effective time, and
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short-term with respect to such shares held for 12 months or less as of the
effective time. The maximum rate on long-term capital gains in the case of
individuals currently is 20% with respect to property that has been held for
more than 18 months, and 28% with respect to property that has been held for
more than one year but not more than 18 months.
IndyMac will be treated as having purchased, in a taxable transaction, the
shares of SGV common stock. Accordingly, its basis in such shares of SGV common
stock will be equal to the cash it paid to purchase such shares, and its
holding period for the shares of SGV common stock will begin the day after the
effective time of the merger. The stockholders of IndyMac will not have any
federal income tax consequences as a result of the merger.
For the tax consequences of the termination of IndyMac's election to be
taxed as a REIT for U.S. federal income tax purposes, see page 56. In addition
to approving the merger agreement, the IndyMac stockholders will be asked at
the IndyMac Special Meeting to approve IndyMac's termination of its REIT status
effective January 1, 2000. If the stockholders of IndyMac do not vote to
terminate the REIT status of IndyMac but do vote in favor of the merger, then
it is important to note that the ownership of SGV which results from the merger
may cause IndyMac to fail to meet certain of the requirements relating to
income and diversification that must be met in order for qualification as a
REIT for federal income tax purposes, which failure may lead to a termination
of IndyMac's REIT status.
The tax consequences of the merger may vary depending upon the particular
circumstances of each IndyMac or SGV stockholder. Accordingly, IndyMac and SGV
stockholders are urged to consult their own tax advisors as to the specific tax
consequences to them of the merger, including the applicability and effect of
state, local, and foreign tax laws.
Background of and Reasons for the Merger
Background to the Merger. Since SGV's mutual to stock conversion in 1995,
SGV's Board of Directors periodically reviewed the strategic alternatives
available to SGV, including in meetings with its financial advisors, Sandler
O'Neill & Partners, L.P., on February 4, 1996, August 18, 1997, August 28, 1997
and February 20, 1998. At those meetings, the SGV Board of Directors
considered, among other items, strategic alternatives ranging from pursuing a
course of continuing as an independent institution and growing internally,
possible acquisitions of smaller financial institutions, a possible merger-of-
equals with a similar sized institution and a possible sale of SGV to another
institution.
As the result of the lack of liquidity that occurred in the capital markets
in the fourth quarter of 1998 and IndyMac's desire to provide for a more stable
source of funding to continue to grow its business, management of IndyMac, with
the approval of the Board, developed a revised business strategy that would
result in IndyMac terminating its REIT status and becoming a taxable, growth-
oriented institution. By terminating its REIT status, IndyMac would no longer
be required to distribute at least 95% of its net income annually and thereby
could strengthen its capital position to provide greater balance sheet leverage
to grow its business as a means of increasing stockholder value. The revised
business strategy also contemplated that IndyMac would, through an acquisition,
become an insured depository institution or would obtain a de novo federal
depository institution charter,
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thereby developing additional sources of funding and lessening its reliance on
the capital markets. Accordingly, in furtherance of the revised business
strategy, in January 1999, the IndyMac Board of Directors authorized IndyMac
officers to explore the possibility of acquiring a thrift institution. The
Board believed that becoming a thrift would offer IndyMac the benefits of
diversification, additional financing resources and certain licensing,
servicing and interest rate exemptions in various states. In the following
months, IndyMac investigated various possibilities for merger partners.
In late January and early February 1999, at the direction of IndyMac,
representatives of Merrill Lynch & Co., Inc., IndyMac's financial advisors,
contacted SGV's president and chief executive officer, Barrett Andersen and
representatives of Sandler O'Neill to discuss the possible acquisition of SGV
by IndyMac. Mr. Andersen relayed IndyMac's expression of interest to an
executive session of SGV's Board of Directors held on February 22, 1999. At
that time, SGV's Board of Directors authorized and instructed Mr. Andersen and
Sandler O'Neill to meet with IndyMac to discuss strategic alternative issues.
On March 26, 1999, after discussing the possibility of such an acquisition
with its outside legal advisors, Muldoon, Murphy & Faucette LLP, as well as
with its primary regulators, Mr. Andersen and representatives of Sandler
O'Neill met with IndyMac's chief executive officer, Michael Perry, IndyMac's
chief operating officer and general counsel and representatives of Merrill
Lynch. At this meeting, IndyMac reiterated its interest in acquiring a
financial institution such as SGV. At this time, Mr. Andersen advised IndyMac
that SGV was not for sale but that he was authorized to listen to IndyMac's
proposal. IndyMac and Merrill Lynch then outlined the proposed structure of
such a deal, including a suggested range of pricing in the area of one and one-
half to two times SGV's book value.
On May 24, 1999 the IndyMac Board of Directors held a telephonic special
meeting at which Mr. Perry discussed SGV as a potential merger partner for
IndyMac. Mr. Perry indicated that the similarity between SGV's and IndyMac's
assets, the apparent quality of SGV's assets, and the proximity of SGV's branch
locations to IndyMac's headquarters made SGV a good merger candidate. Mr. Perry
further indicated that he had had preliminary discussions with Mr. Andersen.
The Board authorized Mr. Perry to continue discussions with SGV.
Telephonic conversations occurred between the parties regarding the
prospective transaction between the March 26, 1999 face-to-face meeting and May
27, 1999. On May 27, 1999 SGV received correspondence from IndyMac which
contained a merger proposal and Mr. Andersen conferred with representatives of
Sandler O'Neill regarding the proposal, who in turn discussed the proposal with
representatives of Merrill Lynch. Based on those conversations, IndyMac
submitted a revised proposal to SGV on June 1, 1999.
A special meeting of SGV's Board of Directors was held on June 2, 1999, to
review IndyMac's written proposal. At this meeting, Sandler O'Neill made a
detailed presentation to SGV's Board of Directors pursuant to which IndyMac
would acquire SGV for a price of 1.75 times SGV's book value. A representative
of Muldoon, Murphy, attending the meeting telephonically, made a detailed
presentation to SGV's Board of Directors regarding the
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Board's fiduciary responsibilities to the SGV stockholders in this context.
Following these presentations, SGV's Board of Directors voted to authorize and
instruct Mr. Andersen and Sandler O'Neill to continue negotiations with IndyMac
regarding the proposed transaction and to determine if there existed any other
potential suitors for SGV.
On June 2, 1999, IndyMac issued a press release in which IndyMac declared
its intention to acquire a federally chartered savings and loan association,
terminate its status as a REIT and convert to a full-service financial
institution. On June 3, 1999, at the annual meeting of the IndyMac Board of
Directors, Mr. Perry updated the Board of Directors regarding the discussions
with SGV. Following Mr. Perry's presentation, IndyMac's Board of Directors
authorized Mr. Perry to continue negotiations with SGV and to enter into a
definitive merger agreement within the parameters approved by the Board. On
June 4, 1999, the American Banker reported IndyMac's interest in acquiring a
thrift and identified SGV as the most likely target for IndyMac given IndyMac's
publicly stated criteria. Trading in SGV's common stock became irregular early
in the day on June 4, 1999 prompting SGV to contact its financial and legal
advisors. Following discussions with its financial and legal advisors and with
Mr. Perry, SGV issued a press release advising that it had received a
preliminary expression of interest from IndyMac to acquire SGV, that SGV's
Board of Directors was considering IndyMac's offer and that there could be no
assurances that an agreement could be reached between the parties.
Negotiations between the parties continued on June 6, 7, and 8, 1999.
During those discussions, IndyMac raised its offer to acquire SGV to a purchase
price of $25.00 per share in cash. At a special board meeting held on June 8,
1999, Sandler O'Neill made an updated detailed presentation on the proposed
transaction to SGV's Board of Directors, including a detailed review of SGV's
strategic alternatives and an update on possible other suitors for SGV. SGV's
legal advisors also attended the meeting via telephone and reiterated to SGV's
Board of Directors its fiduciary responsibilities in this context. Its
financial advisors having stressed the significantly superior value of the
price at which IndyMac was offering to purchase SGV relative to any other
potential suitor, the Board authorized and instructed Mr. Andersen and Sandler
O'Neill to accept no less than $25.00 per share from IndyMac, but instructed
them to continue negotiating for a higher purchase price.
SGV and IndyMac continued to negotiate the potential acquisition through
face to face meetings and telephone conferences on June 11, 16 through 18 and
21, 1999. At its regularly scheduled board meeting on June 21, 1999, Sandler
O'Neill made an updated detailed presentation to SGV's Board of Directors.
Sandler O'Neill reviewed with SGV's Board of Directors its analysis of the
capacity of other potential partners to offer a per share purchase price at or
in excess of what IndyMac was offering, and advised SGV's Board of Directors
that no third party had expressed an interest in acquiring SGV even though the
negotiations with IndyMac had been public since June 4, 1999. SGV's Board of
Directors authorized and instructed Mr. Andersen, Muldoon, Murphy and Sandler
O'Neill to negotiate the terms of a merger agreement between the parties.
At meetings held June 24 through 26, 1999, SGV and IndyMac negotiated a
term sheet to serve as the basis for the drafting of a definitive merger
agreement. A special meeting of
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SGV's Board of Directors was held to review the term sheet on June 27, 1999.
Sandler O'Neill again made a detailed presentation of the proposed transaction,
reviewed all similar recent transactions in the financial institutions
industry, reviewed how SGV's stock was trading vis-a-vis certain industry
indices, and reviewed the principal terms of the proposed agreement. The per
share purchase price of the proposed deal could be increased or decreased based
on a comparison of SGV's net portfolio value as of the end of the month
immediately preceding the effective time of the merger, to SGV's consolidated
common stockholders' equity at June 30, 1999. Accordingly, Sandler O'Neill's
presentation included a review of an analysis prepared by SGV, of the impact of
changes of interest rates on SGV's net portfolio value under various
circumstances that illustrated how changes in SGV's net portfolio value would
likely affect the per share purchase price.
Following a detailed presentation by Muldoon, Murphy on the term sheet that
had been negotiated to date and a review of SGV's Board of Director's fiduciary
responsibilities, the Board voted to authorize the continuance of negotiations
between the parties and the drafting of a definitive merger agreement (subject
to certain modifications to the term sheet as it then existed) for SGV's Board
of Directors to review.
The parties continued to negotiate the terms of the transaction. Once the
details of the term sheet had been resolved in accordance with SGV's Board of
Director's directions, a definitive merger agreement was drafted and presented
to the Board at a special meeting held on July 8, 1999. At the meeting Sandler
O'Neill made a presentation via telephone on the fairness, from a financial
point of view, of the merger consideration to the SGV stockholders. Muldoon,
Murphy reviewed each section of the definitive merger agreement with SGV's
Board of Directors as well as the Board's fiduciary duties to the SGV
stockholders in the merger context. Following detailed discussions on the
foregoing, SGV's Board of Directors approved the merger agreement subject to
certain modifications and its review thereof. A special meeting of SGV's Board
of Directors was held on July 9, 1999, to review the revised definitive merger
agreement and the Board voted to approve the merger agreement and authorized
and instructed Mr. Andersen to execute it on SGV's behalf. The parties executed
the definitive merger agreement as of July 12, 1999.
The merger agreement originally provided that IndyMac would be merged with
and into SGV, with SGV being the surviving corporation, and IndyMac's
stockholders receiving SGV common stock in exchange for their IndyMac common
stock. After further analysis of the structure of the merger, IndyMac's Board
of Directors determined that it would be in IndyMac's and the IndyMac
stockholders' best interests to restructure the transaction so that IndyMac
would create a new wholly-owned subsidiary that would be merged with and into
SGV. Under the new structure, SGV would become a wholly-owned subsidiary of
IndyMac, and IndyMac's stockholders would retain their IndyMac stock. An
amended and restated merger agreement that memorialized the modified structure
of the transaction was presented to and approved by the IndyMac Board of
Directors on October 19, 1999 and the SGV Board of Directors on October 18,
1999. The parties entered into the amended and restated merger agreement
effective October 25, 1999.
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IndyMac's Reasons for the Merger. IndyMac's Board of Directors has
determined that the merger is in the best interests of IndyMac and its
stockholders and has unanimously approved the merger agreement. In reaching its
determination, IndyMac's Board of Directors considered a number of factors,
without assigning any relative weights to such factors, including, but not
limited to, the following, which include all material factors considered by
IndyMac's Board of Directors:
(1) IndyMac's Board of Directors analyzed information with respect to
the financial condition, results of operations, business, and
prospects of IndyMac and SGV, including the synergies of IndyMac
and SGV's operations, both in terms of assets and products.
(2) IndyMac's Board of Directors considered the geographic location of
SGV, including the close proximity of SGV's branch network to
IndyMac's headquarters.
(3) IndyMac's Board of Directors considered the size of SGV's deposit
base and how the merger would give IndyMac access to a more
stable, and more diverse funding base and provide the ability to
increase leverage.
(4) IndyMac's Board of Directors considered how the merger would help
implement IndyMac's revised business strategy by converting it
into a taxable growth-oriented depository institution which would
permit IndyMac to retain earnings to support growth.
(5) IndyMac's Board of Directors considered the terms and conditions
of the merger agreement.
(6) IndyMac's Board of Directors reviewed, based in part on
presentations by IndyMac's financial advisors, the business,
operations, quality of assets, financial condition, earnings and
prospects of SGV.
(7) IndyMac's Board of Directors evaluated the risks to consummation
of the merger, including, among others, the risks associated with
obtaining all necessary regulatory approvals without the
imposition of any condition which differs from conditions
customarily imposed in approving acquisitions of the type
contemplated by the merger agreement and compliance with which
would materially adversely affect the reasonably anticipated
benefits of the transactions to IndyMac.
(8) IndyMac's Board of Directors considered that, based on information
the Board received from its financial advisors, the premium
IndyMac would pay to SGV in the merger was comparable to the
premiums paid in similar transactions.
In view of the variety of factors considered in connection with its
evaluation of the merger, IndyMac's Board of Directors did not find it
practicable to, and did not, quantify or otherwise attempt to assign relative
weights to the specific factors considered in reaching its determination.
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IndyMac's Board of Directors has unanimously approved the merger agreement
and unanimously recommends to the IndyMac stockholders that you approve and
adopt the merger agreement.
SGV's Reasons for the Merger. SGV's Board of Directors has determined that
the merger is in the best interests of SGV and its stockholders and has
unanimously approved the merger agreement. In reaching its determination, SGV's
Board of Directors considered a number of factors, without assigning any
relative weights to such factors, including, but not limited to, the following,
which include all material factors included by SGV's Board of Directors:
(1) SGV's Board of Directors analyzed the per share purchase price
($25.00 cash per share, as it may be adjusted) to be paid to the
SGV stockholders in relation to the current market value of SGV
common stock as well as the last sale prices, volume, trading and
distribution of SGV common stock for the previous year (May 26,
1998 through May 28, 1999), when SGV's Board of Directors first
met to consider the transaction;
(2) SGV's Board of Directors considered the terms and conditions of
the merger agreement, including the taxable nature of the cash to
be paid to the SGV stockholders;
(3) SGV's Board of Directors considered the financial condition,
results of operations, capital levels, asset quality and prospects
for SGV;
(4) SGV's Board of Directors considered market, industry, regulatory
and economic conditions and, in particular, consolidation and
competition in the financial services industry;
(5) SGV's Board of Directors considered the opinion of SGV's financial
advisor that the per share purchase price to be received by the
SGV stockholders in the merger is fair, from a financial point of
view, to the holders of SGV common stock;
(6) The results of the contacts and discussions between SGV and its
financial advisors and various third parties and the belief of
SGV's Board of Directors that the merger with IndyMac offered the
best transaction available to SGV and its stockholders;
(7) SGV's Board of Directors considered the certainty of a cash
transaction versus a transaction in which the SGV stockholders
would receive stock of the acquiror;
(8) SGV's Board of Directors considered the likelihood of receiving
the required regulatory approvals in a timely manner;
(9) The results of the due diligence investigation of IndyMac,
including IndyMac's ability to pay the aggregate merger
consideration; and
(10) SGV's strategic alternatives to the merger, including the
continued operation of SGV as an independent financial
institution.
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In view of the variety of factors considered in connection with its
evaluation of the merger, SGV's Board of Directors did not find it practicable
to, and did not, quantify or otherwise attempt to assign relative weights to
the specific factors considered in reaching its determination.
SGV's Board of Directors has unanimously approved the merger agreement and
the plan of merger and unanimously recommends to the SGV stockholders that you
approve and adopt the merger agreement and the plan of merger.
Opinion of SGV's Financial Advisor
By letter agreement dated as of August 28, 1996, SGV retained Sandler
O'Neill as an independent financial advisor in connection with SGV's strategic
planning and merger and acquisition analyses, including SGV's consideration of
possible business combinations with other parties. Sandler O'Neill is a
nationally recognized investment banking firm whose principal business
specialty is financial institutions. In the ordinary course of its investment
banking business, Sandler O'Neill is regularly engaged in the valuation of
financial institutions and their securities in connection with mergers and
acquisitions and other corporate transactions.
Sandler O'Neill acted as financial advisor to SGV in connection with the
merger and participated in certain of the negotiations leading to the merger
agreement. At the request of SGV's Board of Directors, representatives of
Sandler O'Neill participated by telephone in the July 8, 1999 meeting at which
SGV's Board of Directors considered the merger and in the July 9, 1999 meeting
at which SGV's Board of Directors approved the merger agreement. At the July 9,
1999 meeting, Sandler O'Neill delivered to SGV's Board of Directors its oral
opinion, subsequently confirmed in writing as of July 12, 1999, that as of such
date, the consideration to be received by SGV stockholders in the merger was
fair to the SGV stockholders from a financial point of view. Sandler O'Neill
has also delivered to SGV's Board of Directors a written opinion dated the date
of this joint proxy statement which is substantially identical to the July 12,
1999 opinion. The full text of Sandler O'Neill's opinion is attached as
Appendix C to this joint proxy statement. The opinion outlines the procedures
followed, assumptions made, matters considered and qualifications and
limitations on the review undertaken by Sandler O'Neill in rendering the
opinion. The opinion is incorporated by reference into this description and
this description is qualified in its entirety by reference to the opinion. SGV
stockholders are urged to carefully read the opinion in connection with their
consideration of the proposed merger.
Sandler O'Neill's opinion was directed to SGV's Board of Directors and was
provided to SGV's Board of Directors for its information in considering the
merger. The opinion is directed only to the fairness of the merger
consideration to the SGV stockholders from a financial point of view. It does
not address SGV's underlying business decision to engage in the merger or any
other aspect of the merger and is not a recommendation to any SGV stockholder
as to how such stockholder should vote at the SGV special meeting with respect
to the merger or any other related matter.
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In rendering its July 12, 1999 opinion, Sandler O'Neill performed a variety
of financial analyses. The following is a summary of the material analyses
performed by Sandler O'Neill, but is not a complete description of all the
analyses underlying Sandler O'Neill's opinion. The preparation of a fairness
opinion is a complex process involving subjective judgments as to the most
appropriate and relevant methods of financial analysis and the application of
those methods to the particular circumstances. The process, therefore, is not
necessarily susceptible to a partial analysis or summary description. Sandler
O'Neill believes that its analyses must be considered as a whole and that
selecting only certain factors and analyses, or attempting to ascribe relative
weights to some or all factors and analyses, could create an incomplete view of
the evaluation process underlying its opinion. Also, no company included in
Sandler O'Neill's comparative analysis described below is identical to SGV and
no transaction is identical to the merger. Accordingly, an analysis of
comparable companies or transactions is not mathematical; rather, it involves
complex considerations and judgments concerning differences in financial and
operating characteristics of the companies and other factors that could affect
the public trading value or merger transaction value of SGV and the companies
to which it is being compared.
The earnings projections for SGV relied upon by Sandler O'Neill in its
analyses were reviewed with management and were based upon SGV's fiscal year
2000 internal projections. For periods after fiscal year 2000, Sandler O'Neill
assumed an annual growth rate on earning assets and earnings per share of 10%
and 20%, respectively. The fiscal year 2000 earnings projections furnished to
Sandler O'Neill were prepared by the senior management of SGV for internal
purposes only and not with a view towards public disclosure. Those projections,
as well as the other earnings estimates relied upon by Sandler O'Neill in its
analyses, were based on numerous variables and assumptions which are inherently
uncertain and accordingly, actual results could vary materially from those set
forth in such projections.
In performing its analyses, Sandler O'Neill also made numerous assumptions
with respect to industry performance, business and economic conditions and
various other matters, many of which cannot be predicted and are beyond the
control of SGV and Sandler O'Neill. The analyses performed by Sandler O'Neill
are not necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by such analyses. Sandler
O'Neill prepared its analyses solely for purposes of rendering its opinion and
provided such analyses to SGV's Board of Directors at the Board's July 8, 1999
and July 9, 1999 meetings. Estimates on the values of companies do not purport
to be appraisals or necessarily reflect the prices at which companies or their
securities may actually be sold. Such estimates are inherently subject to
uncertainty and actual values may be materially different. Accordingly, Sandler
O'Neill's analyses do not necessarily reflect the value of SGV common stock or
the price at which SGV common stock may be sold at any time.
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<PAGE>
Summary of Proposal. Sandler O'Neill reviewed the financial terms of the
proposed transaction. Based upon the per share cash consideration of $25.00 and
SGV's March 31, 1999 financial information, Sandler O'Neill calculated the
following ratios:
<TABLE>
<S> <C>
Transaction Price/Book value............................................. 1.77x
Transaction Price/Tangible book value.................................... 1.78x
Transaction Price/Last twelve months' EPS................................ 25.25x
</TABLE>
The implied aggregate transaction value was approximately $59.1 million,
based upon 2,363,654 fully diluted shares of SGV common stock outstanding,
which was determined using the treasury stock method at the per share
transaction value of $25.00. For purposes of Sandler O'Neill's analyses,
earnings per share were based on fully diluted earnings per share. Sandler
O'Neill noted that the $25.00 transaction value represented a 24% premium over
the July 9, 1999 closing price of SGV common stock of $20.13 and a premium of
102% over the closing price of SGV common stock of $12.38 on June 3, 1999,
which was the date prior to the public announcement of negotiations between the
parties.
Stock Trading History. Sandler O'Neill reviewed the history of the reported
trading prices and volume of SGV common stock, and the relationship between the
movements in the price of SGV common stock to movements in certain stock
indices, including the Standard & Poor's 500 Index, the Nasdaq Bank Index and
the median performance of a composite group of regional savings institutions
selected by Sandler O'Neill. During the one year period ended July 7, 1999, the
SGV common stock outperformed its composite group index and the Nasdaq Bank
Index, while it underperformed the S&P Index. In connection with its analyses,
Sandler O'Neill noted the impact of SGV's public announcement that it was
engaged in preliminary discussions regarding a potential business combination
transaction.
Comparable Company Analysis. Sandler O'Neill used publicly available
information to compare selected financial and market trading information for
SGV with that of the two groups of savings institutions selected by Sandler
O'Neill. The Regional Group consisted of SGV and the following nine publicly
traded regional savings institutions:
FirstFed Financial Corp. PBOC Holdings Inc.
PFF Bancorp Inc. Hawthorne Financial Corp.
Quaker City Bancorp Inc. Provident Financial Holdings
Highland Bancorp Inc. Monterey Bay Bancorp Inc.
Broadway Financial Corp.
The High Performing Group consisted of the following 12 publicly traded
savings institutions that had a return on average equity (based on the last
twelve months' earnings) of greater than 13% and a price to tangible book value
of greater than 160%:
MetroWest Bank American Bank of Connecticut
Coastal Financial Corp. Progress Financial Corp.
Highland Bancorp Inc. Bancorp Connecticut Inc.
Cascade Financial Corp. Warren Bancorp Inc.
Winton Financial Corp. Home Port Bancorp Inc.
First Georgia Holding Inc. Peoples Savings Bank of Troy
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The analysis compared publicly available financial information for SGV as
of and for each of the years ended June 30, 1994 through 1998 and as of and for
the twelve months ended March 31, 1999 to the median data for each of the
Regional Group and High Performing Group as of and for each of the years ended
December 31, 1994 through 1998 and as of and for the twelve months ended March
31, 1999. The table below sets forth the comparative data as of and for the
twelve months ended March 31, 1999.
<TABLE>
<CAPTION>
High
Regional Performing
SGV Group Group
-------- -------- ----------
<S> <C> <C> <C>
Total assets..................................... $464,500 $922,885 $533,892
Annual growth rate of total assets............... 15.82% 13.76% 13.19%
Tangible equity/total assets..................... 6.82 7.78 7.53
Intangible assets/total equity................... 0.97 0.00 0.00
Net loans/total assets........................... 75.70 75.22 73.52
Cash & securities/total assets................... 21.90 21.01 22.92
Gross loans/total deposits....................... 109.08 118.17 109.69
Total borrowings/total assets.................... 22.38 23.96 23.73
Non-performing assets/total assets............... 0.74 0.75 0.38
Loan loss reserve/gross loans.................... 0.49 1.06 1.33
Net interest margin.............................. 2.86 3.02 4.00
Loan loss provision/average assets............... 0.24 0.19 0.08
Non-interest income/average assets............... 0.39 0.42 0.61
Non-interest expense/average assets.............. 2.04 1.98 2.38
Efficiency ratio................................. 65.12 62.46 55.56
Return on average assets......................... 0.53 0.70 1.25
Return on average equity......................... 7.36 8.82 15.02
Price/tangible book value per share.............. 131 115 183
Price/earnings per share......................... 19.25x 13.48x 13.62x
Dividend yield................................... 0.00% 0.00% 1.95%
Dividend payout ratio............................ 0.00 0.00 26.51
</TABLE>
Analysis of Selected Merger Transactions. Sandler O'Neill reviewed certain
other transactions involving publicly traded savings institutions as acquired
institutions with transaction values greater than $15 million. Sandler O'Neill
reviewed 22 transactions announced nationwide from January 1, 1999 to July 7,
1999 ("Nationwide YTD Transactions"), and 13 transactions announced from
January 1, 1999 to July 7, 1999, in which the acquired institution had a return
on average equity of less than 10% ("Lower ROAE YTD Transactions"). Sandler
O'Neill also reviewed 83 transactions announced nationwide from January 1, 1998
to July 7, 1999 ("All Nationwide Transactions"), and 48 transactions announced
from January 1, 1998 to July 7, 1999, in which the acquired institution had a
return on average equity of less than 10% ("All Lower ROAE Transactions").
Sandler O'Neill reviewed the ratios of transaction price to last four quarters'
earnings, transaction price to book value, transaction price to tangible book
value and tangible book premium to core deposits and computed high, low, mean,
and median ratios and premiums for the respective groups of transactions. These
multiples were applied to SGV's financial information as of and for the 12
months ended March 31, 1999. As illustrated in the following table, Sandler
O'Neill derived an imputed range of values per share of SGV common stock of
$23.74 to $29.03 based upon the median multiples for
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Nationwide YTD Transactions, $21.28 to $26.46 based upon the median multiples
for Lower ROAE YTD Transactions, $24.63 to $38.34 based upon the median
multiples for All Nationwide Transactions and $25.32 to $33.34 based upon the
median multiples for All Lower ROAE Transactions.
<TABLE>
<CAPTION>
Nationwide YTD Lower ROAE YTD
Transactions Transactions
---------------- ----------------
Median Implied Median Implied
Multiple Value Multiple Value
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Deal price/LTM EPS............................ 23.97x $23.74 24.53x $24.30
Deal price/Book value......................... 1.81x 26.59 1.45x 21.28
Deal price/Tangible book value................ 1.84x 26.84 1.56x 22.65
Tangible book premium/Core deposits........... 11.82% 29.03 9.86% 26.46
<CAPTION>
All Nationwide All Lower ROAE
Transactions Transactions
---------------- ----------------
Median Implied Median Implied
Multiple Value Multiple Value
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Deal price/LTM EPS............................ 24.87x $24.63 28.45x $28.18
Deal price/Book value......................... 2.08x 30.52 1.74x 25.55
Deal price/Tangible book value................ 2.14x 31.22 1.74x 25.32
Tangible book premium/Core deposits........... 18.91% 38.34 15.10% 33.34
</TABLE>
Discounted Dividend Stream and Terminal Value Analysis. Sandler O'Neill
also performed an analysis which estimated the future stream of after-tax
dividend flows of SGV through June 30, 2003 under various circumstances,
assuming SGV's current dividend payout ratio and that SGV performed in
accordance with the earnings forecasts reviewed with management. To approximate
the terminal value of SGV common stock at June 30, 2003, Sandler O'Neill
applied price/earnings multiples ranging from 11x to 26x and applied multiples
of tangible book value ranging from 75% to 175%. The dividend income streams
and terminal values were then discounted to present values using different
discount rates ranging from 9% to 15% chosen to reflect different assumptions
regarding required rates of return of holders or prospective buyers of SGV
common stock. As illustrated in the following table, this analysis indicated an
imputed range of values per share of SGV common stock of $14.86 to $45.13 when
applying the price/earnings multiples and $8.39 to $25.18 when applying
multiples of tangible book value.
<TABLE>
<CAPTION>
Price/Earnings Tangible Book
Multiples Value Multiples
--------------------------------- ---------------------------------
Discount Rate 11x 26x 0.75x 1.75x
------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
9% $ 19.09 $ 45.13 $ 10.79 $ 25.18
11 17.56 41.50 9.92 23.15
13 16.15 38.17 9.13 21.29
15 14.86 35.11 8.39 19.59
</TABLE>
In connection with its analysis, Sandler O'Neill considered and discussed
with SGV's Board of Directors how the present value analysis would be affected
by changes in the underlying assumptions, including variations with respect to
the growth rate of assets, net interest spread, non-interest income, non-
interest expenses and dividend payout ratio. Sandler O'Neill noted that the
discounted dividend stream and terminal value analysis is a widely
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<PAGE>
used valuation methodology, but the results of such methodology are highly
dependent upon the numerous assumptions that must be made, and the results
thereof are not necessarily indicative of actual values or future results.
In connection with rendering its July 12, 1999 opinion, Sandler O'Neill
reviewed, among other things:
(1) the merger agreement and exhibits thereto;
(2) certain publicly available financial statements of SGV and other
historical financial information provided by SGV that they deemed
relevant;
(3) certain publicly available financial statements of IndyMac and
other historical financial information provided by IndyMac that
they deemed relevant;
(4) certain internal financial analyses and forecasts of SGV prepared
by and reviewed with SGV management and the views of SGV's senior
management, based on certain limited discussions with certain
members of senior management, regarding SGV's past and current
business, financial condition, results of operations and future
prospects;
(5) certain internal financial analyses and forecasts of IndyMac
prepared by and reviewed with IndyMac management and the views of
IndyMac's senior management, based on certain limited discussions
with certain members of senior management, regarding IndyMac's
past and current business, financial condition, results of
operations and future prospects;
(6) the publicly reported historical price and trading activity for
SGV and IndyMac common stock;
(7) a comparison of certain financial and stock market information for
SGV with similar publicly available information for certain other
companies the securities of which are publicly traded;
(8) the financial terms of recent business combinations in the savings
institution industry, to the extent publicly available;
(9) the current market environment generally and the banking
environment in particular; and
(10) such other information, financial studies, analyses and
investigations and financial, economic and market criteria as
they considered relevant.
In connection with rendering its updated opinion included as an appendix to
this joint proxy statement, Sandler O'Neill confirmed the appropriateness of
its reliance on the analyses used to render its July 12, 1999 opinion by
performing procedures to update certain of such analyses and by reviewing the
assumptions upon which such analyses were based and the other factors
considered in rendering its opinion.
In performing its reviews and analyses, Sandler O'Neill assumed and relied
upon the accuracy and completeness of all the financial information, analyses
and other information
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<PAGE>
that was publicly available or otherwise furnished to, reviewed by or discussed
with it, and Sandler O'Neill did not assume any responsibility or liability for
independently verifying the accuracy or completeness of any of such
information. Sandler O'Neill did not make an independent evaluation or
appraisal of the assets, the collateral securing assets or the liabilities,
contingent or otherwise, of SGV or IndyMac or any of their respective
subsidiaries, or the collectibility of any such assets, nor was it furnished
with any such evaluations or appraisals. Sandler O'Neill is not an expert in
the evaluation of allowances for loan losses and it has not made an independent
evaluation of the adequacy of the allowance for loan losses of SGV or IndyMac,
nor has it reviewed any individual credit files relating to SGV or IndyMac.
With SGV's consent, Sandler O'Neill has assumed that the respective allowances
for loan losses for both SGV and IndyMac are adequate to cover such losses and
will be adequate on a pro forma basis for the combined entity. In addition,
Sandler O'Neill has not conducted any physical inspection of the properties or
facilities of SGV or IndyMac. With respect to all financial projections
reviewed with each company's management and used by Sandler O'Neill in its
analyses, Sandler O'Neill assumed that they reflected the best currently
available estimates and judgments of the respective managements of the
respective future financial performances of SGV and IndyMac and that such
performances will be achieved. Sandler O'Neill expressed no opinion as to such
financial projections or the assumptions on which they were based.
Sandler O'Neill's opinion was necessarily based upon market, economic and
other conditions as they existed on, and could be evaluated as of, the date of
its opinion. Sandler O'Neill assumed, in all respects material to its analysis,
that all of the representations and warranties contained in the merger
agreement and all related agreements are true and correct, that each party to
such agreements will perform all of the covenants required to be performed by
such party under such agreements and that the conditions precedent in the
merger agreement are not waived. Sandler O'Neill also assumed, with SGV's
consent, that there has been no material change in SGV's or IndyMac's assets,
financial condition, results of operations, business or prospects since the
date of the last publicly filed financial statements made available to them,
that SGV and IndyMac will remain as going concerns for all periods relevant to
its analyses, and that the merger will be accounted for as a purchase
transaction and will qualify as a tax-free transaction to IndyMac for federal
income tax purposes.
SGV has agreed to pay Sandler O'Neill a transaction fee in connection with
the merger, a substantial portion of which is contingent upon the closing of
the merger. Based on a transaction price of $25.00, SGV would pay Sandler
O'Neill a transaction fee of approximately $691,000, of which approximately
$173,000 has been paid and the balance will be paid when the merger is closed.
SGV has also paid Sandler O'Neill a fee of $50,000 for rendering its fairness
opinion. SGV has also agreed to reimburse Sandler O'Neill for its reasonable
out-of-pocket expenses incurred in connection with its engagement and to
indemnify Sandler O'Neill and its affiliates and their respective partners,
directors, officers, employees, agents, and controlling persons against certain
expenses and liabilities, including liabilities under securities laws.
Sandler O'Neill has in the past provided, and continues to provide, certain
other investment banking services to SGV and has received, and will receive,
compensation for
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<PAGE>
such services. In the ordinary course of its business as a broker-dealer,
Sandler O'Neill may also purchase securities from and sell securities to SGV
and IndyMac and may actively trade the equity or debt securities of SGV and
IndyMac and their respective affiliates for its own account and for the
accounts of customers and, accordingly, may at any time hold a long or short
position in such securities.
Effective Time of the Merger
Unless IndyMac and SGV otherwise agree, we will use reasonable efforts to
cause the merger to become effective on the first business day following the
last to occur of:
(1) the effective date of the last consent of any regulatory authority
having authority over and approving or exempting the merger (taking
into account any required waiting period);
(2) the date on which stockholders of IndyMac and SGV approve the
merger agreement; and
(3) a later date which may be required to finalize the calculations of
SGV's net portfolio value to determine whether there will be an
adjustment in the per share purchase price to be paid to the SGV
stockholders.
IndyMac and SGV anticipate that the merger will become effective on or
about the end of the first quarter of 2000. However, delays could occur.
On the date the merger closes, the parties will file a certificate of
merger with the Delaware Secretary of State merging a newly-formed, wholly-
owned subsidiary of IndyMac into SGV. The merger will become effective at the
time stated in the certificate of merger.
IndyMac and SGV cannot assure you that the necessary stockholder and
regulatory approvals of the merger will be obtained or that other conditions to
consummation of the merger can or will be satisfied. Either IndyMac's or SGV's
Board of Directors may terminate the merger agreement if the merger is not
completed by July 12, 2000, unless it is not completed because of the willful
breach of the merger agreement by the party seeking termination and in certain
other circumstances related to a delay in the receipt of regulatory approvals.
See "--Conditions to Completion of the Merger" on page 46 and "--Waiver,
Amendment, and Termination" on page 48.
Distribution of Merger Consideration to SGV Stockholders
Before we complete the merger, IndyMac will enter into an agreement with a
bank or trust company selected by IndyMac to serve as paying agent for the
merger. After IndyMac selects the paying agent and before we complete the
merger, IndyMac will deliver to the paying agent enough cash to pay all the SGV
stockholders entitled to receive it, the per share purchase price for each
share of SGV common stock outstanding immediately prior to the effective time
of the merger.
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<PAGE>
Within three business days following the effective time of the merger,
IndyMac will cause the paying agent to mail to each record holder of SGV common
stock immediately prior to the effective time a letter of transmittal and
instructions. These materials will specify that delivery will be effected, and
risk of loss and title to SGV stock certificates will pass, only upon proper
delivery of such SGV stock certificates to the paying agent. The SGV stock
certificates so delivered will be duly endorsed as the paying agent may
require.
In the event of a transfer of ownership of shares of SGV common stock
represented by SGV stock certificates that is not registered in the transfer
records of SGV, the per share purchase price may be issued to a transferee if
the SGV stock certificate representing such shares is delivered to the paying
agent, accompanied by all documents required to evidence such transfer and by
evidence satisfactory to the paying agent that any applicable stock transfer
taxes have been paid.
If any SGV stock certificate has been lost, stolen, mislaid, or destroyed,
upon the stockholders submission of an affidavit claiming the certificate to be
lost, mislaid, stolen, or destroyed, the posting of a bond in such amount as
IndyMac and the paying agent may reasonably require, and any other documents
necessary to evidence and effect the bona fide exchange of the certificate, the
paying agent will issue to such holder the consideration into which the shares
represented by such lost, stolen, mislaid, or destroyed SGV stock certificate
will have been converted. The paying agent may establish such other reasonable
and customary rules and procedures in connection with its duties as it may deem
appropriate.
You should not send in your certificates until you receive a letter of
transmittal and instructions. Do not return your stock certificates with the
enclosed proxy.
At the time the merger becomes effective, the stock transfer books of SGV
will be closed to the SGV stockholders and no transfer of SGV common stock by
any stockholder will thereafter be made or recognized. At and after the
effective time, SGV stock certificates will represent only the right to receive
the per share purchase price for each share represented by the certificate.
Within five business days after the paying agent has received your
certificates for SGV common stock with a properly completed letter of
transmittal and any other required documentation, the paying agent will make to
you your distribution of the per share purchase price together with all unpaid
dividends or other distributions to which you are entitled.
If you are an SGV stockholder and hold shares of SGV common stock in book
entry form, the paying agent will automatically exchange your shares.
Conditions to Completion of the Merger
IndyMac and SGV are required to complete the merger only after the
satisfaction of various conditions. These conditions include:
(1) the holders of a majority of the shares of IndyMac common stock
present at the IndyMac special meeting and a majority of the
outstanding shares of SGV common stock must approve the merger
agreement;
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<PAGE>
(2) IndyMac must receive certain required regulatory approvals;
(3) the representations and warranties of IndyMac and SGV as set
forth in the merger agreement must be true and correct, without
any qualifications, subject to an exception generally for
inaccuracies that would not have or be reasonably likely to have
in the aggregate a material adverse effect as of the date the
merger becomes effective;
(4) IndyMac and SGV must perform all agreements and comply with all
covenants set forth in the merger agreement in all material
respects;
(5) IndyMac and SGV must receive all other consents that may be
required to complete the merger or to prevent any default under
any contract or permit which would be reasonably likely to have,
individually or in the aggregate, a material adverse effect on
IndyMac or SGV;
(6) the absence of any law or order or any action taken by any court,
governmental, or regulatory authority of competent jurisdiction
that makes it illegal to complete the merger or otherwise
prohibits or restricts completing the merger;
(7) SGV must receive a certificate from the paying agent to the
effect that IndyMac has deposited sufficient funds with the paying
agent to pay the per share purchase price on each outstanding
share of SGV common stock and as adjusted on each outstanding
option to purchase SGV common stock;
(8) there may not have occurred any event which generally resulted
in:
. a material adverse effect on the consolidated financial
condition, business or results of operations of SGV or the
ability of SGV to perform its obligations under the merger
agreement on a timely basis,
. a decline in any of the regulatory or compliance ratings of
SGV or First Federal, which is not caused by SGV's compliance
with its covenants in the merger agreement, provided that if
IndyMac elects not to terminate the merger agreement within 60
days after receiving notice from SGV of a regulatory ratings
decline based on a regulatory examination SGV received notice
of prior to the date of the merger agreement, IndyMac cannot
refuse to close based on such decline,
. more than a 15% reduction in First Federal's total or core
deposits from total or core deposits on May 31, 1999, or
. a reduction in SGV's book net worth from March 31, 1999 to
June 30, 1999 or from June 30, 1999 to the month-end before
the effective time; and
(9) satisfaction of certain other conditions, including the receipt of
various certificates from the officers of IndyMac and SGV.
We cannot assure you as to when or if all of the conditions to the merger
can or will be satisfied or waived by the party permitted to do so.
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<PAGE>
Regulatory Approval Needed to Complete the Merger
IndyMac must receive certain regulatory approvals before the merger can be
completed. There is no assurance that these regulatory approvals will be
obtained or when they will be obtained.
It is a condition to the completion of the merger that IndyMac and SGV
receive all necessary regulatory approvals to the merger, without the
imposition by any regulator of any condition or restriction which, in the
reasonable judgment of IndyMac's Board of Directors, would so materially
adversely impact the economic or business benefits of the merger that, had the
condition or restriction been known, IndyMac would not, in its reasonable
judgment, have entered into the merger agreement. There can be no assurance
that the regulatory approvals of the merger will not contain terms, conditions
or requirements which would have such an impact.
IndyMac and SGV are not aware of any material governmental approvals or
actions that are required to complete the merger, except as described below.
Should any other approval or action be required, IndyMac and SGV contemplate
that they would seek such approval or action.
The merger is subject to the prior approval of the OTS. In evaluating the
merger, the OTS must consider, among other factors, the financial and
managerial resources and future prospects of the institutions and the
convenience and needs of the communities to be served. This review includes
consideration of the competence, experience and integrity of the officers,
directors and principal shareholders of IndyMac and First Federal.
Waiver, Amendment, and Termination
To the extent permitted by law, the Board of Directors of IndyMac and SGV
may agree in writing to amend the merger agreement, whether before or after the
IndyMac and the SGV stockholders have approved it; provided, however, that
after such approvals by the IndyMac and the SGV stockholders, no amendments may
be made which would require stockholder approval under the Delaware General
Corporation Law without further approval of the relevant stockholders. In
addition, before or at the time the merger becomes effective, either IndyMac or
SGV, or both, may waive any default in the performance of any term of the
merger agreement by the other party or may waive or extend the time for the
compliance or fulfillment by the other party of any and all of its obligations
under the merger agreement. In addition, either IndyMac or SGV may waive any of
the conditions precedent to its obligations under the merger agreement, unless
a violation of any law or governmental regulation would result. Waivers must be
in writing and signed by an authorized officer of IndyMac or SGV, as the case
may be.
At any time before the merger becomes effective, the merger agreement may
be terminated by:
(1) the mutual consent of SGV and IndyMac;
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<PAGE>
(2) by IndyMac or SGV, upon the material breach by the other party of
any such party's representations or warranties contained in the
merger agreement if the breach cannot be or has not been cured
within 30 days after the giving of written notice of the breach to
the breaching party and which breach is reasonably likely to have,
in the opinion of the terminating party a material adverse effect
on the terminating party (provided that the terminating party is
not then in material breach of any representation, warranty,
covenant or other agreement contained in the merger agreement);
(3) by IndyMac or SGV, if a material breach by the other party of any
covenant or agreement contained in the merger agreement cannot be
or has not been cured within 30 days after the giving of written
notice of the breach to the breaching party (provided that the
terminating party is not then in breach of any representation,
warranty, covenant or other agreement contained in the merger
agreement);
(4) by IndyMac or SGV, if any consent of any regulatory authority
required to complete the merger or other transactions contemplated
by the merger agreement has been denied by a final nonappealable
action, or if any action taken by such authority is not appealed
within the time limit for appeal (provided that the terminating
party is not then in material breach of any representation,
warranty, covenant, or other agreement contained in the merger
agreement);
(5) by IndyMac or SGV, if the stockholders of IndyMac or SGV fail to
approve the merger agreement and the merger at the IndyMac or the
SGV special meeting (provided that the terminating party is not
then in material breach of any representation, warranty, covenant,
or other agreement contained in the merger agreement);
(6) either party if the merger is not completed by July 12, 2000,
provided that the failure to complete is not caused by any willful
breach of the merger agreement by the party seeking to terminate.
However, if
. IndyMac has obtained all required consents of the OTS to the
merger, but the waiting periods imposed in connection with
these consents have not expired by July 12, 2000, the
termination date automatically will be extended to the date 10
days after all waiting periods expire; and
. IndyMac has not obtained all required consents of the OTS by
July 12, 2000, IndyMac may extend the termination date to a
date not later than October 12, 2000, provided, IndyMac gives
SGV notice of its intent to extend the termination date no
later than July 7, 2000;
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<PAGE>
(7) SGV, before the SGV stockholders approve the merger agreement, if
SGV's Board of Directors determines in good faith, based on the
advice of outside counsel that
. to comply with its fiduciary duties to its stockholders, it
must terminate the merger agreement in order to enter into an
agreement with respect to or to complete another acquisition
transaction that SGV's Board of Directors reasonably believes
is more favorable to the SGV stockholders from a financial
point of view, provided that,
. before SGV can terminate the merger agreement to pursue a
superior proposal, SGV must at least two days before any
termination negotiate and cause its representatives to
negotiate with IndyMac to make adjustments to the merger
agreement that would enable SGV to proceed with the merger on
those adjusted terms;
(8) IndyMac, if SGV's Board of Directors has:
. resolved not to reaffirm the merger, or
. affirmed, recommended or authorized SGV entering into a
transaction other than the merger of IndyMac into SGV
involving a merger share exchange, consolidation, or transfer
of substantially all of the assets of SGV; and
(9) IndyMac, if:
. SGV's total deposits or core deposits decline more than 15%
from its total deposits or core deposits at May 31, 1999,
after adding the deposits that SGV acquired in connection with
the acquisition of a branch from Citibank, Federal Savings
Bank, excluding any increase in deposits resulting from
IndyMac purchasing certificates of deposit in connection with
the termination of SGV's Employee Severance Plan,
. SGV's adjusted consolidated stockholders' equity at the end of
the month before the month in which the merger becomes
effective (adjusted as described in the agreement) is less
than SGV's adjusted consolidated stockholders equity at June
30, 1999,
. SGV's stockholders equity of June 30, 1999 is less than SGV's
stockholders equity at March 31, 1999,
. SGV's or First Federal's regulatory ratings or compliance by
the OTS decline from the ratings of SGV and First Federal as
of May 31, 1999 and the ratings decline is not a result of SGV
performing its covenants under the merger agreement,
. SGV's net portfolio value declines to a level which would
cause the per share purchase price to decline below $22.50,
disregarding that the purchase price may be upwardly adjusted
due to IndyMac choosing to extend the termination date, or
50
<PAGE>
. SGV fails to comply with provisions of the merger agreement
requiring SGV to ensure that all loan documents on future
loans comply with all applicable laws and that within 30 days
of IndyMac's completing its application to the OTS to approve
the merger, all loan documentation for outstanding loans
comply with IndyMac's policies.
IndyMac shall pay SGV $1.0 million upon termination of the agreement if:
(1) both parties mutually consent to terminate the merger agreement;
(2) SGV terminates the merger agreement pursuant to paragraphs (2) or
(3) above, and the breach giving rise to SGV's termination right
was not willful; or
(3) either party terminates the merger agreement because the IndyMac
stockholders do not approve the merger at the IndyMac special
meeting under the circumstances described in paragraph (5), above.
IndyMac shall pay SGV $3.0 million upon termination of the merger agreement
if:
(1) SGV terminates the merger agreement pursuant to paragraphs (2) or
(3) above, and the breach giving rise to SGV's termination right
was willful; or
(2) either party terminates the merger agreement pursuant to paragraph
(4) above (but only if the consent of the OTS shall have been
denied by final non-appealable action) or pursuant to paragraph
(6) above, but only if
. the failure to receive the required OTS consents is not due to
a material adverse effect in the financial condition of SGV or
a decline in SGV's regulatory or compliance ratings, or
. if IndyMac is entitled to but fails to extend the termination
date as described in paragraph (6) above, and on July 12,
2000, SGV has not experienced any of the events described in
paragraph (12) under "--Conditions to Completion of the
Merger" on page 46.
SGV will pay IndyMac $1.0 million upon termination of the agreement if:
(1) either party terminates the merger agreement because the SGV
stockholders do not approve the merger at the SGV special meeting
(provided the terminating party is not in material breach of the
merger agreement); or
(2) IndyMac terminates the merger agreement pursuant to the
circumstances described in paragraph (9) above.
SGV will pay IndyMac $3.0 million upon termination of the merger agreement
if:
(1) IndyMac terminates the merger agreement pursuant to paragraphs (2)
or (3) above and the breach giving rise to IndyMac's termination
right was willful,
(2) SGV terminates the merger agreement pursuant to circumstances
described in paragraph (7) above, or
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<PAGE>
(3) IndyMac terminates the merger agreement pursuant to circumstances
described in paragraph (8) above.
If the merger is terminated, the merger agreement and the plan of merger
will become void and have no effect, except that certain provisions of the
merger agreement, including those relating to the obligations to share certain
expenses, pay termination fees, and maintain the confidentiality of certain
information obtained, will survive. Termination of the merger agreement will
not relieve any breaching party from liability for any uncured willful breach
of a representation, warranty, covenant, or agreement. See "--Expenses and
Fees" on page 55.
Conduct of Business Pending the Merger
The merger agreement requires SGV to conduct its business only in the
usual, regular, and ordinary course before the merger becomes effective and
imposes certain limitations on the operations of SGV and its subsidiaries.
These limitations are contained in Article 7 of the merger agreement which is
attached as Appendix A to this joint proxy statement.
SGV has agreed that neither it nor any of its representatives will directly
or indirectly initiate, solicit, encourage or knowingly facilitate (including
by furnishing information) any inquires about or making any proposal to acquire
a substantial ownership interest in or a substantial portion of the assets of
SGV or any of its subsidiaries. However, SGV's Board of Directors may:
(1) comply with the tender offer rules of the Securities Exchange Act
of 1934; and
(2) engage in discussions or negotiations or provide information in
response to an unsolicited bona fide written proposal to acquire a
substantial ownership interest in or a substantial portion of the
assets of SGV or any of its subsidiaries if:
. the SGV special meeting has not occurred, and
. SGV's Board of Directors concludes in good faith and
consistent with their fiduciary duties that the proposal could
reasonably be expected to be completed and to be more
favorable to the SGV stockholders from a financial point of
view than the merger.
In the event that SGV does consider an acquisition proposal, SGV has agreed
to notify IndyMac of such proposals and their material terms, and to keep
IndyMac informed of the status of the negotiations relating to such proposals.
IndyMac and SGV have also agreed not to take any action that would:
(1) materially adversely affect their ability to obtain any consents
required for the merger; or
(2) materially adversely affect their ability to perform their
covenants and agreements under the merger agreement.
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<PAGE>
Management and Operations After the Merger
As a result of the merger, SGV will become a wholly-owned subsidiary of
IndyMac. At the effective time of the merger, IndyMac will change its name to
IndyMac Bancorp, Inc. IndyMac will continue to be governed by the laws of the
state of Delaware and will be governed by its current management and Board of
Directors under its Certificate of Incorporation, as amended, and amended
Bylaws.
Barrett G. Andersen, President and Chief Executive Officer of SGV, and
Ronald A. Ott, Executive Vice President, Chief Financial Officer and Treasurer
of SGV have agreed to execute agreements to remain with SGV or IndyMac for at
least six months following completion of the merger.
It is currently anticipated that following the merger, IndyMac will approve
and then engage in a reorganization resulting in, among other things, a
majority of the assets of IndyMac being contributed to First Federal to
facilitate its business operations, though it will evaluate these steps
following the merger and is not legally or contractually obligated to pursue
such reorganization.
Interests of Certain Persons in the Merger
General. Certain members of SGV's management and boards of directors may be
deemed to have interests in the merger that are in addition to their interests
as stockholders of SGV. SGV's Board of Directors was aware of these interests
and considered them in approving the merger agreement.
Stock Options. Certain directors and executive officers of SGV hold options
to purchase SGV common stock. If the merger is completed, those options
(whether or not they are exercisable at that time) will be cancelled and
exchanged for a cash payment equal to the per share purchase price minus the
exercise price of such option. Those options which would not otherwise be
exercisable at the effective time of the merger, will become exercisable as a
result of the merger.
The following table sets forth, with respect to each SGV executive officer,
the number of shares of SGV common stock covered by outstanding SGV options
held by such persons as of the SGV record date.
<TABLE>
<CAPTION>
Number of Securities Options Weighted Average
Underlying Currently Exercise Price Aggregate Value
Options Granted Exerciseable Per Option of Options (1)
-------------------- ------------ ---------------- ---------------
<S> <C> <C> <C> <C>
Barrett G. Andersen..... 61,460 37,140 $9.94 $925,888
Ronald A. Ott........... 43,893 26,617 9.96 660,151
</TABLE>
- --------
(1) Based on a calculation of the per share purchase price of $25.00 minus the
weighted average exercise price per option.
Change in Control Agreements. Each of the following officers of SGV or
First Federal has entered into a change in control agreement that requires SGV
to make severance payments to such officer if he or she is terminated without
cause or voluntarily terminates his or her employment following a change in
control. Pursuant to these agreements, estimated payments to Edie Beachboard
($373,000), Dale Schiering ($339,600), Michael Quigley ($294,250), or Jeanne
Thompson ($312,300) would be due if his or her
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<PAGE>
respective employment terminates within 24 months following the merger, and
estimated payments to Jeffrey Foreman ($114,700), Douglas Nigbor ($120,560), or
Raymond Spirko ($115,135) would be due if his or her respective employment
terminates within 12 months following the merger. IndyMac currently intends to
make these payments at the effective time of the merger, regardless of whether
the employment of these officers is terminated.
Employment Agreements. In contemplation of the merger, Barrett G. Andersen
and Ronald A. Ott will each enter into new employment agreements with SGV that
will be effective when the merger is completed. Pursuant to these agreements,
Messrs. Andersen and Ott have generally agreed to continue their employment
with SGV through the effective time of the merger and have committed to
continue such employment with SGV or IndyMac for a period of six months after
the effective time.
In exchange for their service with SGV and IndyMac, Mr. Andersen will
receive a six-month base salary estimated to be $130,000 and Mr. Ott will
receive a six-month base salary estimated to be $100,000. In addition, at the
effective time of the merger, Mr. Andersen will be paid an estimated lump sum
payment of $500,000 and Mr. Ott will be paid an estimated lump sum payment of
$380,000 in the form of consideration for the termination of their current
employment agreements. Also at the effective time, each of Messrs. Andersen and
Ott will receive estimated lump sum payments in the amounts of $350,000 and
$250,000, respectively, in consideration for entering into certain covenants
not to compete contained in their new employment agreements. Also at the
effective time, each of Messrs. Andersen and Ott will receive estimated lump
sum payments of $125,000, as a retention bonus in consideration for entering
into the new employment agreement and remaining employed through the term of
the agreement. Messrs. Andersen and Ott will repay a pro rata portion of the
retention bonus if they voluntarily leave employment prior to the expiration of
the term of the agreement.
Indemnification; Directors and Officers Insurance. From and after the
completion of the merger, IndyMac will indemnify the present and former
directors, officers, employees, and agents of SGV and its subsidiaries against
certain liabilities arising out of actions or omissions occurring at or prior
to the time the merger becomes effective (including the merger) to the full
extent permitted under Delaware law, and SGV's Certificate of Incorporation and
Bylaws. IndyMac will also use its reasonable efforts to maintain in effect for
a period of three years after completion of the merger, SGV's existing
directors' and officers' liability insurance policy or a policy of at least the
same coverage and amounts containing terms and conditions which are
substantially no less advantageous.
Termination of Employee Severance Plan. Prior to the effective time, SGV
will terminate its Employee Severance Plan. In consideration for the
termination of the Employee Severance Plan, IndyMac will adopt a non-qualified
plan that will be funded prior to the effective time. IndyMac will fund the new
non-qualified plan by purchasing certificates of deposit at First Federal for
each employee who, as of the effective time, would be entitled to severance
benefits under the SGV Employee Severance Plan, in the amount that each
employee would be entitled to if such employee were terminated, demoted or
constructively terminated without cause at the effective time. One third of the
principal balance of each certificate of deposit will vest on the first, second
and third anniversary of the effective time.
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<PAGE>
The full principal balance of each certificate of deposit, together with any
accrued interest thereon will be paid to the relevant employee on the third
anniversary of the effective time, even if the employee has voluntarily ceased
his employment with SGV, First Federal or IndyMac prior to the third
anniversary. If an employee is terminated, demoted or constructively terminated
(other than for cause) prior to the third anniversary of the effective time
involuntarily or due to death or disability, the employee or his/her heir or
representative will be entitled to receive the full principal amount of the
certificate of deposit together with any accrued interest thereon.
Accounting Treatment
It is anticipated that the merger will be accounted for as a purchase by
IndyMac. The earnings of SGV will be included in the earnings of IndyMac only
after the effective time of the merger and SGV's assets and liabilities will be
valued at their fair value at the time of the merger. The excess of the
consideration IndyMac is paying over the fair value of SGV's assets and
liabilities will be recorded as goodwill on IndyMac's financial statements. The
goodwill will be amortized as an expense on IndyMac's financial statements for
a period initially estimated at 20 years. It is estimated that IndyMac will
record approximately $32.0 million of goodwill in the merger.
Expenses and Fees
IndyMac and SGV will each pay its own expenses in connection with the
merger, including fees and expenses of its own financial or other consultants,
investment bankers, accountants, and counsel, except that IndyMac will bear and
pay the filing fees, application fees and printing costs incurred in connection
with the merger.
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<PAGE>
TERMINATION OF INDYMAC'S REIT STATUS
(To be voted upon by IndyMac stockholders)
General
If you are an IndyMac stockholder, you will be asked at the IndyMac special
meeting to approve a proposal to terminate IndyMac's status as a REIT on
January 1, 2000. If this proposal is approved, IndyMac will not be a REIT
effective January 1, 2000.
Consequences of Termination of REIT Status
If IndyMac terminates its REIT status, distributions to stockholders will
not be deductible for purposes of computing IndyMac's taxable income, and
IndyMac will be subject to income tax, including any applicable alternative
minimum tax, on its taxable income at regular corporate rates, without offset
for distributions of such income to stockholders. It is anticipated that
IndyMac will record a one-time credit to earnings of approximately $28 million,
subject to the independent review of IndyMac's external auditors, arising from
differences in the timing of income recognition for book and tax reporting
purposes. The amount of credit recorded will be based on the actual amount of
timing differences on the date IndyMac terminates its REIT status. Moreover,
although IndyMac was required to distribute at least 95% of its net income
annually in order to maintain REIT qualification, no such minimum distribution
requirements will apply to IndyMac beginning January 1, 2000, and the annual
dividends paid on shares of IndyMac common stock likely will be substantially
less than the dividends historically paid by IndyMac. IndyMac's distributions
per share of IndyMac common stock were $1.79 in 1998, $1.79 in 1997, and $1.52
in 1996. IndyMac generally will be prohibited from re-electing REIT status for
five years, and, in any event, there can be no assurance that IndyMac will be
in a position to re-qualify as a REIT at a future date.
With the termination of IndyMac's REIT status, investments in IndyMac
capital stock will be taxed under the general rules applicable to investments
in stock of regular C corporations. For example, none of the dividends from
IndyMac will be eligible for the favorable treatment accorded capital gain
dividends by REITs, and all distributions will be taxed as ordinary dividend
income to the extent paid out of IndyMac's earnings and profits. Additionally,
IndyMac could pay up to 35% of its taxable income in federal taxes. On the
other hand, distributions to corporations may be eligible for the dividends
received deduction, subject to certain limitations in the Internal Revenue
Code, whereas distributions from REITs are not eligible for the dividends
received deduction.
The termination of IndyMac's REIT status would have the following impact to
liquidity and capital resources:
(1) IndyMac would no longer be required to distribute at least 95% of its
taxable income to its stockholders; and
(2) IndyMac would be required to pay income taxes, including quarterly
estimated tax payments, based upon its income tax liability each year.
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<PAGE>
IndyMac's return on equity could be negatively affected by becoming a
taxable corporation, although IndyMac plans to partly offset the effect of
taxes through the use of higher leverage generally available to depositary
institutions. If we do not become a depository institution either through the
merger or otherwise, IndyMac will need to reassess the economic returns of its
business, including its construction lending and investment portfolio.
Sale of Ownership Interest by Countrywide
Countrywide Credit Industries, Inc. owns approximately 5% of the
outstanding shares of IndyMac common stock. All of the outstanding voting
common stock and 1% of the economic interest of IndyMac, Inc., IndyMac's
operating subsidiary, are owned by Countrywide Home Loans, Inc., a subsidiary
of Countrywide Credit Industries, Inc. All of the outstanding non-voting
preferred stock and 99% of the economic interest of IndyMac, Inc. is owned by
IndyMac. As soon as possible after IndyMac terminates its REIT status, IndyMac
intends to purchase from Countrywide Home Loans, Inc. all of Countrywide's
shares of IndyMac, Inc. common stock and its 1% economic interest at a price to
be negotiated between the two companies.
Recommendation
IndyMac's Board of Directors has unanimously approved the proposal to
terminate IndyMac's REIT status and unanimously recommends to the IndyMac
stockholders that you vote for the proposal to terminate IndyMac's REIT status
effective January 1, 2000.
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DESCRIPTION OF AMENDMENTS TO INDYMAC'S CERTIFICATE OF INCORPORATION
(To be voted upon by IndyMac stockholders)
General
If you are an IndyMac stockholder, you will be asked at the IndyMac special
meeting to consider and approve certain amendments to IndyMac's Certificate of
Incorporation. Specifically, you are being asked to consider:
(1) Amending Article I of IndyMac's Certificate of Incorporation to
change the name of the corporation from IndyMac Mortgage Holdings,
Inc. to IndyMac Bancorp, Inc.;
(2) Deleting Article VI of IndyMac's Certificate of Incorporation; and
(3) Deleting Article VII of IndyMac's Certificate of Incorporation.
IndyMac's Board of Directors unanimously approved these amendments. If
approved by the IndyMac stockholders, the amendment changing the name of the
corporation will not take effect until and unless the merger is completed and
the other amendment will not take effect until and unless IndyMac terminates
its status as a REIT. IndyMac's Certificate of Incorporation containing the
full text of these amendments is attached to this joint proxy statement as
Appendix E.
Article I Amendment--Changing the Name of the Corporation
Article I of IndyMac's Certificate of Incorporation contains the name of
the corporation. If we complete the merger, IndyMac will become a thrift
holding company and, if approved by the IndyMac stockholders, will be renamed
IndyMac Bancorp, Inc. at that time. If approved, this amendment would only
become effective if and when we complete the merger.
This amendment requires the approval of the holders of a majority of the
shares of IndyMac common stock outstanding and entitled to vote.
Article VI Amendment--Deletion of Acquisition and Transfer Restrictions on
IndyMac Common Stock
Article VI of IndyMac's Certificate of Incorporation contains certain
restrictions on the acquisition and transfer of IndyMac common stock which were
designed to maintain IndyMac's status as a REIT. Specifically, Article VI
generally:
(1) prohibits any IndyMac stockholder from owning more than 9.8% of the
shares of IndyMac's outstanding capital stock;
(2) requires any potential transferee of shares of IndyMac capital stock
that would become the owner of more than 9% of the shares of IndyMac's
outstanding capital stock as a result of the transfer to file with
IndyMac's Board of Directors an affadavit containing information
regarding such person's ownership in the company; and
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(3) gives IndyMac's Board of Directors discretion to take certain actions
as the Board deems advisable to preserve IndyMac's REIT status.
This amendment requires the approval of the holders of a majority of the
shares of IndyMac common stock outstanding and entitled to vote.
Article VII Amendment--Deletion of Restrictions on Acquisition of IndyMac
Common Stock by Certain Organizations.
Article VII of IndyMac's Certificate of Incorporation delegates certain
powers to IndyMac's Board of Directors to prohibit certain entities that are
not subject to federal income tax from acquiring shares of IndyMac capital
stock, which, because of IndyMac's status as a REIT, could have adverse tax
consequences to real estate mortgage investment conduits or taxable mortgage
pools in which IndyMac has an interest. Article VII also nullifies certain
transfers of IndyMac capital stock that would or could cause these adverse tax
consequences. Finally, Article VII gives the IndyMac Board discretion to redeem
shares of IndyMac capital stock to avoid these adverse tax consequences.
This amendment requires the approval of the holders of a majority of the
shares of IndyMac common stock outstanding and entitled to vote.
Recommendation
IndyMac's Board of Directors has unanimously approved the proposals to
amend IndyMac's Certificate of Incorporation and unanimously recommends to the
IndyMac stockholders that you vote for these amendments to IndyMac's
Certificate of Incorporation.
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COMPARATIVE MARKET PRICES AND DIVIDENDS
IndyMac common stock is traded on the New York Stock Exchange under the
symbol "NDE." SGV common stock is traded on the Nasdaq National Market under
the symbol "SGVB." The following table sets forth, for the indicated periods,
the high and low closing sale prices for IndyMac and SGV common stock as
reported by the New York Stock Exchange and the Nasdaq, and the cash dividends
declared per share of IndyMac and SGV common stock for the indicated periods.
The stock prices do not include retail mark-ups, mark-downs or commissions.
<TABLE>
<CAPTION>
IndyMac SGV
------------------------- -------------------------
Cash Cash
Price Range Dividends Price Range Dividends
--------------- Declared --------------- Declared
High Low Per Share High Low Per Share
------- ------- --------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
1997
First Quarter............ $23.625 $19.375 $ .42 $13.875 $11.125 N/A
Second Quarter........... 24.000 19.375 .43 14.250 11.375
Third Quarter............ 25.500 22.438 .46 17.875 13.375
Fourth Quarter........... 26.125 21.000 .48 19.125 14.375
-----
Total.................. $1.79
=====
1998
First Quarter............ $27.188 $23.000 $ .50 $18.000 $16.000 N/A
Second Quarter........... 26.125 21.500 .53 18.813 17.250
Third Quarter............ 24.000 17.375 .38 18.125 11.750
Fourth Quarter........... 20.250 7.375 .38 13.625 12.000
-----
Total.................. $1.79
=====
1999
First Quarter............ $12.188 $10.188 $ .38 $13.500 $10.750 N/A
Second Quarter........... 17.000 10.750 .38 20.000 10.563
Third Quarter ........... 16.563 12.938 .38 22.375 19.688
Fourth Quarter (through
November 3, 1999)....... 14.875 12.563 21.938 20.750
-----
Total.................. $1.14
=====
</TABLE>
On November 3, 1999, the last sale price of IndyMac common stock as
reported on the New York Stock Exchange was $13.00 per share and the last sale
price of SGV common stock as reported on the Nasdaq was $21.75 per share. On
July 12, 1999, the last trading day prior to public announcement of the merger,
the last sale price of IndyMac common stock as reported by the New York Stock
Exchange was $16.563 per share and the last sale price of SGV common stock as
reported on the Nasdaq was $21.25 per share.
You should obtain current stock price quotations for IndyMac common stock
and SGV common stock.
The IndyMac stockholders have received at least 95% of IndyMac's taxable
income in the form of dividends due to IndyMac's status as a REIT. If IndyMac
terminates its status as
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a REIT, effective January 1, 2000, IndyMac stockholders will no longer receive
at least 95% of IndyMac's taxable income in dividends. Further, after the
merger and the subsequent reorganization, IndyMac's revenues will largely be
dependent on the payment of dividends from First Federal.
First Federal is subject to certain legal restrictions which govern the
amount of dividends it will be permitted to pay IndyMac. See "Business of SGV--
Regulation and Supervision" on page 94.
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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The unaudited Pro Forma Condensed Combined Statement of Financial Condition
combines the historical consolidated balance sheets of IndyMac and SGV,
including SGV's primary subsidiary, First Federal, as of June 30, 1999 as if
the merger were consummated on June 30, 1999, giving effect to a share
repurchase program announced by IndyMac on July 21, 1999, the proposed
reorganization of IndyMac, and a purchase of branch offices by SGV. The
unaudited pro forma condensed combined statement of operations for the year
ended December 31, 1998 and for the six months ended June 30, 1999 combine the
historical consolidated statements of operations of IndyMac and SGV as if the
merger were consummated January 1, 1998. SGV's results of operations have been
recast for the presentation periods used herein.
Certain items in the unaudited pro forma condensed combined financial
statements have been reclassified to conform both IndyMac and SGV to a common
form of presentation.
The merger will be accounted for using the "purchase" method of accounting
by IndyMac. SGV's assets, liabilities, and other items will be adjusted to
their estimated fair value at the closing date of the merger and combined with
the historical book values of the assets, liabilities, and other items of
IndyMac. Applicable income tax effects of such adjustments are included as a
component of the combined entity's deferred tax asset/liability. The difference
between the estimated fair value of the assets, liabilities and other items,
adjusted as discussed above, and the purchase price, is recorded as goodwill.
For pro forma presentation purposes, goodwill is amortized over an estimated
life of 20 years.
For purposes of the unaudited pro forma condensed combined financial
statements, estimates relating to the fair value of certain assets,
liabilities, and other items have been made as of June 30, 1999. Actual
adjustments will be made on the basis of actual assets, liabilities, and other
items as of the date of the merger using appraisals and evaluations made as of
that time. Therefore, actual fair value amounts are expected to differ from
those in the unaudited pro forma condensed combined financial statements.
Management's expectations of cost savings and other operating efficiencies
are not reflected in the unaudited pro forma condensed combined financial
statements. Further, net interest income may increase or decrease from
historical levels based upon changes in the shape of the yield curve and
current market conditions.
The pro forma financial data does not necessarily reflect the results of
operations or the financial position of IndyMac that actually would have
resulted had the merger occurred at June 30, 1999, or project the results of
operations or financial position of IndyMac for any future date or period.
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Unaudited Pro Forma Condensed Combined Statement of Financial Condition
<TABLE>
<CAPTION>
As of June 30, 1999
---------------------------------------------------------------------------------------------------
(Dollars in thousands)
Impact of: Impact of:
-------------------------- -----------------------
IndyMac
Mortgage Share IndyMac Purchase of Acquisition Pro Forma
Holdings, Inc. Repurchase Reorganization Adjusted SGV Bancorp Branches Adjustments Combined
-------------- ---------- -------------- ---------- ----------- ----------- ----------- ----------
(Note A) (Note B) (Note C) (Notes D-F)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and amounts due
from banks.......... $ 4,827 $ -- $ 285 $ 5,112 $ 9,515 $ 18,829 $ -- $ 33,456
Other investments.... -- -- 181,137 181,137 25,816 -- -- 206,953
Loans receivable,
net................. 3,034,879 -- 151,663 3,186,542 355,089 130 (1,136) 3,540,625
Mortgage-backed
securities, net..... 275,688 -- 404,574 680,262 62,588 -- (2,017) 740,833
Collateral for
collateralized
mortgage
obligations......... 121,984 -- -- 121,984 -- -- -- 121,984
Real estate acquired
in settlement of
loans............... 16,922 -- 2,180 19,102 827 -- -- 19,929
Investment in capital
stock of FHLB, at
cost................ -- -- -- -- 5,407 -- 35,873 41,280
Mortgage servicing
assets.............. -- -- 128,157 128,157 -- -- 918 129,075
Goodwill and other
intangible assets... -- -- -- -- 280 1,288 38,919 40,487
Investment in, and
advances to IndyMac,
Inc. ............... 258,293 -- (258,293) -- -- -- -- --
Deferred tax asset... -- -- 28,317 28,317 -- -- -- 28,317
Other assets......... 47,337 -- 67,261 114,598 9,208 484 -- 124,290
---------- --------- --------- ---------- -------- -------- -------- ----------
$3,759,930 $ -- $ 705,281 $4,465,211 $468,730 $ 20,731 $ 72,557 $5,027,229
========== ========= ========= ========== ======== ======== ======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits............. $ -- $ -- $ -- $ -- $324,106 $ 36,731 $ (1,088) $ 359,749
Securities sold under
agreements to
repurchase.......... 1,877,239 100,000 551,937 2,529,176 -- -- 98,373 2,627,549
Collateralized
mortgage
obligations......... 100,677 -- -- 100,677 -- -- -- 100,677
Borrowings from the
FHLB................ -- -- -- -- 108,002 (16,000) 798 92,800
Syndicated bank
lines............... 597,193 89,139 686,332 -- -- -- 686,332
Other borrowings..... 258,548 -- -- 258,548 -- -- -- 258,548
Other liabilities.... 32,797 -- 36,803 69,600 4,251 -- 6,845 80,696
Minority interest.... 915 -- (915) -- -- -- -- --
Shareholders'
equity.............. 892,561 (100,000) 28,317 820,878 32,371 -- (32,371) 820,878
---------- --------- --------- ---------- -------- -------- -------- ----------
$3,759,930 $ -- $ 705,281 $4,465,211 $468,730 $ 20,731 $ 72,557 $5,027,229
========== ========= ========= ========== ======== ======== ======== ==========
</TABLE>
63
<PAGE>
Unaudited Pro Forma Condensed Combined Statements of Income
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 1999
--------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Impact of:
------------------------- Pro
Share IndyMac SGV Acquisition Forma
IndyMac Repurchase Reorganization Adjusted Bancorp Adjustments Combined
------- ---------- -------------- -------- ------- ----------- --------
(Note A) (Note B) (Notes D-F)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income......... $177,146 $ -- $ 20,014 $197,160 $16,115 $ 1,311 $214,586
Interest expense........ 98,184 2,950 18,036 119,170 9,663 2,684 131,517
-------- ------- -------- -------- ------- ------- --------
Net interest income.... 78,962 (2,950) 1,978 77,990 6,452 (1,373) 83,069
Provision for loan
losses................ 7,898 -- 428 8,326 490 -- 8,816
-------- ------- -------- -------- ------- ------- --------
Net interest income
after provision for
loan losses........... 71,064 (2,950) 1,550 69,664 5,962 (1,373) 74,253
Other income:
Fee income............. -- -- 10,342 10,342 559 (71) 10,830
Gain (loss) on sale of
loans, net............ (831) -- 63,909 63,078 44 -- 63,122
Gain on sale of
mortgage-backed
securities, net....... (69) -- (32,440) (32,509) 64 -- (32,445)
Equity in earnings
(loss) of IndyMac,
Inc. ................ (4,306) -- 4,306 -- -- -- --
Other income, net..... 3,624 -- 9,620 13,244 360 -- 13,604
-------- ------- -------- -------- ------- ------- --------
Total other income... (1,582) -- 55,737 54,155 1,027 (71) 55,111
Other expenses:
Compensation and
employee benefits..... 11,754 -- 32,994 44,748 2,814 -- 47,562
Premises & equipment,
net................... 970 -- 5,731 6,701 499 -- 7,200
Regulatory insurance... -- -- -- -- 91 -- 91
Advertising and
promotion............. 166 -- 4,624 4,790 71 -- 4,861
Data processing........ 1,204 -- 3,025 4,229 460 -- 4,689
Other general and
administrative
expenses.............. 2,717 -- 14,097 16,814 786 -- 17,600
Amortization of
goodwill and other
intangible assets..... -- -- -- -- -- 1,464 1,464
-------- ------- -------- -------- ------- ------- --------
Total other expense.... 16,811 -- 60,471 77,282 4,721 1,464 83,467
Earnings (loss) before
income tax provision
(benefit).............. 52,671 (2,950) (3,184) 46,537 2,268 (2,908) 45,897
Income tax provision
(benefit)............. -- -- 19,747 19,747 910 (560) 20,097
-------- ------- -------- -------- ------- ------- --------
Earnings (loss) before
minority interest..... 52,671 (2,950) (22,931) 26,790 1,358 (2,348) 25,800
Minority interest...... (43) (30) 73 -- -- -- --
-------- ------- -------- -------- ------- ------- --------
Net earnings (loss)... $ 52,714 ($2,920) ($23,004) $ 26,790 $ 1,358 ($2,348) $ 25,800
======== ======= ======== ======== ======= ======= ========
Basic earnings per
share.................. $ 0.66 $ 0.35
======== ========
Diluted earnings per
share.................. $ 0.65 $ 0.34
======== ========
Weighted average common
shares outstanding.... 79,807 (5,882) 73,925
======== ======= ========
Weighted average
diluted shares
outstanding........... 80,980 (5,882) 75,098
======== ======= ========
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
For the Twelve Months Ended December 31, 1998
---------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Impact of:
------------------------- Pro
Share IndyMac SGV Acquisition Forma
IndyMac Repurchase Reorganization Adjusted Bancorp Adjustments Combined
-------- ---------- -------------- --------- ------- ----------- --------
(Note A) (Note B) (Note D-F)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income......... $528,825 $ -- $ 38,543 $ 567,368 $30,482 $ 2,621 $600,471
Interest expense........ 355,359 5,900 39,830 401,089 18,711 6,457 426,257
-------- ------- -------- --------- ------- ------- --------
Net interest income.... 173,466 (5,900) (1,287) 166,279 11,771 (3,836) 174,214
Provision for loan
losses................ 35,892 -- 442 36,334 871 -- 37,205
-------- ------- -------- --------- ------- ------- --------
Net interest income
after provision for
loan losses........... 137,574 (5,900) (1,729) 129,945 10,900 (3,836) 137,009
Other income:
Fee income............. -- -- 1,587 1,587 1,375 (157) 2,805
Gain (loss) on sale of
loans, net............ (2,882) -- 98,869 95,987 52 -- 96,039
Gain (loss) on sale of
mortgage-backed
securities, net....... (16,206) -- (95,631) (111,837) 15 -- (111,822)
Equity in earnings
(loss) of IndyMac,
Inc. ................ (58,232) -- 58,232 -- -- -- --
Other income, net..... 2,822 -- 7,884 10,706 178 -- 10,884
-------- ------- -------- --------- ------- ------- --------
Total other income... (74,498) -- 70,941 (3,557) 1,620 (157) (2,094)
Other expenses:
Compensation and
employee benefits..... 19,616 -- 66,138 85,754 5,005 -- 90,759
Premises & equipment,
net................... 1,835 -- 10,487 12,322 1,058 -- 13,380
Data processing........ 260 -- 6,379 6,639 1,373 -- 8,012
Advertising and
promotion............. 829 -- 5,427 6,256 147 -- 6,403
Regulatory insurance... -- -- -- -- 178 -- 178
Other general and
administrative
expenses.............. 7,333 -- 24,843 32,176 1,184 -- 33,360
Amortization of
goodwill and other
intangible assets..... -- -- -- -- -- 2,928 2,928
-------- ------- -------- --------- ------- ------- --------
Total other expense.... 29,873 -- 113,274 143,147 8,945 2,928 155,020
Earnings (loss) before
income tax provision
(benefit).............. 33,203 (5,900) (44,062) (16,759) 3,575 (6,921) (20,105)
Income tax provision
(benefit)............. -- -- (7,123) (7,123) 1,463 (1,641) (7,301)
-------- ------- -------- --------- ------- ------- --------
Earnings (loss) before
extraordinary items... 33,203 (5,900) (36,939) (9,636) 2,112 (5,280) (12,804)
Minority interest...... (587) (59) 646 -- -- -- --
-------- ------- -------- --------- ------- ------- --------
Net earnings (loss)... $ 33,790 $(5,841) $(37,585) $ (9,636) $ 2,112 $(5,280) $(12,804)
======== ======= ======== ========= ======= ======= ========
Basic earnings per
share.................. $ 0.48 $ (0.20)
======== ========
Diluted earnings per
share.................. $ 0.48 $ (0.20)
======== ========
Weighted average common
shares outstanding.... 69,983 (5,882) 64,101
======== ======= ========
Weighted average
diluted shares
outstanding........... 70,092 (5,882) 64,210
======== ======= ========
</TABLE>
The accompanying notes are an integral part of these statements.
65
<PAGE>
Notes to Unaudited Pro Forma Financial Statements
(All dollar amounts are expressed in thousands, except per share data)
NOTE A: Impact of Share Repurchase
On July 21, 1999, IndyMac announced a share buyback program, by which the
company intends to repurchase up to $100 million of common stock. For pro forma
presentation purposes only, the average per share price is assumed to be $17,
the share repurchase is assumed to have taken place on January 1, 1998, and the
repurchase is assumed to be financed with the sale of securities under
agreements to repurchase, bearing interest at 5.90% per year.
There can be no assurance that shares will be repurchased at an average per
share price of $17 per share. The actual price at which IndyMac shares are
repurchased under the share buyback program may vary significantly from $17 per
share.
NOTE B: Plan of Reorganization
Pursuant to IndyMac's reorganization plan, IndyMac will cease to be a
qualifying REIT and will purchase the minority interest in its taxable equity
method investee, IndyMac, Inc., from Countrywide Credit Industries, Inc.
("Countrywide").
The price IndyMac will pay for IndyMac, Inc. is subject to negotiation
between IndyMac and Countrywide. For pro forma presentation purposes, a
purchase price equal to the book value of Countrywide's minority interest in
IndyMac, Inc. was assumed and the purchase price is expected to be paid through
a combination of cash and forgiveness of amounts owed IndyMac from Countrywide.
Upon the purchase of Countrywide's interest in IndyMac, Inc., IndyMac will
change the method of accounting for its investment in IndyMac, Inc. from the
equity method to inclusion of IndyMac, Inc. in IndyMac's consolidated reporting
entity, including recognition of IndyMac, Inc.'s net assets and results of
operations in IndyMac's consolidated financial statements.
Pursuant to IndyMac's conversion from a qualifying non-taxable REIT,
IndyMac will become a fully taxable entity for federal and state income
taxation purposes. The tax effect of the reorganization transaction will be to
recognize on the books of IndyMac, the cumulative income tax effect of
differences arising from the timing of recognition of assets and liabilities
for book and for tax purposes.
At December 31, 1998, IndyMac had temporary differences totaling $69.1
million. The estimated tax effect of this difference, $28.3 million, will be
recognized upon the reorganization, in earnings in accordance with the
requirements of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." The amount of the deferred tax asset to be
recorded upon completion of the reorganization will be based upon the actual
level of deferred tax items at the date of reorganization. For pro forma
presentation purposes, the effect of this adjustment is reflected as an
adjustment to shareholders' equity and to the deferred income tax asset on the
statement of financial condition.
66
<PAGE>
Following are the adjustments expected to be recorded pursuant to: (1)
IndyMac's purchase of Countrywide's interest in IndyMac, Inc.; and (2)
conversion of IndyMac from a REIT to a fully taxable entity (using June 30,
1999 recorded balances):
<TABLE>
<CAPTION>
Mortgage
Other Loans Backed
Cash Investments Receivable Securities
----- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Purchase of Countrywide's interest in
IndyMac, Inc. ....................... $(164) $ -- $ -- $ --
Recognition of IndyMac, Inc.'s net
assets pursuant to
purchase of Countrywide's interest... 449 181,137 151,663 404,574
Eliminate intercompany investment..... -- -- -- --
Income tax benefit of reorganization
transaction.......................... -- -- -- --
----- -------- -------- --------
$ 285 $181,137 $151,663 $404,574
===== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Real Estate
Acquired in Mortgage Investment and Deferred
Settlement Servicing Advances to Tax Other
Of Loans Assets IndyMac, Inc. Asset Assets
----------- ---------- -------------- -------- -------------
<S> <C> <C> <C> <C> <C>
Purchase of
Countrywide's interest
in IndyMac, Inc. ...... $ -- $ -- $ -- $ -- $ (751)
Recognition of IndyMac,
Inc.'s net assets
pursuant to purchase of
Countrywide's
interest............... 2,180 128,157 -- -- (98,795)
Eliminate intercompany
investment............. -- -- (258,293) -- 166,807
Income tax benefit of
reorganization
transaction............ -- -- -- 28,317 --
--------- -------- --------- ------- -----------
$ 2,180 $128,157 $(258,293) $28,317 $ 67,261
========= ======== ========= ======= ===========
<CAPTION>
Reverse Syndicated
Repurchase Bank Other Minority Shareholders'
Agreements Lines Liabilities Interest Equity
----------- ---------- -------------- -------- -------------
<S> <C> <C> <C> <C> <C>
Purchase of
Countrywide's interest
in IndyMac, Inc........ $ -- $ -- $ -- $ (915) $ --
Recognition of IndyMac,
Inc.'s net assets
pursuant to purchase of
Countrywide's
interest............... 551,937 89,139 36,803 -- 91,486
Eliminate intercompany
investment............. -- -- -- -- (91,486)
Income tax benefit of
reorganization
transaction............ -- -- -- -- 28,317
--------- -------- --------- ------- -----------
$ 551,937 $ 89,139 $ 36,803 $ (915) $ 28,317
========= ======== ========= ======= ===========
</TABLE>
67
<PAGE>
Following is a summary of the impact of the reorganization on IndyMac's
income tax expense:
<TABLE>
<CAPTION>
Twelve Months Six Months
December 31, 1998 June 30, 1999
----------------- -------------
<S> <C> <C>
IndyMac Mortgage Holdings, Inc. net income
before minority interest expense............. $ 33,203 $ 52,671
less: interest expense arising from borrowings
to finance the share repurchase.............. (5,900) (2,950)
add: equity in losses of IndyMac, Inc......... 58,232 4,306
--------- --------
Taxable income................................ 85,535 54,027
--------- --------
Applicable tax rate........................... 42.50% 42.50%
--------- --------
Income tax expense applicable to REIT\........ $ 36,352 $ 22,961
Reclassification of IndyMac, Inc. income tax
benefit in consolidation..................... (43,475) (3,214)
--------- --------
$ (7,123) $ 19,747
========= ========
</TABLE>
NOTE C: Purchase of Certain Branches Before Completion of the Merger
During December of 1998, SGV announced the purchase by First Federal, of
two branch locations and the related deposits, from CitiBank. The acquisition
involves an estimated $37 million of deposits. SGV used some of the funds
acquired in the purchase to repay $16 million of FHLB advances and recorded a
deposit premium relating to the customer relationships acquired of
approximately $1.3 million. The transaction closed on July 25, 1999.
NOTE D: Purchase Price
The existing SGV shareholders will be paid a price, currently estimated at
$25.00 per share, for each share of stock they hold in SGV. The estimated
purchase price is subject to adjustment based on the outcome of certain future
events, including changes in the estimated fair value of SGV's interest earning
asset and interest bearing liability portfolios and changes in SGV's
shareholders' equity. The merger agreement limits the amount by which the price
may be adjusted to between $22.50 and $27.50 per share. IndyMac may terminate
the merger if the calculated per share purchase price is below $22.50 per
share.
Based on the estimated per share price and the number of shares subject to
stock option agreements as of the date of the merger agreement, the purchase
price is calculated, for pro forma presentation purposes, as the product of 2.5
million shares of SGV common stock outstanding or subject to option multiplied
by the assumed per share purchase price of $25.00 for a cash purchase price of
$62.5 million.
68
<PAGE>
NOTE E: Acquisition Adjustments
The estimated acquisition adjustments relating to the merger are detailed
below:
<TABLE>
<CAPTION>
Mortgage Mortgage
Loans Backed FHLB Servicing Deposit
Receivable Securities Stock Assets Goodwill Premium
---------- ---------- ------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Purchase of SGV stock
(Note D)............... $ -- $ -- $ -- $-- $30,129 $ --
Fair value adjustments.. (1,136) (2,017) -- 918 (4,255) 6,200
Impact of branch
purchase before
closing................ -- -- -- -- 1,288 (1,288)
Tax effect of fair value
adjustments............ -- -- -- -- 1,808 --
Merger costs, net of
taxes (Note F)......... -- -- -- -- 4,635 --
Restructuring costs, net
of taxes (Note F)...... -- -- -- -- 402 --
Purchase of additional
FHLB stock in
compliance with FHLB
requirements........... -- -- 35,873 -- -- --
-------- ------- ------- ---- ------- ------
$ (1,136) $(2,017) $35,873 $918 $34,007 $4,912
======== ======= ======= ==== ======= ======
</TABLE>
<TABLE>
<CAPTION>
Reverse
Repurchase FHLB Other Shareholders'
Deposits Agreements Advances Liabilities Equity
-------- ---------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Purchase of SGV stock
(Note D)............... $ -- $62,500 $-- $ -- $(32,371)
Fair value adjustments.. (1,088) -- 798 -- --
Impact of branch
purchase before
closing................ -- -- -- -- --
Tax effect of fair value
adjustments............ -- -- -- 1,808 --
Merger costs, net of
taxes.................. -- -- -- 4,635 --
Restructuring costs, net
of taxes............... -- -- -- 402 --
Purchase of additional
FHLB stock in
compliance with FHLB
requirements........... -- 35,873 -- -- --
-------- ------- ---- ------ --------
$ (1,088) $98,373 $798 $6,845 $(32,371)
======== ======= ==== ====== ========
</TABLE>
Included in the purchase adjustments is the purchase of additional FHLB
stock. IndyMac will be required to hold FHLB stock at a level equal to the
greater of 1% of its mortgage-related assets, 0.3% of its total assets, or 5%
of its FHLB advances. The amount shown represents the estimated additional
stock holding requirement based on the anticipated contribution of IndyMac net
assets to First Federal, based on June 30, 1999 consolidated pro forma amounts.
For pro forma presentation purposes, the acquisition adjustments relating
to the interest earning assets and interest bearing liabilities are amortized
using the interest method over the respective assets' and liabilities'
estimated average remaining lives; the acquisition adjustment relating to the
mortgage servicing asset is amortized in proportion to, and over the estimated
period of, the estimated net servicing fee income of the underlying loans. For
pro forma presentation purposes, goodwill is amortized over an estimated life
of 20 years, and the deposit premium is amortized over an estimated life of
four years.
69
<PAGE>
NOTE F: Merger and Integration Costs
The table below reflects IndyMac's current estimate, for purposes of pro
forma presentation, of the aggregate merger and integration costs, net of
taxes, expected to be incurred in connection with the merger. While a portion
of these costs may be required to be recognized in the combined entity's
results of operations as incurred, the current estimate of these costs has been
reflected in the pro forma condensed combined statement of financial condition
to disclose the effect of these activities on IndyMac's pro forma condensed
combined financial position.
<TABLE>
<CAPTION>
Related
Gross Tax Net
Costs Benefit Costs
------ ------- ------
<S> <C> <C> <C>
Merger costs:
Severance costs......................................... $4,800 $2,040 $2,760
Investment banking, legal and other professional fees... 2,106 231 1,875
------ ------ ------
Subtotal-merger costs included in the allocation of the
purchase price........................................ 6,906 2,271 4,635
Other integration costs, including building conversion
and customer notification costs......................... 700 298 402
------ ------ ------
Total merger and integration costs....................... $7,606 $2,569 $5,037
====== ====== ======
</TABLE>
70
<PAGE>
BUSINESS OF INDYMAC
General
IndyMac is a Delaware corporation and a REIT under the Internal Revenue
Code of 1986, as amended, located in Pasadena, California. IndyMac conducts a
diversified lending business, including the origination and purchase of and
investment in conforming, non-conforming and jumbo residential loans, subprime
loans, consumer and builder construction loans, manufactured housing loans,
home improvement loans, mortgage-backed securities and other mortgage-related
assets.
IndyMac conducts certain consumer lending activities, including third party
lending activities through its non-consolidated subsidiary, IndyMac, Inc.
IndyMac owns all of the non-voting preferred stock of IndyMac, Inc. and 99% of
its economic interest. IndyMac uses three primary channels to generate assets:
(1) consumer-direct marketing, via LoanWorks and LoanWorks.com (prime
brand), LoanTown and LoanTown.com (subprime brand) and LoanWorks
Servicing;
(2) business-to-business marketing to consumers through intermediaries such
as mortgage brokers via IndyMac's third party lending using e-MITS(R)
(electronic-Mortgage Information and Transaction System) (including
through loan programs offered by Warehouse Lending Corporation of
America); and
(3) commercial marketing via its IndyMac Commercial Mortgage Banking unit
for subdivision and residential consumer construction.
The principal executive offices of IndyMac are located at 155 North Lake
Avenue, Pasadena, California 91101 and its telephone number at such address is
(800) 669-2300. Additional information with respect to IndyMac and its
subsidiaries is included in documents incorporated by reference in this joint
proxy statement. See "Where You Can Find More Information" on page 129.
Recent Developments
IndyMac's Board of Directors has approved a $100 million share repurchase
plan. The shares will be purchased at prevailing market prices from time to
time depending upon market conditions. The purchases will be effected through
open market purchases or in privately negotiated transactions. Through October
15, 1999 IndyMac has purchased 3.4 million shares. The purpose of the
repurchase plan is to increase stockholder value.
71
<PAGE>
BUSINESS OF SGV
General
SGV 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 from the mutual to stock form of ownership. SGV utilized
approximately 50% of the net proceeds of the initial public offering to acquire
all of the issued and outstanding stock of First Federal. SGV is headquartered
in West Covina, California and its principal business currently consists of the
operations of its wholly-owned subsidiary, First Federal. SGV's only
significant assets, other than its investment in the capital stock of First
Federal and a loan to First Federal's ESOP, are cash, investments and mortgage-
backed securities. Operational activity of First Federal will hereafter be
referred to as "First Federal," where applicable. SGV had no operations prior
to June 28, 1995, and accordingly, the results of operations prior to such date
reflect only those of First Federal and its subsidiary. SGV, as a savings and
loan holding company, and First Federal are subject to regulation by the OTS,
the Federal Deposit Insurance Corporation (the "FDIC") and the SEC.
The principal business of First Federal 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, First Federal 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 First Federal's
portfolio designated as being held for sale or originated during the period and
being so designated. First Federal 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. First Federal'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. First
Federal's primary sources of funds are deposits, principal and interest
payments on loans, advances from the FHLB and, to a lesser extent, proceeds
from the sale of loans.
Market Area and Competition
First Federal 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. First Federal 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. First Federal's
deposit gathering is concentrated in the communities surrounding its offices in
eastern Los Angeles county. First Federal 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. First
Federal faces significant competition both in making loans and in attracting
deposits. First Federal's share
72
<PAGE>
of deposits and loan originations in the Los Angeles metropolitan area amounts
to less than 1%. First Federal 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 First Federal. First Federal'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, First Federal 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, First Federal 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 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.
Lending Activities
Loan Portfolio Composition. First Federal's loan portfolio consists
primarily of conventional first mortgage loans secured by one- to four-family
residences. At June 30, 1999, First Federal 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 First Federal'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. First Federal had $100,000 in loans held for sale as of
June 30, 1999. At that same date, 74.4% of First Federal's mortgage loans had
adjustable interest rates. Of First Federal'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
First Federal'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 SGV's cost of funds.
The types of loans that First Federal may originate are subject to federal
and state law and regulations. Interest rates charged by First Federal 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.
73
<PAGE>
The following table sets forth the composition of First Federal's loan
portfolio in dollar amounts and as a percentage of the portfolio at the dates
indicated.
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------ ------------------ ----------------- ------------------ -----------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate and other:
One- to four-family..... $279,897 78.59% $247,129 83.04% $250,303 87.29% $226,660 87.81% $187,693 85.82%
Multi-family............ 46,425 13.03 29,546 9.93 27,241 9.50 21,690 8.40 20,431 9.34
Commercial.............. 23,901 6.71 11,895 4.00 8,660 3.02 9,331 3.62 9,567 4.37
Construction and land... -- 0.00 -- 0.00 -- 0.00 -- 0.00 415 0.19
Consumer................ 5,961 1.67 9,007 3.03 533 0.19 440 0.17 602 0.28
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans............ 356,184 100.00% 297,577 100.00% 286,737 100.00% 258,121 100.00% 218,708 100.00%
====== ====== ====== ====== ======
Less:
Unamortized yield
adjustments, net....... (1,486) (613) 121 (64) 45
Deferred loan fees,
net.................... 736 635 515 451 472
Allowance for loan
losses................. 1,845 1,425 1,263 1,058 792
-------- -------- -------- -------- --------
Total loans, net....... 355,089 296,130 284,838 256,676 217,399
Less:
Loans receivable held
for sale:
One- to four-family.... 100 391 230 723 --
-------- -------- -------- -------- --------
Loans receivable held
for investment........ $354,989 $295,739 $284,608 $255,953 $217,399
======== ======== ======== ======== ========
</TABLE>
Loan Maturity. The following table shows the contractual maturity of First
Federal'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.
<TABLE>
<CAPTION>
At June 30, 1999
------------------------------------------------
One- to Total
Four- Multi- Loans
Family Family Commercial Consumer Receivable
-------- ------- ---------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
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
======== ======= ======= ====== ========
</TABLE>
74
<PAGE>
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.
<TABLE>
<CAPTION>
Due After June 30, 2000
---------------------------
Fixed Adjustable Total
------- ---------- --------
(In thousands)
<S> <C> <C> <C>
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
======= ======== ========
</TABLE>
Origination, Sale, Servicing and Purchase of Loans. First Federal's
mortgage lending activities are conducted primarily by commissioned loan
representatives and through its eight branch offices. First Federal originates
both adjustable-rate and fixed-rate mortgage loans. First Federal'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 First
Federal to sell the majority of the fixed-rate mortgage loans that it
originates. First Federal may also sell the adjustable-rate mortgage loans that
it originates. First Federal 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, First Federal did not have any forward sales
contracts outstanding. First Federal retains virtually all servicing of the
loans sold. See "Loan Servicing." First Federal 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, First Federal has purchased loans originated by other
institutions based upon First Federal's investment needs and market
opportunities. During the year ended June 30, 1999, First Federal 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. First Federal has purchased loans during the
past three years as a supplement to its internal origination process in order
to meet internal goals. First Federal has reviewed each loan it purchases to
ensure it meets First Federal's underwriting guidelines. The loans were
purchased in several transactions consummated during the year ended June 30,
1999.
75
<PAGE>
The following table sets forth First Federal's loan originations,
purchases, sales and principal repayments for the periods indicated:
<TABLE>
<CAPTION>
For the Years Ended June
30,
--------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Gross loans (1):
Beginning balance................................. $297,555 $286,101 $257,734
Loans originated:
One- to four-family (2)........................... 74,082 46,787 33,108
Multi-family...................................... 14,507 3,977 3,242
Commercial........................................ 6,010 3,540 160
-------- -------- --------
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
-------- -------- --------
Total loans..................................... 356,934 297,555 286,101
Loans held for sale................................. 100 391 230
-------- -------- --------
Ending balance, loans held for investment........... $356,834 $297,164 $285,871
======== ======== ========
</TABLE>
- --------
(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. First Federal offers both fixed-rate
and adjustable-rate mortgage loans secured by one- to four-family residences
located in First Federal's primary market area, with maturities up to 40 years.
Substantially all of such loans are secured by property located in First
Federal's primary market area. Loan originations are generally obtained from
First Federal'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, First Federal'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
outstanding at that date, 25.6% were fixed-rate loans, and 74.4% were
adjustable-rate mortgage loans. First Federal's adjustable-rate mortgage loans
are generally indexed to COFI and the CMT. First Federal currently offers a
number of adjustable-rate mortgage loan programs with interest rates which
adjust monthly, semi-annually, or annually. A portion of First Federal'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. First Federal'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,
First Federal had no
76
<PAGE>
one- to four-family adjustable-rate mortgage loans with interest rates that
were between zero 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. First Federal 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 First Federal because during a period
of high interest rates, the loan principal may increase above the amount
originally advanced. However, First Federal believes that the risk of default
may be reduced by negative amortization caps, underwriting criteria and the
stability provided by payment schedules.
Of First Federal'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.
First Federal'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. First Federal
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 First Federal
generally include due-on-sale clauses, which provide First Federal with the
contractual right to deem the loan immediately due and payable in the event the
borrower transfers ownership of the property without First Federal's consent.
Due-on-sale clauses are an important means of adjusting the rates on First
Federal's fixed-rate mortgage loan portfolio and First Federal has generally
exercised its rights under these clauses.
Multi-Family Lending. First Federal originates multi-family mortgage loans
generally secured by five- to 36- unit apartment buildings located in First
Federal's primary market area. As a result of uncertain market conditions in
its primary market area, First Federal currently originates multi-family loans
on a limited and highly selective basis. In reaching its decision on whether to
make a multi-family loan, First Federal 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
First Federal'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 First
Federal's primary market area have resulted in some increase in the loan-to-
value ratio on some mortgage loans. In addition, First Federal 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. First Federal's multi-family loan portfolio at June 30, 1999 totaled
$46.4 million.
77
<PAGE>
When evaluating the qualifications of the borrower for a multi-family loan,
First Federal considers the financial resources and income level of the
borrower, the borrower's experience in owning or managing similar property, and
First Federal's lending experience with the borrower. First Federal'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, First Federal
generally reviews the financial statements, employment and credit history of
the borrower, as well as other related documentation. First Federal'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.
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.
First Federal 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. First Federal 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 First
Federal's primary market area. First Federal'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 First Federal's current loans-to-one
borrower limit. These loans may be made with terms up to 30 years for
adjustable-rate loans and are indexed to CMT or COFI. First Federal's
underwriting standards and procedures are similar to those applicable to its
multi-family loans, whereby First Federal considers the net operating income of
the property and the borrower's expertise, credit history and profitability.
First Federal 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 First Federal'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, First Federal's commercial
real estate loan portfolio was $23.9 million or 6.7% of total loans. First
Federal 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.
First Federal seeks to minimize these risks through its underwriting standards,
78
<PAGE>
which require such loans to be qualified on the basis of the property's income
and debt service ratio.
First Federal 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, First Federal 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. First Federal has in the past originated
loans for the acquisition and development of property to contractors and
individuals in its primary market area. First Federal'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. First Federal is not currently
originating construction and land loans but may in the future depending on
market conditions. At June 30, 1999, First Federal 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, First
Federal may be confronted with a project, when completed, having a value which
is insufficient to assure full repayment.
Consumer Lending. First Federal 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 First Federal's loan portfolio. First
Federal 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 First
Federal'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 allowed to draw on the line of credit for a period of 10
years to 15 years after which time the loan is converted to a fixed term loan
with no further access to the line. First Federal's HELOC portfolio of $5.6
million represents approximately 1.6% of its total loan portfolio.
First Federal'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, First Federal 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
79
<PAGE>
charged-off although, in certain circumstances, collection efforts may
continue. First Federal 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. First Federal also services mortgage loans for others. All
of the loans currently being serviced for others are loans which have been sold
by First Federal. 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 are made on behalf of the borrowers
and generally administering the loans. At June 30, 1999, First Federal 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 First Federal 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, First Federal takes a number of
steps to have the borrower cure the delinquency and restore the loan to current
status. First Federal 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 First Federal to take
legal action, which typically occurs after a loan is delinquent at least 30
days or more, First Federal 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 First Federal's Classification of Assets Policy
require that First Federal utilize an internal asset classification system as a
means of reporting problem and potential problem assets. First Federal has
incorporated the OTS internal asset classifications as a part of its credit
monitoring system. First Federal 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."
80
<PAGE>
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.
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 First Federal believes that it has established an adequate
allowance for loan losses, there can be no assurance that regulators, in
reviewing First Federal's loan portfolio, will not request First Federal to
materially increase at that time its allowance for loan losses, thereby
negatively affecting First Federal'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.
First Federal's Internal Asset Review is conducted by an employee
independent of the loan origination and loan servicing functions. This
individual reviews and classifies First Federal's assets monthly and reports
the results of its review to the Board of Directors. First Federal classifies
assets in accordance with the management guidelines described above. Real
Estate Owned ("REO") is classified as Substandard. At June 30, 1999, First
Federal 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.
First Federal generally requires appraisals on an annual basis on
foreclosed properties and, to the extent necessary, on impaired loans. First
Federal conducts external inspections on foreclosed properties and certain
other properties as deemed necessary.
81
<PAGE>
The following table sets forth delinquencies in First Federal's loan
portfolio as of the dates indicated:
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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%
</TABLE>
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C>
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%
</TABLE>
82
<PAGE>
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 First Federal 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.
<TABLE>
<CAPTION>
At June 30,
--------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
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 SGV assets(2).................. 0.50% 0.93% 0.70% 1.03% 1.00%
</TABLE>
- --------
(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.
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 First Federal's allowance for loan losses. Such agencies
may require First Federal to make
83
<PAGE>
additional provisions for loan losses based upon judgments different from those
of management. As of June 30, 1999, First Federal's allowance for loan losses
was 0.52% of gross loans as compared to 0.48% as of June 30, 1998. First
Federal had non-accrual loans of $1.5 million and $1.9 million at June 30, 1999
and June 30, 1998, respectively. First Federal will continue to monitor and
modify its allowances for loan losses as conditions dictate.
SGV considers a loan impaired when it is probable that SGV 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 SGV's normal
internal asset review process. SGV 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, SGV 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, SGV had classified $569,000 of
its loans as impaired with $100,000 in specific reserves and none with no
specific reserves. In addition, SGV 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.
84
<PAGE>
The following table sets forth activity in First Federal's allowance for
loan losses for the periods set forth in the table.
<TABLE>
<CAPTION>
At or For the Year Ended June 30,
-------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ -----
(In thousands)
<S> <C> <C> <C> <C> <C>
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
====== ====== ====== ====== =====
</TABLE>
85
<PAGE>
The following table sets forth First Federal'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.
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------------------------------------------------------
1999 1998 1997 1996
----------------------------- ----------------------------- ----------------------------- -----------------
Percent of Percent of Percent of
Percent of Loans in Percent of Loans in Percent of Loans in Percent of
Allowance Each Allowance Each Allowance Each Allowance
to Total Category to to Total Category to to Total Category to to Total
Amount Allowance Total Loans Amount Allowance Total Loans Amount Allowance Total Loans Amount Allowance
------ ---------- ----------- ------ ---------- ----------- ------ ---------- ----------- ------ ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-
family........... $ 734 39.79% 78.59% $ 616 43.23% 85.04% $ 994 78.70% 87.29% $ 696 65.79%
Multi-family..... 469 25.42 13.03 397 27.86 9.93 164 12.99 9.50 195 18.43
Commercial....... 99 5.37 6.71 89 6.25 4.00 95 7.52 3.02 153 14.46
Construction and
land............. -- 0.00 0.00 -- 0.00 0.00 -- 0.00 0.00 -- 0.00
Consumer......... 439 23.79 1.67 162 11.37 3.03 10 0.79 0.19 14 1.32
Unallocated...... 104 5.63 -- 161 11.29 -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total........... $1,845 100.00% 100.00% $1,425 100.00% 100.00% $1,263 100.00% 100.00% $1,058 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
<CAPTION>
1995
-----------------------------
Percent of Percent of
Loans in Percent of Loans in
Each Allowance Each
Category to to Total Category to
Total Loans Amount Allowance Total Loans
----------- ------ ---------- -----------
<S> <C> <C> <C> <C>
One- to four-
family........... 87.82% $466 58.84% 85.82%
Multi-family..... 8.40 105 13.26 9.34
Commercial....... 3.61 166 20.96 4.37
Construction and
land............. 0.00 42 5.30 0.19
Consumer......... 0.17 13 1.64 0.28
Unallocated...... -- -- -- --
----------- ------ ---------- -----------
Total........... 100.00% $792 100.00% 100.00%
=========== ====== ========== ===========
</TABLE>
86
<PAGE>
Real Estate Owned. At June 30, 1999, First Federal had $827,000 of 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 First Federal 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, First Federal
provides for a specific valuation allowance and charges operations for the
diminution in value. It is the policy of First Federal 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, First Federal must maintain minimum
levels of investments that qualify as liquid assets under OTS regulations. See
"--Regulation and Supervision--Federal Savings Institution Regulation--
Liquidity Requirements" on page 103. Historically, First Federal 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 SGV 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 SGV's lending activities. Specifically, SGV'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. SGV's policies provide the authority to invest in
marketable equity securities meeting SGV's guidelines and in mortgage-backed
securities guaranteed by the U.S. government and agencies thereof and other
financial institutions. SGV'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, SGV 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, SGV 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 SGV'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
87
<PAGE>
adjustments to the amortization of any premium or accretion of any discount
relating to such instruments thereby reducing the net yield on such securities.
There is also reinvestment risk associated with the cash flows from such
securities. In addition, the market value of such securities may be adversely
affected by changes in interest rates.
The following table sets forth the composition of SGV's mortgage-backed
securities portfolio in dollar amounts and in percentages of the portfolio at
the dates indicated.
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------
1999 1998 1997
---------------- ---------------- ----------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------- -------- ------- -------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
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
======= ======= =======
</TABLE>
The following table sets forth SGV's mortgage-backed securities activities
for the periods indicated:
<TABLE>
<CAPTION>
For the Year Ended June 30,
-------------------------------
1999 1998 1997
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
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
========= ========= ========
</TABLE>
88
<PAGE>
The following table sets forth certain information regarding the carrying
and market value of SGV's mortgage-backed securities at the dates indicated:
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------
1999 1998 1997
---------------- ---------------- ----------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
-------- ------- -------- ------- -------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
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
======= ======= ======= ======= ======= =======
</TABLE>
The following table sets forth certain information regarding the carrying
and market values of SGV's federal funds sold and other short-term investments
and investment securities at the dates indicated:
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------
1999 1998 1997
---------------- ---------------- ----------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
-------- ------- -------- ------- -------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
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
======= ======= ======= ======= ======= =======
</TABLE>
89
<PAGE>
The following table sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of SGV's federal
funds sold and other short-term investments and investment securities as of
June 30, 1999.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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%
======= ========== =========== ==========
<CAPTION>
Total
-----------------
Weighted
Carrying Average
Value Yield
-------- --------
<S> <C> <C>
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%
========
</TABLE>
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 First Federal's funds for use in lending, investing and for other
general purposes.
Deposits. First Federal offers a variety of deposit accounts with a range
of interest rates and terms. First Federal'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,
90
<PAGE>
prevailing interest rates and competition. First Federal's deposits are
obtained predominantly from the areas in which its branch offices are located.
During the year ended June 30, 1997, First Federal acquired $20.2 million in
deposits from another institution. First Federal 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 First Federal's ability to attract
and retain deposits. Certificate accounts in excess of $100,000 are not
actively solicited by First Federal nor has First Federal since 1992 used
brokers to obtain deposits.
The following table presents the deposit activity of First Federal for the
periods indicated:
<TABLE>
<CAPTION>
For the Year Ended June 30,
------------------------------
1999 1998 1997
--------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
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
========= ========= =========
</TABLE>
At June 30, 1999, First Federal had $57.0 million in certificate accounts
in amounts of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
Weighted
Maturity Period Amount Average Rate
--------------- ------------ --------------
(Dollars in thousands)
<S> <C> <C>
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%
============ =========
</TABLE>
91
<PAGE>
The following table sets forth the distribution of First Federal's average
deposit accounts for the periods indicated and the weighted average interest
rates on each category of deposits presented.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Money market savings
accounts............... $ 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%
======== ===== ======== ===== ======== =====
</TABLE>
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.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
======== ====== ====== ====== ====== ======== ======== ========
</TABLE>
Borrowings
From time to time First Federal 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 First Federal's mortgage loans and
mortgage-backed securities and secondarily by First Federal'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.
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<PAGE>
The maximum amount that the FHLB will advance to member institutions, including
First Federal, fluctuates from time to time in accordance with the policies of
the OTS and the FHLB. During the year ended June 30, 1999, First Federal repaid
approximately $38.0 million in FHLB advances. At June 30, 1999, First Federal
had $108.0 million in outstanding advances from the FHLB.
The following table sets forth certain information regarding First
Federal's borrowed funds from the FHLB at or for the periods ended on the dates
indicated:
<TABLE>
<CAPTION>
At or For the Years Ended June 30,
--------------------------------------
1999 1998 1997
------------ ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
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%
</TABLE>
As part of its funding strategy, First Federal 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, First Federal had
no outstanding borrowings. During the year ended June 30, 1999, First Federal
repaid approximately $10.3 million of such borrowings.
The following table sets forth certain information regarding First
Federal's borrowed funds from securities sold under agreements to repurchase at
or for the periods ended on the dates indicated:
<TABLE>
<CAPTION>
At or For the Years Ended June 30,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
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%
</TABLE>
Subsidiary Activities
First Covina Service Company, a wholly-owned subsidiary of First Federal,
acts as trustee for deeds of trust on behalf of First Federal 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 First Federal which matured in October 1999. Other than
interest on the note to First Federal, First Covina Service Company earns
commissions on the sale of tax-deferred annuities and mutual funds.
93
<PAGE>
Personnel
As of June 30, 1999, SGV had 83 full-time employees and 32 part-time
employees. The employees are not represented by a collective bargaining unit
and SGV considers its relationship with its employees to be good.
Regulation and Supervision
General. First Federal is chartered as a federal savings bank under the
Home Owners' Loan Act, as amended (the "HOLA"), which is implemented by
regulations adopted and administered by the OTS. As a federal savings bank,
First Federal is subject to regulation, supervision and regular examination by
the OTS. Federal banking laws and regulations control, among other things,
First Federal's required reserves, investments, loans, mergers and
consolidations, payment of dividends and other aspects of its operations. The
deposits of First Federal are insured by the Savings Association Insurance Fund
("SAIF") administered by the FDIC to the maximum extent provided by law
($100,000 for each depositor).
The FDIC has certain regulatory and examination authority over OTS-
regulated savings institutions, such as First Federal, and may recommend
enforcement actions against First Federal to the OTS, even though the FDIC is
not the primary regulator of First Federal. The supervision and regulation of
First Federal is intended for the protection of the deposit insurance fund and
First Federal's depositors rather than for holders of SGV's stock or for SGV as
the holder of the stock of First Federal.
As a savings and loan holding company, SGV is registered with and is
subject to OTS regulation and supervision under the HOLA. SGV also is required
to file certain reports with, and otherwise comply with the rules and
regulations of, the SEC under the federal securities laws.
The following discussion is intended to be a summary of certain statutes,
rules and regulations affecting First Federal and SGV. A number of other
statutes and regulations have an impact on their operations. The following
summary of applicable statutes and regulations does not purport to be complete
and is qualified in its entirety by reference to such statutes and regulations.
Federal Savings Institution Regulation.
Legislative Developments. Congress is considering financial modernization
legislation that would affect certain savings and loan holding companies. Under
current law, a holding company that controls a single savings association is
eligible for unitary holding company status, which means that the holding
company may engage in a wide range of commercial and non-financial activities
without regulatory approval. (This is in contrast to bank holding companies,
which are limited to banking-related activities that require prior approval
from the Federal Reserve Board.)
Under the pending legislation, companies that acquired control of a savings
association after May 4, 1999 (or that file an application for that purpose
after that date) would not be entitled to full unitary holding company status.
Rather, these companies would have
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authority to engage in a range of securities and insurance-related activities
(a range broader than that now allowed for bank holding companies) but would
not have authority to engage in non-financial activities. SGV has been a
unitary holding company since before the date specified in the pending
legislation, and therefore would retain that status under the legislation.
However, if the legislation is enacted, IndyMac would not be entitled to full
unitary holding company status after the merger.
Business Activities. First Federal derives its lending and investment
powers from the HOLA and the regulations of the OTS thereunder. Under these
laws and regulations, First Federal may invest in mortgage loans secured by
residential and commercial real estate, commercial and consumer loans, certain
types of commercial paper and debt securities, and certain other assets. First
Federal may also establish service corporations that may engage in financial
activities not otherwise permissible for First Federal, including certain real
estate equity investments and securities and insurance brokerage. These
investment powers are subject to various limitations.
OTS Capital Requirements; Reserve Requirements. Under federal law and OTS
regulations, savings associations are required to comply with each of three
separate capital adequacy standards: a "tangible capital" requirement; a
"leverage ratio"; and a "risk-based capital" requirement. The OTS is authorized
to establish individual capital requirements for a savings association
consistent with these capital standards. As noted below under "Prompt
Corrective Action," the OTS was required by the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") to promulgate additional capital
requirements that in certain respects have superseded the capital requirements
discussed immediately below.
Tangible Capital. The OTS capital regulations require tangible capital of
at least 1.5% of adjusted total assets (as defined by regulation). Tangible
capital generally includes common stockholders' equity and retained earnings,
noncumulative perpetual preferred stock and related surplus. In addition, all
intangible assets, other than interest-only strips receivables and other non-
security financial instruments and a limited amount of properly valued
purchased mortgage servicing rights ("MSRs"), must be deducted from tangible
capital.
Leverage Ratio. The leverage ratio adopted by the OTS requires savings
associations to maintain core capital in an amount equal to at least 3.0% of
adjusted total assets. "Core capital" is comprised of common stockholders'
equity (including retained earnings), non-cumulative perpetual preferred stock
and any related surplus, and minority interests in the equity accounts of fully
consolidated subsidiaries, and certain goodwill, less certain intangible
assets, mortgage servicing rights above a certain level, and investments in
nonincludable subsidiaries. In general, intangible assets must be deducted from
both capital and assets in computing the core capital or leverage ratio. There
are exceptions to this rule of deduction, however. PMSRs, originated mortgage
servicing rights ("OMSRs") and purchased credit card relationships ("PCCRs") in
the aggregate are includable in core
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capital up to 100% of an association's core capital, with PCCRs not exceeding
25% of core capital. All such rights, however, must be valued at the lower of
90% of fair market value or 100% of the remaining unamortized book value of the
asset.
Risk-Based Capital. The risk-based capital standard for savings
institutions requires the maintenance of total capital (which is defined as
core capital and supplementary capital less certain holdings) to risk-weighted
assets of at least 8.0%. In determining the amount of risk-weighted assets, all
assets, including certain off-balance sheet assets, are multiplied by a risk
weight of 0% to 100%, as assigned by the OTS capital regulation based on the
risks OTS believes are inherent in the type of asset. The components of core
capital are equivalent to those discussed earlier under the 3.0% leverage
standard. 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 allowance
for loan and lease losses. Allowance for loan and lease losses includable in
supplementary capital is limited to a maximum of 1.25% of risk-adjusted assets.
For example, cash and U.S. Treasury securities are risk-weighted at 0%, agency
securities (including Fannie Mae and Freddie Mac securities) are risk-weighted
at 20%, performing one-to-four family first mortgage loans (prudently
underwritten and with loans-to-value rate below 80%) are at 50%, and consumer,
commercial, and home equity loans are at 100%. Overall, the amount of
supplemental capital counted toward total capital cannot exceed 100% of core
capital.
Interest Rate Risk. FDICIA requires the OTS (and the other federal banking
agencies) to revise their risk-based capital standards, with appropriate
transition rules, to ensure that they take account of interest-rate risk,
concentration of credit risk, and the risks of non-traditional activities. In
1993, the OTS adopted a final rule adding an interest rate risk ("IRR")
component that would be incorporated into its risk-based capital rule. Under
the final rule, which became effective in 1994, only a savings association with
"above normal" interest rate risk exposure (i.e., where the ratio of an
institution's net portfolio value or "NPV" to the estimated economic value of
its assets would decline by more than 2% in the event of a hypothetical 200-
basis point move in interest rates) would be required to deduct an IRR
component from its capital. The NPV is defined as the net present value of
expected cash inflows and outflows from an institution's assets, liabilities,
and off-balance sheet items. The IRR component deduction that such an
institution would be required to make from its capital would be equal to one-
half of its above normal interest rate risk exposure (i.e., 50% of the amount
by which the decline in its NPV ratio exceeds a 2.0% decline). The deduction
would become effective two quarters after the date of the report on which the
IRR component was based. Savings associations with less than $300 million in
assets and risk-based capital ratios in excess of 12% are not subject to an IRR
component deduction. The OTS has delayed implementation of the IRR component
deduction.
On August 31, 1995, the OTS issued an interim rule providing that the
amount of risk-based capital that may be required to be maintained by an
institution for recourse assets
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cannot be greater than the total of the recourse liability. The interim rule
provides that whenever the calculation of risk-based assets (including assets
sold with recourse) would result in a capital charge greater than the
institution's maximum recourse liability on the assets sold, instead of
including the assets sold in the institution's risk-weighted assets, the
institution may increase its risk-based capital by its maximum recourse
liability. In addition, qualified savings associations may include in their
risk-weighted assets, for the purpose of capital standards and other measures,
only the amount of retained recourse of small business obligation transfers
multiplied by the appropriate risk weight percentage. The interim rule sets
reserve requirements and aggregate limits for recourse held under the modified
treatment. Only well-capitalized institutions and adequately capitalized
institutions with OTS permission may use this reduced capital treatment.
On August 16, 1996, the federal banking agencies jointly proposed to revise
their respective risk-based capital rules relating to treatment of certain
collateralized transactions. These types of transactions generally include
claims held by banks (such as loans and repurchase agreements) that are
collateralized by cash or securities issued by the U.S. Treasury or U.S.
Government agencies. If adopted, the proposal would permit certain partially
collateralized claims to qualify for the 0% risk category. To qualify for the
0% risk category, the portion of the claim that will be continuously
collateralized must be specified either in terms of dollar amount or percentage
of the claim. For off-balance sheet derivative contracts, the collateralized
portion of the transaction could be specified by dollar amount or percentage of
the current or potential future exposure.
Effective September 1, 1995, the interest rate risk rule was amended to
include, in evaluating capital adequacy, an assessment of the exposure to
declines in the economic value of an association's capital due to changes in
interest rates.
Based upon calculations performed by the OTS, First Federal's interest rate
risk exposure has been determined to be 2.13% as of June 30, 1999.
The FDICIA also required that the OTS (and other federal banking agencies)
revise the risk-based capital standards with appropriate transition rules to
take into account concentration of credit risks and risks of non-traditional
activities. Effective January 17, 1995, the OTS (along with the other federal
banking agencies) issued final regulations which explicitly identify
concentration of credit risk and other risks from non-traditional activities,
as well as an institution's ability to manage these risks, as important factors
in assessing an institution's overall capital adequacy. These final regulations
do not contain any specific mathematical formulas or capital requirements.
On December 1, 1998, the OTS issued Thrift Bulletin 13a ("TB 13a"), which
replaced previous thrift bulletins and certain other guidance on interest rate
risk. TB 13a sets forth a definition and sources of interest rate risk and
directs the Board of Directors of a savings association to set interest rate
risk limits for the savings association and to adopt a system for measuring
interest rate risk. TB 13a also describes certain due diligence management
should undertake before taking a position in investment securities or financial
derivatives, requires certain record-keeping of such investments, and states
that the savings association's
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activities in this area will be subject to assessment by examiners. TB 13a
discusses the two elements to an examiner's assessment of interest rate risk:
the level of market risk as measured by a net portfolio value model, and the
quality of the savings association's practices for managing interest rate risk.
In the event, the OTS believes supervisory action is required to address
interest rate risk at a savings association, TB 13a outlines the range of
agency responses, from written plans from the board to reduce risk to formal
enforcement action, including supervisory agreements or cease and desist
orders.
The table below sets forth First Federal's compliance with its regulatory
capital requirements at June 30, 1999.
<TABLE>
<CAPTION>
First Federal's Capital
Capital Requirements Excess Capital
--------------- --------------- ---------------
Amount Percent Amount Percent Amount Percent
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Tangible capital............... $30,994 6.61% $ 7,034 1.50% $23,960 5.11%
Core capital................... $30,994 6.61% $14,068 3.00% $16,926 3.61%
Total risk-based capital....... $32,601 13.34% $19,544 8.00% $13,057 5.34%
</TABLE>
Pursuant to regulations of the Federal Reserve Board, all FDIC-insured
depository institutions must maintain average daily reserves against their
transaction accounts. No reserves are required to be maintained on the first
$4.3 million of transaction accounts, and reserves equal to 3% must be
maintained on the next $52.0 million of transaction accounts, plus reserves
equal to 10% on the remainder. These percentages are subject to adjustment by
the Federal Reserve Board. Because required reserves must be maintained in the
form of vault cash or in a non-interest-bearing account at a Federal Reserve
Bank, the effect of the reserve requirement is to reduce the amount of the
institution's interest-earning assets. As of June 30, 1999, First Federal met
its reserve requirements.
Federal Deposit Insurance. First Federal is required to pay assessments
based on a percentage of its insured deposits to the FDIC for insurance of its
deposits by the SAIF.
The FDICIA was enacted to recapitalize the Bank Insurance Fund ("BIF") and
impose certain supervisory and regulatory reforms on insured depository
institutions. Pursuant to the FDICIA, the FDIC established a risk-based
assessment system for determining the deposit insurance assessments to be paid
by insured depository institutions. The assessment rate depends on the capital
category and supervisory category to which an institution is assigned, and has
varied over time.
The insurance assessment rates for SAIF-insured institutions, like First
Federal, were set at zero to 27 basis points per $100 of assessable deposits
for 1997 and have not changed since then. At present, First Federal is assessed
at a rate of 0 basis points. In addition, SAIF-insured institutions must pay
assessments to the FDIC to help fund interest payments on certain bonds issued
by the Financing Corporation ("FICO"), an agency of the federal government
established to recapitalize the predecessor to the SAIF. The rate, expressed as
an annual rate, varies by quarter; the third quarter 1999 rate is 5.80 basis
points per $100 of assessable deposits, and the fourth quarter rates will be
5.92 basis points. BIF member banks also are assessed for payment of the FICO
obligations at one-fifth the rate of SAIF member
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institutions. After December 31, 1999, BIF and SAIF members will be assessed at
the same rate for FICO obligations.
The 1996 Act also provides that the FDIC cannot assess regular insurance
assessments for the SAIF or the BIF unless required to maintain or to achieve
the designated reserve ratio of 1.25%, except for assessments on institutions
that are not classified as "well-capitalized" or that have been found to have
"moderately severe" or "unsatisfactory" financial, operational or compliance
weaknesses. First Federal is classified as "well-capitalized" and has not been
found by the OTS to have such supervisory weaknesses.
Qualified Thrift Lender Test. The HOLA and OTS regulations require all
savings institutions to meet a Qualified Thrift Lender ("QTL") test. Under the
QTL test, as modified by FDICIA, a savings association is required to maintain
at least 65% of its "portfolio assets"(total assets less (1) specified liquid
assets up to 20% of total assets, (2) intangible assets, including goodwill,
and (3) the value of property used to conduct business) in certain "qualified
thrift investments" (such as home mortgage loans and other residential real
estate-related assets) on a monthly average basis in nine out of every 12
months.
A savings institution that fails the QTL test must either operate under
certain restrictions on its activities or convert to a bank charter. An initial
failure to qualify as a QTL results in a number of sanctions, including the
imposition of certain operating restrictions and a restriction on obtaining
additional advances from its FHLB. If a savings institution does not requalify
under the QTL test within the three-year period after it fails the QTL test, it
would be required to terminate any activity not permissible for a national bank
and repay as promptly as possible any outstanding advances from its FHLB. In
addition, the holding company of such an institution, such as SGV, would
similarly be required to register as a bank holding company with the Federal
Reserve Board. At June 30, 1999, First Federal qualified as a QTL, with 92.1%
of its portfolio assets in qualified thrift assets.
Legislation enacted into law on September 30, 1996 made certain amendments
to the HOLA that significantly liberalize the QTL test. First, the new law
permits loans to small businesses, student loans and credit card loans to be
counted as Qualified Thrift Investments without percentage limits. The current
10% limit on all other loans to households is eliminated by the new law, and
such loans may now be counted toward the QTL test within the 20% of portfolio
assets limit. Second, the statute amends the QTL test to provide that a savings
institution may be considered a QTL either (1) by satisfying the HOLA's QTL
requirements or (2) by qualifying as a "domestic building and loan association"
as defined under the Internal Revenue Code.
Standards for Safety and Soundness. The FDI Act, as amended by FDICIA and
the Riegle Community Development and Regulatory Improvement Act of 1994,
requires the OTS, together with the other federal bank regulatory agencies, to
prescribe standards, by regulation or guideline, relating to internal controls,
information systems and internal audit systems, loan documentation, credit
underwriting, interest rate risk exposure, asset growth, asset quality,
operational and managerial standards as the agencies deem appropriate. The OTS
and the federal bank regulatory agencies adopted, effective August 9, 1995, a
set of
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guidelines prescribing safety and soundness standards pursuant to the statute.
The safety and soundness guidelines establish general standards relating to
internal controls and information systems, internal audit systems, and
compensation, fees and benefits. In general, the guidelines require, among
other things, appropriate systems and practices to identify and manage the
excessive compensation as an unsafe and unsound practice and describe
compensation as excessive when the amounts paid are unreasonable or
disproportionate to the services performed by an executive officer, employee,
director or principal stockholder.
In addition, on August 27, 1996, the OTS and the federal bank regulatory
agencies added guidelines for asset quality and earnings standards. Under the
standards, a savings institution would be required to maintain systems,
commensurate with its size and the nature and scope of its operations, to
identify problem assets and prevent deterioration in those assets as well as to
evaluate and monitor earnings and ensure that earnings are sufficient to
maintain adequate capital and reserves. Management believes that the asset
quality and earnings standards would not have a material effect on the
operations of First Federal.
Prompt Corrective Action. Under FDICIA, the federal banking regulators are
required to take prompt corrective action in respect of depository institutions
that do not meet certain minimum capital requirements, including a leverage
limit and a risk-based capital requirement. All institutions, regardless of
their capital levels, are restricted from making any capital distribution or
paying any management fees that would cause the institution to become
undercapitalized. As required by FDICIA, banking regulators, including the OTS,
have issued regulations that classify insured depository institutions by
capital levels and provide that the applicable agency will take various prompt
corrective actions to resolve the problems of any institution that fails to
satisfy the capital standards.
At June 30, 1999, First Federal met all of its capital requirements on a
fully phased-in basis and had the requisite capital levels to be deemed a "well
capitalized" institution under the OTS' prompt corrective action regulations.
Limitations on Capital Distributions. OTS regulations currently impose
limitations upon capital distributions by savings institutions, such as cash
dividends, payments to repurchase or otherwise acquire its shares, payments to
stockholders of another institution in a cash-out merger and other
distributions charged against capital. A savings institution must give notice
to the OTS at least 30 days before payment of a proposed capital distribution,
and capital distributions in excess of specified earnings or by certain
institutions are subject to approval by the OTS. A savings institution that has
capital in excess of all regulatory capital requirements ("Tier 1 Bank") before
and after a proposed capital distribution and that is not otherwise restricted
in making capital distributions may, after prior notice but without the
approval of the OTS, make capital distributions during a calendar year equal to
the greater of (a) 100% of its net earnings to date during the calendar year
plus the amount that would reduce by one-half its "surplus capital ratio" (the
excess capital over its fully phased-in capital requirements) at the beginning
of the calendar year, or (b) 75% of its net earnings for the previous four
quarters. Any additional capital distributions would require prior OTS
approval. At June 30, 1999, First Federal was a Tier 1 Bank.
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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. If it was in need of more than
normal supervision, First Federal'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.
In addition to the foregoing, earnings of First Federal appropriate to bad
debt reserves and deducted for foreign income tax purposes are not available
for payment of dividends or other distributions to SGV without payment of taxes
at the then current tax rate by First Federal on the amount of earnings removed
from the reserves for such distributions.
Real Estate Lending Standards. Under joint regulations of the federal
banking agencies, including the OTS, savings institutions must adopt and
maintain written policies that establish appropriate limits and standards for
extensions of credit that are secured by liens or interests in real estate or
extensions of credit that are secured by liens or interests in real estate or
are made for the purpose of financing permanent improvements to real estate.
These policies must establish loan portfolio diversification standards, prudent
underwriting standards, including loan-to-value limits, that are clear and
measurable, loan administration procedures and documentation, approval and
reporting requirements. An institution's real estate lending policy must
reflect consideration of Interagency Guidelines for Real Estate Lending
Policies (the "Interagency Guidelines") that have been adopted by the federal
bank regulators. The Interagency Guidelines, among other things, call upon
depository institutions to establish internal loan-to-value limits specified in
the Interagency Guidelines for the various types of real estate loans. The
Interagency Guidelines state that it may be appropriate in individual cases to
originate or purchase loans with loan-to-value ratios in excess of the
supervisory loan-to-value limits not exceeding those specified, but require
that the aggregate amount of loans with loan-to-value ratios in excess of
certain specified levels may not exceed the amount of the savings association's
total capital.
Federal Consumer Credit and Non-Discrimination Legislation. First Federal's
mortgage lending activities are subject to the provisions of various federal
and state statutes, including, among others, the Truth in Lending Act, the
Equal Credit Opportunity Act, the Real Estate Settlement Procedures Act, the
Fair Housing Act and the regulations promulgated thereunder. These statutes and
regulations, among other things, prohibit discrimination on the basis of race,
gender or other designated characteristics, prohibit unfair and deceptive trade
practices, require the disclosure of certain basic information to mortgage
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borrowers concerning credit terms and settlement costs, and otherwise regulate
terms and conditions of credit and the procedures by which credit is offered
and administered. Each of the foregoing statutes provides for various
administrative, civil and, in limited circumstances, criminal enforcement
procedures, and violations thereof may also lead to class actions seeking
actual and/or punitive damages.
First Federal attempts in good faith to comply with the provisions of these
statutes and their implementing regulations; however, the provisions are
complex and even inadvertent non-compliance could result in liability to First
Federal. During the past several years, numerous individual claims, purported
class actions and federal enforcement proceedings have been commenced against a
number of financial institutions alleging that one or more of these provisions
have been violated. While First Federal has incurred no material detriment as a
result of these actions, there can be no assurance that one or more aspects of
its lending program will not be found to have been in violation of these
statutes.
Community Reinvestment. Under the Community Reinvestment Act ("CRA"), as
implemented by OTS regulations, a savings institution has a continuing and
affirmative obligation consistent with its safe and sound operation to help
meet the credit needs of its entire community, including low and moderate
income neighborhoods. The CRA does not establish specific lending requirements
or programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with its examination of a savings institution,
to assess the institution's record of meeting the credit needs of its community
and to take that record into account in its evaluation of certain applications
by the institution. FIRREA amended the CRA to require all institutions to make
public disclosure of their CRA performance using the ratings of "outstanding,"
"satisfactory," "needs to improve," or "substantial noncompliance." First
Federal received a satisfactory rating in its last CRA examination by the OTS
in 1998.
On May 4, 1995, the bank regulatory agencies, including the OTS, adopted
new uniform CRA regulations that provide guidance to financial institutions on
their CRA obligations and the methods by which those obligations will be
assessed and enforced. The regulations establish three tests applicable to
First Federal: (1) a lending test to evaluate direct lending in low- to
moderate-income areas and indirect lending to groups that specialize in
community lending; (2) a service test to evaluate its delivery of services to
such areas, and (3) an investment test to evaluate its investment in programs
beneficial to such areas. First Federal believes its current operations and
policies substantially comply with the regulations, and therefore no material
changes to operations or policies are expected.
Agencies. First Federal's lending activities, including its mortgage
banking operations, are subject to the rules and regulations of the FHA, VA,
Fannie Mae, Freddie Mac, GNMA and other regulatory agencies with respect to
originating, processing, underwriting, selling and servicing mortgage loans. In
addition, there are other federal and state statutes and regulations affecting
such activities. Moreover in order to participate in their programs, lenders
such as First Federal are required annually to submit audited financial
statements to
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Fannie Mae, Freddie Mac and GNMA and to comply with each entity's own financial
requirements. First Federal's business is also subject to examination by Fannie
Mae, Freddie Mac and GNMA to assure compliance with applicable regulations,
policies and procedures for loans originated, sold and/or serviced by First
Federal under those agencies' programs.
Transactions with Affiliates. First Federal is subject to restrictions
imposed by federal law on extensions of credit to, and certain other
transactions with, SGV and other affiliates and on investments in the stock or
other securities thereof. Such restrictions prevent SGV and such other
affiliates from borrowing from First Federal unless the loans are secured by
specified collateral, and require such transactions to have terms comparable to
terms of arms-length transactions with third persons. Further, such secured
loans and other transactions and investments by First Federal are generally
limited in amount as to SGV and as to any other affiliate to 10% of First
Federal's capital and surplus and as to SGV and all other affiliates to an
aggregate of 20% of First Federal's capital and surplus. These regulations and
restrictions may limit SGV's ability to obtain funds from First Federal for its
cash needs, including funds for acquisitions and for payment of dividends,
interest and operating expenses. First Federal's ability to extend credit to
its directors, executive officers, and 10% stockholders, as well as to entities
controlled by such persons, is governed by the requirements of Sections 22(g)
and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve
Board thereunder.
Liquidity Requirements. First Federal is required by OTS regulation to
maintain an average daily balance of liquid assets (cash, certain time
deposits, bankers' acceptances, highly rated corporate debt and commercial
paper, securities of certain mutual funds and specified United States
government, state or federal agency obligations) equal to the monthly average
of not less than a specified percentage (currently 4%) of its net withdrawable
savings deposit plus short-term borrowings. The average daily liquidity ratio
of First Federal for the month ended June 30, 1999 was 17.43%. Monetary
penalties may be imposed for failure to meet liquidity requirements.
Branching. Subject to certain limitations, the HOLA and the OTS regulations
currently permit federally chartered savings institutions such as First Federal
to establish branches in any state of the United States. The authority to
establish such branches is available (1) in states that expressly authorize
branches of savings institutions located in another state or (2) to a federal
savings institution that qualifies as a "domestic building and loan
association" under the Code. See "--Regulation and Supervision--Federal Savings
Institutions Regulation--Qualified Thrift Lender Test" on page 99. The
authority for a federal savings institution to establish an interstate branch
network would facilitate a geographic diversification of the institution's
activities. This authority under the HOLA and the OTS regulations preempts any
state law purporting to regulate branching by federal savings institutions.
Federal Home Loan Bank System. The FHLB System consists of 12 district
FHLBs subject to supervision and regulation by the Federal Housing Finance
Board ("FHFB"). The FHLBs provide a central credit facility primarily for
member institutions. As a member of the FHLB, First Federal is required to
acquire and hold shares of capital stock in the FHLB in an amount at least
equal to 1% of the aggregate unpaid principal of its home mortgage
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loans, home purchase contracts, and similar obligations at the beginning of
each year, or 1/20 of its advances (borrowings), from the FHLB, whichever is
greater. First Federal was in compliance with this requirement, with an
investment in FHLB stock at June 30, 1999 of $5.4 million. Long-term FHLB
advances may only be made for the purpose of providing funds for residential
housing finance. At June 30, 1999, First Federal had total advances of $108.0
million outstanding from the FHLB.
Year 2000 Compliance. The federal banking agencies, including OTS, have
issued several regulations and guidelines addressing the capacity of the
computer systems and other technology-based operations at insured depository
institutions to continue to perform after the century-date change on January 1,
2000. Among other items, the safety and soundness regulations see ("--
Regulation and Supervision--Federal Savings Institutions Regulation--Standards
for Safety and Soundness" on page 99) now include an appendix that outlines
standards for Year 2000 compliance. In addition, on May 25, 1999, the OTS
issued a memorandum advising that by June 30, 1999, savings associations should
have completed testing of mission-critical systems, substantially completed the
implementation phase of Year 2000 compliance, and developed and approved a
contingency plan and method for validation. For more information regarding
SGV's Year 2000 readiness see "Management's Discussion and Analysis of SGV--
Year 2000" on page 122.
Holding Company Regulation. SGV is a unitary savings and loan holding
company under the HOLA and, as such, is subject to OTS regulation, supervision
and examination. In addition, the OTS has enforcement authority over SGV and
may restrict or prohibit activities that are determined to represent a serious
risk to the safety, soundness or stability of First Federal or any other
subsidiary savings institution.
Under the HOLA, a savings and loan holding company may not (1) acquire,
with certain exceptions, more than 5% of a non-subsidiary savings institution
or a non-subsidiary savings and loan holding company; or (2) acquire or retain
control of a depository institution that is not insured by the FDIC.
As a unitary savings and loan holding company, SGV currently is not subject
to any restriction as to the types of business activities in which it may
engage, provided that First Federal continues to satisfy the QTL test. See "--
Regulation and Supervision--Federal Savings Institutions Regulation--Qualified
Thrift Lender Test" on page 99. However, if the legislation now pending in
Congress (see "--Legislative Developments" on page 94) becomes law, then
IndyMac would not be entitled to grandfathered unitary thrift holding company
status. Accordingly, IndyMac would be limited to the activities permissible for
financial holding companies.
Federal and State Taxation
Federal Taxation
General. SGV and First Federal 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
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same manner as other corporations with some exceptions, including particularly
First Federal'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 First Federal or SGV.
Bad Debt Reserve. For tax years beginning prior to January 1, 1996,
savings institutions such as First Federal 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").
Under SFAS 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 First Federal's current and
accumulated earnings and profits, a redemption of shares, or upon a partial or
complete liquidation of First Federal. Upon the occurrence of such events,
First Federal 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 First Federal'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, First Federal'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, First Federal's bad
debt tax reserve grandfathered under the new law for which federal deferred
taxes have not been provided totaled approximately $2.7 million. First Federal
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 First
Federal equals the franchise tax rate applicable to corporations generally,
plus an "in lieu" rate
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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 First Federal); 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. First Federal 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, SGV 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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF SGV
Management of Interest Rate Risk
The principal objective of First Federal's interest rate risk management
function is to evaluate the interest rate risk included in certain balance
sheet accounts, determine the level of risk appropriately given First Federal's
business focus, operating environment, capital and liquidity requirements and
performance objectives, and manage the risk consistent with Board approved
guidelines. Through such management, First Federal seeks to reduce the
vulnerability of its operations to changes in interest rates. First Federal
monitors its interest rate risk as such risk relates to its operating
strategies. First Federal'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 First Federal'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 First Federal.
In recent years, First Federal has utilized the following strategies to
manage rate risk: (1) emphasizing the origination or purchase of adjustable-
rate one- to four-family mortgage loans for portfolio; (2) selling to the
secondary market the majority of fixed-rate mortgage loans originated; and, (3)
attempting to reduce the overall interest rate sensitivity of liabilities
emphasizing core and longer-term deposits and utilizing FHLB advances.
Net Portfolio Value. First Federal'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 First Federal's quarterly Thrift Financial Reports.
As of June 30, 1999, First Federal's Sensitivity Measure, as measured by
the OTS, was 2.13%. At that same date, the Sensitivity Measure as measured by
First Federal, was 1.62%. The differences between the two measurements is
partially attributed to differences in assigning various prepayment rates,
decay rates and discount rates. First Federal 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. First Federal projects net interest income for
the next 12 month period, based upon certain specific assumptions.
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<PAGE>
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 First Federal'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 First Federal's business or strategic
plans. Accordingly, although the NPV measurements and interest income models do
provide an indication of First Federal'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
First Federal's net interest income and will differ from actual results.
The following table sets forth, at June 30, 1999 and June 30, 1998, an
analysis of First Federal'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).
<TABLE>
<CAPTION>
Change in Net Portfolio Value -- June 30, 1999
Interest Rates ------------------------------------
In Basis Points Change Change
(Rate Shock) Amount $ %
--------------- ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
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
<CAPTION>
Change in Net Portfolio Value -- June 30, 1998
Interest Rates ------------------------------------
In Basis Points Change Change
(Rate Shock) Amount $ %
--------------- ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
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
</TABLE>
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<PAGE>
At June 30, 1999, First Federal 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 First Federal'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 First Federal 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 First Federal's change in NPV in
rising rate environments.
The following table provides information regarding SGV'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.
<TABLE>
<CAPTION>
Year 1 Year 2 Year 3 Year 4 Year 5 Thereafter
-------- ------- ------- ------- ------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
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 rate....... 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 rate.. 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% --
</TABLE>
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<PAGE>
SGV does not have any foreign exchange exposure nor any commodity exposure
and therefore does not have any market risk exposure for these issues.
Average Balance Sheet
The following table sets forth certain information relating to SGV 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.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------------------------------
1999 1998 1997
-------------------------- -------------------------- --------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
-------- -------- ------- -------- -------- ------- -------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning
assets:
Interest earning
deposits and short-
term investments...... $ 5,675 $ 295 5.20% $ 10,109 $ 609 6.02% $ 7,176 $ 389 5.42%
Investment securities,
net................... 22,543 1,425 6.32 16,705 1,073 6.42 17,222 1,133 6.58
Loans receivable....... 336,311 25,978 7.72 301,984 23,641 7.83 273,469 20,890 7.64
Mortgage-backed
securities, net....... 61,841 3,813 6.17 60,413 4,032 6.67 59,733 4,051 6.78
FHLB stock............. 5,082 267 5.25 4,130 247 5.98 3,884 237 6.10
-------- ------- -------- -------- -------- -------
Total interest-
earning assets....... 431,452 $31,778 7.37% 393,341 $ 29,602 7.53% 361,484 $26,700 7.39%
======= ======== =======
Non-interest-earning
assets............... 17,416 13,710 11,773
-------- -------- --------
Total assets......... $448,868 $407,051 $373,257
======== ======== ========
Liabilities and Equity:
Interest-bearing
liabilities:
Money market savings
accounts.............. $ 67,399 $ 3,069 4.55% $ 31,291 $ 1,367 4.37% $ 13,334 $ 493 3.70%
Passbook accounts...... 18,413 367 1.99 18,516 377 2.04 17,432 348 2.00
NOW accounts........... 21,165 240 1.13 21,171 309 1.46 20,249 280 1.38
Certificate accounts... 192,496 9,856 5.12 212,744 11,574 5.44 203,744 11,074 5.44
-------- ------- -------- -------- -------- -------
Total savings
accounts............. 299,473 13,532 4.52 283,722 13,627 4.80 254,759 12,195 4.79
FHLB advances.......... 97,110 5,572 5.74 72,722 4,615 6.35 73,513 4,569 6.22
Securities sold under
agreements to
repurchase............ 3,831 237 6.18 6,528 397 6.08 6,043 349 5.78
Impounds & other
borrowings............ 615 29 4.72 485 22 4.54 443 25 5.64
-------- ------- -------- -------- -------- -------
Total interest-
bearing
liabilities.......... 401,029 $19,370 4.83% 363,457 $ 18,661 5.13% 334,758 $17,138 5.12%
======= ======== =======
Non-interest bearing
liabilities............ 16,147 12,596 7,821
-------- -------- --------
Total liabilities.... 417,176 376,053 342,579
Equity.................. 31,692 30,998 30,678
-------- -------- --------
Total liabilities and
equity.............. $448,868 $407,051 $373,257
======== ======== ========
Net interest rate
spread................. 2.54% 2.40% 2.27%
Net interest margin..... 2.88% 2.78% 2.65%
Ratio of interest-
earning assets to
interest-bearing
liabilities............ 107.59% 108.22% 107.98%
</TABLE>
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<PAGE>
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 SGV's interest income and interest expense during the
periods indicated. Information is provided in each category with respect to:
(1) changes attributable to changes in volume (changes in volume multiplied by
prior rate); (2) changes attributable to changes in rate (changes in rate
multiplied by prior volume); and (3) 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.
<TABLE>
<CAPTION>
Year Ended June 30, Year Ended June 30,
1999 Compared to 1998 Compared to
Year Ended June 30, Year Ended June 30,
1998 1997
------------------------ ---------------------
Increase (decrease) Increase (decrease)
due to due to
------------------------ ---------------------
Average Average
Volume Rate Net Volume Rate Net
------- ------- ------ ------- ---- ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
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 and 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
======= ======= ====== ====== ==== ======
</TABLE>
- --------
(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.
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<PAGE>
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 SGV'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 COFI and to the one year CMT and were
primarily seasoned, fully-indexed loans. Although SGV 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 SGV'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, SGV'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
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<PAGE>
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 SGV'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 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.
SGV'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. SGV'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
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<PAGE>
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 SGV 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 First Federal's allowance for loan losses. Such
agencies may require First Federal 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 SGV 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. SGV 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
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primarily attributable to the increase in staff during the year to enhance
SGV's lending operations and 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.
Comparison of Financial Condition at June 30, 1999 and June 30, 1998
SGV'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, SGV 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 SGV'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 SGV 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
SGV from increasing its portfolio significantly more. During the year ended
June 30, 1999, SGV 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, SGV 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 SGV's loan portfolio and to provide improvement in overall
yields. SGV still remains focused on being a single-family lender as evidenced
by the 78.6% of its loan portfolio being in this category.
SGV'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).
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SGV'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 11 versus 18 in the
prior year.
The total liabilities of SGV increased to $436.4 million at June 30, 1999
from $376.1 million at June 30, 1998 primarily due to increases in SGV'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 SGV'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, SGV'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 SGV in
terms of lower cost of funds, the ability to generate additional fee income and
the ability to build multiple relationships. In July 1999, SGV completed its
acquisition of two Citibank savings branches in La Verne and Covina which
combined had total deposits of $36.8 million. This acquisition enables SGV to
enhance its market share of deposits in both communities.
SGV 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, SGV's borrowings from the FHLB totaled $108.0
million as compared to $70.5 million at June 30, 1998. Also, SGV'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.
SGV's stockholders' equity was $32.4 million at June 30, 1999, an 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
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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, First Federal paid a special assessment totaling $1.3 million for the
recapitalization of the 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 SGV'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 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.
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
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$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. SGV'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 SGV'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.
SGV'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 SGV's
liabilities.
Provision for Loan Losses. SGV'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-
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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 SGV 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. SGV
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.
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, SGV recorded a net loss on REO 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.
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Comparison of Financial Condition at June 30, 1998 and June 30, 1997
SGV'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 First Federal's mortgage-backed securities, which were
partially offset by increases in First Federal's loans receivable. During the
year, SGV 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. First Federal 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 SGV's normal lending area. Although SGV 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 SGV's loan portfolio. During the
year ended June 30, 1998, SGV experienced an 84% increase in prepayments to
$61.0 million as compared to $33.2 million for the year ended June 30, 1997.
SGV'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 SGV's loan and mortgage-backed
securities portfolios.
SGV'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 SGV's general lending area throughout most of the current
year.
The total liabilities of SGV decreased to $376.1 million at June 30, 1998
from $379.4 million at June 30, 1997 primarily due to decreases in First
Federal's FHLB advances and securities sold under agreements to repurchase,
which was partially offset by increases in First Federal'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 SGV's core deposits was in
the growth of money market savings accounts which
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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, SGV's non-interest-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 SGV in terms of lower cost of funds, the ability to
generate additional fee income and the ability to build multiple relationships.
SGV 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, SGV's borrowings from the FHLB totaled $70.5 million as compared to $77.9
million at June 30, 1997. Also, SGV'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.
SGV's stockholders' equity was $32.2 million at June 30, 1998, a 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 SGV's operations. Unlike industrial companies, nearly all of the assets
and liabilities of SGV are monetary in nature. As a result, interest rates have
a greater impact on SGV'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, SGV 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 FASB statements. SGV 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.
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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 SGV.
Year 2000
In recent years SGV 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.
SGV's Y2K plan has been designed to address potential problems that could arise
from software, hardware and equipment both within SGV's direct control and
outside of SGV's control, yet which SGV relies upon, in that it electronically
or operationally interfaces with such software, hardware and equipment.
SGV principally utilizes third-party data processors and third-party
software for its information technology ("IT") needs. As a result, the year
2000 compliance of SGV'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 SGV'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.
SGV 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 SGV's Year 2000 Plan. Also, SGV has enlisted
the services of outside contractors to assist in the attainment of year 2000
readiness. In order to address the year 2000 issue, SGV has developed and
implemented a five-phase plan, which is divided into the following major
components:
.awareness
.assessment
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.renovation
.validation
.implementation
SGV has completed all phases of this plan. Because SGV 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 SGV. SGV's primary third-party service bureau
provides data processing for all of SGV'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
SGV is confident these issues will be resolved, none of the issues detected are
expected to have any material impact to SGV's successful transition to year
2000 even if they have not been corrected by year 2000. SGV 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 SGV.
SGV surveyed its primary vendors and others with whom it relies on to
assure their systems will be year 2000 ready. Of the vendors SGV considers
critical to its operations, all have responded that they are year 2000 ready or
are in process of becoming ready. Vendors SGV 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 SGV 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, SGV 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), SGV may be adversely affected.
Further, SGV will be unable to seek alternative service providers with respect
to some critical vendors such as utility providers. SGV has endeavored to
determine such vendors will be year 2000 compliant and at this time, based upon
information supplied by such vendors, has no information suggesting utility
services will be interrupted. However, any disruption in utility service would
directly affect SGV's ability to operate.
In regard to vendors or service providers SGV deems are important for the
normal operations of SGV, but not considered critical, approximately 87% have
represented that they are year 2000 ready or are working towards readiness. SGV
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 SGV believes will not be year 2000 ready, SGV will evaluate the
potential impact on the operations of SGV by such
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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 SGV's operations. SGV 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 SGV to financial loss. SGV 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 SGV to any material impact by a lack
of year 2000 preparedness. Also, the analysis of fund users indicates that SGV
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.
SGV has completed its Year 2000 Contingency Plan for handling issues which
may present concern to SGV 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 SGV.
Recommendations made by the consultant were reviewed by management and
incorporated into the contingency plan. SGV 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 SGV's vendors and service
providers.
During the execution of this project, SGV 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 SGV replaced many of the internal
systems with year 2000 compliant personal computers in 1997, the expenses
incurred to bring SGV 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. SGV 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 SGV's normal depreciation of such hardware or software. The
future expenses of the year 2000 project as well as the related potential
effect on SGV's earnings is not expected to have a material effect on its
financial position or results of operations. For the fiscal year ended June 30,
1999, SGV has spent approximately $157,000 for year 2000 related issues which
included approximately $121,000 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.
124
<PAGE>
SGV believes it has developed an effective and prudent plan to review,
renovate and resolve any potential year 2000 issues. In respect to operations
under SGV'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 SGV. 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 SGV. In addition, SGV 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 SGV's ability to provide services to its customers.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Certain Beneficial Owners
The following table sets forth certain information concerning the
beneficial owners of more than 5.0% of SGV common stock, as of the record date.
Unless otherwise indicated, the person listed is the beneficial owner and has
the sole voting and investment power over the shares.
<TABLE>
<CAPTION>
Number of Shares Beneficially
Owned at September 30, 1999
-------------------------------------
Title of Name and
Class Address of Beneficial Owner Amount Percent of Class
-------- -------------------------------- ---------------- -------------------
<C> <S> <C> <C>
Common First Federal Savings and Loan 183,428(1) 8.4%
Association of San Gabriel
Valley Employee Stock Ownership
Plan and Trust ("ESOP")
225 North Barranca Street
West Covina, California 91791
Jeffrey L. Gendell 214,500(2) 9.9
Tontine Partners, L.P.
Tontine Financial Partners, L.P.
Tontine Management, L.L.L.
Tontine Overseas Associates,
L.L.L.
200 Park Avenue, Suite 3900
New York, New York 10166
Grace & White 300,500(3) 13.52
515 Madison Avenue, Suite 1700
New York, New York 10022
FMR Corp. 137,800(4) 6.21
82 Devonshire Street
Boston, Massachusetts 02109
</TABLE>
- --------
(1) The ESOP Committee of SGV's Board of Directors administers the ESOP. The
ESOP Trustee must vote all allocated shares held in the ESOP in accordance
with the instructions of the participants. As of the record date, 95,468
shares have been allocated to participant's accounts. Under the ESOP,
unallocated shares will be voted by the ESOP Trustee in a manner calculated
to most accurately reflect the instructions received from participants
regarding the allocated stock so long as such vote is in accordance with
the provisions of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA").
125
<PAGE>
(2) Based on information disclosed in an amended Schedule 13D filed with the
SEC on July 15, 1998.
(3) Based on information disclosed in an amended Schedule 13G filed with the
SEC on February 12, 1998.
(4) Based on information disclosed in an amended Schedule 13G filed with the
SEC on February 11, 1999.
Management
The following table presents information about the stock ownership of the
directors and executive officers of SGV as of the record date. Unless otherwise
indicated, the person listed is the record owner and has the sole voting and
investment power over the shares.
<TABLE>
<CAPTION>
Number of Shares Beneficially
Owned at September 30, 1999
---------------------------------
Title of Name and
Class Address of Beneficial Owner Amount Percent of Class
- -------- -------------------------------------- --------------- ----------------
<S> <C> <C> <C>
Common Barrett G. Andersen 101,246(2)(3)(4) 4.29%
Royce A. Stutzman 15,820(2)(3) *
Thomas A. Patronite 23,320(2)(3) *
John D. Randall 17,470(2)(3) *
Irven G. Reynolds 38,570(2)(3) 1.64
Benjamin S. Wong 27,070(2)(3) 1.15
Ronald A. Ott 53,501(2)(3)(4) 2.27
Dale Schiering 25,032(2)(3)(4) 1.06
Michael A. Quigley 13,338(4)(5) *
Directors and Officers as a Group (15) 410,746(6) 17.43
</TABLE>
- --------
* Represents less than 1.0% of SGV's voting securities.
(1) Each person effectively exercises sole (or shares with spouse or other
immediate family member) voting or dispositive power as to shares reported
herein (except as noted).
(2) Includes 3,023 shares awarded to each outside director, 18,002, 13,094 and
6,546 shares awarded to Messrs. Andersen, Ott and Schiering, respectively,
under the SGV Bancorp, Inc. 1995 Amended and Restated Stock-Based Incentive
Plan ("Stock-Based Incentive Plan"). Such awards commenced vesting at a
rate of 20% per year on January 17, 1997. Each participant presently has
voting power as to the shares awarded.
(3) Includes options to purchase 6,546 shares of SGV common stock granted to
each outside director and options to purchase 32,733, 22,913 and 11,457
shares of SGV common stock granted to Messrs. Andersen, Ott and Schiering,
respectively, under the Stock-Based Incentive Plan which are currently
exercisable or will become exercisable within 60 days of the record date.
Includes options to purchase 500 and 200 shares of SGV common stock granted
to Messrs. Andersen and Ott, respectively, pursuant to the SGV Bancorp,
Inc. 1997 Stock-Based Incentive Plan ("1997 Incentive Plan") which vested
100% on February 20, 1999. Also includes options to purchase 3,907, 3,506,
3,306 and 3,306 shares of SGV common stock granted to Messrs. Andersen,
Ott, Schiering and Quigley, respectively, pursuant to the 1997 Incentive
Plan, which vested 100% on September 8, 1999. Excludes options to purchase
4,364 shares of SGV common stock granted to each outside director and
options to purchase 21,820, 15,274 and 7,637 shares of SGV common stock
granted to Messrs. Andersen, Ott and Schiering, respectively, pursuant to
the Stock-Based Incentive Plan, which are not yet exercisable. Such shares
vest at a rate of 20% per year, beginning January 17, 1997. Also excludes
options to purchase 2,500, 2,000, 1,500 and 1,500 shares of SGV common
stock granted to Messrs. Andersen, Ott, Schiering and Quigley,
respectively, pursuant to the 1997 Incentive Plan, which are not yet
exercisable. Such shares vest 100% on January 22, 2000.
(4) Includes 6,029, 5,605, 3,022 and 1,199 shares beneficially owned by Messrs.
Andersen, Ott, Schiering and Quigley, respectively, under the ESOP.
(5) Mr. Quigley's ownership includes options to purchase 7,638 shares of SGV
common stock granted under the 1997 Incentive Plan that are currently
exercisable, or will become exercisable within 60 days of the
126
<PAGE>
Record Date. Excludes options to purchase 7,637 shares of SGV common stock
granted to Mr. Quigley pursuant to the 1997 Incentive Plan that are not
yet exercisable. Such shares vest at a rate of 25% per year, beginning
February 21, 1998.
(6) For purposes of calculating the aggregate ownership percentage, options
which are currently exercisable or will become exercisable within 60 days
of the SGV record date, and 75,540 unvested shares of restricted stock
have been added to the amount of outstanding SGV common stock as of the
SGV record date.
CERTAIN REGULATORY CONSIDERATIONS
As a result of the merger, IndyMac will become, as SGV currently is, a
thrift holding company regulated by the OTS. For a description of the
regulations under which IndyMac will operate, see "Business of SGV--Regulation
and Supervision" on page 94.
ADDITIONAL MATTERS RELATING TO THE SPECIAL MEETINGS
As of the date of this joint proxy statement, neither IndyMac's or SGV's
Board of Directors knows of any matters that will be presented for
consideration at the special meetings other than as described in this joint
proxy statement. However, if any other matters properly come before the
special meetings or any adjournment or postponement of the special meetings
and are voted upon, the enclosed proxy will be deemed to confer discretionary
authority to the individuals named as proxies to vote the shares represented
by such proxy as to any such matters.
127
<PAGE>
STOCKHOLDER PROPOSALS
IndyMac expects to hold its 2000 annual meeting of stockholders on May 23,
2000. Proposals of stockholders intended to be presented at the 2000 annual
meeting pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as
amended, must be received by the Secretary of IndyMac, 155 North Lake Avenue,
Pasadena, California 91101, not later than December 10, 1999 to be considered
for inclusion in IndyMac's proxy materials for that meeting. A stockholder that
intends to present business at the IndyMac 2000 annual meeting other than
pursuant to Rule 14a-8 must comply with the requirements set forth in IndyMac's
Bylaws. To bring business before an annual meeting, IndyMac's Bylaws require,
among other things, that the stockholder submit written notice thereof
complying with the Bylaws, to the Secretary of IndyMac not less than 90 days
nor more than 120 days prior to the anniversary of the preceding year's annual
meeting. Therefore, IndyMac must receive notice of a stockholder proposal
submitted other than pursuant to Rule 14a-8 no sooner than February 4, 2000 and
no later than March 5, 2000. If the notice is received before February 4, 2000
or after March 5, 2000, it will be considered untimely and IndyMac will not be
required to present such proposal at the IndyMac 2000 annual meeting. Any such
proposals shall be subject to the requirements of the proxy rules adopted under
the Securities Exchange Act of 1934, Delaware law and IndyMac's Certificate of
Incorporation and Bylaws.
SGV will hold its 2000 annual meeting of stockholders only if the merger is
not completed. In order to be eligible for inclusion in SGV's proxy materials
for the 2000 annual meeting, if held, any stockholder proposal to take action
at such meeting must have been received at SGV's executive offices at 225 North
Barranca Street, West Covina, California 91791, no later than June 17, 2000.
However, if the date of SGV's 2000 annual meeting changes by more than 30 days
from the date of last year's meeting, then the deadline for any such proposals
is a reasonable time before SGV prints and mails its proxy materials. Any such
proposals shall be subject to the requirements of the proxy rules adopted under
the Securities Exchange Act of 1934, Delaware law and SGV's Certificate of
Incorporation and Bylaws.
INDEPENDENT AUDITORS
The consolidated financial statements of IndyMac Mortgage Holdings, Inc.
and subsidiaries as of December 31, 1998 and 1997 and for each of the years in
the three-year period ended December 31, 1998, have been incorporated herein by
reference and have been audited by Grant Thornton LLP, independent certified
public accountants.
The consolidated financial statements of SGV Bancorp, Inc. and subsidiary
as of June 30, 1999 and 1998 and for each of the three years in the period
ended June 30, 1999 included in this joint proxy statement have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report
appearing herein.
128
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
IndyMac and SGV file annual, quarterly and current reports, proxy and
information statements, and other information with the SEC under the Securities
Exchange Act of 1934. You may read and copy this information at the Public
Reference Section at the SEC at 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549. You may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains
an Internet site that contains reports, proxy and information statements, and
other information about issuers that file electronically with the SEC. The
address of that site is "http://www.sec.gov". In addition, you can read and
copy this information at the regional offices of the SEC at 7 World Trade
Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You can also inspect
reports, proxy and information statements, and other information about IndyMac
at the offices of the New York Stock Exchange, 20 Broad Street, New York, New
York 10005.
This joint proxy statement incorporates important business and financial
information about IndyMac. The following documents filed with the SEC by
IndyMac are incorporated by reference in this joint proxy statement (SEC File
No. 1-08972):
(1) IndyMac's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998;
(2) IndyMac's Quarterly Reports on Form 10-Q for the three months
ended March 31, 1999, and June 30, 1999;
(3) IndyMac's Current Reports on Form 8-K dated June 2, 1999, July 14,
1999, and July 21, 1999.
IndyMac also incorporates by reference additional documents filed by
IndyMac pursuant to Sections 13(a), 13(c), 14, or 15(d) of the Exchange Act
after the date of this joint proxy statement and prior to final adjournment of
the special meeting. Any statement contained in this joint proxy statement or
in a document incorporated or deemed to be incorporated by reference in this
joint proxy statement shall be deemed to be modified or superseded to the
extent that a statement contained herein or in any subsequently filed document
which also is, or is deemed to be, incorporated by reference herein modifies or
supersedes such statement.
You may obtain copies of the information incorporated by reference in this
joint proxy statement upon written or oral request. The inside front cover of
this joint proxy statement contains information about how such requests should
be made.
All information contained in this joint proxy statement or incorporated
herein by reference with respect to IndyMac was supplied by IndyMac, and all
information contained in this joint proxy statement with respect to SGV was
supplied by SGV.
129
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report.............................................. F-2
Consolidated Statements of Financial Condition as of June 30, 1999 and
1998..................................................................... F-3
Consolidated Statements of Operations for Each of the Three Years in the
Period Ended June 30, 1999............................................... F-4
Consolidated Statements of Stockholders' Equity for Each of the Three
Years in the Period Ended June 30, 1999.................................. F-5
Consolidated Statements of Cash Flows for Each of the Three Years in the
Period Ended June 30, 1999............................................... F-6
Notes to Consolidated Financial Statements for Each of the Three Years in
the Period Ended June 30, 1999........................................... F-8
</TABLE>
F-1
<PAGE>
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
F-2
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
(Dollars in thousands)
<S> <C> <C>
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
=========== ===========
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
(In thousands, except per share data)
<S> <C> <C> <C>
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
============ ============ ============
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
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)
<TABLE>
<CAPTION>
Accumulated
Additional Other Deferred Total
Preferred Common Paid-in Retained Comprehensive Stock Treasury Comprehensive Stockholders'
Stock Stock Capital Earnings Income (loss) Compensation Stock Income Equity
--------- ------ ---------- -------- ------------- ------------ -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, July 1,
1996.............. $-- $27 $ 20,684 $ 14,470 $ (202) $ (2,153) $(1,240) $ 31,586
Comprehensive
income
Net earnings..... -- -- -- 731 -- -- -- $ 731 731
Other
comprehensive
income, net of
tax
Net change in
unrealized losses
on securities,
net of
reclassification
adjustment....... -- -- -- -- 92 -- -- 92 92
-------
Comprehensive
income............ $ 823
=======
Amortization of
deferred
compensation...... -- -- 105 -- -- 273 -- 378
Repurchase of
stock (249,100
shares)........... -- -- -- -- -- -- (2,884) (2,884)
---- --- -------- -------- ------ -------- ------- --------
BALANCE, June 30,
1997.............. -- 27 20,789 15,201 (110) (1,880) (4,124) 29,903
Comprehensive
income
Net earnings..... -- -- -- 1,487 -- -- -- $ 1,487 1,487
Other
comprehensive
income, net of
tax
Net change in
unrealized losses
on securities,
net of
reclassification
adjustment....... -- -- -- -- 97 -- -- 97 97
-------
Comprehensive
income............ $ 1,584
=======
Exercise of stock
options (5,892
shares)........... -- -- (3) -- -- -- 63 60
Amortization of
deferred
compensation...... -- -- 361 -- -- 325 -- 686
---- --- -------- -------- ------ -------- ------- --------
BALANCE, June 30,
1998.............. -- 27 21,147 16,688 (13) (1,555) (4,061) 32,233
Comprehensive
income
Net earnings..... -- -- -- 2,548 -- -- -- $ 2,548 2,548
Other
comprehensive
income, net of
tax
Net change in
unrealized losses
on securities,
net of
reclassification
adjustment....... -- -- -- -- (427) -- -- (427) (427)
-------
Comprehensive
income............ $ 2,121
=======
Amortization of
deferred
compensation...... -- -- 150 -- -- 414 -- 564
Repurchase of
stock (171,745
shares)........... -- -- -- -- -- -- (2,547) (2,547)
---- --- -------- -------- ------ -------- ------- --------
BALANCE, June 30,
1999.............. $-- $27 $ 21,297 $ 19,236 $ (440) $ (1,141) $(6,608) $ 32,371
==== === ======== ======== ====== ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
1999 1998 1997
Disclosure of reclassification amount for June 30: ----- ---- ----
<S> <C> <C> <C> <C>
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
===== ==== ====
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- --------
(In thousands)
<S> <C> <C> <C>
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)
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999
(Continued)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
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
</TABLE>
See notes to consolidated financial statements
F-7
<PAGE>
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
F-8
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999
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.
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,
F-9
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999
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.
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.
F-10
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999
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
<TABLE>
<S> <C>
Office buildings............................................ 20 to 40 years
Furniture, fixtures and equipment........................... 3 to 10 years
</TABLE>
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.
F-11
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999
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.
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.
F-12
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999
The Association's actual capital amounts and ratios are also presented in
the table.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------- ------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
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%
</TABLE>
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.
F-13
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999
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:
<TABLE>
<CAPTION>
1999
-----------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized Fair
cost gains losses Value
--------- ---------- ---------- ---------
(In thousands)
<S> <C> <C> <C> <C>
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
======== ===== ==== ========
<CAPTION>
1998
-----------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized Fair
cost gains losses Value
--------- ---------- ---------- ---------
(In thousands)
<S> <C> <C> <C> <C>
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
======== ===== ==== ========
</TABLE>
F-14
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999
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.
4. MORTGAGE-BACKED SECURITIES HELD TO MATURITY
A summary of mortgage-backed securities held to maturity at June 30
follows:
<TABLE>
<CAPTION>
1999
-----------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- ---------
(In thousands)
<S> <C> <C> <C> <C>
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
======= ==== ===== =======
</TABLE>
F-15
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
1998
-----------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- ---------
(In thousands)
<S> <C> <C> <C> <C>
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
======= ==== === =======
</TABLE>
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.
5. LOANS RECEIVABLE
A summary of loans receivable at June 30 follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
(Dollars in thousands)
<S> <C> <C>
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%
=========== ===========
</TABLE>
F-16
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999
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:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(In thousands)
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
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.
F-17
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999
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:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ -------
(In thousands)
<S> <C> <C> <C>
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
====== ====== =======
</TABLE>
6. ACCRUED INTEREST RECEIVABLE
A summary of accrued interest receivable at June 30 follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
(In thousands)
<S> <C> <C>
Loans receivable............................................ $ 2,447 $ 2,286
Mortgage-backed securities.................................. 371 378
Investment securities and other............................. 161 110
------- -------
Total..................................................... $ 2,979 $ 2,774
======= =======
</TABLE>
F-18
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999
7. REAL ESTATE ACQUIRED THROUGH FORECLOSURE
A summary of real estate acquired through foreclosure at June 30 follows:
<TABLE>
<CAPTION>
1999 1998
---------------
(In thousands)
<S> <C> <C>
One- to four-unit properties................................ $ 827 $ 1,728
Multifamily................................................. -- 274
Allowance for real estate losses............................ -- (100)
------ --------
Total..................................................... $ 827 $ 1,902
====== ========
</TABLE>
Activity in the allowance for real estate losses is as follows for the
years ended June 30:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
(In thousands)
<S> <C> <C> <C>
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
===== ===== =====
</TABLE>
Net gain (loss) on real estate acquired through foreclosure is summarized
as follows for the years ended June 30:
<TABLE>
<CAPTION>
1999 1998 1997
---- ------ ----
(In thousands)
<S> <C> <C> <C>
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
==== ====== ====
</TABLE>
8. PREMISES AND EQUIPMENT
A summary of premises and equipment at June 30 follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
(In thousands)
<S> <C> <C>
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
======= =======
</TABLE>
F-19
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999
9. DEPOSIT ACCOUNTS
Deposit accounts are summarized as follows at June 30:
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
Interest Interest
Balance rate* Balance rate*
-------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
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%
======== ========
</TABLE>
- --------
* 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:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
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
========
</TABLE>
Interest expense on deposit accounts is summarized as follows for the year
ended June 30:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(In thousands)
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
F-20
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999
10. OTHER BORROWED FUNDS
Advances from the Federal Home Loan Bank (FHLB) are scheduled to mature as
follows at June 30, 1999:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Year ending June 30:
2000........................................................ $ 46,071
2001........................................................ 24,154
2002........................................................ 26,639
2003........................................................ 1,138
2004........................................................ 10,000
--------
Total..................................................... $108,002
========
</TABLE>
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:
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
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%
======== ======= =======
</TABLE>
The following summarizes activities in securities sold under agreements to
repurchase as of June 30:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
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%
======= ======= =======
</TABLE>
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.
F-21
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999
11. INCOME TAXES
Income taxes are summarized as follows for the year ended June 30:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------- ----
(In thousands)
<S> <C> <C> <C>
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
====== ======= ====
</TABLE>
A reconciliation from the statutory federal income tax rate to the
consolidated effective income tax rate follows for the year ended June 30:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
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%
==== ==== ====
</TABLE>
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:
<TABLE>
<CAPTION>
1999 1998
-------- -------
(In thousands)
<S> <C> <C>
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
</TABLE>
F-22
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
1999 1998
------- -------
(In thousands)
<S> <C> <C>
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
======= =======
</TABLE>
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.
12. EARNINGS PER SHARE RECONCILIATION
<TABLE>
<CAPTION>
Weighted
Average
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
June 30, 1999
-----------------------------------
<S> <C> <C> <C>
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
=========== ========= ======
<CAPTION>
June 30, 1998
-----------------------------------
<S> <C> <C> <C>
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
=========== ========= ======
</TABLE>
F-23
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Weighted
Average
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
June 30, 1997
-----------------------------------
<S> <C> <C> <C>
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
======== ========= ======
</TABLE>
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:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
First year.................................................... $ 417
Second year................................................... 215
Third year.................................................... 217
Fourth year................................................... 217
Fifth year.................................................... 181
Thereafter.................................................... 217
------
Total....................................................... $1,464
======
</TABLE>
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
F-24
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999
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
F-25
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999
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.
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
F-26
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999
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 are $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 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.
F-27
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999
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.
F-28
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999
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:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
(In thousands, except per share data)
<S> <C> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
Weighted Average Weighted Average
Number of Exercise Price Fair Value of
Option Shares of Option Shares Option Shares Granted
------------- ---------------- ---------------------
<S> <C> <C> <C>
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
=======
</TABLE>
F-29
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999
Financial data pertaining to outstanding stock options as of June 30, 1999
were as follows:
<TABLE>
<CAPTION>
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
-------- --------- ---------------- ---------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
$ 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
======= =======
</TABLE>
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:
F-30
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
1999
-------------------
Carrying Estimated
amount fair value
-------- ----------
(In thousands)
<S> <C> <C>
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.................................. -- --
</TABLE>
<TABLE>
<CAPTION>
1998
-------------------
Carrying Estimated
amount fair value
-------- ----------
(In thousands)
<S> <C> <C>
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)
</TABLE>
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.
F-31
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999
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 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.
F-32
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999
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.
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
<TABLE>
<CAPTION>
1999 1998
------- -------
(In thousands)
<S> <C> <C>
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
======= =======
</TABLE>
SGV BANCORP, INC. (Parent company only)
STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ -----
(In thousands)
<S> <C> <C> <C>
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
====== ====== =====
</TABLE>
F-33
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999
SGV BANCORP, INC. (Parent company only)
SUMMARY STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
1999 1998 1997
------- ------ -------
(In thousands)
<S> <C> <C> <C>
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:
Change in net unrealized gain/loss on securities
available for sale, net of taxes.................. $ 3 $ (12) $ (39)
</TABLE>
F-34
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1999
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of quarterly results for the years ended June
30, 1999 and 1998:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
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
</TABLE>
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.
F-35
<PAGE>
APPENDIX A
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
BY AND BETWEEN
SGV BANCORP, INC.
AND
INDYMAC MORTGAGE HOLDINGS, INC.
Dated as of July 12, 1999
and
Amended and Restated as of
October 25, 1999
A-1
<PAGE>
LIST OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1. --Plan of Merger. (Section 1.1).
2. --Directors of the Surviving Corporation (Section 2.3)
</TABLE>
A-2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
Parties................................................................... A-6
Preamble.................................................................. A-6
ARTICLE 1--TRANSACTIONS AND TERMS OF MERGER............................... A-6
1.1 Merger............................................................ A-6
1.2 Time and Place of Closing......................................... A-7
1.3 Effective Time.................................................... A-7
1.4 Restructure of Transaction........................................ A-7
ARTICLE 2--TERMS OF MERGER................................................ A-7
2.1 Certificate of Incorporation...................................... A-7
2.2 Bylaws............................................................ A-7
2.3 Board of Directors................................................ A-7
ARTICLE 3--MANNER OF CONVERTING SHARES.................................... A-8
3.1 Conversion of Shares.............................................. A-8
3.2 Shares Held by IndyMac or SGV..................................... A-9
3.3 Dissenting SGV Stockholders....................................... A-9
3.4 Pre-Closing Calculations and NPV Adjustment....................... A-9
ARTICLE 4--EXCHANGE PROCEDURES............................................ A-12
4.1 Exchange of SGV Certificates...................................... A-12
4.2 Cancellation of SGV Options; Restricted Stock..................... A-14
ARTICLE 5--REPRESENTATIONS AND WARRANTIES OF INDYMAC...................... A-15
5.1 Organization, Standing, and Power................................. A-15
5.2 Authority of IndyMac; No Breach By Agreement...................... A-15
5.3 SEC Filings....................................................... A-16
5.4 Information Supplied.............................................. A-16
5.5 Regulatory Matters................................................ A-16
5.6 Financing......................................................... A-16
5.7 Diversified Investment Company Status............................. A-17
5.8 Year 2000 Matters................................................. A-17
5.9 SGV Shares........................................................ A-17
ARTICLE 6--REPRESENTATIONS AND WARRANTIES OF SGV.......................... A-17
6.1 Organization, Standing, and Power................................. A-17
6.2 Authority; No Breach By Agreement................................. A-17
6.3 Capital Stock..................................................... A-18
6.4 SGV Subsidiaries.................................................. A-19
6.5 SEC Filings; Financial Statements................................. A-20
6.6 Absence of Undisclosed Liabilities................................ A-21
6.7 Absence of Certain Changes or Events.............................. A-21
6.8 Tax Matters....................................................... A-21
6.9 Allowance for Possible Loan Losses................................ A-23
</TABLE>
A-3
<PAGE>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
6.10 Assets........................................................... A-23
6.11 Intellectual Property............................................ A-24
6.12 Environmental Matters............................................ A-24
6.13 Compliance with Laws............................................. A-24
6.14 Labor Relations.................................................. A-25
6.15 Employee Benefit Plans........................................... A-25
6.16 Material Contracts............................................... A-28
6.17 Legal Proceedings................................................ A-29
6.18 Deposits......................................................... A-29
6.19 Citibank Branch Acquisition Agreement............................ A-29
6.20 Year 2000........................................................ A-30
6.21 Servicing........................................................ A-30
6.22 Reports.......................................................... A-30
6.23 Information Supplied............................................. A-30
6.24 Regulatory Matters............................................... A-31
6.25 State Takeover Laws.............................................. A-31
6.26 Charter Provisions............................................... A-32
6.27 Opinion of Financial Advisor..................................... A-32
6.28 Board Recommendation............................................. A-32
ARTICLE 7--CONDUCT OF BUSINESS PENDING CONSUMMATION....................... A-32
7.1 Affirmative Covenants of SGV..................................... A-32
7.2 Negative Covenants of SGV........................................ A-33
7.3 Loan Portfolio Changes........................................... A-35
7.4 Covenants of IndyMac............................................. A-36
7.5 Adverse Changes in Condition..................................... A-36
7.6 Reports.......................................................... A-37
ARTICLE 8--ADDITIONAL AGREEMENTS.......................................... A-37
8.1 Joint Proxy Statement; Stockholder Approval...................... A-37
8.2 Applications..................................................... A-38
8.3 Filings with State Offices....................................... A-38
8.4 Agreement as to Efforts to Consummate............................ A-38
8.5 Investigation and Confidentiality................................ A-39
8.6 Press Releases................................................... A-40
8.7 Certain Actions.................................................. A-40
8.8 Regulatory Compliance Matters.................................... A-41
8.9 Consents......................................................... A-41
8.10 Employee Benefits................................................ A-41
8.11 Indemnification.................................................. A-44
8.12 Certain Policies of SGV.......................................... A-45
8.13 IndyMac Merger Subsidiary Organization........................... A-46
</TABLE>
A-4
<PAGE>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
ARTICLE 9--CONDITIONS PRECEDENT TO OBLIGATIONS TO CONSUMMATE.............. A-46
9.1 Conditions to Obligations of Each Party......................... A-46
9.2 Conditions to Obligations of SGV................................ A-47
9.3 Conditions to Obligations of IndyMac............................ A-48
ARTICLE 10--TERMINATION................................................... A-49
10.1 Termination..................................................... A-49
10.2 Termination Fees................................................ A-50
10.3 Effect of Termination........................................... A-51
10.4 Non-Survival of Representations and Covenants................... A-52
ARTICLE 11--MISCELLANEOUS................................................. A-52
11.1 Definitions..................................................... A-52
11.2 Expenses........................................................ A-61
11.3 Brokers and Finders............................................. A-62
11.4 Entire Agreement................................................ A-62
11.5 Amendments...................................................... A-62
11.6 Waivers......................................................... A-62
11.7 Assignment...................................................... A-63
11.8 Notices......................................................... A-63
11.9 Governing Law................................................... A-64
11.10 Counterparts.................................................... A-64
11.11 Captions; Articles and Sections................................. A-64
11.12 Interpretations................................................. A-64
11.13 Enforcement of Agreement........................................ A-64
11.14 Severability.................................................... A-64
Signatures................................................................ A-65
</TABLE>
A-5
<PAGE>
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is made and entered
into as of July 12, 1999, and amended and restated as of October 25, 1999, by
and between IndyMac Mortgage Holdings, Inc., a Delaware corporation
("IndyMac"), and SGV Bancorp, Inc., a Delaware corporation ("SGV") and the
parent company of First Federal Savings and Loan Association of San Gabriel
Valley.
Preamble
The respective Boards of Directors of IndyMac and SGV have approved and
deem it advisable and in the best interests of the parties to this Agreement
and their respective stockholders to consummate the transaction provided for
herein, pursuant to which a newly-formed, wholly-owned subsidiary of IndyMac
("IndyMac Merger Subsidiary") will merge with and into SGV. At the effective
time of such merger, the outstanding shares of common stock of SGV shall be
converted into the right to receive a cash payment from IndyMac (except as
provided herein). The transactions described in this Agreement are subject to
the approvals of the stockholders of SGV, the stockholders of IndyMac, the
Office of Thrift Supervision, and the satisfaction of certain other conditions
described in this Agreement.
This Agreement was originally entered into as of July 12, 1999. Pursuant
to Section 1.4 of this Agreement, this Agreement was amended and restated as
of October 25, 1999. All references to "the date of this Agreement" contained
herein shall mean July 12, 1999.
Certain terms used in this Agreement are defined in Section 11.1 of this
Agreement.
NOW, THEREFORE, in consideration of the above and the mutual warranties,
representations, covenants, and agreements set forth herein, the parties agree
as follows:
ARTICLE 1
Transactions and Terms of Merger
1.1 Merger. Subject to the terms and conditions of this Agreement, at the
Effective Time, IndyMac Merger Subsidiary shall be merged with and into SGV in
accordance with the provisions of Section 251 of the DGCL and with the effect
provided in Sections 259 of the DGCL (the "Merger"). SGV shall be the
surviving corporation (the "Surviving Corporation") resulting from the Merger
and shall continue to be governed by the Laws of the State of Delaware. The
Merger shall be consummated pursuant to the terms of this Agreement, which has
been approved and adopted by the respective Boards of Directors of IndyMac and
SGV and the Plan of Merger, in substantially the form of Exhibit 1, which will
be approved and adopted by the Board of Directors of SGV prior to the SGV
Stockholders' Meeting and will be adopted by the Board of Directors of IndyMac
Merger Subsidiary and by IndyMac (in its capacity as sole stockholder of
IndyMac Merger Subsidiary) upon the organization of IndyMac Merger Subsidiary.
A-6
<PAGE>
1.2 Time and Place of Closing. The closing of the transactions contemplated
hereby (the "Closing") will take place at 9:00 A.M., Pasadena, California time
on the date that the Effective Time occurs (or the immediately preceding day if
the Effective Time is earlier than 9:00 A.M., Pasadena, California time), or at
such other time as the Parties may mutually agree. The Closing shall be held at
the offices of IndyMac, 155 North Lake Avenue, Pasadena, California, or at such
other location as the Parties may mutually agree.
1.3 Effective Time. The Merger and other transactions contemplated by this
Agreement shall become effective on the date and at the time the Certificate of
Merger reflecting the Merger shall become effective with the Secretary of State
of the State of Delaware (the "Effective Time"). Subject to the terms and
conditions hereof, unless otherwise mutually agreed upon in writing by the
authorized officers of each Party, the Parties shall use their reasonable
efforts to cause the Effective Time to occur on the first business day
following the last to occur of (i) the effective date (including expiration of
any applicable waiting period) of the last required Consent of any Regulatory
Authority having authority over and approving or exempting the Merger, and
(ii) the date on which the respective stockholders of IndyMac and SGV approve
this Agreement to the extent such approval is required by applicable Law; or
such later date as may be required to comply with the provisions of Section
3.5.
1.4 Restructure of Transaction. IndyMac shall, in its reasonable
discretion, have the unilateral right to revise the structure of the Merger for
any reason IndyMac deems advisable. However, without the consent of SGV,
IndyMac may not revise the Merger to (i) adversely affect the Tax effects or
alter or change the amount or kind of the consideration that the holders of SGV
Common Stock are entitled to receive or the treatment of SGV Options or the
economic benefits of the transactions contemplated hereby to the holders of SGV
Common Stock, (ii) change the manner in which the consideration for SGV Common
Stock is paid, (iii) affect the interests of the holders of SGV Common Stock
materially and adversely, or (iv) unreasonably impede or delay the receipt of
the approval of the Merger by the OTS or the consummation of the Merger.
IndyMac may exercise this right by giving written notice of the revision,
including with it the amendments to this Agreement, to SGV before the
Termination Date.
ARTICLE 2
Terms of Merger
2.1 Certificate of Incorporation. The Certificate of Incorporation of SGV
shall be the Certificate of Incorporation of the Surviving Corporation until
duly amended or repealed.
2.2 Bylaws. The Bylaws of SGV shall be the Bylaws of the Surviving
Corporation until duly amended or repealed.
2.3 Board of Directors. Immediately prior to the Effective Time, the Board
of Directors of SGV shall take all such action as may be required under the
DGCL and SGV's Certificate of Incorporation and Bylaws to cause the directors
composing the full Board of
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Directors of the Surviving Corporation immediately following the Effective Time
to be the persons listed in Exhibit 2, or such other Persons as may be required
by Law or under any Consent of a Regulatory Authority. If, prior to the
Effective Time, any of the persons listed in Exhibit 2 shall decline or be
unable to serve as a director, IndyMac shall designate another person to serve
in such person's stead. In connection with the foregoing, each of the members
of the Board of Directors of SGV who are in office immediately prior to the
Effective Time shall resign as a member of such Board of Directors (and any
successor to it) effective immediately as of the Effective Time. SGV shall make
at Closing any and all payments relating to director fees and reimbursement of
expenses due and payable to the resigning board members that are outstanding as
of the Effective Time.
ARTICLE 3
Manner of Converting Shares
3.1 Conversion of Shares. Subject to the provisions of this Article 3, at
the Effective Time, by virtue of the Merger and without any action on the part
of SGV, IndyMac Merger Subsidiary, IndyMac, or the stockholders of either of
the foregoing, the shares of the constituent corporations shall be converted as
follows:
(a) Each share of IndyMac Common Stock issued and outstanding
immediately prior to the Effective Time shall remain issued and
outstanding from and after the Effective Time.
(b) Each share of IndyMac Merger Subsidiary Common Stock issued and
outstanding immediately prior to the Effective Time shall cease to be
outstanding and shall be converted into and exchanged for one share of SGV
Common Stock.
(c) Each share of SGV Common Stock (excluding shares subject to the
provisions of Sections 3.2 and 3.3) issued and outstanding immediately
prior to the Effective Time shall cease to be outstanding and shall be
converted into and exchanged for the right to receive from IndyMac a cash
payment, without interest thereon, in the amount of $25.00 (subject to the
following adjustments, the "Per Share Purchase Price"); provided that:
(i) the Per Share Purchase Price shall be increased by an amount
equal to the quotient obtained by dividing (1) $1 million by (2) the
Outstanding Share Equivalents, if IndyMac shall exercise the Extension
Right provided in Section 10.1(e)(ii) (the "Extension Adjustment");
and
(ii) the Per Share Purchase Price shall be increased or decreased,
as applicable, by the Per Share NPV Adjustment Amount, if any,
determined pursuant to Section 3.4 (the "NPV Adjustment"), provided
further, that (1) in the event the Per Share Purchase Price determined
after giving effect to the NPV Adjustment but before giving effect to
the Extension Adjustment, if any, would be less than $22.50, the Per
Share Purchase Price before giving effect to the Extension Adjustment,
if any, shall be $22.50, and (2) in the event the Per Share Purchase
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Price determined after giving effect to the NPV Adjustment but before
giving effect to the Extension Adjustment, if any, would be greater
than $27.50, the Per Share Purchase Price before giving effect to the
Extension Adjustment, if any, shall be $27.50.
The "Outstanding Share Equivalents" shall mean the sum of (i) the
number of shares of SGV Common Stock outstanding immediately prior to
the Effective Time plus (ii) the number of shares of SGV Common Stock
issuable upon exercise in full of all SGV Options issued and
outstanding immediately prior to the Effective Time (which number of
SGV Options shall not be greater than the number of SGV Options issued
and outstanding at May 31, 1999).
3.2 Shares Held by IndyMac or SGV. Each of the shares of SGV Common Stock
held by any IndyMac Entity or by any SGV Entity, in each case other than in a
fiduciary capacity or as a result of debts previously contracted, shall be
canceled and retired at the Effective Time and no consideration shall be issued
in exchange therefor.
3.3 Dissenting SGV Stockholders. Any holder of shares of SGV Common Stock
who perfects such holder's dissenters' rights in accordance with and as
contemplated by Section 262 of the DGCL shall be entitled to receive such
payment as may be determined pursuant to such provision of Law; provided, that
no such payment shall be made to any dissenting stockholder unless and until
such dissenting stockholder has complied with the applicable provisions of the
DGCL and surrendered to IndyMac the SGV Certificate or Certificates
representing the shares of SGV Common Stock for which payment is being made. In
the event that after the Effective Time a dissenting stockholder of SGV fails
to perfect, or effectively withdraws or loses, such holder's right to appraisal
and of payment for such holder's shares of SGV Common Stock, IndyMac shall
issue and deliver the consideration to which such holder of shares of SGV
Common Stock is entitled under this Article 3 (without interest) upon surrender
of such holder's SGV Certificate or Certificates.
3.4 Pre-Closing Calculations and NPV Adjustment.
(a) As promptly as practicable, but not later than ten business days,
after the end of the calendar month immediately preceding the Effective
Time, SGV shall prepare and deliver to IndyMac a certificate attaching
SGV's computation (the "Calculations") of Pre-Closing NPV and Pre-Closing
Book Net Worth. "Pre-Closing NPV" shall be determined (i) as of the end of
the calendar month immediately preceding the Effective Time, (ii) using
the Sendaro model with all assumptions, methodologies, and line items used
by SGV in its March 31, 1999 model (the "March Sendaro Model") and
previously provided to IndyMac (the "Baseline NPV"), and (iii) by
utilizing the unconsolidated common stockholders' equity of SGV, as
reflected in the audited consolidated financial statements of SGV for the
fiscal year ended June 30, 1999 ("Parent Book Net Worth"), as adjusted to
(1) exclude any gain or loss on sales of Assets or securities at the
parent level of SGV (treating for this purpose all Assets comprising
Parent Book Net Worth as if unleveraged and without varying parent level
SGV's Asset mix by dollar or percentage amount from such dollar or
percentage
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amounts at May 31, 1999 and set forth on Schedule 3.4 of the SGV
Disclosure Memorandum), (2) exclude proceeds resulting from the exercise
of SGV Options after May 31, 1999, and (3) reflect any adjustments in the
assumptions utilized in the March Sendaro Model, (x) as reasonably agreed
upon by the Parties and resulting from changes in market interest rates or
Asset category book values, in each case, consistent with SGV's practices
at March 31, 1999, or (y) as a result of adjustments required by the OTS.
"Pre-Closing Book Net Worth" shall mean consolidated stockholders' equity
of SGV as of the end of the calendar month immediately preceding the
Effective Time, as adjusted to (i) exclude (1) any payments by any SGV
Entity of amounts required to be paid under SGV Compensation Contracts and
plans identified in Section 8.11(a) of the SGV Disclosure Memorandum, (2)
any costs incurred by SGV as a direct result of written requests from
IndyMac (including specifically the costs of obtaining the letters
contemplated by Section 9.3(g)), and (3) any proceeds resulting from the
exercise of SGV Options after May 31, 1999, and (ii) include "Net Deal
Expenses." For purposes of this Section 3.4, Net Deal Expenses shall mean
the amount by which all expenses incurred by SGV in connection with
effecting the transactions contemplated by this Agreement (including, but
not limited to, legal and investment banking expenses) exceed the "Pro
Rata Portion." For purposes of this Section 3.4, the "Pro Rata Portion"
shall mean the difference between (i) $1 million and (ii) the product
obtained by multiplying (1) $1 million and (2) the quotient obtained by
dividing (x) the number of full months that elapse between the date of
this Agreement and the Closing Date (if such period is less than 12
months) by (y) 12.
(b) The Calculations shall be deemed final upon the earliest of (i)
the date on which IndyMac and SGV jointly agree that the Calculations are
final, (ii) the fifth business day after delivery of the Calculations
pursuant to Section 3.4(a), if IndyMac has not delivered to SGV prior
notice expressing disagreement with such calculations and setting forth
its calculation of Pre-Closing NPV and Pre-Closing Book Net Worth, and
(iii) the date on which all disputes relating to such statements and
calculations between the parties are resolved in accordance with Section
3.4(c).
(c) If IndyMac shall deliver a notice of disagreement (and shall
include IndyMac's reasons for disagreeing) pursuant to Section 3.4(b),
IndyMac and SGV shall, during the five business days following such
delivery, use their reasonable efforts to reach agreement on the disputed
items or amounts (the "Disputed Amounts"). If, during such period, SGV and
IndyMac are unable to reach such agreement, they shall promptly thereafter
cause independent accountants of nationally recognized standing reasonably
satisfactory to IndyMac and SGV (who shall not have any material
relationship with IndyMac or SGV), promptly to review this Agreement, the
documents delivered pursuant to Section 3.4(a) and any other documents
necessary to calculate the Disputed Amounts (including all work papers of
the parties used in calculating the Disputed Amounts). In making such
calculation, such independent accountants shall act as experts and not
arbitrators and shall consider only the Disputed Amounts, solely in
accordance with the terms of this Agreement. Such independent accountants
shall deliver to IndyMac and SGV, as promptly as practicable, a report
setting forth such
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calculation. Such report shall be final and binding upon IndyMac and SGV.
The cost of such review and report shall be borne equally by SGV and
IndyMac.
(d) SGV agrees that it will, and will cause its independent
accountants and Subsidiaries to, cooperate and assist in the preparation
of the Calculations and in the conduct of the audits and reviews referred
to in this Section 3.4, including, without limitation, making available,
to the extent necessary, relevant books, records, working papers,
analyses, and schedules, and permitting representatives of IndyMac to
consult with the employees, auditors, actuaries, attorneys, and agents of
SGV and its Subsidiaries.
(e) If Final Pre-Closing NPV shall be less than 110% of Baseline Book
Net Worth, the "Per Share NPV Adjustment Amount" shall (i) mean the
quotient obtained by dividing (1) the product of 1.5 and the difference
between (x) 110% of Baseline Book Net Worth and (y) Final Pre-Closing NPV
by (2) the Outstanding Share Equivalents, and (ii) be deducted from the
Per Share Purchase Price as and for the extent provided in Section
3.1(c)(ii). If Final Pre-Closing NPV shall exceed 125% of Baseline Book
Net Worth, the "Per Share NPV Adjustment Amount" shall (i) mean the
quotient obtained by dividing (1) the amount that Final Pre-Closing NPV
exceeds 125% of Baseline Book Net Worth by (2) the Outstanding Share
Equivalents, and (ii) be added to the Per Share Purchase Price as and for
the extent provided in Section 3.1(c)(ii). "Final Pre-Closing NPV" means
the Pre-Closing NPV (i) as shown in the calculations, if no notice of
disagreement with respect thereto is duly delivered pursuant to Section
3.4(b), or (ii) if such a notice of disagreement is delivered, (A) as
agreed by IndyMac and SGV pursuant to Section 3.4(b) or (B) in the absence
of such agreement, as shown in the independent accountant's calculation
delivered pursuant to Section 3.4(c); provided that, in no event shall
Final Pre-Closing NPV be (i) more than SGV's calculation of Pre-Closing
NPV delivered pursuant to Section 3.4(a), or (ii) less than IndyMac's
calculation of Pre-Closing NPV assuming resolution of all Disputed
Amounts, if any, in IndyMac's favor. "Baseline Book Net Worth" shall mean
consolidated common stockholders' equity of SGV, as reflected in the
audited consolidated financial statements of SGV for the fiscal year ended
June 30, 1999 (excluding any proceeds resulting from the exercise of SGV
Options after May 31, 1999).
(f) "Final Pre-Closing Book Net Worth" means the Pre-Closing Book Net
Worth (i) as shown in the calculations, if no notice of disagreement with
respect thereto is duly delivered pursuant to Section 3.4(b), or (ii) if
such a notice of disagreement is delivered, (A) as agreed by IndyMac and
SGV pursuant to Section 3.4(b) or (B) in the absence of such agreement, as
shown in the independent accountant's calculation delivered pursuant to
Section 3.4(c); provided that, in no event shall Final Pre-Closing Book
Net Worth be (i) more than SGV's calculation of Pre-Closing Book Net Worth
delivered pursuant to Section 3.4(a), or (ii) less than IndyMac's
calculation of Pre-Closing Book Net Worth assuming resolution of all
Disputed Amounts, if any, in IndyMac's favor.
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(g) Between the date of this Agreement and the Effective Time, SGV
shall provide to IndyMac, as promptly as practicable, but not later than
ten business days, after the end of each quarter (and after the end of
each month (i) if the interest rate on the ten-year U.S. Treasury Notes
increases or decreases by 50 basis points or more from the interest rate
on the ten-year U.S. Treasury Notes as of the date of this Agreement and
(ii) if so requested by IndyMac), a certificate attaching SGV's
computation of NPV, with assumptions, as submitted to the OTS and Pre-
Closing NPV as determined in accordance with Section 3.4(a). IndyMac shall
have 20 business days to review such calculations of NPV and Pre-Closing
NPV and to provide a notice of disagreement (and include IndyMac's reasons
for disagreeing) of the NPV and the Pre-Closing NPV. In the event that
IndyMac does not provide SGV with a notice of disagreement within the time
period contemplated by the preceding sentence, IndyMac shall be deemed,
absent error on the part of SGV, to accept the assumptions, methodologies,
and line items used by SGV in the calculation of the Pre-Closing NPV.
ARTICLE 4
Exchange Procedures
4.1 Exchange of SGV Certificates.
(a) Prior to the Effective Time, IndyMac shall enter into an agreement
with a bank or trust company selected by IndyMac (the "Paying Agent") to
serve as paying agent and exchange agent for the Merger, pursuant to which
agreement IndyMac shall deliver to the Paying Agent prior to the Effective
Time, for the benefit of the holders of shares of SGV Common Stock for
exchange in accordance with this Section 4.1, through the Paying Agent,
cash in the aggregate amount required to make the cash payments specified
in Section 3.1(c) in respect of the SGV Common Stock issued and
outstanding immediately prior to the Effective Time (other than shares to
be canceled pursuant to Section 3.2 or as to which statutory dissenters'
rights have been perfected as provided in Section 3.3), such sums being
hereinafter referred to as the "Exchange Fund."
(b) As soon as practicable after the Effective Time, but no later than
three business days following the Effective Time, IndyMac shall cause the
Paying Agent to mail to each holder of record of a certificate or
certificates which represented shares of SGV Common Stock immediately
prior to the Effective Time (the "SGV Certificates") appropriate
transmittal materials and instructions (which shall specify that delivery
shall be effected, and risk of loss and title to such SGV Certificates
shall pass, only upon proper delivery of such SGV Certificates to the
Paying Agent). The SGV Certificate or Certificates so delivered shall be
duly endorsed as the Paying Agent may require. In the event of a transfer
of ownership of shares of SGV Common Stock represented by SGV Certificates
that are not registered in the transfer records of SGV, the consideration
provided in Section 3.1 may be issued to a transferee if the SGV
Certificates representing such shares are delivered to the Paying Agent,
accompanied by all documents required to evidence such transfer and by
evidence satisfactory to the Paying
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Agent that any applicable stock transfer taxes have been paid. If any SGV
Certificate shall have been lost, stolen, mislaid, or destroyed, upon
receipt of (i) an affidavit of that fact from the holder claiming such SGV
Certificate to be lost, mislaid, stolen, or destroyed, (ii) such bond,
security, or indemnity as IndyMac and the Paying Agent may reasonably
require, and (iii) any other documents necessary to evidence and effect
the bona fide exchange thereof, the Paying Agent shall issue to such
holder the consideration into which the shares represented by such lost,
stolen, mislaid, or destroyed SGV Certificate shall have been converted.
The Paying Agent may establish such other reasonable and customary rules
and procedures in connection with its duties as it may deem appropriate.
After the Effective Time, each holder of shares of SGV Common Stock (other
than shares to be canceled pursuant to Section 3.2 or as to which
statutory dissenters' rights have been perfected as provided in Section
3.3) issued and outstanding at the Effective Time shall surrender the SGV
Certificate or Certificates representing such shares to the Paying Agent
and IndyMac shall cause the Paying Agent to make payment of the merger
consideration provided in Section 3.1, together with all undelivered
dividends or distributions in respect of such shares (without interest
thereon) pursuant to this Section 4.1(b) within five business days of
receipt of all required documentation from each stockholder individually.
Neither IndyMac nor the Paying Agent shall be obligated to deliver the
consideration to which any former holder of SGV Common Stock is entitled
as a result of the Merger until such holder surrenders such holder's SGV
Certificate or Certificates for exchange as provided in this Section
4.1(b). Any other provision of this Agreement notwithstanding, neither
IndyMac, SGV, or the Paying Agent, nor any of the directors, officers, or
employees of any of them, shall be liable to a holder of SGV Common Stock
for any amounts paid or property delivered in good faith to a public
official pursuant to any applicable abandoned property, escheat, or
similar Law.
(c) At the Effective Time, the stock transfer books of SGV shall be
closed as to holders of SGV Common Stock immediately prior to the
Effective Time and no transfer of SGV Common Stock by any such holder
shall thereafter be made or recognized. Until surrendered for exchange in
accordance with the provisions of Section 4.1(b), each SGV Certificate
theretofore representing shares of SGV Common Stock (other than shares to
be canceled pursuant to Section 3.2 or as to which statutory dissenters'
rights have been perfected as provided in Section 3.3) shall from and
after the Effective Time represent for all purposes only the right to
receive the consideration provided in Section 3.1 in exchange therefor.
(d) The Paying Agent may invest any cash included in the Exchange Fund
in a reasonable and prudent manner, as directed by IndyMac. Any interest
and other income resulting from such investments shall accrue for the
benefit of and be paid to IndyMac promptly on receipt by the Exchange
Fund. Any portion of the Exchange Fund which remains undistributed to the
holders of the SGV Certificates for nine months after the Effective Time
shall be delivered to IndyMac, upon demand, and any holders of the SGV
Certificates who have not theretofore complied with this Section 4.1 shall
thereafter look only to IndyMac for payment of the consideration therefor
specified in
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Section 3.1. Any portion of the Merger Consideration made available to the
Paying Agent pursuant to this Section 4.1 to pay for shares of SGV Common
Stock as to which dissenters' rights have been perfected shall be returned
to IndyMac.
4.2 Cancellation of SGV Options; Restricted Stock.
(a) As compensation for services rendered to SGV, at the Effective
Time, each option or other Equity Right to purchase shares of SGV Common
Stock pursuant to stock options or stock appreciation rights ("SGV
Options") granted by SGV under the SGV Bancorp, Inc. 1995 Amended and
Restated Master Stock-Based Incentive Plan or any other stock-based equity
compensation plans (the "SGV Stock Plans"), and outstanding at the
Effective Time, whether or not exercisable, shall be canceled and each
holder of a SGV Option shall be entitled to receive directly from IndyMac
(and not from the Exchange Fund), at the Effective Time, in consideration
for the cancellation of such SGV Option, an amount in cash, without any
interest thereon and less any required withholding Taxes, for each share
of SGV Common Stock subject to such SGV Option (the "Option Cancellation
Payment"), equal to the difference (if positive) between the Per Share
Purchase Price and the exercise price per share of SGV Common Stock to
which such SGV Option relates. At the Effective Time, each such SGV Option
shall no longer represent the right to purchase shares of SGV Common
Stock, but in lieu thereof shall represent only the nontransferable right
to receive the Option Cancellation Payment, subject to receipt by IndyMac
of an acknowledgment from such holder that such payment shall constitute
consideration for the termination of such option. SGV agrees to take all
necessary steps to effectuate the foregoing provisions of this Section
4.2, including using its reasonable efforts to obtain from each holder of
a SGV Option an agreement acknowledging cancellation of such holder's SGV
Option and all rights thereunder in exchange for the Option Cancellation
Payment. The surrender of a SGV Option to IndyMac in exchange for the
consideration set forth in this Section 4.2 shall, to the extent permitted
by Law, be deemed a release of any and all rights the holder had or may
have had in respect of such SGV Option.
(b) Effective as of the Effective Time, each then outstanding
restricted share of SGV Common Stock granted by SGV prior to the date of
this Agreement pursuant to the SGV Stock Plans and not vested and
transferable immediately prior to such Effective Time (a "SGV Restricted
Share") shall become vested and transferable and shall be converted into
the right to receive the Per Share Purchase Price from IndyMac in
accordance with Section 3.1, provided that the holder of such SGV
Restricted Share makes arrangements satisfactory to IndyMac for the
payment of any applicable withholding Taxes. The accelerated vesting and
conversion of a SGV Restricted Share as provided herein shall, to the
extent permitted by Law, be deemed a release of any and all rights the
holder had or may have had in respect of such SGV Restricted Share.
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ARTICLE 5
Representations and Warranties of Indymac
IndyMac hereby represents and warrants to SGV as follows:
5.1 Organization, Standing, and Power. IndyMac is a corporation duly
organized, validly existing, and in good standing under the Laws of the State
of Delaware, and has the corporate power and authority to carry on its business
as now conducted and to own, lease, and operate its material Assets.
5.2 Authority of IndyMac; No Breach by Agreement.
(a) IndyMac has the corporate power and authority necessary to
execute, deliver, and perform its obligations under this Agreement and to
consummate the transactions contemplated hereby. The execution, delivery,
and performance of this Agreement and the consummation of the transactions
contemplated herein, including the Merger, have been duly and validly
authorized by all necessary corporate action in respect thereof on the
part of IndyMac. This Agreement represents a legal, valid, and binding
obligation of IndyMac, enforceable against IndyMac in accordance with its
terms (except in all cases as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, receivership,
conservatorship, moratorium, or similar Laws affecting the enforcement of
creditors' rights generally and except that the availability of the
equitable remedy of specific performance or injunctive relief is subject
to the discretion of the court before which any proceeding may be
brought).
(b) Neither the execution and delivery of this Agreement by IndyMac,
nor the consummation by IndyMac of the transactions contemplated hereby,
nor compliance by IndyMac with any of the provisions hereof, will (i)
conflict with or result in a breach of any provision of IndyMac's
Certificate of Incorporation or Bylaws or the certificate or articles of
incorporation or Bylaws of any IndyMac Subsidiary or any resolution
adopted by the board of directors or the stockholders of any IndyMac
Entity, or (ii) except with respect to Consents required to be obtained by
IndyMac under its financing Contracts or real property lease Contracts,
constitute or result in a Default under, or require any Consent pursuant
to, any Contract, where such Default, or any failure to obtain such
Consent, is reasonably likely to have, individually or in the aggregate,
an IndyMac Material Adverse Effect, or, (iii) subject to receipt of the
requisite Consents referred to in Section 9.1(b), constitute or result in
a Default under, or require any Consent pursuant to, any Law or Order
applicable to any IndyMac Entity or any of their respective material
Assets.
(c) IndyMac knows of no reason why any Consents under its financial
Contracts or real property lease Contracts will not be obtained.
(d) No notice to, filing with, or Consent of, any public body or
authority is necessary for the consummation by IndyMac of the Merger and
the other transactions contemplated in this Agreement, except for (i) the
filing of applications and notices with the OTS under HOLA and approval or
non-objection of same, (ii) the filing with the
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SEC of the Joint Proxy Statement and such reports under the 1934 Act as
may be required in connection with this Agreement and the transactions
contemplated hereby and the obtaining from the SEC of such orders as may
be required in connection therewith, (iii) the filing of the Certificate
of Merger pursuant to the DGCL and appropriate documents with the relevant
authorities of other states in which IndyMac is qualified to do business,
and (iv) the applicable state banking approvals and any applicable state
takeover approvals.
5.3 SEC Filings. IndyMac has timely filed all SEC Documents required to be
filed by IndyMac since December 31, 1995 (together with all such SEC Documents
so filed, whether or not required to be filed, the "IndyMac SEC Reports"). The
IndyMac SEC Reports (i) at the time filed, complied in all material respects
with the applicable requirements of the Securities Laws and other applicable
Laws, and (ii) did not, at the time they were filed (or, if amended or
superseded by a filing prior to the date of this Agreement, then on the date of
such filing) contain any untrue statement of a material fact or omit to state a
material fact required to be stated in such IndyMac SEC Reports or necessary in
order to make the statements in such IndyMac SEC Reports, in light of the
circumstances under which they were made, not misleading.
5.4 Information Supplied. None of the information supplied or to be
supplied by IndyMac or any Affiliate for inclusion in the Joint Proxy Statement
to be mailed to each Party's stockholders in connection with the Stockholders'
Meetings, and any other documents to be filed by IndyMac or any Affiliate with
the SEC in connection with the transactions contemplated hereby, will, at the
respective time such documents are filed, and with respect to the Joint Proxy
Statement, when first mailed to the Parties' respective stockholders, be false
or misleading with respect to any material fact, or omit to state any material
fact necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading, or, in the case of the Joint Proxy
Statement or any amendment thereof or supplement thereto, at the time of the
Stockholders' Meetings, be false or misleading with respect to any material
fact, or omit to state any material fact necessary to correct any statement in
any earlier communication with respect to the solicitation of any proxy for the
Stockholders' Meetings. All documents that any IndyMac Entity or any Affiliate
thereof is responsible for filing with any Regulatory Authority in connection
with the transactions contemplated hereby will comply as to form in all
material respects with the provisions of applicable Law.
5.5 Regulatory Matters. No IndyMac Entity or any Affiliate thereof has
taken or agreed to take any action or has any Knowledge of any fact or
circumstance relating to IndyMac that is reasonably likely to materially impede
or delay receipt of any Consents of Regulatory Authorities referred to in
Section 9.1(b) or result in the imposition of a condition or restriction of the
type referred to in the last sentence of such Section.
5.6 Financing. IndyMac has available, and will have available at the
Closing, sufficient funds (through existing credit arrangements or otherwise)
to enable it to consummate the transactions contemplated by this Agreement on
its terms and conditions.
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5.7 Diversified Investment Company Status. Not more than 25 percent of the
value of IndyMac's Assets is invested in the stock and securities of any one
issuer and not more than 50 percent of the value of IndyMac's total Assets is
invested in the stock and securities of five or fewer issuers. For purposes of
this representation, all members of a controlled group of corporations (within
the meaning of Section 1563(a) of the Internal Revenue Code) shall be treated
as one issuer.
5.8 Year 2000 Matters. IndyMac has completed a review of its computer
system to identify systems that could be affected by the "Year 2000 Issues" and
reasonably believes it has identified all Year 2000 problems. IndyMac's
management has developed and commenced implementation of a plan which is
designed to complete any required initial changes to its computer systems and
to complete testing of those changes by year-end 1999. Between the date of this
Agreement and the Effective Time, IndyMac shall use commercially practicable
efforts to implement and/or continue to undertake such plan. Year 2000 issues
are not reasonably expected to prevent or adversely affect the ability of
IndyMac to obtain the requisite regulatory approvals or to consummate the
Merger.
5.9 SGV Shares. As of the date of this Agreement, IndyMac owns none of
SGV's outstanding shares of SGV Common Stock.
ARTICLE 6
Representations and Warranties of SGV
SGV hereby represents and warrants to IndyMac as follows:
6.1 Organization, Standing, and Power. SGV is a corporation duly organized,
validly existing, and in good standing under the Laws of the State of Delaware,
and has the corporate power and authority to carry on its business as now
conducted and to own, lease, and operate its material Assets. SGV is duly
qualified or licensed to transact business as a foreign corporation in good
standing in the States of the United States and foreign jurisdictions where the
character of its Assets or the nature or conduct of its business requires it to
be so qualified or licensed, except for such jurisdictions in which the failure
to be so qualified or licensed is not reasonably likely to have, individually
or in the aggregate, a SGV Material Adverse Effect. The Certificate of
Incorporation and Bylaws of SGV included in Section 6.1 of the SGV Disclosure
Memorandum are complete and correct copies of such documents as in effect on
the date of this Agreement. The minute book and other organizational documents
for SGV have been made available to IndyMac for its review and, except as
disclosed in Section 6.1 of the SGV Disclosure Memorandum, are complete and
correct in all material respects as in effect as of the date of this Agreement
and accurately reflect in all material respects all amendments thereto and all
proceedings of the Board of Directors and stockholders thereof.
6.2 Authority; No Breach By Agreement.
(a) SGV has the corporate power and authority necessary to execute,
deliver and perform its obligations under this Agreement and the Plan of
Merger and to
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consummate the transactions contemplated hereby and thereby. The
execution, delivery, and performance of this Agreement and the Plan of
Merger and the consummation of the transactions contemplated herein and
therein, including the Merger, have been duly and validly authorized by
all necessary corporate action in respect thereof on the part of SGV,
subject to the adoption of this Agreement and the Plan of Merger by the
holders of a majority of the outstanding shares of SGV Common Stock, which
is the only stockholder vote required for approval of this Agreement and
the Plan of Merger and consummation of the Merger by SGV. Subject to such
requisite stockholder approval, this Agreement and the Plan of Merger each
represents a legal, valid, and binding obligation of SGV, enforceable
against SGV in accordance with its terms (except in all cases as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, receivership, conservatorship, moratorium, or similar Laws
affecting the enforcement of creditors' rights generally and except that
the availability of the equitable remedy of specific performance or
injunctive relief is subject to the discretion of the court before which
any proceeding may be brought).
(b) Neither the execution and delivery of this Agreement and the Plan
of Merger by SGV, nor the consummation by SGV of the transactions
contemplated hereby and thereby, nor compliance by SGV with any of the
provisions hereof and thereof, will (i) conflict with or result in a
breach of any provision of SGV's Certificate of Incorporation or Bylaws,
or (ii) constitute or result in a Default under, or require any Consent
pursuant to, or result in the creation of any Lien on any Asset of any SGV
Entity under, any Contract or Permit of any SGV Entity, where such Default
or Lien, or any failure to obtain such Consent, is reasonably likely to
have, individually or in the aggregate, a SGV Material Adverse Effect, or
(iii) subject to receipt of the requisite Consents referred to in Section
9.1(b), constitute or result in a Default under, or require any Consent
pursuant to, any Law or Order applicable to any SGV Entity or any of their
respective material Assets.
(c) No notice to, filing with, or Consent of, any public body or
authority is necessary for the consummation by SGV of the Merger and the
other transactions contemplated in this Agreement, except for (i) the
filing of applications and notices with the OTS under HOLA and approval or
non-objection of same, (ii) the filing with the SEC of the Joint Proxy
Statement and such reports under the 1934 Act as may be required in
connection with this Agreement and the transactions contemplated hereby
and the obtaining from the SEC of such orders as may be required in
connection therewith, (iii) the filing of the Certificate of Merger
pursuant to the DGCL and appropriate documents with the relevant
authorities of other states in which the Surviving Corporation will be
qualified to do business, and (iv) the applicable state banking approvals
and any applicable state takeover approvals.
6.3 Capital Stock.
(a) The authorized capital stock of SGV consists of (i) 10 million
shares of SGV Common Stock, of which 2,176,323 shares are issued and
outstanding as of the date of this Agreement and not more than 2,499,753
shares will be issued and outstanding at the Effective Time, and (ii) 2
million shares of SGV Preferred Stock, none of which is
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issued and outstanding. SGV has reserved 323,430 shares of SGV Common
Stock for issuance under the SGV Stock Plans, pursuant to which options to
purchase not more than 323,430 shares of SGV Common Stock are outstanding.
All of the issued and outstanding shares of SGV Common Stock are duly and
validly issued and outstanding and fully paid and nonassessable under the
DGCL. None of the outstanding shares of SGV Capital Stock has been issued
in violation of any preemptive rights of the current or past stockholders
of SGV.
(b) Except as set forth in Section 6.3(a), there are no shares of
capital stock or other equity securities of SGV outstanding and no
outstanding Equity Rights relating to the capital stock of SGV. No bond,
debentures, notes, or other indebtedness having the right to vote on, or
otherwise Consent to, any matters on which stockholders may vote ("Voting
Debt") of SGV is issued or outstanding.
6.4 SGV Subsidiaries. SGV has disclosed in Section 6.4 of the SGV
Disclosure Memorandum all of the SGV Subsidiaries as of the date of this
Agreement (identifying its legal structure, jurisdiction of organization, each
jurisdiction in which the character of its Assets or the nature or conduct of
its business requires it to be qualified and/or licensed to transact business,
and the number of shares owned and percentage ownership interest represented by
such share ownership). Except as disclosed in Section 6.4 of the SGV Disclosure
Memorandum, SGV or one of its wholly-owned Subsidiaries owns all of the issued
and outstanding shares of capital stock (or other equity interests) of each SGV
Subsidiary and no SGV Subsidiary has outstanding any Voting Debt. No capital
stock (or other equity interest) of any SGV Subsidiary are or may become
required to be issued (other than to another SGV Entity) by reason of any
Equity Rights, and there are no Contracts by which any SGV Subsidiary is bound
to issue (other than to another SGV Entity) additional shares of its capital
stock (or other equity interests) or Equity Rights or Voting Debt or by which
any SGV Entity is or may be bound to transfer any shares of the capital stock
(or other equity interests) of any SGV Subsidiary (other than to another SGV
Entity). There are no Contracts relating to the rights of any SGV Entity to
vote or to dispose of any shares of the capital stock (or other equity
interests) of any SGV Subsidiary. All of the shares of capital stock (or other
equity interests) of each SGV Subsidiary held by a SGV Entity are fully paid
and nonassessable under the applicable corporation Law of the jurisdiction in
which such Subsidiary is incorporated or organized and are owned by the SGV
Entity free and clear of any Lien. Each SGV Subsidiary is either a savings
association or a corporation, and is duly organized, validly existing, and (as
to corporations) in good standing under the Laws of the jurisdiction in which
it is incorporated or organized, and has the corporate power and authority
necessary for it to own, lease, and operate its Assets and to carry on its
business as now conducted. Each SGV Subsidiary is duly qualified or licensed to
transact business as a foreign corporation in good standing in the States of
the United States and foreign jurisdictions where the character of its Assets
or the nature or conduct of its business requires it to be so qualified or
licensed, except for such jurisdictions in which the failure to be so qualified
or licensed is not reasonably likely to have, individually or in the aggregate,
a SGV Material Adverse Effect. Each SGV Subsidiary that is a depository
institution is an "insured institution" as defined in the Federal Deposit
Insurance Act and applicable
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regulations thereunder the deposits in which are insured by the Bank Insurance
Fund or Savings Association Insurance Fund. Except as disclosed in Section 6.4
of the SGV Disclosure Memorandum, no SGV Entity owns, directly or indirectly,
any equity or debt securities of, or any other ownership interest in, any
person other than the SGV Subsidiaries. The certificates of incorporation,
charters, Bylaws and similar governing instruments of the SGV Subsidiaries
included in Section 6.4 of the SGV Disclosure Memorandum are complete and
correct copies of such documents as in effect on the date of this Agreement.
The minute book and other organizational documents for each SGV Subsidiary have
been made available to IndyMac for its review, and are complete and correct in
all material respects as in effect as of the date of this Agreement and
accurately reflect in all material respects all amendments thereto and all
proceedings of the Board of Directors and stockholders thereof.
6.5 SEC Filings; Financial Statements.
(a) Except as disclosed in Section 6.5 of the SGV Disclosure
Memorandum, SGV has timely filed and made available to IndyMac all SEC
Documents required to be filed by SGV since June 30, 1995 (together with
all such SEC Documents so filed, whether or not required to be filed, the
"SGV SEC Reports"). The SGV SEC Reports (i) at the time filed, complied in
all material respects with the applicable requirements of the Securities
Laws and other applicable Laws, and (ii) did not, at the time they were
filed (or, if amended or superseded by a filing prior to the date of this
Agreement, then on the date of such filing) contain any untrue statement
of a material fact or omit to state a material fact required to be stated
in such SGV SEC Reports or necessary in order to make the statements in
such SGV SEC Reports, in light of the circumstances under which they were
made, not misleading. No SGV Subsidiary is required to file any SEC
Documents.
(b) Each of the SGV Financial Statements (including, in each case, any
related notes) contained in the SGV SEC Reports, including any SGV SEC
Reports filed after the date of this Agreement until the Effective Time,
complied, or will comply, as to form in all material respects with the
applicable published rules and regulations of the SEC with respect
thereto, was, or will be, prepared in accordance with GAAP applied on a
consistent basis throughout the periods involved (except as may be
indicated in the notes to such financial statements or, in the case of
unaudited interim statements, as permitted by Form 10-Q of the SEC), and
fairly presented, or will fairly present, in all material respects the
consolidated financial position of SGV and its Subsidiaries as at the
respective dates and the consolidated results of operations and cash flows
for the periods indicated, except that the unaudited interim financial
statements were or are subject to normal and recurring year-end
adjustments which were not or are not expected to be material in amount or
effect.
(c) Each of the SGV May 31 Financial Statements was prepared in
accordance with GAAP applied on a consistent basis throughout the periods
involved, and fairly presented in all material respects the consolidated
financial position of SGV and its Subsidiaries as of May 31, 1999, and the
consolidated results of operations and cash flows for the periods
indicated, subject to normal and recurring year-end adjustments which are
not expected to be material in amount or effect.
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(d) Since January 1, 1995, no SGV Entity has received any management
letters from its independent accountants indicating any deficiencies in
SGV's internal controls or inaccuracies in the SGV Financial Statements,
and SGV has not had any disagreements with its independent accountants
that have not been resolved to the satisfaction of such accountants.
6.6 Absence of Undisclosed Liabilities. No SGV Entity has any Liabilities
that are reasonably likely to have, individually or in the aggregate, a SGV
Material Adverse Effect, except Liabilities which are accrued or reserved
against in the consolidated balance sheets of SGV as of March 31, 1999,
included in the SGV Financial Statements delivered prior to the date of this
Agreement or reflected in the notes thereto, or as of May 31, 1999, included in
the SGV May 31 Financial Statements. No SGV Entity has incurred or paid any
Liability since May 31, 1999, except for such Liabilities incurred or paid (i)
in the ordinary course of business consistent with past business practice and
which are not reasonably likely to have, individually or in the aggregate, a
SGV Material Adverse Effect, or (ii) in connection with the transactions
contemplated by this Agreement.
6.7 Absence of Certain Changes or Events. Since March 31, 1999, (i) there
have been no events, changes or occurrences which have had, or are reasonably
likely to have, individually or in the aggregate, a SGV Material Adverse
Effect, and (ii) the SGV Entities have not taken any action, or failed to take
any action, prior to the date of this Agreement, which action or failure, if
taken after the date of this Agreement, would represent or result in a material
breach or violation of any of the covenants and agreements of SGV provided in
Article 7. The Baseline Book Net Worth is not less than the consolidated common
stockholders' equity of SGV as of March 31, 1999, and as of May 31, 1999, as
reflected in the SGV Financial Statements and the SGV May 31 Financial
Statements, respectively.
6.8 Tax Matters.
(a) All Tax Returns required to be filed by or on behalf of any of the
SGV Entities have been timely filed or requests for extensions have been
timely filed, granted, and have not expired for periods ended on or before
June 30, 1998, and on or before the date of the most recent fiscal year
end immediately preceding the Effective Time, except to the extent that
all such failures to file, taken together, are not reasonably likely to
have a SGV Material Adverse Effect, and all Tax Returns filed are complete
and accurate in all material respects. All Taxes shown on filed Tax
Returns have been paid. As of the date of this Agreement, there is no
audit examination, deficiency, or refund Litigation with respect to any
Taxes that is reasonably likely to result in a determination that would
have, individually or in the aggregate, a SGV Material Adverse Effect,
except as reserved against in the SGV Financial Statements delivered prior
to the date of this Agreement. Except as disclosed in Section 6.8(a) of
the SGV Disclosure Memorandum, SGV and its Subsidiaries have not received
any Internal Revenue Service ("IRS") Agent reports, IRS inquiries,
California Franchise Tax Board tax audit reports, or any correspondence
from any Taxing jurisdiction within the three years prior to SGV's fiscal
year ending June 30, 1999. All Taxes and other Liabilities due with
respect to completed and settled examinations or concluded Litigation have
been fully paid.
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(b) None of the SGV Entities has executed an extension or waiver of
any statute of limitations on the assessment or collection of any Tax due
(excluding such statutes that relate to years currently under examination
by the Internal Revenue Service or other applicable taxing authorities)
that is currently in effect.
(c) The provision for any Taxes due or to become due for any of the
SGV Entities for the period or periods through and including the date of
the respective SGV Financial Statements that has been made and is
reflected on such SGV Financial Statements is sufficient to cover all such
Taxes.
(d) Deferred Taxes of the SGV Entities have been provided for in
accordance with GAAP.
(e) Except as disclosed in Section 6.8(e) of the SGV Disclosure
Memorandum, none of the SGV Entities is a party to any Tax allocation or
sharing agreement and none of the SGV Entities has been a member of an
affiliated group filing a consolidated federal income Tax Return (other
than a group the common parent of which was SGV) has any Liability for
Taxes of any Person (other than SGV and its Subsidiaries) under Treasury
Regulation Section 1.1502-6 (or any similar provision of state, local or
foreign Law) as a transferee or successor or by Contract or otherwise.
(f) Each of the SGV Entities is in compliance with, and its records
contain all information and documents (including properly completed IRS
Forms W-9) necessary to comply with, all applicable information reporting
and Tax withholding requirements under federal, state, and local Tax Laws,
and such records identify with specificity all accounts subject to backup
withholding under Section 3406 of the Internal Revenue Code, except for
such instances of noncompliance and such omissions as are not reasonably
likely to have, individually or in the aggregate, a SGV Material Adverse
Effect.
(g) Except as disclosed in Section 6.8(g) of the SGV Disclosure
Memorandum, none of the SGV Entities has made any payments, is obligated
to make any payments, or is a party to any Contract that could obligate it
to make any payments that would be disallowed as a deduction under Section
280G or 162(m) of the Internal Revenue Code.
(h) There has not been an ownership change, as defined in Internal
Revenue Code Section 382(g), of the SGV Entities that occurred during or
after any Taxable Period in which the SGV Entities incurred a net
operating loss that carries over to any Taxable Period ending after June
30, 1998.
(i) No SGV Entity has or has had in any foreign country a permanent
establishment, as defined in any applicable tax treaty or convention
between the United States and such foreign country.
(j) Not more than 25 percent of the value of SGV's Assets is invested
in the stock and securities of any one issuer and not more than 50 percent
of the value of SGV's total Assets is invested in the stock and securities
of five or fewer issuers. For purposes of this representation, all members
of a controlled group of corporations (within the meaning of Section
1563(a) of the Internal Revenue Code) shall be treated as one issuer.
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6.9 Allowance for Possible Loan Losses. In the reasonable judgment of
management of SGV, the Allowance shown on the consolidated balance sheets of
SGV included in the most recent SGV Financial Statements dated prior to the
date of this Agreement and the SGV May 31 Financial Statements was, and the
Allowance shown on each of the consolidated balance sheets of SGV included in
the SGV Financial Statements as of dates subsequent to the execution of this
Agreement will be, as of the dates thereof, adequate (within the meaning of
GAAP and applicable regulatory requirements or guidelines) to provide for all
known or reasonably anticipated losses relating to or inherent in the loan and
lease portfolios (including accrued interest receivables, principal, interest,
taxes, and insurance) of the SGV Entities and other extensions of credit
(including letters of credit and commitments to make loans or extend credit) by
the SGV Entities as of the dates thereof.
6.10 Assets.
(a) Except as disclosed or reserved against in the SGV Financial
Statements delivered prior to the date of this Agreement or SGV May 31
Financial Statements, the SGV Entities have good and marketable title,
free and clear of all Liens, to all of their respective Assets, except for
any such Liens or other defects of title which are not reasonably likely
to have a material adverse effect on the Asset concerned. All tangible
properties used in the businesses of the SGV Entities are in good
condition, reasonable wear and tear excepted, and are usable in the
ordinary course of business consistent with SGV's past practices.
(b) All Assets which are material to SGV's business on a consolidated
basis, held under leases or subleases by any of the SGV Entities, are held
under valid Contracts enforceable in accordance with their respective
terms (except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, or other Laws affecting the
enforcement of creditors' rights generally and except that the
availability of the equitable remedy of specific performance or injunctive
relief is subject to the discretion of the court before which any
proceedings may be brought), and each such Contract is in full force and
effect. Section 6.10 of the SGV Disclosure Memorandum includes a complete
and correct list of all leases relating to property leased by any SGV
Entity and the principal terms related thereto, including terms, rental
payments, square footage leased, options, and extraordinary expenses and
terms.
(c) The SGV Entities currently maintain insurance similar in amounts,
scope, and coverage as companies engaged in similar business would in
accordance with good business practice, customarily be insured. None of
the SGV Entities has received notice from any insurance carrier that (i)
such insurance will be canceled or that coverage thereunder will be
reduced or eliminated, or (ii) premium costs with respect to such policies
of insurance will be substantially increased. Except as disclosed in
Section 6.10(c) of the SGV Disclosure Memorandum, there are presently no
claims pending under such policies of insurance and no notices have been
given by any SGV Entity under such policies.
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6.11 Intellectual Property. Except as disclosed in Section 6.11 of the SGV
Disclosure Memorandum, no SGV Entity owns, has a license to use, or has the
right to convey by sale or license, any Intellectual Property.
6.12 Environmental Matters.
(a) Except as disclosed in Section 6.12 of the SGV Disclosure
Memorandum, each SGV Entity, its Participation Facilities, and its
Operating Properties are, and have been, in compliance with all
Environmental Laws, except for violations which are not reasonably likely
to have, individually or in the aggregate, a SGV Material Adverse Effect.
(b) There is no Litigation pending or, to the Knowledge of SGV,
threatened before any court, governmental agency, or authority or other
forum in which any SGV Entity or any of its Operating Properties or
Participation Facilities (or SGV in respect of such Operating Property or
Participation Facility) has been or, with respect to threatened
Litigation, may be named as a defendant (i) for alleged noncompliance
(including by any predecessor) with any Environmental Law, or (ii)
relating to the release, discharge, spillage, or disposal into the
environment of any Hazardous Material, whether or not occurring at, on,
under, adjacent to, or affecting (or potentially affecting) a site owned,
leased, or operated by any SGV Entity or any of its Operating Properties
or Participation Facilities, except for such Litigation pending or
threatened that is not reasonably likely to have, individually or in the
aggregate, a SGV Material Adverse Effect, nor, except as disclosed in
Section 6.12 of the SGV Disclosure Memorandum, to the Knowledge of SGV, is
there any reasonable basis for any Litigation of a type described in this
sentence, except such as is not reasonably likely to have, individually or
in the aggregate, a SGV Material Adverse Effect.
(c) Except as disclosed in Section 6.12 of the SGV Disclosure
Memorandum, during the period of (i) any SGV Entity's ownership or
operation of any of their respective current properties, (ii) any SGV
Entity's participation in the management of any Participation Facility, or
(iii) any SGV Entity's holding of a security interest in an Operating
Property, there have been no releases, discharges, spillages, or disposals
of Hazardous Material in, on, under, adjacent to, or affecting (or
potentially affecting) such properties, except such as are not reasonably
likely to have, individually or in the aggregate, a SGV Material Adverse
Effect. Except as disclosed in Section 6.12 of the SGV Disclosure
Memorandum, prior to the period of (i) any SGV Entity's ownership or
operation of any of their respective current properties, (ii) any SGV
Entity's participation in the management of any Participation Facility, or
(iii) any SGV Entity's holding of a security interest in an Operating
Property, to the Knowledge of SGV, there were no releases, discharges,
spillages, or disposals of Hazardous Material in, on, under, or affecting
any such property, Participation Facility, or Operating Property, except
such as are not reasonably likely to have, individually or in the
aggregate, a SGV Material Adverse Effect.
6.13 Compliance with Laws. SGV is duly registered as a savings and loan
holding company under the HOLA. Each SGV Entity has in effect all Permits
necessary for it to
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own, lease, or operate its material Assets and to carry on its business as now
conducted, except for those Permits the absence of which are not reasonably
likely to have, individually or in the aggregate, a SGV Material Adverse
Effect, and there has occurred no Default under any such Permit, other than
Defaults which are not reasonably likely to have, individually or in the
aggregate, a SGV Material Adverse Effect. None of the SGV Entities:
(a) is in Default under its Certificate of Incorporation or Bylaws (or
other governing instruments); or
(b) except as disclosed in Section 6.13 of the SGV Disclosure
Memorandum, is in Default under any Laws, Orders, or Permits applicable to
its business or employees conducting its business, except as disclosed in
Section 6.13(b) of the SGV Disclosure Memorandum and except for Defaults
which are not reasonably likely to have, individually or in the aggregate,
a SGV Material Adverse Effect; or
(c) except as disclosed in Section 6.13 (c) of the SGV Disclosure
Memorandum, since January 1, 1993, has received any notification or
communication from any agency or department of federal, state, or local
government or any Regulatory Authority or the staff thereof (i) asserting
that any SGV Entity is not in compliance with any of the Laws or Orders
which such governmental authority or Regulatory Authority enforces, (ii)
threatening to revoke any Permits, (iii) requiring any SGV Entity to enter
into or consent to the issuance of a cease and desist order, formal
agreement, directive, commitment, or memorandum of understanding, or to
adopt any Board resolution or similar undertaking, which restricts
materially the conduct of its business, or in any manner relates to its
capital adequacy, its credit or reserve policies, its management, or the
payment of dividends, or (iv) indicating that any SGV Entity has
unsatisfactory CAMEL, CRA, or compliance ratings; or
(d) except as disclosed in Section 6.13 of the SGV Disclosure
Memorandum, is currently a party to any transaction with an Affiliate that
is in violation of Regulation O or any other applicable Law and any such
transaction is on terms no less favorable to SGV that would be obtained
from a unaffiliated third party.
6.14 Labor Relations. No SGV Entity is the subject of any Litigation
asserting that it or any other SGV Entity has committed an unfair labor
practice (within the meaning of the National Labor Relations Act or comparable
state law) or seeking to compel it or any other SGV Entity to bargain with any
labor organization as to wages or conditions of employment, nor is any SGV
Entity party to any collective bargaining agreement, nor is there any strike or
other labor dispute involving any SGV Entity, pending or threatened, or to the
Knowledge of SGV, is there any activity involving any SGV Entity's employees
seeking to certify a collective bargaining unit or engaging in any other
organization activity.
6.15 Employee Benefit Plans.
(a) Section 6.15(a) of the SGV Disclosure Memorandum includes a
complete and correct list, and SGV has delivered or made available to
IndyMac prior to the execution of this Agreement, complete and correct
copies, of all pension, retirement, profit-sharing, deferred compensation,
stock option, employee stock ownership, severance pay, vacation, bonus, or
other incentive plan, all other written employee programs,
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arrangements, or agreements, all medical, vision, dental, or other health
plans, all life insurance plans, and all other employee benefit plans or
fringe benefit plans, including "employee benefit plans" as that term is
defined in Section 3(3) of ERISA, currently adopted, maintained by,
sponsored in whole or in part by, or contributed to by any SGV Entity or
ERISA Affiliate thereof for the benefit of employees, retirees,
dependents, spouses, directors, independent contractors, or other
beneficiaries and under which employees, retirees, dependents, spouses,
directors, independent contractors, or other beneficiaries are eligible to
participate (collectively, the "SGV Benefit Plans"). Any of the SGV
Benefit Plans which is an "employee pension benefit plan," as that term is
defined in Section 3(2) of ERISA, is referred to herein as a "SGV ERISA
Plan." Each SGV ERISA Plan which is also a "defined benefit plan" (as
defined in Section 414(j) of the Internal Revenue Code) is referred to
herein as a "SGV Pension Plan." No SGV Pension Plan is or has been a
multi-employer plan within the meaning of Section 3(37) of ERISA.
(b) All SGV Benefit Plans are in compliance with the applicable terms
of ERISA, the Internal Revenue Code, and any other applicable Laws the
breach or violation of which are reasonably likely to have, individually
or in the aggregate, a SGV Material Adverse Effect. Each SGV ERISA Plan
which is intended to be qualified under Section 401(a) of the Internal
Revenue Code has received a favorable determination letter from the
Internal Revenue Service, and SGV is not aware of any circumstances likely
to result in revocation of any such favorable determination letter. To the
Knowledge of SGV, no SGV Entity has engaged in a transaction with respect
to any SGV Benefit Plan that, assuming the taxable period of such
transaction expired as of the date hereof, would subject any SGV Entity to
a Tax imposed by either Section 4975 of the Internal Revenue Code or
Section 502(i) of ERISA in amounts which are reasonably likely to have,
individually or in the aggregate, a SGV Material Adverse Effect.
(c) For such SGV Pension Plan, the fair market value of the assets of
each such Plan as of the most recent actuarial valuation date for such
Plan equals or exceeds the present value of all benefit obligations of
such Plan as of such date, determined as though such Plan terminated in a
PBGC-trustee termination under Section 4041 of ERISA. Since the date of
the most recent actuarial valuation, there has been (i) no material change
in the financial position of a SGV Pension Plan, (ii) no change in the
actuarial assumptions with respect to any SGV Pension Plan, and (iii) no
increase in benefits under any SGV Pension Plan as a result of plan
amendments or changes in applicable Law which is reasonably likely to
have, individually or in the aggregate, a SGV Material Adverse Effect or
materially adversely affect the funding status of any such plan. Neither
any SGV Pension Plan nor any "single-employer plan," within the meaning of
Section 4001(a)(15) of ERISA, currently or formerly maintained by any SGV
Entity, or the single-employer plan of any ERISA Affiliate has an
"accumulated funding deficiency" within the meaning of Section 412 of the
Internal Revenue Code or Section 302 of ERISA, which is reasonably likely
to have a SGV Material Adverse Effect. No SGV Entity has provided, or is
required to provide, security to a SGV Pension Plan or to any single-
employer plan of an ERISA Affiliate pursuant to Section 401(a)(29) of the
Internal Revenue Code.
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(d) Within the six-year period preceding the Effective Time, no
Liability under Subtitle C or D of Title IV of ERISA has been or is
expected to be incurred by any SGV Entity with respect to any ongoing,
frozen or terminated single-employer plan or the single-employer plan of
any ERISA Affiliate, which Liability is reasonably likely to have a SGV
Material Adverse Effect. No SGV Entity has incurred any withdrawal
Liability with respect to a multi-employer plan under Subtitle B of Title
IV of ERISA (regardless of whether based on contributions of an ERISA
Affiliate), which Liability is reasonably likely to have a SGV Material
Adverse Effect. No notice of a "reportable event," within the meaning of
Section 4043 of ERISA for which the 30-day reporting requirement has not
been waived, has been required to be filed for any SGV Pension Plan or by
any ERISA Affiliate within the 12-month period ending on the date hereof.
(e) Except as disclosed in Section 6.15(e) of the SGV Disclosure
Memorandum, no payments to any Person will be triggered under SGV's
existing split-dollar life insurance by any event other than death of the
policy insureds.
(f) To the Knowledge of SGV, no SGV Entity or any representative of an
SGV Entity has made any statement, whether orally or in writing, to any
individual with regard to any SGV Benefit Plan that was not in accordance
with the terms of such SGV Benefit Plan.
(g) All filings required by ERISA and the Internal Revenue Code as to
each SGV Benefit Plan have been timely filed and all notices and
disclosures to participants or beneficiaries required by ERISA or the
Internal Revenue Code have been timely provided.
(h) Each SGV Entity has complied with ERISA Section 601 et. seq. and
Internal Revenue Code Section 4980B. Except as disclosed in Section
6.15(h) of the SGV Disclosure Memorandum, except to the extent required
under ERISA Section 601 et. seq. and Internal Revenue Code Section 4980B,
no SGV Benefit Plan provides health or welfare benefits for any retired or
former employee or is obligated to provide health or welfare benefits to
any active employee following such employee's retirement or other
termination of service.
(i) Except as disclosed in Section 6.15(i) of the SGV Disclosure
Memorandum, each SGV Entity has performed all of their respective
obligations under each SGV Benefit Plan and have made appropriate entries
in their financial records and statements for all such obligations that
have accrued but that are not yet due. Each SGV Entity has made, or will
make, all required contributions and payments under each SGV Benefit Plan
for all periods through and including the Effective Time.
(j) To the Knowledge of SGV, no SGV Entity nor any administrator or
fiduciary of any SGV Benefit Plan (or agent of any of the foregoing) has
engaged in any transaction or acted or failed to act in any manner which
could subject an SGV Entity or such individual to any Liability for a
breach of any duty under ERISA.
(k) Except as disclosed in Section 6.15(k) of the SGV Disclosure
Memorandum, the consummation of the transactions contemplated by this
Agreement will not entitle
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any current or former stockholder or employee of any SGV Entity to
severance pay, unemployment compensation, or any similar payment, and will
not accelerate the time of payment or vesting, or increase the amount, of
any compensation due to any such stockholder, employee, or former
employee.
(l) Except as disclosed in Section 6.15(l) of the SGV Disclosure
Memorandum, no event has occurred or circumstances exist that could result
in a material increase in premium costs of any SGV Benefit Plan that is
insured, or a material increase in any benefit costs of any SGV Benefit
Plan that is self-insured.
(m) Other than routine claims for benefits, no claim against or legal
proceeding involving any SGV Benefit Plan is pending or, to the Knowledge
of SGV, threatened.
(n) Except as disclosed in Section 6.15(n) of the SGV Disclosure
Memorandum, no payment that is owed or may become due to any stockholder,
director, officer, employee, or agent of any SGV Entity will be non-
deductible or subject to Tax under Internal Revenue Code Section 280G or
4999; nor will any SGV Entity be required to "gross up" or otherwise
compensate such individuals because of the imposition of any excise tax
upon payment to such individual.
(o) Except as disclosed in Section 6.15(o) of the SGV Disclosure
Memorandum, the actuarial present values of all accrued deferred
compensation entitlements (including entitlements under any executive
compensation, supplemental retirement, or employment agreement) of
employees and former employees of any SGV Entity and their respective
beneficiaries, other than entitlements accrued pursuant to funded
retirement plans subject to the provisions of Section 412 of the Internal
Revenue Code or Section 302 of ERISA, have been fully reflected on the SGV
Financial Statements to the extent required by and in accordance with
GAAP.
6.16 Material Contracts. Section 6.16 of the SGV Disclosure Memorandum
includes a complete and correct list of each material Contract to which a SGV
Entity or any of their respective Assets, businesses, or operations, is a party
to, or is bound or affected by, or receives benefits, including, but not
limited to, (i) any employment, severance, termination, consulting, or
retirement Contract providing for aggregate payments to any Person in any
calendar year in excess of $50,000, or (ii) any Contract relating to the long-
term indebtedness of any SGV Entity or the guarantee by any SGV Entity of any
such obligation (other than Contracts evidencing deposit liabilities, purchases
of federal funds, and trade payables), but excluding Contracts referred to in
Sections 6.10(b) and 6.15(a) (together with all Contracts referred to in
Section 6.10(b) and 6.15(a), the "SGV Contracts"). With respect to each SGV
Contract and except as disclosed in Section 6.16 of the SGV Disclosure
Memorandum: (i) the Contract is in full force and effect; (ii) no SGV Entity is
in Default thereunder, other than Defaults which are not reasonably likely to
have, individually or in the aggregate, a SGV Material Adverse Effect; (iii) no
SGV Entity has repudiated or waived any material provision of any such
Contract; (iv) the information provided with respect to each Contract
(including, in the case of leases, information relating to the term, rental
payments, and extraordinary expenses) is complete and correct in all material
respects; and (v) no other party to any such Contract is, to the Knowledge of
SGV, in Default in any
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respect, other than Defaults which are not reasonably likely to have,
individually or in the aggregate, a SGV Material Adverse Effect, or has
repudiated or waived any material provision thereunder. All of the indebtedness
of any SGV Entity for money borrowed is prepayable at any time by such SGV
Entity without penalty or premium.
6.17 Legal Proceedings. There is no Litigation instituted or pending, or,
to the Knowledge of SGV, threatened (or unasserted but considered probable of
assertion and which if asserted would have at least a reasonable probability of
an unfavorable outcome) against any SGV Entity, or against any director,
employee, or employee benefit plan of any SGV Entity, or against any Asset,
interest, or right of any of them, that is reasonably likely to have,
individually or in the aggregate, a SGV Material Adverse Effect, nor are there
any Orders of any Regulatory Authorities, other governmental authorities, or
arbitrators outstanding against any SGV Entity. Section 6.17 of the SGV
Disclosure Memorandum contains a summary of all Litigation as of the date of
this Agreement to which any SGV Entity is a party and which names a SGV Entity
as a defendant or cross-defendant or for which any SGV Entity has potential
Liability.
6.18 Deposits. Section 6.18 of the SGV Disclosure Memorandum sets forth a
complete and correct account of (i) the Deposits of First Federal, and (ii) the
Deposits expected to be acquired in the transaction (the "Citibank Branch
Acquisition") contemplated by that certain Agreement to Purchase Assets and
Assume Liabilities, dated March 16, 1999, between First Federal and Citibank,
Federal Savings Bank (the "Citibank Branch Acquisition Agreement"), each as of
May 31, 1999. Section 6.18 of the SGV Disclosure Memorandum also sets forth a
complete and correct account of the dollar amount (and percentage amount of the
total Deposits in the case of Core Deposits) of total Deposits and Core
Deposits of the Deposits of First Federal and the Deposits expected to be
acquired in the Citibank Branch Acquisition.
6.19 Citibank Branch Acquisition Agreement. The Citibank Branch Acquisition
Agreement has been duly executed and delivered by the parties thereto and
constitutes the valid and legally binding obligations of such parties as of the
date of this Agreement. No Defaults exist under the Citibank Branch Acquisition
Agreement. SGV has delivered to IndyMac a complete and correct copy of the
Citibank Branch Acquisition Agreement as in effect on the date of this
Agreement. No amendments or other changes to the Citibank Branch Acquisition
Agreement exist and no waivers or other renunciation of any rights under the
Citibank Branch Acquisition Agreement have occurred. In connection with
entering into the Citibank Branch Acquisition Agreement, SGV completed a due
diligence review of the books and records, properties, contracts, deposits and
other items that it is the customary practice in the industry to review in
connection with a branch acquisition, and otherwise completed a due diligence
review consistent with the practice in the industry in connection with a branch
acquisition. Upon consummation of the Citibank Branch Acquisition, SGV or its
Subsidiaries, shall have good and marketable title to all Assets to be conveyed
pursuant to such agreement, free and clear of all Liens except as disclosed in
the Citibank Branch Acquisition Agreement. The premium to be paid by First
Federal for the assumption of the Citibank Deposits is based on a straight
percentage of Deposits in
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existence and assumed by First Federal at consummation of the Citibank Branch
Acquisition. Upon consummation of the Merger, the Surviving Corporation shall
succeed to any and all rights of SGV under the Citibank Branch Acquisition
Agreement.
6.20 Year 2000. Except as disclosed in Section 6.20 of the SGV Disclosure
Memorandum, no SGV Entity has received, or reasonably expects to receive, a
"Year 2000 Notice of Deficiency" from the OTS pursuant to its Interim
Guidelines, or any other less than "satisfactory" rating from OTS. Each SGV
Entity has complied with all requirements of Fannie Mae and Freddie Mac and its
lenders, and provided all required notices and certifications within the time
periods prescribed for such notices and/or certifications, regarding compliance
with Year 2000 Issues. Except as disclosed in Section 6.20 of the SGV
Disclosure Memorandum, SGV has made available to IndyMac a complete and
accurate copy of its respective plan, including an estimate of the anticipated
associated costs, for addressing the Year 2000 Issues set forth in the
statements of the Federal Financial Institutions Examination Council, dated May
5, 1997, entitled "Year 2000 Project Management Awareness," and December 1997,
entitled "Safety and Soundness Guidelines Concerning the Year 2000 Business
Risk," as such issues affect the SGV Entities. SGV has made a review and
assessment of all areas within its business and operations that could be
adversely affected by the Year 2000 Issues. Between the date of this Agreement
and the Effective Time, SGV shall use its commercially reasonable efforts to
implement its plan.
6.21 Servicing. First Federal is an approved servicer of conventional
mortgage loans for, and in good standing with, Fannie Mae and Freddie Mac. All
mortgage loans serviced by or on behalf of First Federal (including all
mortgage loans underlying any participation certificate in which First Federal
holds an interest) are being serviced in accordance with customary and prudent
servicing practices for the types of loans being serviced and, in the case of
mortgage loans eligible for sale to Fannie Mae or Freddie Mac, are also being
serviced in accordance with Fannie Mae or Freddie Mac servicing standards and
guidelines, as applicable.
6.22 Reports. Since January 1, 1993, or the date of organization if later,
each SGV Entity has filed all reports and statements, together with any
amendments required to be made with respect thereto, that it was required to
file with Regulatory Authorities (except, in the case of state securities
authorities, failures to file which are not reasonably likely to have,
individually or in the aggregate, a SGV Material Adverse Effect). As of their
respective dates, each of such reports and documents, including the financial
statements, exhibits, and schedules thereto, complied in all material respects
with all applicable Laws. As of its respective date, each such report and
document did not, in all material respects, contain any untrue statement of a
material fact or omits to state, or will omit to state, a material fact
required to be stated therein or necessary to make the statements made therein,
in light of the circumstances under which they were made, not misleading.
6.23 Information Supplied.
(a) No written statement, certificate, instrument, or other writing
provided by SGV to IndyMac in connection with the due diligence of SGV
undertaken by IndyMac prior
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to the date of this Agreement and referenced on Exhibit A to the
representation letter of management of SGV delivered with this Agreement,
contains any untrue statement of material fact, or omits to state a
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not materially misleading. No
other written statement, certificate, instrument, or other writing
provided by SGV to IndyMac in connection with the due diligence of SGV
undertaken by IndyMac prior to the date of this Agreement contains any
inaccuracies such that the aggregate effect of such inaccuracies has, or
is reasonably likely to have, a SGV Material Adverse Effect. No written
statement, certificate, instrument, or other writing, including the
information included in the SGV Disclosure Memorandum, furnished or to be
furnished by any SGV Entity or any Affiliate thereof to IndyMac, pursuant
to this Agreement or any other document, agreement, or instrument referred
to herein, contains or will contain any untrue statement of material fact,
or omit to state a material fact necessary to make the statements therein,
in light of the circumstances under which they were made, not materially
misleading.
(b) The information included in Section 6.23(b) of the SGV Disclosure
Memorandum is correct and complete as of or at, the date indicated
therein.
(c) None of the information supplied or to be supplied by SGV or any
Affiliate for inclusion in the Joint Proxy Statement to be mailed to each
Party's stockholders in connection with the Stockholders' Meetings, and
any other documents to be filed by SGV or any Affiliate with the SEC in
connection with the transactions contemplated hereby, will, at the
respective time such documents are filed, and with respect to the Joint
Proxy Statement, when first mailed to the Parties' respective
stockholders, be false or misleading with respect to any material fact, or
omit to state any material fact necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading,
or, in the case of the Joint Proxy Statement or any amendment thereof or
supplement thereto, at the time of the Stockholders' Meetings, be false or
misleading with respect to any material fact, or omit to state any
material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of any proxy for the
Stockholders' Meetings. All documents that any SGV Entity or any Affiliate
thereof is responsible for filing with any Regulatory Authority in
connection with the transactions contemplated hereby will comply as to
form in all material respects with the provisions of applicable Law.
6.24 Regulatory Matters. No SGV Entity or any Affiliate thereof has
taken or agreed to take any action or has any Knowledge of any fact or
circumstance relating to SGV that is reasonably likely to materially
impede or delay receipt of any Consents of Regulatory Authorities referred
to in Section 9.1(b) or result in the imposition of a condition or
restriction of the type referred to in the last sentence of such Section.
6.25 State Takeover Laws. Each SGV Entity has taken all necessary
action to exempt the transactions contemplated by this Agreement from
Section 203 of the DGCL and Article Eighth, Section A of the Certificate
of Incorporation of SGV to the extent such sections are applicable
(collectively, "Takeover Laws").
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6.26 Charter Provisions. Each SGV Entity has taken all action so that
the entering into of this Agreement and the consummation of the Merger and
the other transactions contemplated by this Agreement do not and will not
result in the grant of any rights to any Person under the Certificate of
Incorporation, Bylaws, or other governing instruments of any SGV Entity.
6.27 Opinion of Financial Advisor. SGV has received the written
opinion of Sandler O'Neill & Partners, L.P., dated the date of this
Agreement, to the effect that the consideration to be received in the
Merger by the holders of SGV Common Stock is fair, from a financial point
of view, to such holders, a signed copy of which opinion has been
delivered to IndyMac.
6.28 Board Recommendation. The Board of Directors of SGV, at a meeting
duly called and held, has by unanimous vote of the directors present (who
constituted all of the directors then in office) (i) determined that this
Agreement and the transactions contemplated hereby, including the Merger,
and the transactions contemplated thereby, taken together, are fair to and
in the best interests of the stockholders, and (ii) resolved to recommend
to the holders of the shares of SGV Common Stock that this Agreement is
advisable and that such holders should adopt this Agreement.
ARTICLE 7
Conduct of Business Pending Consummation
7.1 Affirmative Covenants of SGV. From the date of this Agreement until the
earlier of the Effective Time or the termination of this Agreement, unless the
prior written consent of the chief executive officer or the chief operating
officer of IndyMac shall have been obtained (which consent shall not be
unreasonably withheld and which response must be communicated to SGV within 24
hours of SGV's written request or IndyMac will be deemed to have given such
consent), and except as otherwise expressly provided herein, SGV shall and
shall cause each of its Subsidiaries to (i) operate its business only in the
usual, regular, and ordinary course in substantially the same manner as
heretofore conducted, including, but not limited to, maintaining its
underwriting and funding standards, pricing of Deposits, and mortgage loan
sales to previously approved investors, all in accordance with existing
practice, (ii) preserve intact its business organization and Assets (including
branch locations and the Citibank, Federal Savings Bank branch (once
acquired)), maintain all policies of insurance currently in effect or replace
such policies with comparable policies, and maintain its rights and franchises,
and preserve its relationships with customers, employees, depositors,
suppliers, investors, and others having business dealings with it, and (iii)
take no action which would (x) materially adversely affect the ability of any
Party to obtain any Consents required for the transactions contemplated hereby
without imposition of a condition or restriction of the type referred to in the
last sentences of Section 9.1(b) or 9.1(c), or (y) materially adversely affect
the ability of any Party to perform its covenants and agreements under this
Agreement. Notwithstanding anything to the contrary in this Agreement, SGV
shall be permitted to consummate the transactions contemplated by the Citibank
Branch
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Acquisition Agreement in accordance with the terms of that agreement as in
effect on the date of this Agreement. In addition, any Assets held by SGV at
the holding company level will not be leveraged or pledged in any manner and
the nature and amount of such Assets shall remain substantially the same as the
Assets of SGV held at the holding company level as of June 30, 1999, except for
such sales of Assets by SGV for cash, the proceeds of which are contributed to
First Federal. Notwithstanding anything to the contrary in this Agreement,
nothing in this Section 7.1 shall require SGV to take any action that would
violate applicable Law or accounting pronouncements of FASB or the AICPA or
subject SGV to adverse regulatory action.
7.2 Negative Covenants of SGV. Except as otherwise provided by this
Agreement and except as required by Law or regulation or by any Regulatory
Authorities, from the date of this Agreement until the earlier of the Effective
Time or the termination of this Agreement, and unless the prior written consent
of the chief executive officer or chief operating officer of IndyMac shall have
been obtained (which consent shall not be unreasonably withheld and which
response must be communicated to SGV within 24 hours of SGV's written request
or IndyMac will be deemed to have given such consent), SGV covenants and agrees
that it will not do or agree or commit to do, or permit any of its Subsidiaries
to do or agree or commit to do, any of the following:
(a) amend the Certificate of Incorporation, Bylaws, or other governing
instruments of any SGV Entity; or
(b) incur any additional debt obligation or other obligation for
borrowed money or guarantee any indebtedness of any other Person (other
than indebtedness of a SGV Entity to another SGV Entity) except in the
ordinary course of the business of SGV Subsidiaries consistent with past
practices (which shall include, for First Federal, creation of deposit
liabilities, purchases of federal funds, and advances from the Federal
Home Loan Bank having a maximum term of ten years), incur any long-term
indebtedness, except for Federal Home Loan Bank advances with terms less
than ten years, or impose, or suffer the imposition, on any Asset of any
SGV Entity of any Lien or permit any such Lien to exist (other than in
connection with deposits, repurchase agreements, bankers acceptances,
"treasury tax and loan" accounts established in the ordinary course of
business, the satisfaction of legal requirements in the exercise of trust
powers, and Liens in effect as of the date hereof that are disclosed in
the SGV Disclosure Memorandum); or
(c) except as disclosed in Section 7.2(c) of the SGV Disclosure
Memorandum, repurchase, redeem, or otherwise acquire or exchange (other
than exchanges in the ordinary course under the SGV ESOP or SGV 401(k)
Plan), directly or indirectly, any shares, or any securities convertible
into any shares, of the capital stock of any SGV Entity, or declare or pay
any dividend or make any other distribution in respect of SGV's capital
stock, or repurchase or otherwise retire any long-term indebtedness before
its maturity date (other than replacement of advances from the Federal
Home Loan Bank with longer term advances having a maximum term of ten
years); or
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(d) except for this Agreement, or pursuant to the exercise of stock
options outstanding as of the date hereof and pursuant to the terms
thereof in existence on the date hereof, issue, sell, pledge, encumber,
authorize the issuance of, enter into any Contract to issue, sell, pledge,
encumber, or authorize the issuance of, or otherwise permit to become
outstanding, any additional SGV Options or shares of SGV Common Stock or
any other capital stock of any SGV Entity, or any stock appreciation
rights, or any option, warrant, or other Equity Right or any Voting Debt
(including any amendment of outstanding indebtedness that would make such
indebtedness Voting Debt); or
(e) adjust, split, combine, or reclassify any capital stock of any SGV
Entity or issue or authorize the issuance of any other securities in
respect of or in substitution for shares of SGV Common Stock, or sell,
lease, mortgage, or otherwise dispose of or otherwise encumber (i) any
shares of capital stock of any SGV Subsidiary (unless any such shares of
stock are sold or otherwise transferred to another SGV Entity), or (ii)
any Asset other than as expressly contemplated herein; or
(f) except for purchases of U.S. Treasury securities or U.S.
Government agency securities, which in either case have maturities of ten
years or less, purchase any securities or make any material investment,
either by purchase of stock of securities, contributions to capital, Asset
transfers, or purchase of any Assets, in any Person other than a wholly
owned SGV Subsidiary, or otherwise acquire direct or indirect control over
any Person, other than in connection with foreclosures in the ordinary
course of business, or otherwise enter into any new material line or
business; or
(g) grant any increase in compensation or benefits to any employee of
a SGV Entity who is a party to a SGV Compensation Contract, except as
required by Law; grant any increase in compensation or benefits to any
employee or officer of any SGV Entity who is not a party to a SGV
Compensation Contract, except increases in compensation based on annual
reviews consistent with past practice or except as required by Law; pay
any severance or termination pay or any bonus, except all payments set
forth in the SGV Disclosure Memorandum pursuant to existing plans or
Contracts; enter into or amend any severance agreements with officers of
any SGV Entity; grant any increase in fees or other increases in
compensation or other benefits to directors of any SGV Entity; make any
loans to any officer of any SGV Entity; or make any loans to other
employees of the SGV Entities other than in the ordinary course of
business consistent with past practices; or
(h) except as contemplated by Section 7.2(h) of the SGV Disclosure
Memorandum, enter into or amend any employment Contract between any SGV
Entity and any Person (unless such amendment is required by Law) that the
SGV Entity does not have the unconditional right to terminate without
Liability (other than Liability for accrued wages for services already
rendered), at any time on or after the Effective Time; or
(i) adopt any new employee benefit plan of any SGV Entity or, except
as provided in Section 8.10, terminate or withdraw from, or make any
material change in or to, any
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existing employee benefit plans of any SGV Entity other than any such
change that is required by Law or that, in the opinion of counsel, is
necessary or advisable to maintain the tax qualified status of any such
plan or in connection with the termination of such plan, or make any
distributions from such employee benefit plans, except as required by Law
or the terms of such plans or in connection with the termination of such
plan; or
(j) make any significant change in any Tax or accounting methods or
systems of internal accounting controls, except as may be appropriate to
conform to changes in Tax Laws or accounting requirements promulgated or
adopted by Regulatory Authorities or GAAP; or
(k) commence any Litigation other than as necessary for the prudent
operation of its business, settle any Litigation involving any Liability
of any SGV Entity for material money damages or restrictions upon the
operations of any SGV Entity; or
(l) except as disclosed in Section 7.2(l) of the SGV Disclosure
Memorandum, extend or renew or allow the automatic extension or renewal of
any Contract with an obligation exceeding $100,000 during the term of such
Contract, except for (i) the lease related to the North LaVerne branch of
First Federal (the "North LaVerne Lease") and (ii) the FPS Gold computer
application Contract; it being understood that in connection with (i) the
North LaVerne Lease, SGV may negotiate a new lease for the same or a
comparable location near the North LaVerne branch facility for a period of
between two and five years and at rental rates not to exceed then-current
market rates, and (ii) the FPS Gold computer application Contract, SGV may
negotiate such Contract so that its term terminates on or about December
31, 2000.
Notwithstanding anything to the contrary in this Agreement, nothing in
this Section 7.2 shall require SGV to take any action that would violate
applicable Law or accounting pronouncements of FASB or the AICPA or
subject SGV to adverse regulatory action.
7.3 Loan Portfolio Changes. From the date of this Agreement until the
earlier of the Effective Time or the termination of this Agreement, unless the
prior written consent of the chief executive officer or chief operating officer
of IndyMac shall have been obtained (which consent shall not be unreasonably
withheld and which response must be communicated to SGV within 24 hours of
SGV's written request or IndyMac will be deemed to have given such Consent),
SGV agrees that it will, and it will cause its Subsidiaries to do, the
following:
(a) With respect to the origination and purchase of one- to four-
family residential mortgage loans ("SFR Loans"), (i) reference the FICO
scores in all lending files for all SFR Loans originated after the date of
this Agreement, (ii) limit the origination and purchase of SFR Loans with
FICO scores below 600 to no more than $10 million, (iii) limit bulk loan
purchases and loan participations relating to SFR Loans to $5 million per
transaction and $10 million from any one seller or originator during any
12-month period following the date of this Agreement, (iv) except for
commitments in effect on the date of this Agreement and disclosed in
Section 7.3(a)(iv) of the SGV Disclosure Memorandum, not originate or
purchase a SFR Loan with a principal balance in excess of $500,000, (v)
limit the percentage and total dollar amount of self-insured SFR Loans
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to 110% of such Assets' percentage and total dollar amount in SGV's
portfolio at May 31, 1999, (vi) originate equity lines of credit, or
purchase standard second trust deed mortgages, piggy-back second
mortgages, overdraft lines of credit, and other consumer loans in
accordance with underwriting standards in effect on the date of this
Agreement and consistent with past practice (provided that no SGV Entity
shall (x) increase the total dollar amount of such loans or the percentage
of any such loans in SGV's portfolio by more than 25% from the respective
dollar and percentage levels in effect at May 31, 1999, or (y) purchase
any consumer home equity lines of credit), and (vii) not originate or
purchase SFR Loans that are third mortgages or lower in priority.
(b) With respect to commercial and multi-family loans, (i) not
originate or purchase any of such loans with a principal balance in excess
of $1 million, and (ii) limit the size of SGV's total loan portfolio
(excluding the SFR Loans described in (a)) to 125% of the total dollar
amount of such loans at May 31, 1999.
(c) With respect to the loan and mortgage-backed securities ("MBS")
portfolios generally, (i) not originate or purchase any loan
participations, except as necessary to meet CRA requirements, (ii) limit
the dollar amount of each of the whole loan and MBS portfolios to 115% of
the respective dollar amount of the whole loan and MBS portfolio balances
at May 31, 1999, (iii) apply underwriting criteria and pricing to loans
originated or purchased that are consistent with past practice, and (iv)
not permit total delinquent (at least 30-days past due) loans and real
estate owned ("REO") to exceed $10 million in the aggregate.
Notwithstanding anything to the contrary in this Agreement, nothing in
this Section 7.3 shall require SGV to take any action that would violate
applicable Law or accounting pronouncements of FASB or the AICPA or
subject SGV to adverse regulatory action.
7.4 Covenants of IndyMac. From the date of this Agreement until the earlier
of the Effective Time or the termination of this Agreement, unless the prior
written consent of SGV shall have been obtained (which consent shall not be
unreasonably withheld and which response must be communicated to IndyMac within
24 hours of IndyMac's written request), and except as otherwise expressly
contemplated herein, IndyMac covenants and agrees that it shall take no action
which would (i) materially adversely affect the ability of any Party to obtain
any Consents required for the transactions contemplated hereby without
imposition of a condition or restriction of the type referred to in the last
sentences of Section 9.1(b) or 9.1(c), or (ii) materially adversely affect the
ability of any Party to perform its covenants and agreements under this
Agreement; provided, that the foregoing shall not prevent any IndyMac Entity
from acquiring any Assets or other businesses or from discontinuing or
disposing of any of its Assets or business if such action is, in the reasonable
judgment of IndyMac, desirable in the conduct of the business of IndyMac and
its Subsidiaries, provided that such actions shall not materially delay the
Effective Time or materially hinder consummation of the Merger.
7.5 Adverse Changes in Condition. Each Party agrees to give written notice
promptly to the other Party upon becoming aware of the occurrence or impending
occurrence of any
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event or circumstance relating to it or any of its Subsidiaries which (i) is
reasonably likely to have, individually or in the aggregate, an IndyMac
Material Adverse Effect or a SGV Material Adverse Effect, as applicable, (ii)
would cause or constitute a material breach of any of its representations,
warranties, or covenants contained herein, and thereafter to use its reasonable
efforts to prevent or promptly to remedy the same in a timely manner, or (iii)
in the case of SGV, results or is reasonably likely to result, in SGV being
named a defendant in any litigation.
7.6 Reports. Each Party and its Subsidiaries shall file all reports or
information required to be filed by it with Regulatory Authorities between the
date of this Agreement and the Effective Time and shall deliver to the other
Party copies of all such reports promptly after the same are filed. If
financial statements are contained in any such reports filed with the SEC, such
financial statements will fairly present the consolidated financial position of
the entity filing such statements as of the dates indicated and the
consolidated results of operations, changes in stockholders' equity, and cash
flows for the periods then ended in accordance with GAAP (subject in the case
of interim financial statements to normal recurring year-end adjustments that
are not material). As of their respective dates, such reports filed with the
SEC will comply in all material respects with the Securities Laws and will not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. Any financial statements contained in any other reports to another
Regulatory Authority shall be prepared in accordance with Laws applicable to
such reports.
ARTICLE 8
Additional Agreements
8.1 Joint Proxy Statement; Stockholder Approval.
(a) IndyMac and SGV shall cooperate with each other in the preparation
of, and shall promptly prepare and file with the SEC, the Joint Proxy
Statement. Each of IndyMac and SGV shall furnish to each other all
information concerning them that they may reasonably require in connection
with the Joint Proxy Statement and shall use all reasonable efforts to
cause the Joint Proxy Statement to be cleared by the SEC as promptly as
practicable after such filing.
(b) IndyMac shall call a Stockholders' Meeting, to be held as soon as
reasonably practicable after the Joint Proxy Statement is cleared by the
SEC, for the purpose of voting upon adoption of this Agreement and such
other related matters as it deems appropriate. SGV shall call a
Stockholders' Meeting, to be held as soon as reasonably practicable after
the Joint Proxy Statement is cleared by the SEC, for the purpose of voting
upon the adoption of this Agreement and such other related matters as it
deems appropriate. The Parties shall coordinate and cooperate with respect
to the timing of such meetings and shall use their reasonable efforts to
hold such meetings on the same day.
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(c) In connection with the Stockholders' Meetings, (i) IndyMac and SGV
shall mail the Joint Proxy Statement to their respective stockholders,
(ii) the Boards of Directors of IndyMac and SGV shall recommend to their
respective stockholders the approval of the matters submitted for approval
(subject to the Board of Directors of SGV, after having consulted with and
considered the advice of outside counsel, reasonably determining in good
faith that the making of such recommendation, or the failure to withdraw
or modify its recommendation, would constitute a breach of fiduciary
duties of the members of such Board of Directors to SGV's stockholders
under applicable Law), and (iii) the Board of Directors and officers of
IndyMac and SGV shall use their reasonable efforts (including hiring an
appropriate proxy solicitation firm if a super-majority vote of
stockholders is required) to obtain such stockholders' approval (subject
to the Board of Directors of SGV, after having consulted with and
considered the advice of outside counsel, reasonably determining in good
faith that the taking of such actions would constitute a breach of
fiduciary duties of the members of such Board of Directors to SGV's
stockholders under applicable Law).
(d) SGV and IndyMac shall make all other necessary filings with
respect to the Merger under the Securities Laws.
8.2 Applications. IndyMac shall promptly prepare, and SGV shall cooperate
in the preparation and, where appropriate, shall file, applications with all
Regulatory Authorities having jurisdiction over the transactions contemplated
by this Agreement seeking the requisite Consents necessary to consummate the
transactions contemplated by this Agreement. The Parties shall deliver to each
other copies of all filings, correspondence and orders to and from all
Regulatory Authorities in connection with the transactions contemplated hereby.
8.3 Filings with State Offices. Upon the terms and subject to the
conditions of this Agreement, SGV shall execute and file the Certificate of
Merger with the Secretary of State of the State of Delaware in connection with
the Closing.
8.4 Agreement as to Efforts to Consummate. Subject to the terms and
conditions of this Agreement, each Party agrees to use, and to cause its
Subsidiaries to use, its reasonable efforts to take, or cause to be taken, all
actions, and to do, or cause to be done, all things necessary, proper, or
advisable under applicable Laws to consummate and make effective, as soon as
reasonably practicable after the date of this Agreement, the transactions
contemplated by this Agreement, including using its reasonable efforts to lift
or rescind any Order adversely affecting its ability to consummate the
transactions contemplated herein and to cause to be satisfied the conditions
referred to in Article 9, including, if necessary, using reasonable efforts to
resolve any concern of the OTS to avoid the imposition of a condition or
restriction referred to in the last sentence of Section 9.1(b); provided, that
nothing herein shall preclude either Party from exercising its rights under
this Agreement. Each Party shall use, and shall cause each of its Subsidiaries
to use, its reasonable efforts to obtain all Consents necessary or desirable
for the consummation of the transactions contemplated by this Agreement.
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8.5 Investigation and Confidentiality.
(a) Prior to the Effective Time, SGV shall keep IndyMac advised of all
material developments relevant to its business and to consummation of the
Merger and shall upon reasonable notice permit IndyMac to make or cause to
be made such investigation of the business and properties of SGV and its
Subsidiaries and of their respective financial and legal conditions as
IndyMac reasonably requests, including access to the books and records and
key managers of the SGV Entities during normal business hours, and shall
cooperate with all of IndyMac's ongoing informational requests, provided
that such investigation shall be reasonably related to the transactions
contemplated hereby and shall not interfere unnecessarily with normal
operations. Without limiting the generality of the foregoing, with respect
to each SGV Entity, IndyMac (i) may attend any monthly meeting of the
Board of Directors, (ii) shall receive the agenda and minutes of any
meeting of the Board of Directors and any meeting of the audit or
executive committee of such Board of Directors, and (iii) may attend any
meeting of the audit or executive committee of the Board of Directors and
any meeting of the management committee, in each case if a matter or
matters will be discussed at such meeting which could reasonably result in
a SGV Material Adverse Effect (but only after management of SGV shall have
had the opportunity to consult either formally or informally with the SGV
Board of Directors). With respect to any meeting of the Board of Directors
or audit or executive committee of such Board of Directors or management
committee of each SGV Entity that IndyMac attends, IndyMac may attend as
an observer only and shall receive notice of such meeting as though
IndyMac were a member of such Board of Directors or committee, with
appropriate information relating to the business to be discussed at each
such meeting. In addition, SGV and its Subsidiaries shall provide to
IndyMac at the end of each calendar month prior to the Closing Date a
reporting package which includes the following information related to
SGV's and its Subsidiaries' businesses (all schedules shall show
comparison of specific month-end information to May 31, 1999 information
previously provided): (1) loan-by-loan file download on a monthly basis
for all loan portfolios of SGV and its Subsidiaries; (2) mark-to-market
valuation, by SGV and its Subsidiaries for each securities' portfolio, as
of the end of such month;(3) loan loss reserve by product type and Asset
class for SGV's and its Subsidiaries' portfolios, as of the end of such
month; (4) charge-offs, by product type and Asset class for SGV's and its
Subsidiaries' portfolios, during such month; (5) accounting of Deposits,
by product type and branch location, for First Federal as of the end of
such month; (6) accounting of Deposits, by product type for Citibank,
Federal Savings Bank Deposits, until the closing of such transaction and
then show as part of such schedule in subsection (5), (7) the dollar
amount and percentage amount of the Assets, by product type and Asset
class, comprising each portfolio of SGV as of the end of such month; and
(7) monthly delinquency and REO reports on its entire loan and REO
portfolio, by Asset type and product type, as of the end of such month. No
investigation by a Party shall affect the representations and warranties
of the other Party. In implementing the provisions of this Agreement and
in particular, the provisions of this Section 8.5, IndyMac and SGV shall
each appoint two individuals who will serve on a "Coordination Committee"
to
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channel all the requests for information and all responses to such
requests in order to centralize informational requests and minimize the
burden of such requests on SGV.
(b) In addition to the Parties' respective obligations under the
Confidentiality Agreement, which are hereby reaffirmed and adopted, and
incorporated by reference herein, each Party shall, and shall cause its
advisers and agents to, maintain the confidentiality of all confidential
information furnished to it by the other Party concerning its and its
Subsidiaries' businesses, operations, and financial positions and shall
not use such information for any purpose except in furtherance of the
transactions contemplated by this Agreement. If this Agreement is
terminated prior to the Effective Time, each Party shall promptly return
or certify the destruction of all documents and copies thereof and all
work papers containing confidential information received from the other
Party.
8.6 Press Releases. Prior to the Effective Time, IndyMac and SGV shall
consult with each other as to the form and substance of any press release or
other public disclosure materially related to this Agreement or any other
transaction contemplated hereby; provided, that nothing in this Section 8.6
shall be deemed to prohibit any Party from making any disclosure which its
counsel deems necessary or advisable in order to satisfy such Party's
disclosure obligations imposed by Law.
8.7 Certain Actions. Except with respect to this Agreement and the
transactions contemplated hereby, no SGV Entity nor any Affiliate thereof nor
any Representative thereof retained by any SGV Entity shall, directly or
indirectly, initiate, solicit, encourage, or knowingly facilitate (including by
way of furnishing information) any inquiries or the making of any Acquisition
Proposal. Notwithstanding anything herein to the contrary, a SGV Entity and its
respective Board of Directors shall be permitted (i) to the extent applicable,
to comply with Rule 14d-9 and Rule 14e-2 promulgated under the 1934 Act with
regard to an Acquisition Proposal, or (ii) to engage in any discussions or
negotiations with, or provide any information to, any Person in response to an
unsolicited bona fide written Acquisition Proposal by any such Person, if and
only to the extent that (a) the SGV Stockholders' Meeting shall not have
occurred, (b) SGV's Board of Directors concludes in good faith and consistent
with its fiduciary duties to SGV's stockholders under applicable Law that such
Acquisition Proposal could reasonably be expected to result in a Superior
Proposal, (c) prior to providing any information or data to any Person in
connection with an Acquisition Proposal by any such Person, SGV's Board of
Directors receives from such Person an executed confidentiality agreement
containing terms at least as stringent as those contained in the
Confidentiality Agreement, and (d) prior to providing any information or data
to any Person or entering into discussions or negotiations with any Person,
SGV's Board of Directors notifies IndyMac promptly of such inquiries,
proposals, or offers received by, any such information requested from, or any
such discussions or negotiations sought to be initiated or continued with, any
of its Representatives indicating, in connection with such notice, the name of
such Person and the material terms and conditions of any inquiries, proposals,
or offers. SGV agrees that it will promptly keep IndyMac informed of the status
and terms of any such proposals or offers and the status and terms of any such
discussions or negotiations. SGV agrees that it will, and will cause its
officers, directors, and
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Representatives to, immediately cease and cause to be terminated any
activities, discussions, or negotiations existing as of the date of this
Agreement with any parties conducted heretofore with respect to any Acquisition
Proposal. SGV agrees that it will use reasonable best efforts to promptly
inform its directors, officers, key employees, agents, and Representatives of
the obligations undertaken in this Section 8.7. Nothing in this Section 8.7
shall (i) permit SGV to terminate this Agreement (except as specifically
provided in Article 10), or (ii) affect any other obligation of IndyMac or SGV
under this Agreement.
8.8 Regulatory Compliance Matters. SGV's disclosure documents on future
loans shall be in compliance with all Laws. SGV shall, within 30 days after
IndyMac's application to the OTS for approval to complete the Merger has been
"deemed complete," implement such actions required by IndyMac prior to this
Agreement and shall prior to the Closing Date ensure that all loan
documentation for all outstanding loans comply with IndyMac's policies
regarding loan documentation or shall otherwise take such other measures as
requested by IndyMac. SGV shall take all reasonable steps to ensure that, prior
to Closing, SGV's overall CAMEL, CRA, and compliance ratings do not decline
from the ratings it has been assigned as of May 31, 1999. Section 8.8 of the
SGV Disclosure Memorandum lists the commencement schedule of compliance
examinations of which SGV has received notice from the OTS prior to the date of
this Agreement.
8.9 Consents. IndyMac will take all action reasonably necessary to obtain
all Consents under its financing Contracts and will have obtained such Consents
under its financing Contracts prior to the Effective Time.
8.10 Employee Benefits.
(a) Following the Effective Time, IndyMac shall provide generally to
officers and employees of SGV and its Subsidiaries, who at or after the
Effective Time become or remain employees of IndyMac and its Subsidiaries
(the "Continuing Employees"), employee benefits under employee benefit
plans on terms and conditions which, when taken as a whole, are
substantially similar to those currently provided by IndyMac to its
similarly situated officers and employees. For purposes of participation,
vesting, and benefit accrual (but not accrual of benefits under any tax
qualified defined benefit pension plan) under such employee benefit plans,
(i) each Continuing Employee's prior service with SGV shall be treated as
service under IndyMac's tax qualified retirement plans, and (ii) service
under any other employee benefit plans of SGV shall be treated as service
under any similar employee benefit plans maintained by IndyMac. IndyMac
shall cause IndyMac's welfare benefit plans that cover the Continuing
Employees after the Effective Time to (x) waive any waiting period and
restrictions and limitations for preexisting conditions or insurability,
and (y) cause any deductible, co-insurance, or maximum out-of-pocket
payments made by the Continuing Employees under IndyMac or SGV welfare
benefit plans to be credited to such Continuing Employees under IndyMac's
welfare benefit plans, so as to reduce the amount of any deductible, co-
insurance, or maximum out-of-pocket payments payable by the Continuing
Employees under the IndyMac welfare benefit plans. The continued coverage
of the Continuing Employees under the similar employee benefits plans
maintained by SGV and/or any
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Subsidiary immediately prior to the Effective Time during a transition
period after the Effective Time to be determined by IndyMac shall be
deemed to provide the Continuing Employees with benefits that are no less
favorable than those offered to other employees of IndyMac and its
Subsidiaries. Except as otherwise expressly contemplated by this
Agreement, IndyMac also shall honor all employment, severance, consulting,
and other compensation Contracts disclosed in Section 8.11 of the SGV
Disclosure Memorandum to IndyMac between any SGV Entity and any current or
former director, officer, or employee thereof. To the extent that IndyMac
has agreed to honor the Contracts as set forth in the preceding sentence
(the "SGV Compensation Contracts"), IndyMac acknowledges that the Merger
constitutes a "change of control" for all purposes, pursuant to any such
SGV Compensation Contracts. SGV, in turn, acknowledges that the employment
of all officers of SGV will be terminated at the Closing Date and that
such termination shall give rise to the benefits due under the SGV
Compensation Contracts upon a change in control and that SGV will pay all
amounts due under the SGV Compensation Contracts, subject to receipt by
IndyMac of the calculation of the payment amounts, at the Closing Date as
set forth in the SGV Compensation Contracts.
(b) At the Effective Time, the SGV ESOP shall be terminated with all
participant accounts becoming fully vested and nonforfeitable. At the
Effective Time or as soon thereafter as practicable, and contingent upon
the issuance by the Internal Revenue Service of a favorable determination
letter, private letter ruling, or other authority reasonably acceptable to
IndyMac, it is intended that each of the following shall occur: (i) Per
Share Purchase Price payments received by the SGV ESOP in the Merger in an
amount sufficient to fully-retire the then outstanding balance of the SGV
ESOP loan, including any accrued but unpaid interest thereon, shall be
applied to satisfy in full the outstanding balance of such SGV ESOP loan;
(ii) all remaining proceeds attributable to unallocated shares shall be
allocated to the accounts of participants as earnings as of the Effective
Time in accordance with applicable Law; and (iii) the SGV ESOP shall make
a distribution of benefits in a manner consistent with applicable Law. On
a date determined by the Parties after the date of this Agreement, SGV
shall file an application of a determination relating to the termination
of the SGV ESOP, containing a full description of each of the proposals in
clauses (i), (ii), and (iii) of the preceding sentence and the methodology
to be utilized for allocating unallocated shares as earnings. If SGV
receives a determination letter or private letter ruling from the Internal
Revenue Service that restricts any portion of the remaining and
unallocated shares to Internal Revenue Code Section 415 limitations (i.e.,
limitations on earnings allocations) or if the Internal Revenue Service in
any way limits, caveats, or refuses to rule or issue a determination with
respect to the intended termination of the SGV ESOP or any of the
proposals in clauses (i), (ii), and (iii) of the preceding sentence, the
Parties shall cooperate to implement a resolution that will maximize the
allocation of the unallocated proceeds to participants with account
balances as of the Effective Time in a manner that complies with
applicable Law and does not adversely effect the qualified status of the
plan.
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(c) Immediately prior to the Effective Time, SGV shall terminate the
First Federal Savings and Loan Profit Sharing Plan (the "SGV 401(k)
Plan"). After such termination there shall be no further accrual of
benefits under the SGV 401(k) Plan, and to the extent permitted by
applicable Law, all benefits under the SGV 401(k) Plan shall become fully
vested and nonforfeitable. As soon as practicable upon the termination of
the SGV 401(k) Plan in accordance with applicable Law and after receipt of
a favorable determination letter from the Internal Revenue Service with
respect to the SGV 401(k) Plan's termination, SGV shall cause vested
accrued benefits thereunder to be distributed to participants or their
beneficiaries; provided, however, that no plan termination distribution
shall occur prior to the Effective Time. At the time distribution of
benefits is made under the SGV 401(k) Plan on or after the Effective Time,
upon the election of the participant the amounts thereof that constitutes
an "eligible rollover distribution" (as defined in Internal Revenue Code
Section 402(f)(2)(A)), may be rolled over by such participant to the
401(k) plan maintained by IndyMac or to any other eligible individual
retirement account.
(d) At or prior to the Closing Date, SGV's Employee Severance Plan
will be terminated by the Board of Directors of SGV. In consideration for
the termination of the SGV Employee Severance Plan, IndyMac will adopt a
non-qualified plan, which will be funded prior to the Closing Date,
pursuant to which IndyMac will purchase a certificate of deposit at First
Federal for each employee (other than employees who are parties to a SGV
Compensation Contract) who, as of the Effective Time, would be entitled to
severance benefits under the SGV Employee Severance Plan, as if such
employee were terminated or demoted or otherwise constructively terminated
without cause, in an amount equal to the dollar amount of severance
benefits that would be due such employee as of the Effective Time (without
reduction for the time value of money). On the first, second, and third
anniversaries of the Effective Time, one-third of the principal balance of
each certificate of deposit, together with any accrued interest thereon,
shall vest, with the full principal balance of each certificate of
deposit, together with any accrued interest thereon, vesting and being
paid to the employee on the third anniversary of the Effective Time; and
the employee will be entitled to receive such vested portion of the
certificate of deposit in the event the employee voluntarily leaves the
employment of IndyMac prior to the third anniversary of the Effective
Time. In the event the employee's employment is terminated or demoted or
otherwise constructively terminated (other than for cause) involuntarily
or due to death or disability, such employee or, in the case of death,
such employee's heir or representative shall be entitled to receive the
full amount of the certificate of deposit, together with all accrued
interest thereon. For purposes of this provision, any reason of
termination listed in Section 4.2 of SGV's Employee Severance Plan shall
be considered a "constructive termination."
(e) SGV agrees to use all reasonable efforts to terminate, at or prior
to the Closing Date, the retired director's benefit plan and to pay out
all benefits owed under such plan on a lump sum basis, in an amount not to
exceed the accrued balance for such plan on SGV's general ledger at May
31, 1999.
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(f) Except as otherwise provided in Section 4.3, any award
certificates that are not vested and any other awards under any of the SGV
benefit plans that have not vested, either by its terms or in accordance
with this Agreement, in either case at the Effective Time will be
cancelled and of no further effect as of the Effective Time.
(g) Prior to the Effective Time, IndyMac and Barrett G. Andersen and
Ronald A. Ott shall negotiate in good faith to reach agreement on the
terms of the employment of Messrs. Andersen and Ott by IndyMac for a
period of not less than six months after the Effective Time with a salary
consistent with their salaries at SGV as of May 31, 1999 (including one
year non-compete/no hire/no solicitation provisions). Messrs. Andersen and
Ott will use their reasonable best efforts to encourage all other officers
and employees of SGV to continue their employment with IndyMac, if such
employment is offered following the Effective Time. SGV acknowledges that
during the period between the date of this Agreement and the Effective
Time, IndyMac will have the right and opportunity to negotiate continuing
employment arrangements with SGV personnel, including managers, branch
managers, branch operations managers, and other corporate personnel
identified by IndyMac between the date of this Agreement and the Effective
Time, with any such arrangements to be effective at the Effective Time.
IndyMac will use its reasonable best efforts to retain non-management
employees of SGV and the SGV Subsidiaries consistent with the needs of its
business, but this shall not limit IndyMac's right to amend the terms and
conditions of employment of any of its employees or to terminate any
employee's employment at will.
8.11 Indemnification.
(a) From and after the Effective Time, IndyMac shall indemnify,
defend, and hold harmless the present and former directors, officers,
employees, and agents of SGV Entities (each, an "Indemnified Party")
against all Liabilities arising out of actions or omissions arising out of
the Indemnified Party's service or services as directors, officers,
employees, or agents of SGV or, at SGV's request, of another corporation,
partnership, joint venture, trust, or other enterprise occurring at or
prior to the Effective Time (including the transactions contemplated by
this Agreement) to the fullest extent permitted under Delaware Law and by
SGV's Certificate of Incorporation and Bylaws as in effect on the date
hereof, including provisions relating to advances of expenses incurred in
the defense of any Litigation (upon receipt of any undertaking required by
Section 145(e) of the DGCL) and whether or not any SGV Entity is insured
against any such matter. Without limiting the foregoing, in any case in
which approval by IndyMac is required to effectuate any indemnification,
IndyMac shall direct, at the election of the Indemnified Party, that the
determination of any such approval shall be made by independent counsel
mutually agreed upon between IndyMac and the Indemnified Party.
(b) IndyMac shall use its reasonable efforts to maintain in effect for
a period of three years after the Effective Time SGV's existing directors'
and officers' liability insurance policy (provided that the Surviving
Corporation may substitute therefor (i) policies of at least the same
coverage and amounts containing terms and conditions which are
substantially no less advantageous, or (ii) with the consent of SGV given
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prior to the Effective Time, any other policy) with respect to claims
arising from facts or events which occurred prior to the Effective Time
and covering persons who are currently covered by such insurance;
provided, that IndyMac shall not be obligated to make aggregate premium
payments for such three-year period in respect of such policy (or coverage
replacing such policy) which exceed, for the portion related to SGV's
directors and officers, 150% of the annual premium payments on SGV's
current policy in effect as of the date of this Agreement (the "Maximum
Amount"). If the amount of the premiums necessary to maintain or procure
such insurance coverage exceeds the Maximum Amount, IndyMac shall use its
reasonable efforts to maintain the most advantageous policies of
directors' and officers' liability insurance obtainable for a premium
equal to the Maximum Amount.
(c) Any Indemnified Party wishing to claim indemnification under
Section 8.11(a), upon learning of any such Liability or Litigation, shall
promptly notify IndyMac thereof. In the event of any such Litigation
(whether arising before or after the Effective Time), (i) IndyMac shall
have the right to assume the defense thereof and IndyMac shall not be
liable to such Indemnified Parties for any legal expenses of other counsel
or any other expenses subsequently incurred by such Indemnified Parties in
connection with the defense thereof, except that if IndyMac elects not to
assume such defense or counsel for the Indemnified Parties advises that
there are substantive issues which raise conflicts of interest between
IndyMac and the Indemnified Parties, the Indemnified Parties may retain
counsel satisfactory to them, and IndyMac shall pay all reasonable fees
and expenses of such counsel for the Indemnified Parties promptly as
statements therefor are received; provided, that IndyMac shall be
obligated pursuant to this paragraph (c) to pay for only one firm of
counsel for all Indemnified Parties in any jurisdiction, (ii) the
Indemnified Parties will cooperate in the defense of any such Litigation,
and (iii) IndyMac shall not be liable for any settlement effected without
its prior written consent, but shall have the right to effect any
settlement on behalf of the Indemnified Party; and provided further that
IndyMac shall not have any obligation hereunder to any Indemnified Party
when and if a court of competent jurisdiction shall determine, and such
determination shall have become final, that the indemnification of such
Indemnified Party in the manner contemplated hereby is prohibited by
applicable Law.
(d) The provisions of this Section 8.11 are intended to be for the
benefit of and shall be enforceable by, each Indemnified Party and their
respective heirs and representatives.
8.12 Certain Policies of SGV. SGV and IndyMac shall consult with respect to
their respective loan, litigation, and real estate valuation policies and
practices (including loan classifications and levels of reserves) and SGV shall
make such modification or changes to its policies and practices, if any, prior
to the Effective Time as may be mutually agreed upon. SGV and IndyMac also
shall consult with respect to the character, amount, and timing of
restructuring and Merger-related expense charges to be taken by each of the
Parties in connection with the transactions contemplated by this Agreement and
shall take such charges in accordance with GAAP, prior to the Effective Time,
as may be mutually agreed upon by
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the Parties. Neither Party's representations, warranties, covenants, or
agreements contained in this Agreement shall be deemed to be inaccurate or
breached in any respect as a consequence of any modifications or charges
undertaken solely on account of this Section 8.12.
8.13 IndyMac Merger Subsidiary Organization. IndyMac shall organize IndyMac
Merger Subsidiary under the Laws of the State of Delaware. Prior to the
Effective Time, the outstanding capital stock of IndyMac Merger Subsidiary
shall consist of 1,000 shares of IndyMac Merger Subsidiary Common Stock, all of
which shares shall be owned by IndyMac. Prior to the Effective Time, IndyMac
Merger Subsidiary shall not (i) conduct any business operations whatsoever or
(ii) enter into any Contract or agreement of any kind, acquire any assets or
incur any Liability, except as may be specifically contemplated by this
Agreement or the Plan of Merger or as the Parties may otherwise agree. IndyMac,
as the sole stockholder of IndyMac Merger Subsidiary, shall vote prior to the
Effective Time, the shares of IndyMac Merger Subsidiary Common Stock in favor
of the Plan of Merger.
ARTICLE 9
Conditions Precedent to Obligations to Consummate
9.1 Conditions to Obligations of Each Party. The respective obligations of
each Party to perform this Agreement and consummate the Merger and the other
transactions contemplated hereby are subject to the satisfaction of the
following conditions, unless waived by both Parties pursuant to Section 11.6:
(a) Stockholder Approval. The stockholders of IndyMac shall have
adopted this Agreement in accordance with the voting requirement set forth
in the Joint Proxy Statement. The stockholders of SGV shall have adopted
this Agreement and the Plan of Merger as and to the extent required by
Law, by the provisions of any governing instruments, or by the rules of
the Nasdaq Stock Market, Inc.
(b) Regulatory Approvals. All Consents of, filings and registrations
with, and notifications to, all Regulatory Authorities required for
consummation of the Merger shall have been obtained or made and shall be
in full force and effect and all waiting periods required by Law shall
have expired. No Consent obtained from any Regulatory Authority which is
necessary to consummate the transactions contemplated hereby shall be
conditioned or restricted in a manner (including requirements relating to
the raising of additional capital or the disposition of Assets) which in
the reasonable judgment of the Board of Directors of IndyMac would so
materially adversely impact the economic or business benefits assumptions
of the transactions contemplated by this Agreement that, had such
condition or requirement been known, IndyMac would not, in its reasonable
judgment, have entered into this Agreement.
(c) Consents and Approvals. Each Party shall have obtained any and all
Consents required for consummation of the Merger (other than those
referred to in Section 9.1(b)) or for the preventing of any Default under
any Contract or Permit of such Party which, if not obtained or made, is
reasonably likely to have, individually or
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in the aggregate, an IndyMac Material Adverse Effect or a SGV Material
Adverse Effect, as applicable. No Consent so obtained which is necessary
to consummate the transactions contemplated hereby shall be conditioned or
restricted in a manner which in the reasonable judgment of the Board of
Directors of IndyMac would so materially adversely impact the economic or
business benefits assumptions of the transactions contemplated by this
Agreement that, had such condition or requirement been known, IndyMac
would not, in its reasonable judgment, have entered into this Agreement.
(d) Legal Proceedings. No court or governmental or regulatory
authority of competent jurisdiction shall have enacted, issued,
promulgated, enforced, or entered any Law or Order (whether temporary,
preliminary, or permanent) or taken any other action which prohibits,
restricts, or makes illegal consummation of the transactions contemplated
by this Agreement.
(e) Joint Proxy Statement. The Joint Proxy Statement shall have been
cleared by the SEC and shall not be subject to any stop order or
proceedings seeking a stop order.
(f) Funds. IndyMac shall have provided the Payment Agent sufficient
funds to satisfy its obligations under Articles 3 and 4 and SGV shall have
received a certificate from the Paying Agent to that effect.
9.2 Conditions to Obligations of SGV. The obligations of SGV to perform
this Agreement and consummate the Merger and the other transactions
contemplated hereby are subject to the satisfaction of the following
conditions, unless waived by SGV pursuant to Section 11.6(a):
(a) Representations and Warranties. For purposes of this Section
9.2(a), the accuracy of the representations and warranties of IndyMac set
forth in this Agreement shall be assessed as of the date of this Agreement
and as of the Effective Time with the same effect as though all such
representations and warranties had been made on and as of the Effective
Time (provided that representations and warranties which are confined to a
specified date shall speak only as of such date). The representations and
warranties set forth in Sections 5.5 and 5.6 shall be correct and complete
in all material respects. There shall not exist inaccuracies in the
representations and warranties of IndyMac set forth in this Agreement
(including the representations and warranties set forth in Sections 5.5
and 5.6) such that the aggregate effect of such inaccuracies has, or is
reasonably likely to have, an IndyMac Material Adverse Effect; provided
that, for purposes of this sentence only, those representations and
warranties which are qualified by references to "material" or "Material
Adverse Effect" or to the "Knowledge" of any Person shall be deemed not to
include such qualifications.
(b) Performance of Agreements and Covenants. Each and all of the
agreements and covenants of IndyMac to be performed and complied with
pursuant to this Agreement and the other agreements contemplated hereby
prior to the Effective Time shall have been duly performed and complied
with in all material respects.
(c) Certificates. IndyMac shall have delivered to SGV (i) a
certificate, dated as of the Effective Time and signed on its behalf by
its chief executive officer and its chief
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financial officer, to the effect that the conditions set forth in Section
9.1 as relates to IndyMac and in Section 9.2(a) and 9.2(b) have been
satisfied, and (ii) certified copies of resolutions duly adopted by
IndyMac's Board of Directors and stockholders evidencing the taking of all
corporate action necessary to authorize the execution, delivery and
performance of this Agreement, and the consummation of the transactions
contemplated hereby, all in such reasonable detail as SGV and its counsel
shall request.
9.3 Conditions to Obligations of IndyMac. The obligations of IndyMac to
perform this Agreement and consummate the Merger and the other transactions
contemplated hereby are subject to the satisfaction of the following
conditions, unless waived by IndyMac pursuant to Section 11.6(b):
(a) Representations and Warranties. For purposes of this Section
9.3(a), the accuracy of the representations and warranties of SGV set
forth in this Agreement shall be assessed as of the date of this Agreement
and as of the Effective Time with the same effect as though all such
representations and warranties had been made on and as of the Effective
Time (provided that representations and warranties which are confined to a
specified date shall speak only as of such date). The representations and
warranties of SGV set forth in Section 6.3 shall be true and correct
(except for inaccuracies which are de minimis in amount). The
representations and warranties of SGV set forth in Sections 6.23(b), 6.24,
6.25, 6.26, 6.27, and 6.28 shall be true and correct in all material
respects. There shall not exist inaccuracies in the representations and
warranties of SGV set forth in this Agreement (including the
representations and warranties set forth in Sections 6.3, 6.23(b), 6.24,
6.25, 6.26, 6.27, and 6.28) such that the aggregate effect of such
inaccuracies has, or is reasonably likely to have, a SGV Material Adverse
Effect; provided that, for purposes of this sentence only, those
representations and warranties which are qualified by references to
"material" or "Material Adverse Effect" or to the "Knowledge" of any
Person shall be deemed not to include such qualifications.
(b) Performance of Agreements and Covenants. Each and all of the
agreements and covenants of SGV to be performed and complied with pursuant
to this Agreement and the other agreements contemplated hereby prior to
the Effective Time shall have been duly performed and complied with in all
material respects.
(c) Certificates. SGV shall have delivered to IndyMac (i) a
certificate, dated as of the Effective Time and signed on its behalf by
its chief executive officer and its chief financial officer, to the effect
that the conditions set forth in Section 9.1 as relates to SGV and in
Section 9.3(a) and 9.3(b) have been satisfied, and (ii) certified copies
of resolutions duly adopted by SGV's Board of Directors and stockholders
evidencing the taking of all corporate action necessary to authorize the
execution, delivery and performance of this Agreement, and the
consummation of the transactions contemplated hereby, all in such
reasonable detail as IndyMac and its counsel shall request.
(d) Material Adverse Effect. Since the date of this Agreement, there
shall not have occurred a SGV Material Adverse Effect, or a Regulatory
Ratings Decline, and as of the Closing there shall not exist a Deposit
Shortfall or any Book Net Worth Shortfall.
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ARTICLE 10
Termination
10.1 Termination. Notwithstanding any other provision of this Agreement,
and notwithstanding the approval of this Agreement by the stockholders of
IndyMac and SGV or both, this Agreement may be terminated and the Merger
abandoned at any time prior to the Effective Time:
(a) By mutual consent of SGV and IndyMac; or
(b) By either Party (provided that the terminating Party is not then
in material breach of any representation, warranty, covenant, or other
agreement contained in this Agreement) in the event of a material breach
by the other Party of any representation or warranty contained in this
Agreement which cannot be or has not been cured within 30 days after the
giving of written notice to the breaching Party of such breach and which
breach is reasonably likely, in the opinion of the non-breaching Party, to
have, individually or in the aggregate, an IndyMac Material Adverse Effect
or a SGV Material Adverse Effect, as applicable, on the breaching Party;
or
(c) By either Party (provided that the terminating Party is not then
in material breach of any representation, warranty, covenant, or other
agreement contained in this Agreement) in the event of a material breach
by the other Party of any covenant or agreement contained in this
Agreement which cannot be or has not been cured within 30 days after the
giving of written notice to the breaching Party of such breach; or
(d) By either Party (provided that the terminating Party is not then
in material breach of any representation, warranty, covenant, or other
agreement contained in this Agreement) in the event (i) any Consent of any
Regulatory Authority required for consummation of the Merger and the other
transactions contemplated hereby shall have been denied by final
nonappealable action of such authority or if any action taken by such
authority is not appealed within the time limit for appeal, or (ii) the
stockholders of IndyMac or SGV fail to vote their approval of the matters
relating to this Agreement and the transactions contemplated hereby at the
Stockholders' Meetings where such matters were presented to such
stockholders for approval and voted upon; or
(e) By either Party in the event that the Merger shall not have been
consummated by July 12, 2000 (the "Original Termination Date" and, as it
may be extended, the "Termination Date"), if the failure to consummate the
transactions contemplated hereby on or before the Termination Date is not
caused by any breach of this Agreement by the Party electing to terminate
pursuant to this Section 10.1(e); (i) provided, that if all required
Consents of the OTS have been obtained by the Original Termination Date,
but any waiting periods imposed in connection with such Consents have not
expired as of the date of the Original Termination Date, neither Party
shall have the right to terminate this Agreement and the Original
Termination Date shall automatically be extended (the "Automatic
Extension") to a date 10 days after the date any waiting period imposed in
connection with any such Consent shall expire; and (ii) provided further,
that if all required Consents of the OTS have not been obtained by the
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Original Termination Date, IndyMac may, but is not obligated to, extend
the Termination Date until not later than October 12, 2000, by providing
SGV notice of its election to do so (the "Extension Right") not later than
five days prior to the Original Termination Date (whereupon the
"Termination Date" shall mean such extended date); or
(f) By SGV, if, prior to the adoption of this Agreement by the
stockholders of SGV, the SGV Board of Directors shall have determined in
good faith, based on the advice of outside counsel, that it is necessary
to comply with its fiduciary duties to its stockholders under applicable
Law, to terminate this Agreement in order to enter into an agreement with
respect to or to consummate an Acquisition Proposal that constitutes a
Superior Offer; provided, however, that (i) at least two business days
prior to any such termination, SGV shall, and shall cause its
Representatives to, negotiate with IndyMac to make such adjustments in the
terms and conditions of this Agreement as would enable SGV to proceed with
the transactions contemplated herein on such adjusted terms, and (ii) SGV
shall have tendered to IndyMac payment in full of the amount specified in
Section 10.2(b)(i)(4) or 10.2(b)(ii)(3), as applicable, concurrently with
delivery of notice of termination pursuant to this Section 10.1(f); or
(g) By IndyMac, in the event that the Board of Directors of SGV shall
have (i) resolved not to reaffirm the Merger, or (ii) affirmed,
recommended, or authorized entering into any other Acquisition Proposal or
other transaction involving a merger, share exchange, consolidation, or
transfer of substantially all of the Assets of SGV; or
(h) By IndyMac, in the event: (i) there shall occur a Deposit
Shortfall; (ii) there shall exist a Book Net Worth Shortfall; (iii) there
shall occur a Regulatory Ratings Decline; (iv) the Per Share Purchase
Price determined before giving effect to the Extension Adjustment, if any,
would be less than $22.50 but for the provisions of Section 3.1(b)(ii)(1);
or (v) SGV fails to comply with the provisions of Section 8.9.
10.2 Termination Fees.
(a) Notwithstanding the provisions of Section 11.2,
(i) IndyMac shall promptly pay to SGV a total of $1 million, if
this Agreement is terminated:
(1) by SGV pursuant to any of Sections 10.1(a), 10.1(b), or
10.1(c) (in either case, other than on the basis of a willful,
uncured breach of this Agreement by IndyMac); or
(2) by either Party pursuant to Section 10.1(d)(ii) (as a
result of the failure of IndyMac's stockholders to approve the
Merger); and
(ii) IndyMac shall promptly pay to SGV a total of $3 million if
this Agreement is terminated:
(1) by SGV pursuant to Section 10.1(b) or 10.1(c) (but, in
either case, only on the basis of a willful, uncured breach of
this Agreement by IndyMac); or
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(2) by either Party pursuant to Section 10.1(d)(i) (but only
if the Consent of the OTS shall have been denied by final
nonappealable action) or Section 10.1(e) (but only if (x) the
Consent of the OTS shall not have been received on or before the
Termination Date other than by reason of the occurrence of a SGV
Material Adverse Effect or Regulatory Ratings Decline, or
(y) IndyMac shall be entitled to, but elects not to, exercise its
Extension Right and on the Original Termination Date the condition
provided in Section 9.3(d) was satisfied.
(b) Notwithstanding the provisions of Section 11.2,
(i) SGV shall promptly pay to IndyMac a total of $1 million, if
this Agreement is terminated:
(1) by either Party pursuant to Section 10.1(d)(ii) (as a
result of the failure of SGV's stockholders to approve the
Merger); or
(2) by IndyMac pursuant to Section 10.1(h); or
(3) by IndyMac, up to and including 30 days after the date of
this Agreement, pursuant to Section 10.1(g); or
(4) by SGV, up to and including 30 days after the date of this
Agreement, pursuant to Section 10.1(f); and
(ii) SGV shall promptly pay to IndyMac a total of $3 million, if
this Agreement is terminated:
(1) by IndyMac pursuant to Section 10.1(b) or 10.1(c) (but, in
either case, only on the basis of a willful, uncured breach of
this Agreement by SGV); or
(2) by IndyMac, more than 30 days after the date of this
Agreement, pursuant to Section 10.1(g); or
(3) by SGV, more than 30 days after the date of this
Agreement, pursuant to Section 10.1(f).
(c) The Parties acknowledge that the loss to either Party resulting
from breach of this Agreement by the other Party or other failure of the
Merger to be consummated is not susceptible of a ready measurement and,
therefore, that the payments provided in this Section 10.2 are intended by
the Parties to constitute liquidated damages for any breach by a Party of
the terms of this Agreement, and not a penalty, and the exclusive remedy
after termination of this Agreement. Upon payment of any such sum required
by this Section 10.2 (and, with the exception of the payment provided in
Section 11.2(b), only one such payment shall be payable by any Party in
connection with termination of this Agreement), the Party receiving such
payment shall have no further rights or claims against the other Party.
10.3 Effect of Termination. In the event of the termination and abandonment
of this Agreement pursuant to Section 10.1, this Agreement shall become void
and have no effect,
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except that the provisions of this Section 10.3 and Article 11 and Sections
8.6(b) and 10.2 shall survive any such termination and abandonment.
10.4 Non-Survival of Representations and Covenants. The respective
representations, warranties, obligations, covenants, and agreements of the
Parties shall not survive the Effective Time except this Section 10.4 and
Articles 1, 2, 3, 4 and 11 and Section 8.11.
ARTICLE 11
Miscellaneous
11.1 Definitions.
(a) Except as otherwise provided herein, the capitalized terms set
forth below shall have the following meanings:
"Acquisition Proposal" with respect to a Party shall mean any
tender offer or exchange offer or any proposal for a merger,
acquisition of all of the stock or assets of, or other business
combination involving the acquisition of SGV or any of its
Subsidiaries or the acquisition of a substantial equity interest in,
or a substantial portion of the assets of, SGV or any of its
Subsidiaries.
"Affiliate" of a Person shall mean (i) any other Person directly,
or indirectly through one or more intermediaries, controlling,
controlled by, or under common control with such Person, (ii) any
officer, director, partner, employer, or direct or indirect beneficial
owner of any 10% or greater equity or voting interest of such Person,
or (iii) any other Person for which a Person described in clause
(ii) acts in any such capacity.
"Agreement" shall mean this Agreement and Plan of Merger ,
including the Exhibits delivered pursuant hereto and incorporated
herein by reference.
"Assets" of a Person shall mean all of the assets, properties,
businesses, and rights of such Person of every kind, nature,
character, and description, whether real, personal or mixed, tangible
or intangible, accrued or contingent, or otherwise relating to or
utilized in such Person's business, directly or indirectly, in whole
or in part, whether or not carried on the books and records of such
Person, and whether or not owned in the name of such Person or any
Affiliate of such Person and wherever located.
"Baseline Core Deposits" shall mean an amount equal to the sum of
(i) Core Deposits of First Federal as of May 31, 1999, plus (ii) Core
Deposits assumed by First Federal on the date of consummation of the
Citibank Branch Acquisition, if consummated.
"Baseline Deposits" shall mean an amount equal to the sum of (i)
Deposits of First Federal as of May 31, 1999, plus (ii) Deposits
assumed by First Federal on the date of consummation of the Citibank
Branch Acquisition, if consummated.
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"Book Net Worth Shortfall" shall exist if either (i) Final Pre-
Closing Book Net Worth shall be less than Baseline Book Net Worth, or
(ii) Baseline Book Net Worth shall be less than consolidated
stockholders' equity of SGV as of March 31, 1999, as reflected in
SGV's Quarterly Report on Form 10-Q for the quarter ended March 31,
1999, as filed with the SEC prior to the date of this Agreement.
"Certificate of Merger" shall mean the Certificate of Merger to be
executed by SGV and filed with the Secretary of State of the State of
Delaware relating to the Merger as contemplated by Section 1.1.
"Closing Date" shall mean the date on which the Closing occurs.
"Confidentiality Agreements" shall mean those certain
Confidentiality Agreements between SGV and IndyMac.
"Consent" shall mean any consent, approval, authorization,
clearance, exemption, waiver, or similar affirmation by any Person
pursuant to any Contract, Law, Order, or Permit.
"Contract" shall mean any written or oral agreement, arrangement,
authorization, commitment, contract, indenture, instrument, lease,
obligation, plan, practice, restriction, understanding, or undertaking
of any kind or character, or other document to which any Person is a
party or that is binding on any Person or its capital stock, Assets,
or business.
"Core Deposits" shall mean all Deposits other than time deposits.
"Default" shall mean (i) any breach or violation of, default
under, contravention of, or conflict with, any Contract, Law, Order,
or Permit, (ii) any occurrence of any event that with the passage of
time or the giving of notice or both would constitute a breach or
violation of, default under, contravention of, or conflict with, any
Contract, Law, Order, or Permit, or (iii) any occurrence of any event
that with or without the passage of time or the giving of notice would
give rise to a right of any Person to exercise any remedy or obtain
any relief under, terminate or revoke, suspend, cancel, or modify or
change the current terms of, or renegotiate, or to accelerate the
maturity or performance of, or to increase or impose any Liability
under, any Contract, Law, Order, or Permit.
"Deposit Shortfall" shall mean either (i) a reduction in total
Deposits to an amount that is less than 85% of Baseline Deposits as of
May 31, 1999, or (ii) a reduction in total Core Deposits to an amount
that is less than 85% of Baseline Core Deposits as of May 31, 1999, in
each case excluding from the calculation of Deposits or Core Deposits,
any Deposits resulting from the implementation of the provisions of
Section 8.10(d).
"Deposits" means the aggregate outstanding balance of all deposit
accounts at a SGV Entity, or at the Citibank, Federal Savings Bank
branch to be acquired, including negotiated order of withdrawal
accounts, but excluding accounts that are
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held by a SGV under or pursuant to any judgment, decree, or order by
any court or subject to any legal restraints or subject to any Lien,
or accounts that are dormant or subject to escheat under the laws of
the State of California.
"DGCL" shall mean the General Corporation Law of the State of
Delaware.
"Environmental Laws" shall mean all Laws relating to pollution or
protection of human health or the environment (including ambient air,
surface water, ground water, land surface, or subsurface strata) and
which are administered, interpreted, or enforced by the United States
Environmental Protection Agency and state and local agencies with
jurisdiction over, and including common law in respect of, pollution
or protection of the environment, including the Comprehensive
Environmental Response Compensation and Liability Act, as amended, 42
U.S.C. 9601 et seq. ("CERCLA"), the Resource Conservation and Recovery
Act, as amended, 42 U.S.C. 6901 et seq. ("RCRA"), and other Laws
relating to emissions, discharges, releases, or threatened releases of
any Hazardous Material, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal,
transport, or handling of any Hazardous Material.
"Equity Rights" shall mean all arrangements, calls, commitments,
Contracts, options, rights to subscribe to, scrip, understandings,
warrants, or other binding obligations of any character whatsoever
relating to, or securities or rights convertible into or exchangeable
for, shares of the capital stock of a Person or by which a Person is
or may be bound to issue additional shares of its capital stock or
other Equity Rights.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.
"ERISA Affiliate" shall mean any Person that is considered one
employer with SGV under Section 4001 of ERISA or Section 414 of the
Internal Revenue Code or Section 302 of ERISA (whether or not waived).
"Exhibits" 1 and 2, inclusive, shall mean the Exhibits so marked,
copies of which are attached to this Agreement. Such Exhibits are
hereby incorporated by reference herein and made a part hereof, and
may be referred to in this Agreement and any other related instrument
or document without being attached hereto.
"First Federal" shall mean First Federal Savings and Loan
Association of San Gabriel Valley, a Federal savings association and a
SGV Subsidiary.
"GAAP" shall mean generally accepted accounting principles,
consistently applied during the periods involved.
"Hazardous Material" shall mean (i) any hazardous substance,
hazardous material, hazardous waste, regulated substance, or toxic
substance (as those terms are defined by any applicable Environmental
Laws), and (ii) any chemicals, pollutants, contaminants, petroleum,
petroleum products, or oil (and specifically shall include asbestos
requiring abatement, removal, or encapsulation pursuant to the
requirements of governmental authorities and any polychlorinated
biphenyls).
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"HOLA" shall mean the Home Owners' Loan Act of 1933, as amended.
"IndyMac Common Stock" shall mean the $.01 par value common stock
of IndyMac.
"IndyMac Entities" shall mean, collectively, IndyMac and all
IndyMac Subsidiaries and Affiliates.
"IndyMac 401(k) Plan" shall mean the IndyMac/IndyMac Mortgage
Holdings, Inc. 401(k) Plan.
"IndyMac Material Adverse Effect" shall mean an event, change or
occurrence which, individually or together with any other event,
change or occurrence, has a material adverse impact on the ability of
IndyMac to perform its obligations under this Agreement or to
consummate the Merger or the other transactions contemplated by this
Agreement.
"IndyMac Merger Subsidiary" shall mean the wholly-owned subsidiary
of IndyMac to be organized to effect the Merger under the laws of the
State of Delaware.
"IndyMac Merger Subsidiary Common Stock" shall mean the $.01 par
value common stock of IndyMac Merger Subsidiary.
"IndyMac Stock Plans" shall mean the existing stock option and
other stock-based compensation plans of IndyMac designated as follows:
(i) 1994 Stock Incentive Plan; (ii) 1996 Stock Incentive Plan; (iii)
1998 Stock Incentive Plan; and (iv) 1985 Stock Option Plan.
"IndyMac Subsidiaries" shall mean the Subsidiaries of IndyMac.
"Intellectual Property" shall mean copyrights, patents,
trademarks, service marks, service names, trade names, applications
therefor, technology rights and licenses, computer software (including
any source or object codes therefor or documentation relating
thereto), trade secrets, franchises, know-how, inventions, and other
intellectual property rights.
"Internal Revenue Code" shall mean the Internal Revenue Code of
1986, as amended, and the rules and regulations promulgated
thereunder.
"Joint Proxy Statement" shall mean the proxy statement used by
IndyMac and SGV to solicit the approval of their respective
stockholders of the transactions contemplated by this Agreement.
"Knowledge" as used with respect to a Person (including references
to such Person being aware of a particular matter) shall mean the
personal knowledge after due inquiry of those facts that are known or
should reasonably have been known after due inquiry by the chairman,
president, chief financial officer, chief accounting officer, chief
operating officer, chief credit officer, or any senior, executive or
other vice president of such Person and the knowledge of any such
persons obtained or which would have been obtained from a reasonable
investigation.
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"Law" shall mean any code, law (including common law), ordinance,
regulation, reporting or licensing requirement, rule, or statute
applicable to a Person or its Assets, Liabilities, or business,
including those promulgated, interpreted or enforced by any Regulatory
Authority, and specifically shall include the Real Estate Settlement
Practices Act, the Truth-in-Lending Act, the Equal Credit Opportunity
Act, the Electronic Funds Transfer Act, the Fair Housing Act, the Fair
Credit Reporting Act, the Fair Debt Collection Practices Act, the
Truth in Savings Act, and the Home Mortgage Disclosure Act.
"Liability" shall mean any direct or indirect, primary or
secondary, liability, indebtedness, obligation, penalty, cost or
expense (including costs of investigation, collection and defense),
claim, deficiency, guaranty or endorsement of or by any Person (other
than endorsements of notes, bills, checks, and drafts presented for
collection or deposit in the ordinary course of business) of any type,
whether accrued, absolute or contingent, liquidated or unliquidated,
matured or unmatured, or otherwise.
"Lien" shall mean any conditional sale agreement, default of
title, easement, encroachment, encumbrance, hypothecation,
infringement, lien, mortgage, pledge, reservation, restriction,
security interest, title retention, or other security arrangement, or
any adverse right or interest, charge, or claim of any nature
whatsoever of, on, or with respect to any property or property
interest, other than (i) Liens for current property Taxes not yet due
and payable, (ii) for depository institution Subsidiaries of a Party,
pledges to secure deposits, and other Liens incurred in the ordinary
course of the banking business, and (iii) Liens which do not
materially impair the use of or title to the Assets subject to such
Lien.
"Litigation" shall mean any action, arbitration, cause of action,
claim, complaint, criminal prosecution, governmental or other
examination or investigation, hearing, administrative or other
proceeding relating to or affecting a Party, its business, its Assets
(including Contracts related to it), or the transactions contemplated
by this Agreement, but shall not include regular, periodic
examinations of depository institutions and their Affiliates by
Regulatory Authorities.
"material" for purposes of this Agreement shall be determined in
light of the facts and circumstances of the matter and Party in
question; provided that any specific monetary amount stated in this
Agreement shall determine materiality in that instance.
"Nasdaq National Market" shall mean the National Market System of
the Nasdaq Stock Market, Inc.
"NPV" shall mean Net Portfolio Value.
"1933 Act" shall mean the Securities Act of 1933, as amended.
"1934 Act" shall mean the Securities Exchange Act of 1934, as
amended.
"NYSE" shall mean the New York Stock Exchange, Inc.
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"Operating Property" shall mean any property owned, leased, or
operated by the Party in question or by any of its Subsidiaries or in
which such Party or Subsidiary holds a security interest or other
interest (including an interest in a fiduciary capacity), and, where
required by the context, includes the owner or operator of such
property, but only with respect to such property.
"Order" shall mean any administrative decision or award, decree,
injunction, judgment, order, quasi-judicial decision or award, ruling,
or writ of any federal, state, local, or foreign or other court,
arbitrator, mediator, tribunal, administrative agency, or Regulatory
Authority.
"Participation Facility" shall mean any facility or property in
which the Party in question or any of its Subsidiaries participates in
the management and, where required by the context, said term means the
owner or operator of such facility or property, but only with respect
to such facility or property.
"Party" shall mean either IndyMac or SGV, and "Parties" shall mean
both IndyMac and SGV.
"Permit" shall mean any federal, state, local, and foreign
governmental approval, authorization, certificate, easement, filing,
franchise, license, notice, permit, or right to which any Person is a
party or that is or may be binding upon or inure to the benefit of any
Person or its securities, Assets, or business.
"Person" shall mean a natural person or any legal, commercial or
governmental entity, such as, but not limited to, a corporation,
general partnership, joint venture, limited partnership, limited
liability company, trust, business association, group acting in
concert, or any person acting in a representative capacity.
"Plan of Merger" shall mean the plan of merger providing for the
Merger substantially in the form of Exhibit 2.
"Regulatory Authorities" shall mean, collectively, the SEC, the
NYSE, the Nasdaq National Market, the Federal Trade Commission, the
United States Department of Justice, the Board of the Governors of the
Federal Reserve System, the Office of Thrift Supervision (including
its predecessor, the Federal Home Loan Bank Board, the "OTS"), the
Federal Deposit Insurance Corporation, and all other federal, state,
county, local, or other governmental or regulatory agencies,
authorities (including self-regulatory authorities),
instrumentalities, commissions, boards or bodies having jurisdiction
over the Parties and their respective Subsidiaries.
"Regulatory Ratings Decline" shall mean any reduction in the
CAMEL, CRA, or compliance ratings of any SGV Entity below the
respective ratings as of May 31, 1999, that is not primarily
attributable to actions taken by SGV pursuant to Article 7; provided,
that a Regulatory Ratings Decline shall not be deemed to be continuing
if IndyMac elects not to terminate this Agreement pursuant to Section
10.1(h) within 60 days of receiving notice from SGV of the receipt of
a written
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report by SGV from the OTS reflecting a Regulatory Ratings Decline
based on an examination of SGV or First Federal that either SGV or
First Federal has received written or oral notice of such
examination's commencement prior to the date of this Agreement.
"Representative" shall mean any investment banker, financial
advisor, attorney, accountant, consultant, or other agent or
representative engaged by a Person.
"SEC" shall mean the United States Securities and Exchange
Commission.
"SEC Documents" shall mean all forms, proxy statements,
registration statements, reports, schedules, and other documents
filed, or required to be filed, by a Party or any of its Subsidiaries
with any Regulatory Authority pursuant to the Securities Laws.
"Securities Laws" shall mean the 1933 Act, the 1934 Act, the
Investment Company Act of 1940, as amended, the Investment Advisors
Act of 1940, as amended, the Trust Indenture Act of 1939, as amended,
and the rules and regulations of any Regulatory Authority promulgated
thereunder.
"SGV Common Stock" shall mean the $.01 par value common stock of
SGV.
"SGV Disclosure Memorandum" shall mean the written information
entitled "SGV Bancorp, Inc. Disclosure Memorandum" delivered prior to
the date of this Agreement to IndyMac describing in reasonable detail
the matters contained therein and, with respect to each disclosure
made therein, specifically referencing each Section of this Agreement
under which such disclosure is being made. Information disclosed with
respect to one Section shall not be deemed to be disclosed for
purposes of any other Section not specifically referenced with respect
thereto.
"SGV Entities" shall mean, collectively, SGV and all SGV
Subsidiaries.
"SGV Financial Statements" shall mean (i) the consolidated
statements of condition (including related notes and schedules, if
any) of SGV as of March 31, 1999, and as of June 30, 1998 and 1997,
and the related statements of income, changes in stockholders' equity,
and cash flows (including related notes and schedules, if any) for the
nine months ended March 31, 1999, and for each of the three fiscal
years ended June 30, 1998, 1997 and 1996, as filed by SGV in SEC
Documents, and (ii) the consolidated statements of condition of SGV
(including related notes and schedules, if any) and related statements
of income, changes in stockholders' equity, and cash flows (including
related notes and schedules, if any) included in SEC Documents filed
with respect to periods ended subsequent to March 31, 1999.
"SGV Material Adverse Effect" shall mean an event, change or
occurrence which, individually or together with any other event,
change or occurrence, has a material adverse impact on (i) the
financial condition, business, or results of
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operations of SGV and its Subsidiaries, taken as a whole, or (ii) the
ability of SGV to perform its obligations under this Agreement or to
consummate the Merger or the other transactions contemplated by this
Agreement on a timely basis, provided that "SGV Material Adverse
Effect" shall not be deemed to include the impact of actions and
omissions of SGV (or any of its Subsidiaries) taken as required under
this Agreement or with the prior informed written Consent of IndyMac
in contemplation of the transactions contemplated hereby.
"SGV May 31 Financial Statements" shall mean (i) the unaudited
consolidated statement of condition of SGV as of May 31, 1999, and
(ii) the related unaudited statement of income for the 11 months ended
May 31, 1999.
"SGV Preferred Stock" shall mean the $.01 par value preferred
stock of SGV.
"SGV Subsidiaries" shall mean the Subsidiaries of SGV, which shall
include the SGV Subsidiaries described in Section 6.4.
"Stockholders' Meetings" shall mean the respective meetings of the
stockholders of IndyMac and SGV to be held pursuant to Section 8.1,
including any adjournment or adjournments thereof.
"Subsidiaries" shall mean all those corporations, associations, or
other business entities of which the entity in question either (i)
owns or controls 50% or more of the outstanding equity securities
either directly or through an unbroken chain of entities as to each of
which 50% or more of the outstanding equity securities is owned
directly or indirectly by its parent (provided, there shall not be
included any such entity the equity securities of which are owned or
controlled in a fiduciary capacity), (ii) in the case of partnerships,
serves as a general partner, (iii) in the case of a limited liability
company, serves as a managing member, or (iv) otherwise has the
ability to elect a majority of the directors, trustees or managing
members thereof.
"Superior Proposal" means any written Acquisition Proposal made by
a Person other than IndyMac (i) which is for (1) a merger,
reorganization, consolidation, share exchange, business combination,
recapitalization, liquidation, dissolution, share purchase, or similar
transaction involving SGV as a result of which either (x) SGV's
stockholders prior to such transaction (by virtue of their ownership
of shares of SGV Common Stock) in the aggregate cease to own at least
75% of the voting securities of the entity surviving or resulting from
such transaction (or the ultimate parent entity thereof) or (y) the
individuals composing the Board of Directors of SGV prior to such
transaction do not constitute a majority of the board of directors of
such ultimate parent entity, (2) a sale, lease, exchange, transfer, or
other disposition of at least 75% of the Assets of SGV and its
Subsidiaries, taken as a whole, in a single transaction or a series of
related transactions, or (3) the acquisition, directly or indirectly,
by a Person of beneficial ownership of 25% or more of the common stock
of SGV whether by merger, consolidation, share exchange, business
combination, tender or exchange offer or
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otherwise, and (ii) which is otherwise on terms which the Board of
Directors of SGV in good faith concludes (after consultation with its
financial advisors and outside counsel), taking into account, among
other things, all legal, financial, regulatory and other aspects of
the proposal and the Person making the proposal, (1) would, if
consummated, result in a transaction that is more favorable to its
stockholders (in their capacities as stockholders), from a financial
point of view, than the transactions contemplated by this Agreement
(after giving effect to the provisions of Section 10.2) and (2) is
reasonably capable of being completed.
"Tax" or "Taxes" shall mean any federal, state, county, local, or
foreign taxes, charges, fees, levies, imposts, duties, or other
assessments, including income, gross receipts, excise, employment,
sales, use, transfer, license, payroll, franchise, severance, stamp,
occupation, windfall profits, environmental, federal highway use,
commercial rent, customs duties, capital stock, paid-up capital,
profits, withholding, Social Security, single business and
unemployment, disability, real property, personal property,
registration, ad valorem, value added, alternative or add-on minimum,
estimated, or other tax or governmental fee of any kind whatsoever,
imposes or required to be withheld by the United States or any state,
county, local, or foreign government or subdivision or agency thereof,
including any interest, penalties, and additions imposed thereon or
with respect thereto.
"Tax Return" shall mean any report, return, information return, or
other information required to be supplied to a taxing authority in
connection with Taxes, including any return of an affiliated or
combined or unitary group that includes a Party or its Subsidiaries.
(b) The terms set forth below shall have the meanings ascribed thereto in
the referenced sections:
<TABLE>
<S> <C>
Allowance................ Section 6.8
Automatic Adjustment..... Section 10.1(e)(i)
Baseline Book Net Worth.. Section 3.4(e)
Baseline NPV............. Section 3.4(a)
Calculations............. Section 3.4(a)
Citibank Branch
Acquisition............. Section 6.18
Citibank Branch
Acquisition Agreement... Section 6.18
Closing.................. Section 1.2
Continuing Employees..... Section 8.10(a)
Deposits................. Section 6.18
Disputed Amounts......... Section 3.4(c)
Effective Time........... Section 1.3
Exchange Fund............ Section 4.1(a)
Extension Adjustment..... Section 3.1(c)
Extension Fee............ Section 11.2(b)
Extension Right.......... Section 10.1(e)(ii)
Final Pre-Closing Book
Net Worth............... Section 3.4(e)
Final Pre-Closing NPV.... Section 3.4(e)
Freddie Mac.............. Section 6.21
</TABLE>
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<TABLE>
<S> <C>
Indemnified Party........ Section 8.11(a)
IndyMac SEC Reports...... Section 5.3
March Sendaro Model...... Section 3.4(a)
Maximum Amount........... Section 8.11(b)
MBS...................... Section 7.3(a)
Merger................... Section 1.1
Net Deal Expenses........ Section 3.4(a)
NPV Adjustment........... Section 3.1(c)
Option Cancellation
Payment................. Section 4.2(a)
Original Termination
Date.................... Section 10.1(e)
Outstanding Share
Equivalents............. Section 3.1(c)
Parent Book Net Worth.... Section 3.4(a)
Paying Agent............. Section 4.1(a)
Per Share NPV Adjustment
Amount.................. Section 3.4(e)
Per Share Purchase
Price................... Section 3.1(c)
Pre-Closing Book Net
Worth................... Section 3.4(a)
Pre-Closing NPV.......... Section 3.4(a)
SFR Loans................ Section 7.3
SGV 401(k) Plan.......... Section 8.10(c)
SGV Benefit Plans........ Section 6.15
SGV Certificates......... Section 4.1(b)
SGV Compensation
Contracts............... Section 8.10(a)
SGV Contracts............ Section 6.16
SGV ERISA Plan........... Section 6.15(a)
SGV Pension Plan......... Section 6.15(a)
SGV Restricted Share..... Section 4.2(b)
SGV SEC Reports.......... Section 6.5(a)
SGV Options.............. Section 4.2(a)
SGV Stock Plans.......... Section 4.2(a)
Surviving Corporation.... Section 1.1
Takeover Laws............ Section 6.25
Termination Date......... Section 10.1(e)(ii)
Voting Debt.............. Section 6.3(b)
Year 2000 Issues......... Section 5.10
</TABLE>
(c) Any singular term in this Agreement shall be deemed to include the
plural, and any plural term the singular. Whenever the words "include,"
"includes" or "including" are used in this Agreement, they shall be deemed
followed by the words "without limitation."
11.2 Expenses.
(a) Except as otherwise provided in this Section 11.2, each of the
Parties shall bear and pay all direct costs and expenses incurred by it or
on its behalf in connection with the transactions contemplated hereunder,
including fees and expenses of its own financial or other consultants,
investment bankers, accountants, and counsel, except that IndyMac shall
pay for the filing, application fees, and printing fees of each of the
Parties.
(b) Notwithstanding the foregoing, in the event that IndyMac exercises
its Extension Right, IndyMac shall promptly pay SGV $1 million (the
"Extension Fee"),
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provided that SGV acknowledges and agrees that if this Agreement is
extended beyond the Original Termination Date as a result of an "Automatic
Extension," no Extension Fee shall be due and payable by IndyMac.
11.3 Brokers and Finders. Except for Carpenter & Company, Banc of America
Securities LLC and Merrill Lynch, Inc. as to IndyMac and except for Sandler
O'Neill & Partners, L.P. as to SGV (whose fee for its services in connection
with the Merger is set forth in Section 11.3 of the SGV Disclosure Memorandum),
each of the Parties represents and warrants that neither it nor any of its
officers, directors, employees, or Affiliates has employed any broker or finder
or incurred any Liability for any financial advisory fees, investment bankers'
fees, brokerage fees, commissions, or finders' fees in connection with this
Agreement or the transactions contemplated hereby. In the event of a claim by
any broker or finder based upon his or its representing or being retained by or
allegedly representing or being retained by IndyMac or by SGV, each of IndyMac
and SGV, as the case may be, agrees to indemnify and hold the other Party
harmless of and from any Liability in respect of any such claim.
11.4 Entire Agreement. Except as otherwise expressly provided herein, this
Agreement (including the documents and instruments referred to herein)
constitutes the entire agreement between the Parties with respect to the
transactions contemplated hereunder and supersedes all prior arrangements or
understandings with respect thereto, written or oral (including all provisions
of the Confidentiality Agreements other than in the case of Section 8.5(b), the
confidentiality provisions of the Confidentiality Agreement). Nothing in this
Agreement expressed or implied, is intended to confer upon any Person, other
than the Parties or their respective successors, any rights, remedies,
obligations, or liabilities under or by reason of this Agreement, other than as
provided in Section 8.11.
11.5 Amendments. To the extent permitted by Law, this Agreement may be
amended by a subsequent writing signed by each of the Parties upon the approval
of each of the Parties, whether before or after stockholder approval of this
Agreement has been obtained; provided, that after any such approval by the
holders of IndyMac Common Stock or SGV Common Stock, there shall be made no
amendment that pursuant to Section 251 of the DGCL requires further approval by
such stockholders without the further approval of such stockholders.
11.6 Waivers.
(a) Prior to or at the Effective Time, SGV, acting through its Board
of Directors, chief executive officer, or other authorized officer, shall
have the right to waive any Default in the performance of any term of this
Agreement by IndyMac, to waive or extend the time for the compliance or
fulfillment by IndyMac of any and all of its obligations under this
Agreement, and to waive any or all of the conditions precedent to the
obligations of SGV under this Agreement, except any condition which, if
not satisfied, would result in the violation of any Law. No such waiver
shall be effective unless in writing signed by the chief executive officer
or other authorized officer of SGV.
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(b) Prior to or at the Effective Time, IndyMac, acting through its
Board of Directors, chief executive officer or chief operating officer,
shall have the right to waive any Default in the performance of any term
of this Agreement by SGV, to waive or extend the time for the compliance
or fulfillment by SGV of any and all of its obligations under this
Agreement, and to waive any or all of the conditions precedent to the
obligations of IndyMac under this Agreement, except any condition which,
if not satisfied, would result in the violation of any Law. No such waiver
shall be effective unless in writing signed by a duly authorized officer
of IndyMac.
(c) The failure of any Party at any time or times to require
performance of any provision hereof shall in no manner affect the right of
such Party at a later time to enforce the same or any other provision of
this Agreement. No waiver of any condition or of the breach of any term
contained in this Agreement in one or more instances shall be deemed to be
or construed as a further or continuing waiver of such condition or breach
or a waiver of any other condition or of the breach of any other term of
this Agreement. Receipt of information pursuant to the terms of this
Agreement by one Party from the other Party, shall not be deemed to be a
waiver by the receiving Party of any rights under this Agreement
11.7 Assignment. Except as expressly contemplated hereby, neither this
Agreement nor any of the rights, interests, or obligations hereunder shall be
assigned by any Party hereto (whether by operation of Law or otherwise) without
the prior written consent of the other Party. Subject to the preceding
sentence, this Agreement will be binding upon, inure to the benefit of, and be
enforceable by the Parties and their respective successors and assigns.
11.8 Notices. All notices or other communications which are required or
permitted hereunder shall be in writing and sufficient if delivered by hand, by
facsimile transmission, by registered or certified mail, postage pre-paid, or
by courier or overnight carrier, to the persons at the addresses set forth
below (or at such other address as may be provided hereunder), and shall be
deemed to have been delivered as of the date so delivered:
IndyMac: IndyMac Mortgage Holdings, Inc.
155 North Lake Avenue
Pasadena, California 91101-7211
Telecopy Number: (626) 535-5899
Attention: Michael W. Perry
Chief Executive Officer and
Melissa K. Gerard
General Counsel
Copy to Counsel: Alston & Bird LLP
601 Pennsylvania Avenue, N.W.
North Building, 11th Floor
Washington, D.C. 20004
Telecopy Number: (202) 756-3333
Attention: Frank M. Conner III
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SGV: SGV Bancorp, Inc.
225 North Barranca Street
West Covina, California 91791
Telecopy Number: (626) 331-4975
Attention: Barrett G. Andersen
President and Chief Executive Officer
Copy to Counsel: Muldoon, Murphy & Faucette LLP
5101 Wisconsin Avenue, N.W.
Washington, D.C. 20016
Telecopy Number: (202) 966-9409
Attention: Lori M. Beresford
11.9 Governing Law. This Agreement shall be governed by and construed in
accordance with the Laws of the State of Delaware, without regard to any
applicable conflicts of law provisions thereof.
11.10 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
11.11 Captions; Articles and Sections. The captions contained in this
Agreement are for reference purposes only and are not part of this Agreement.
Unless otherwise indicated, all references to particular Articles or Sections
shall mean and refer to the referenced Articles and Sections of this Agreement.
11.12 Interpretations. Neither this Agreement nor any uncertainty or
ambiguity herein shall be construed or resolved against any party, whether
under any rule of construction or otherwise. No party to this Agreement shall
be considered the draftsman. The parties acknowledge and agree that this
Agreement has been reviewed, negotiated, and accepted by all parties and their
attorneys and shall be construed and interpreted according to the ordinary
meaning of the words used so as fairly to accomplish the purposes and
intentions of all parties hereto.
11.13 Enforcement of Agreement. The Parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
was not performed in accordance with its specific terms or was otherwise
breached. It is accordingly agreed that the Parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions hereof in any court of the United States
or any state having jurisdiction, this being in addition to any other remedy to
which they are entitled at law or in equity.
11.14 Severability. Any term or provision of this Agreement which is
invalid, illegal, or unenforceable by any Law or public policy in any
jurisdiction shall, as to that jurisdiction, be ineffective to the extent of
such invalidity, illegality, or unenforceability without rendering invalid or
unenforceable the remaining terms and provisions of this Agreement or affecting
the validity or enforceability of any of the terms or provisions of this
Agreement in any other jurisdiction. If any provision of this Agreement is so
broad as to be unenforceable, the provision shall be interpreted to be only so
broad as is enforceable.
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IN WITNESS WHEREOF, each of the Parties has caused this Agreement to be
executed on its behalf by its duly authorized officers as of the day and year
first above written.
ATTEST: SGV BANCORP, INC.
/s/ Edie Beachboard /s/ Barrett G. Andersen
By: _________________________________ By: _________________________________
Edie Beachboard Barrett G. Andersen
Corporate Secretary President and Chief Executive
Officer
[CORPORATE SEAL]
INDYMAC MORTGAGE HOLDINGS, INC.
ATTEST:
/s/ Michael W. Perry
/s/ Melissa K. Gerard By: _________________________________
By: _________________________________ Michael W. Perry
Melissa K. Gerard Chief Executive Officer
Secretary
[CORPORATE SEAL]
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<PAGE>
APPENDIX B
FORM OF
PLAN OF MERGER
OF
INDYMAC MERGER SUBSIDIARY, INC.
INTO AND WITH
SGV BANCORP, INC.
Pursuant to this Plan of Merger ("Plan of Merger"), IndyMac Merger
Subsidiary, Inc. ("Merger Sub"), a corporation organized and existing under the
laws of the State of Delaware and a wholly-owned subsidiary of IndyMac Mortgage
Holdings, Inc., a corporation organized and existing under the laws of the
State of Delaware ("IndyMac"), shall be merged into and with SGV Bancorp, Inc.,
a corporation organized and existing under the laws of the State of Delaware
("SGV").
ARTICLE 1
Definitions
Except as otherwise provided herein, the capitalized terms set forth below
shall have the following meanings:
1.1 "Affiliate" of a Person shall mean (i) any other Person directly, or
indirectly through one or more intermediaries, controlling, controlled by, or
under common control with such Person, (ii) any officer, director, partner,
employer, or direct or indirect beneficial owner of any 10% or greater equity
or voting interest of such Person, or (iii) any other Person for which a Person
described in clause (ii) acts in any such capacity.
1.2 "Assets" of a Person shall mean all of the assets, properties,
businesses, and rights of such Person of every kind, nature, character, and
description, whether real, personal or mixed, tangible or intangible, accrued
or contingent, or otherwise relating to or utilized in such Person's business,
directly or indirectly, in whole or in part, whether or not carried on the
books and records of such Person, and whether or not owned in the name of such
Person or any Affiliate of such Person and wherever located.
1.3 "Certificate of Merger" shall mean the Certificate of Merger to be
executed by SGV and filed with the Secretary of State of the State of Delaware
relating to the Merger as contemplated by Section 2.1 of this Plan of Merger.
1.4 "DGCL" shall mean the General Corporation Law of the State of Delaware.
1.5 "Effective Time" shall have the meaning set forth in Section 2.2 of
this Plan of Merger.
1.6 "IndyMac Common Stock" shall mean the $.01 par value common stock of
IndyMac.
1.7 "Internal Revenue Code" shall mean the Internal Revenue Code of 1986,
as amended, and the rules and regulations promulgated thereunder.
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1.8 "Law" shall mean any code, law (including common law), ordinance,
regulation, reporting or licensing requirement, rule, or statute applicable to
a Person or its Assets, Liabilities, or business, including those promulgated,
interpreted or enforced by any Regulatory Authority, and specifically shall
include the Real Estate Settlement Practices Act, the Truth-in-Lending Act,
the Equal Credit Opportunity Act, the Electronic Funds Transfer Act, the Fair
Housing Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices
Act, the Truth in Savings Act, and the Home Mortgage Disclosure Act.
1.9 "Liability" shall mean any direct or indirect, primary or secondary,
liability, indebtedness, obligation, penalty, cost or expense (including costs
of investigation, collection and defense), claim, deficiency, guaranty or
endorsement of or by any Person (other than endorsements of notes, bills,
checks, and drafts presented for collection or deposit in the ordinary course
of business) of any type, whether accrued, absolute or contingent, liquidated
or unliquidated, matured or unmatured, or otherwise.
1.10 "Merger Sub Common Stock" shall mean the $.01 par value common stock
of Merger Sub.
1.11 "Merger Agreement" shall mean the Agreement and Plan of Merger, dated
as of July 12, 1999, and amended and restated as of October 25, 1999, by and
between IndyMac and SGV.
1.12 "Paying Agent" shall have the meaning set forth in Section 4.1 of
this Plan of Merger.
1.13 "Person" shall mean a natural person or any legal, commercial or
governmental entity, such as, but not limited to, a corporation, general
partnership, joint venture, limited partnership, limited liability company,
trust, business association, group acting in concert, or any person acting in
a representative capacity.
1.14 "Regulatory Authorities" shall mean, collectively, the Securities and
Exchange Commission, the New York Stock Exchange, the Nasdaq National Market,
the Federal Trade Commission, the United States Department of Justice, the
Board of the Governors of the Federal Reserve System, the Office of Thrift
Supervision (including its predecessor, the Federal Home Loan Bank Board, the
"OTS"), the Federal Deposit Insurance Corporation, and all other federal,
state, county, local, or other governmental or regulatory agencies,
authorities (including self-regulatory authorities), instrumentalities,
commissions, boards or bodies having jurisdiction over the parties and their
respective Subsidiaries.
1.15 "SGV Common Stock" shall mean the $1.00 par value common stock of
SGV.
1.16 "Subsidiaries" shall mean all those corporations, associations, or
other business entities of which the entity in question either (i) owns or
controls 50% or more of the outstanding equity securities either directly or
through an unbroken chain of entities as to each of which 50% or more of the
outstanding equity securities is owned directly or indirectly by its parent
(provided, there shall not be included any such entity the equity securities
of which are owned or controlled in a fiduciary capacity), (ii) in the case of
partnerships, serves as a general partner, (iii) in the case of a limited
liability company,
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serves as a managing member, or (iv) otherwise has the ability to elect a
majority of the directors, trustees or managing members thereof.
1.17 "Surviving Corporation" shall have the meaning set forth in Section
2.1 of this Plan of Merger.
ARTICLE 2
Terms of Merger
2.1 Merger. Subject to the terms and conditions set forth in the Merger
Agreement and this Plan of Merger, at the Effective Time, Merger Sub shall be
merged with and into SGV in accordance with the provisions of Section 251 of
the DGCL and with the effect specified in Section 259 of the DGCL. SGV shall be
the surviving corporation (the "Surviving Corporation") resulting from the
Merger and shall continue to be governed by the Laws of the State of Delaware.
2.2 Effective Time. The Merger and the other transactions contemplated by
this Plan of Merger shall become effective on the date and at the time
specified in the Certificate of Merger reflecting the Merger shall become
effective with the Secretary of State of the State of Delaware (the "Effective
Time").
2.3 Certificate of Incorporation. The Certificate of Incorporation of SGV
shall be the Certificate of Incorporation of the Surviving Corporation until
otherwise amended or repealed.
2.4 Bylaws. The Bylaws of SGV shall be the Bylaws of the Surviving
Corporation until otherwise amended or repealed as provided by Law or by such
Bylaws.
ARTICLE 3
Manner of Converting Shares
3.1 Conversion of Shares. Subject to the provisions of this Article 3, at
the Effective Time, by virtue of the Merger and without any action on the part
of SGV, Merger Sub, IndyMac, or the stockholders of either of the foregoing,
the shares of the constituent corporations shall be converted as follows:
(a) Each share of IndyMac Common Stock issued and outstanding
immediately prior to the Effective Time shall remain issued and
outstanding from and after the Effective Time.
(b) Each share of Merger Sub Common Stock issued and outstanding at
the Effective Time shall cease to be outstanding and shall be converted
into and exchanged for one share of SGV Common Stock.
(c) Each share of SGV Common Stock (excluding shares subject to the
provisions of Sections 3.2 and 3.3) issued and outstanding immediately
prior to the Effective Time shall cease to be outstanding and shall be
converted into and exchanged for the right to receive from IndyMac a cash
payment, without interest thereon, in the
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<PAGE>
amount of $25.00 (subject to the following adjustments, the "Per Share
Purchase Price"); provided that:
(i) the Per Share Purchase Price shall be increased by an amount
equal to the quotient obtained by dividing (1) $1 million by (2) the
Outstanding Share Equivalents, if IndyMac shall exercise the Extension
Right provided in Section 10.1(e)(ii) of the Merger Agreement (the
"Extension Adjustment"); and
(ii) the Per Share Purchase Price shall be increased or decreased,
as applicable, by the Per Share NPV Adjustment Amount, if any,
determined pursuant to Section 3.4 (the "NPV Adjustment"), provided
further, that (1) in the event the Per Share Purchase Price determined
after giving effect to the NPV Adjustment but before giving effect to
the Extension Adjustment, if any, would be less than $22.50, the Per
Share Purchase Price before giving effect to the Extension Adjustment,
if any, shall be $22.50, and (2) in the event the Per Share Purchase
Price determined after giving effect to the NPV Adjustment but before
giving effect to the Extension Adjustment, if any, would be greater
than $27.50, the Per Share Purchase Price before giving effect to the
Extension Adjustment, if any, shall be $27.50.
The "Outstanding Share Equivalents" shall mean the sum of (i) the
number of shares of SGV Common Stock outstanding immediately prior to the
Effective Time plus (ii) the number of shares of SGV Common Stock issuable
upon exercise in full of all SGV Options issued and outstanding
immediately prior to the Effective Time (which number of SGV Options shall
not be greater than the number of SGV Options issued and outstanding at
May 31, 1999).
3.2 Shares Held by IndyMac or SGV. Each of the shares of SGV Common Stock
held by any IndyMac Entity or by any SGV Entity, in each case other than in a
fiduciary capacity or as a result of debts previously contracted, shall be
canceled and retired at the Effective Time and no consideration shall be issued
in exchange therefor.
3.3 Dissenting SGV Stockholders. Any holder of shares of SGV Common Stock
who perfects such holder's dissenters' rights in accordance with and as
contemplated by Section 262 of the DGCL shall be entitled to receive such
payment as may be determined pursuant to such provision of Law; provided, that
no such payment shall be made to any dissenting stockholder unless and until
such dissenting stockholder has complied with the applicable provisions of the
DGCL and surrendered to IndyMac the SGV Certificate or Certificates
representing the shares of SGV Common Stock for which payment is being made. In
the event that after the Effective Time a dissenting stockholder of SGV fails
to perfect, or effectively withdraws or loses, such holder's right to appraisal
and of payment for such holder's shares of SGV Common Stock, IndyMac shall
issue and deliver the consideration to which such holder of shares of SGV
Common Stock is entitled under this Article 3 (without interest) upon surrender
of such holder's SGV Certificate or Certificates.
3.4 Pre-Closing Calculations and NPV Adjustment.
(a) As promptly as practicable, but not later than ten business days, after
the end of the calendar month immediately preceding the Effective Time, SGV
shall prepare and deliver to
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IndyMac a certificate attaching SGV's computation (the "Calculations") of Pre-
Closing NPV and Pre-Closing Book Net Worth. "Pre-Closing NPV" shall be
determined (i) as of the end of the calendar month immediately preceding the
Effective Time, (ii) using the Sendaro model with all assumptions,
methodologies, and line items used by SGV in its March 31, 1999 model (the
"March Sendaro Model") and previously provided to IndyMac (the "Baseline NPV"),
and (iii) by utilizing the unconsolidated common stockholders' equity of SGV,
as reflected in the audited consolidated financial statements of SGV for the
fiscal year ended June 30, 1999 ("Parent Book Net Worth"), as adjusted to (1)
exclude any gain or loss on sales of Assets or securities at the parent level
of SGV (treating for this purpose all Assets comprising Parent Book Net Worth
as if unleveraged and without varying parent level SGV's Asset mix by dollar or
percentage amount from such dollar or percentage amounts at May 31, 1999 and
set forth on Schedule 3.4 of the SGV Disclosure Memorandum), (2) exclude
proceeds resulting from the exercise of SGV Options after May 31, 1999, and (3)
reflect any adjustments in the assumptions utilized in the March Sendaro Model,
(x) as reasonably agreed upon by the Parties and resulting from changes in
market interest rates or Asset category book values, in each case, consistent
with SGV's practices at March 31, 1999, or (y) as a result of adjustments
required by the OTS. "Pre-Closing Book Net Worth" shall mean consolidated
stockholders' equity of SGV as of the end of the calendar month immediately
preceding the Effective Time, as adjusted to (i) exclude (1) any payments by
any SGV Entity of amounts required to be paid under SGV Compensation Contracts
and plans identified in Section 8.11(a) of the SGV Disclosure Memorandum, (2)
any costs incurred by SGV as a direct result of written requests from IndyMac
(including specifically the costs of obtaining the letters contemplated by
Section 9.3(g)), and (3) any proceeds resulting from the exercise of SGV
Options after May 31, 1999, and (ii) include "Net Deal Expenses." For purposes
of this Section 3.4, Net Deal Expenses shall mean the amount by which all
expenses incurred by SGV in connection with effecting the transactions
contemplated by the Merger Agreement (including, but not limited to, legal and
investment banking expenses) exceed the "Pro Rata Portion." For purposes of
this Section 3.4, the "Pro Rata Portion" shall mean the difference between (i)
$1 million and (ii) the product obtained by multiplying (1) $1 million and (2)
the quotient obtained by dividing (x) the number of full months that elapse
between the date of the Merger Agreement and the Closing Date (if such period
is less than 12 months) by (y) 12.
(b) The Calculations shall be deemed final upon the earliest of (i) the
date on which IndyMac and SGV jointly agree that the Calculations are final,
(ii) the fifth business day after delivery of the Calculations pursuant to
Section 3.4(a), if IndyMac has not delivered to SGV prior notice expressing
disagreement with such calculations and setting forth its calculation of Pre-
Closing NPV and Pre-Closing Book Net Worth, and (iii) the date on which all
disputes relating to such statements and calculations between the parties are
resolved in accordance with Section 3.4(c).
(c) If IndyMac shall deliver a notice of disagreement (and shall include
IndyMac's reasons for disagreeing) pursuant to Section 3.4(b), IndyMac and SGV
shall, during the five business days following such delivery, use their
reasonable efforts to reach agreement on the disputed items or amounts (the
"Disputed Amounts"). If, during such period, SGV and
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IndyMac are unable to reach such agreement, they shall promptly thereafter
cause independent accountants of nationally recognized standing reasonably
satisfactory to IndyMac and SGV (who shall not have any material relationship
with IndyMac or SGV), promptly to review the Merger Agreement, the documents
delivered pursuant to Section 3.4(a) and any other documents necessary to
calculate the Disputed Amounts (including all work papers of the parties used
in calculating the Disputed Amounts). In making such calculation, such
independent accountants shall act as experts and not arbitrators and shall
consider only the Disputed Amounts, solely in accordance with the terms of the
Merger Agreement. Such independent accountants shall deliver to IndyMac and
SGV, as promptly as practicable, a report setting forth such calculation. Such
report shall be final and binding upon IndyMac and SGV. The cost of such review
and report shall be borne equally by SGV and IndyMac.
(d) SGV agrees that it will, and will cause its independent accountants and
Subsidiaries to, cooperate and assist in the preparation of the Calculations
and in the conduct of the audits and reviews referred to in this Section 3.4,
including, without limitation, making available, to the extent necessary,
relevant books, records, working papers, analyses, and schedules, and
permitting representatives of IndyMac to consult with the employees, auditors,
actuaries, attorneys, and agents of SGV and its Subsidiaries.
(e) If Final Pre-Closing NPV shall be less than 110% of Baseline Book Net
Worth, the "Per Share NPV Adjustment Amount" shall (i) mean the quotient
obtained by dividing (1) the product of 1.5 and the difference between (x) 110%
of Baseline Book Net Worth and (y) Final Pre-Closing NPV by (2) the Outstanding
Share Equivalents, and (ii) be deducted from the Per Share Purchase Price as
and for the extent provided in Section 3.1(c)(ii). If Final Pre-Closing NPV
shall exceed 125% of Baseline Book Net Worth, the "Per Share NPV Adjustment
Amount" shall (i) mean the quotient obtained by dividing (1) the amount that
Final Pre-Closing NPV exceeds 125% of Baseline Book Net Worth by (2) the
Outstanding Share Equivalents, and (ii) be added to the Per Share Purchase
Price as and for the extent provided in Section 3.1 (c)(ii). "Final Pre-Closing
NPV" means the Pre-Closing NPV (i) as shown in the calculations, if no notice
of disagreement with respect thereto is duly delivered pursuant to Section
3.4(b), or (ii) if such a notice of disagreement is delivered, (A) as agreed by
IndyMac and SGV pursuant to Section 3.4(b) or (B) in the absence of such
agreement, as shown in the independent accountant's calculation delivered
pursuant to Section 3.4(c); provided that, in no event shall Final Pre-Closing
NPV be (i) more than SGV's calculation of Pre-Closing NPV delivered pursuant to
Section 3.4(a), or (ii) less than IndyMac's calculation of Pre-Closing NPV
assuming resolution of all Disputed Amounts, if any, in IndyMac's favor.
"Baseline Book Net Worth" shall mean consolidated common stockholders' equity
of SGV, as reflected in the audited consolidated financial statements of SGV
for the fiscal year ended June 30, 1999 (excluding any proceeds resulting from
the exercise of SGV Options after May 31, 1999).
(f) "Final Pre-Closing Book Net Worth" means the Pre-Closing Book Net Worth
(i) as shown in the calculations, if no notice of disagreement with respect
thereto is duly delivered pursuant to Section 3.4(b), or (ii) if such a notice
of disagreement is delivered, (A) as agreed by IndyMac and SGV pursuant to
Section 3.4(b) or (B) in the absence of such agreement, as
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shown in the independent accountant's calculation delivered pursuant to Section
3.4(c); provided that, in no event shall Final Pre-Closing Book Net Worth be
(i) more than SGV's calculation of Pre-Closing Book Net Worth delivered
pursuant to Section 3.4(a), or (ii) less than IndyMac's calculation of Pre-
Closing Book Net Worth assuming resolution of all Disputed Amounts, if any, in
IndyMac's favor.
(g) Between the date of the Merger Agreement and the Effective Time, SGV
shall provide to IndyMac, as promptly as practicable, but not later than ten
business days, after the end of each quarter (and after the end of each month
(i) if the interest rate on the ten-year U.S. Treasury Notes increases or
decreases by 50 basis points or more from the interest rate on the ten-year
U.S. Treasury Notes as of the date of the Merger Agreement and (ii) if so
requested by IndyMac), a certificate attaching SGV's computation of NPV, with
assumptions, as submitted to the OTS and Pre-Closing NPV as determined in
accordance with Section 3.4(a). IndyMac shall have 20 business days to review
such calculations of NPV and Pre-Closing NPV and to provide a notice of
disagreement (and include IndyMac's reasons for disagreeing) of the NPV and the
Pre-Closing NPV. In the event that IndyMac does not provide SGV with a notice
of disagreement within the time period contemplated by the preceding sentence,
IndyMac shall be deemed, absent error on the part of SGV, to accept the
assumptions, methodologies, and line items used by SGV in the calculation of
the Pre-Closing NPV.
ARTICLE 4
Exchange Procedures
4.1 Exchange of SGV Certificates.
(a) Prior to the Effective Time, IndyMac shall enter into an agreement with
a bank or trust company selected by IndyMac (the "Paying Agent") to serve as
paying agent and exchange agent for the Merger, pursuant to which agreement
IndyMac shall deliver to the Paying Agent prior to the Effective Time, for the
benefit of the holders of shares of SGV Common Stock for exchange in accordance
with this Section 4.1, through the Paying Agent, cash in the aggregate amount
required to make the cash payments specified in Section 3.1(c) in respect of
the SGV Common Stock issued and outstanding immediately prior to the Effective
Time (other than shares to be canceled pursuant to Section 3.2 or as to which
statutory dissenters' rights have been perfected as provided in Section 3.3),
such sums being hereinafter referred to as the "Exchange Fund."
(b) As soon as practicable after the Effective Time, but no later than
three business days following the Effective Time, the IndyMac shall cause the
Paying Agent to mail to each holder of record of a certificate or certificates
which represented shares of SGV Common Stock immediately prior to the Effective
Time (the "SGV Certificates") appropriate transmittal materials and
instructions (which shall specify that delivery shall be effected, and risk of
loss and title to such SGV Certificates shall pass, only upon proper delivery
of such SGV Certificates to the Paying Agent). The SGV Certificate or
Certificates so delivered shall be duly endorsed as the Paying Agent may
require. In the event of a
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transfer of ownership of shares of SGV Common Stock represented by SGV
Certificates that are not registered in the transfer records of SGV, the
consideration provided in Section 3.1 may be issued to a transferee if the SGV
Certificates representing such shares are delivered to the Paying Agent,
accompanied by all documents required to evidence such transfer and by evidence
satisfactory to the Paying Agent that any applicable stock transfer taxes have
been paid. If any SGV Certificate shall have been lost, stolen, mislaid, or
destroyed, upon receipt of (i) an affidavit of that fact from the holder
claiming such SGV Certificate to be lost, mislaid, stolen, or destroyed, (ii)
such bond, security, or indemnity as the Surviving Corporation and the Paying
Agent may reasonably require, and (iii) any other documents necessary to
evidence and effect the bona fide exchange thereof, the Paying Agent shall
issue to such holder the consideration into which the shares represented by
such lost, stolen, mislaid, or destroyed SGV Certificate shall have been
converted. The Paying Agent may establish such other reasonable and customary
rules and procedures in connection with its duties as it may deem appropriate.
After the Effective Time, each holder of shares of SGV Common Stock (other than
shares to be canceled pursuant to Section 3.2 or as to which statutory
dissenters' rights have been perfected as provided in Section 3.3) issued and
outstanding at the Effective Time shall surrender the SGV Certificate or
Certificates representing such shares to the Paying Agent and IndyMac shall
cause the Paying Agent to make payment of the merger consideration provided in
Section 3.1, together with all undelivered dividends or distributions in
respect of such shares (without interest thereon) pursuant to Section 4.1(b)
within five business days of receipt of all required documentation from each
stockholder individually. Neither IndyMac nor the Paying Agent shall be
obligated to deliver the consideration to which any former holder of SGV Common
Stock is entitled as a result of the Merger until such holder surrenders such
holder's SGV Certificate or Certificates for exchange as provided in this
Section 4.1(b). Any other provision of this Agreement notwithstanding, neither
IndyMac, SGV, or the Paying Agent, nor any of the directors, officers, or
employees of any of them, shall be liable to a holder of SGV Common Stock for
any amounts paid or property delivered in good faith to a public official
pursuant to any applicable abandoned property, escheat, or similar Law.
(c) At the Effective Time, the stock transfer books of SGV shall be closed
as to holders of SGV Common Stock immediately prior to the Effective Time and
no transfer of SGV Common Stock by any such holder shall thereafter be made or
recognized. Until surrendered for exchange in accordance with the provisions of
Section 4.1(b), each SGV Certificate theretofore representing shares of SGV
Common Stock (other than shares to be canceled pursuant to Section 3.2 or as to
which statutory dissenters' rights have been perfected as provided in Section
3.3) shall from and after the Effective Time represent for all purposes only
the right to receive the consideration provided in Section 3.1 in exchange
therefor.
(d) The Paying Agent may invest any cash included in the Exchange Fund in a
reasonable and prudent manner, as directed by IndyMac. Any interest and other
income resulting from such investments shall accrue for the benefit of and be
paid to IndyMac promptly on receipt by the Exchange Fund. Any portion of the
Exchange Fund which remains undistributed to the holders of the SGV
Certificates for nine months after the
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Effective Time shall be delivered to IndyMac upon demand, and any holders of
the SGV Certificates who have not theretofore complied with this Section 4.1
shall thereafter look only to IndyMac for payment of the consideration therefor
specified in Section 3.1. Any portion of the Merger Consideration made
available to the Paying Agent pursuant to this Section 4.1 to pay for shares of
SGV Common Stock as to which dissenters' rights have been perfected shall be
returned to IndyMac.
4.2 Cancellation of SGV Options; Restricted Stock.
(a) As compensation for services rendered to SGV, at the Effective Time,
each option or other Equity Right to purchase shares of SGV Common Stock
pursuant to stock options or stock appreciation rights ("SGV Options") granted
by SGV under the SGV Bancorp, Inc. 1995 Amended and Restated Master Stock-Based
Incentive Plan or any other stock-based equity compensation plans (the "SGV
Stock Plans"), and outstanding at the Effective Time, whether or not
exercisable, shall be canceled and each holder of a SGV Option shall be
entitled to receive directly from IndyMac (and not from the Exchange Fund), at
the Effective Time, in consideration for the cancellation of such SGV Option,
an amount in cash, without any interest thereon and less any required
withholding Taxes, for each share of SGV Common Stock subject to such SGV
Option (the "Option Cancellation Payment"), equal to the difference (if
positive) between the Per Share Purchase Price and the exercise price per share
of SGV Common Stock to which such SGV Option relates. At the Effective Time,
each such SGV Option shall no longer represent the right to purchase shares of
SGV Common Stock, but in lieu thereof shall represent only the nontransferable
right to receive the Option Cancellation Payment, subject to receipt by IndyMac
of an acknowledgment from such holder that such payment shall constitute
consideration for the termination of such option. SGV agrees to take all
necessary steps to effectuate the foregoing provisions of this Section 4.3,
including using its reasonable efforts to obtain from each holder of a SGV
Option an agreement acknowledging cancellation of such holder's SGV Option and
all rights thereunder in exchange for the Option Cancellation Payment. The
surrender of a SGV Option to IndyMac in exchange for the consideration set
forth in this Section 4.3 shall, to the extent permitted by Law, be deemed a
release of any and all rights the holder had or may have had in respect of such
SGV Option.
(b) Effective as of the Effective Time, each then outstanding restricted
share of SGV Common Stock granted by SGV prior to the date of this Agreement
pursuant to the SGV Stock Plans and not vested and transferable immediately
prior to such Effective Time (a "SGV Restricted Share") shall become vested and
transferable and shall be converted into the right to receive the Per Share
Purchase Price from IndyMac in accordance with Section 3.1, provided that the
holder of such SGV Restricted Share makes arrangements satisfactory to IndyMac
for the payment of any applicable withholding Taxes. The accelerated vesting
and conversion of a SGV Restricted Share as provided herein shall, to the
extent permitted by Law, be deemed a release of any and all rights the holder
had or may have had in respect of such SGV Restricted Share.
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ARTICLE 5
Miscellaneous
5.1 Conditions Precedent. Consummation of the Merger by Merger Sub shall be
conditioned on the satisfaction of, or waiver by IndyMac of, of the conditions
precedent to the Merger set forth in Sections 9.1 and 9.3 of the Merger
Agreement. Consummation of the Merger by SGV shall be conditioned on the
satisfaction of, or waiver by SGV of, of the conditions precedent to the Merger
set forth in Sections 9.1 and 9.2 of the Merger Agreement.
5.2 Termination. This Plan of Merger may be terminated at any time prior to
the Effective Time by the parties hereto as provided in Article 10 of the
Merger Agreement.
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[LETTERHEAD OF SANDLER O'NEILL]
APPENDIX C
November 5, 1999
Board of Directors
SGV Bancorp, Inc.
225 North Barranca Avenue
West Covina, CA 91793
Gentlemen:
SGV Bancorp, Inc. ("SGV") and IndyMac Mortgage Holdings, Inc. ("IndyMac")
have entered into an Amended and Restated Agreement and Plan of Merger, dated
as of July 12, 1999 and amended and restated as of October 25, 1999 (the
"Agreement"), pursuant to which a newly formed, wholly owned subsidiary of
IndyMac will be merged with and into SGV (the "Merger"). Upon consummation of
the Merger, each share of SGV common stock, par value $.01 per share, issued
and outstanding immediately prior to the Merger (the "SGV Shares"), other than
certain shares specified in the Agreement, will be converted into the right to
receive from IndyMac $25.00 in cash, subject to adjustment under certain
circumstances as set forth in the Agreement (the "Merger Consideration");
provided, however, that in no event shall the Merger Consideration be less than
$22.50. The terms and conditions of the Merger are more fully set forth in the
Agreement. You have requested our opinion as to the fairness, from a financial
point of view, of the Merger Consideration to be received by the holders of SGV
Shares.
Sandler O'Neill & Partners, L.P., as part of its investment banking
business, is regularly engaged in the valuation of financial institutions and
their securities in connection with mergers and acquisitions and other
corporate transactions. In connection with this opinion, we have reviewed,
among other things: (i) the Agreement and exhibits thereto; (ii) certain
publicly available financial statements of SGV and other historical financial
information provided by SGV that we deemed relevant; (iii) certain publicly
available financial statements of IndyMac and other historical financial
information provided by IndyMac that we deemed relevant; (iv) certain internal
financial analyses and forecasts of SGV prepared by and reviewed with
management of SGV and the views of senior management of SGV, based on certain
limited discussions with certain members of senior management, regarding SGV's
past and current business, financial condition, results of operations and
future prospects; (v) certain internal financial analyses and forecasts of
IndyMac prepared by and reviewed with management of IndyMac and the views of
senior management of IndyMac, based on certain limited discussions with certain
members of senior management, regarding IndyMac's past and current business,
financial condition, results of operations and future prospects; (vi) the
publicly reported historical price and trading activity for SGV's and IndyMac's
common stock; (vii) a comparison of certain financial and stock market
information for SGV with similar publicly available information for certain
other companies the securities of which are publicly traded; (viii) the
financial terms of recent business
<PAGE>
Board of Directors
SGV Bancorp, Inc.
November 5, 1999
Page 2
[LOGO OF SANDLER O'NEILL]
combinations in the savings institution industry, to the extent publicly
available; (ix) the current market environment generally and the banking
environment in particular; and (x) such other information, financial studies,
analyses and investigations and financial, economic and market criteria as we
considered relevant. In connection with our engagement, we were not asked to,
and did not, solicit indications of interest in a potential transaction from
other third parties.
In performing our review, we have assumed and relied upon the accuracy and
completeness of all the financial information, analyses and other information
that was publicly available or otherwise furnished to, reviewed by or discussed
with us, including, without limitation, the Net Portfolio Value ("NPV")
analyses prepared by SGV's management, and we do not assume any responsibility
or liability for independently verifying the accuracy or completeness thereof.
We did not make an independent evaluation or appraisal of the specific assets,
the collateral securing assets or the liabilities (contingent or otherwise) of
SGV or IndyMac or any of their subsidiaries, or the collectibility of any such
assets, nor have we been furnished with any such evaluations or appraisals. We
did not make an independent evaluation of the adequacy of the allowance for
loan losses of SGV or IndyMac nor have we reviewed any individual credit files
relating to SGV and IndyMac and, with your permission, we have assumed that the
respective allowances for loan losses for both SGV and IndyMac are adequate to
cover such losses and will be adequate on a pro forma basis for the combined
entity. With respect to the financial projections reviewed with the respective
managements of SGV and IndyMac, including in the case of SGV the potential
impact of changes in the interest rate environment on SGV's NPV, we have
assumed that they have been reasonably prepared on bases reflecting the best
currently available estimates and judgments of the respective managements of
the respective future financial performances of SGV and IndyMac and that such
performances will be achieved, and we express no opinion as to such financial
projections or the assumptions on which they are based. We have also assumed
that there has been no material change in SGV's or IndyMac's assets, financial
condition, results of operations, business or prospects since the date of the
most recent financial statements made available to us. We have assumed in all
respects material to our analysis that SGV and IndyMac will remain as going
concerns for all periods relevant to our analyses, that all of the
representations and warranties contained in the Agreement and all related
agreements are true and correct, that each party to such agreements will
perform all of the covenants required to be performed by such party under such
agreements, that the conditions precedent in the Agreement are not waived and
that the Merger will qualify as a tax-free transaction to IndyMac for federal
income tax purposes.
Our opinion is necessarily based on financial, economic, market and other
conditions as in effect on, and the information made available to us as of, the
date hereof. Events occurring after the date hereof could materially affect
this opinion. We have not undertaken to update, revise or reaffirm this opinion
or otherwise comment upon events occurring after
<PAGE>
Board of Directors
SGV Bancorp, Inc.
November 5, 1999
Page 3
[LOGO OF SANDLER O'NEILL]
the date hereof. We are expressing no opinion herein as to the prices at which
SGV's common stock will trade at any time.
We have acted as SGV's financial advisor in connection with the Merger and
will receive a fee for our services, a significant portion of which is
contingent upon consummation of the Merger. We have also received a fee for
rendering this opinion. In the past, we have also provided, and continue to
provide, certain other investment banking services for SGV and have received,
and will receive, compensation for such services.
In the ordinary course of our business as a broker-dealer, we may purchase
securities from and sell securities to SGV and IndyMac. We may also actively
trade the debt and equity securities of SGV and IndyMac for our own account and
for the accounts of our customers and, accordingly, may at any time hold a long
or short position in such securities.
Our opinion is directed to the Board of Directors of SGV in connection with
its consideration of the Merger and does not constitute a recommendation to any
shareholder of SGV as to how such shareholder should vote at any meeting of
shareholders called to consider and vote upon the Merger. Our opinion is not to
be quoted or referred to, in whole or in part, in a registration statement,
prospectus, proxy statement or in any other document, nor shall this opinion be
used for any other purposes, without Sandler O'Neill's prior written consent;
provided, however, that we hereby consent to the inclusion of this opinion as
an appendix to SGV's and IndyMac's Joint Proxy Statement dated the date hereof
and to the references to this opinion therein.
Based upon and subject to the foregoing, it is our opinion, as of the date
hereof, that the Merger Consideration to be received by the holders of SGV
Shares is fair to such shareholders from a financial point of view.
Very truly yours,
/s/ Sandler O'Neill & Partners, L.P.
<PAGE>
APPENDIX D
Section 262 of the Delaware General Corporate Law
(S) 262. Appraisal rights.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to (S) 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and
the words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions
thereof, solely of stock of a corporation, which stock is deposited with the
depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to (S) 251 (other than a merger effected pursuant to (S)
251(g) of this title), (S) 252, (S) 254, (S) 257, (S) 258, (S) 263 or (S) 264
of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of the stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer
quotation system by the National Association of Securities Dealers, Inc.
or (ii) held of record by more than 2,000 holders; and further provided
that no appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of (S) 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or
series of stock of a constituent corporation if the holders thereof are
required by the terms of an agreement of merger or consolidation pursuant
to (S)(S) 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock (or depository
receipts in respect thereof) or
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depository receipts at the effective date of the merger or
consolidation will be either listed on a national securities exchange
or designated as a national market system security on an interdealer
quotation system by the National Association of Securities Dealers,
Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under (S) 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains such a
provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsection (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of such
stockholder's shares shall deliver to the corporation, before the taking
of the vote on the merger or consolidation, a written demand for appraisal
of such stockholder's shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the stockholder and
that the stockholder intends thereby to demand the appraisal of such
stockholder's shares. A proxy or vote against the merger or consolidation
shall not constitute such a demand. A stockholder electing to take such
action must do so by a separate written demand as herein provided. Within
10 days after the effective date of such merger or consolidation, the
surviving or resulting corporation shall notify each stockholder of each
constituent corporation who has complied with this subsection and has not
voted in favor of or consented to the merger or consolidation of the date
that the merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to (S) 228 or
(S) 253 of this title, each constituent corporation, either before the
effective date of the merger or
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consolidation or within ten days thereafter, shall notify each of the
holders of any class or series of stock of such constituent corporation
who are entitled to appraisal rights of the approval of the merger or
consolidation and that appraisal rights are available for any or all
shares of such class or series of stock of such constituent corporation,
and shall include in such notice a copy of this section; provided that, if
the notice is given on or after the effective date of the merger or
consolidation, such notice shall be given by the surviving or resulting
corporation to all such holders of any class or series of stock of a
constituent corporation that are entitled to appraisal rights. Such notice
may, and, if given on or after the effective date of the merger or
consolidation, shall, also notify such stockholders of the effective date
of the merger or consolidation. Any stockholder entitled to appraisal
rights may, within 20 days after the date of mailing of such notice,
demand in writing from the surviving or resulting corporation the
appraisal of such holder's shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the stockholder and
that the stockholder intends thereby to demand the appraisal of such
holder's shares. If such notice did not notify stockholders of the
effective date of the merger or consolidation, either (i) each such
constituent corporation shall send a second notice before the effective
date of the merger or consolidation notifying each of the holders of any
class or series of stock of such constituent corporation that are entitled
to appraisal rights of the effective date of the merger or consolidation
or (ii) the surviving or resulting corporation shall send such a second
notice to all such holders on or within 10 days after such effective date;
provided, however, that if such second notice is sent more than 20 days
following the sending of the first notice, such second notice need only be
sent to each stockholder who is entitled to appraisal rights and who has
demanded appraisal of such holder's shares in accordance with this
subsection. An affidavit of the secretary or assistant secretary or of the
transfer agent of the corporation that is required to give either notice
that such notice has been given shall, in the absence of fraud, be prima
facie evidence of the facts stated therein. For purposes of determining
the stockholders entitled to receive either notice, each constituent
corporation may fix, in advance, a record date that shall be not more than
10 days prior to the date the notice is given, provided, that if the
notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who
has complied with subsections (a) and (d) hereof and who is otherwise entitled
to appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms
offered upon the merger or consolidation. Within 120 days after the effective
date of the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or
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resulting from the consolidation a statement setting forth the aggregate number
of shares not voted in favor of the merger or consolidation and with respect to
which demands for appraisal have been received and the aggregate number of
holders of such shares. Such written statement shall be mailed to the
stockholder within 10 days after such stockholder's written request for such a
statement is received by the surviving or resulting corporation or within 10
days after expiration of the period for delivery of demands for appraisal under
subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by 1 or more
publications at least 1 week before the day of the hearing, in a newspaper of
general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the notices by mail and
by publication shall be approved by the Court, and the costs thereof shall be
borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled
to appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as
to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger
or consolidation, together with a fair rate of interest, if any, to be paid
upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the Court may,
in its discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on the
list filed by the surviving or resulting corporation pursuant to subsection (f)
of this section and who has submitted such stockholder's certificates of stock
to the Register in Chancery, if such is required, may participate fully in
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all proceedings until it is finally determined that such stockholder is not
entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the stockholders entitled thereto. Interest may be simple or compound, as the
Court may direct. Payment shall be so made to each such stockholder, in the
case of holders of uncertificated stock forthwith, and the case of holders of
shares represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation,
either within 60 days after the effective date of the merger or consolidation
as provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the
Court of Chancery shall be dismissed as to any stockholder without the approval
of the Court, and such approval may be conditioned upon such terms as the Court
deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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APPENDIX E
CERTIFICATE OF INCORPORATION
OF
INDYMAC MORTGAGE HOLDINGS, INC.*
The Undersigned, in order to form a corporation for the purposes
hereinafter stated, under and pursuant to the provisions of the General
Corporation Law of the State of Delaware, does hereby certify as follows:
ARTICLE I
Name
The name of the Corporation is: IndyMac Mortgage Holdings, Inc. [To be
amended to read--IndyMac Bancorp, Inc.--if approved by the requisite vote of
the IndyMac stockholders] (the "Corporation").
ARTICLE II
Registered Agent
The address of the registered office of the Corporation in the State of
Delaware is: The Prentice-Hall Corporation System, Inc., 32 Loockerman Square,
Suite L-100, County of Kent, City of Dover, Delaware 19901. The name of the
Corporation's registered agent at such registered office is The Prentice-Hall
Corporation System, Inc.
ARTICLE III
Purpose
The purpose for which the Corporation is formed is to engage in any lawful
act or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware as now or hereafter in force.
ARTICLE IV
Capital Stock
Section 1. The total number of shares of capital stock which the
Corporation shall have authority to issue is Two Hundred Ten Million
(210,000,000), consisting of (i) Two Hundred Million (200,000,000) shares of
Common Stock having a par value of $0.01 per share and (ii) Ten Million
(10,000,000) shares of preferred stock ("Preferred Stock") having a par value
of $0.01 per share.
The Board of Directors is authorized, subject to limitations prescribed by
law and the provisions of Article IV, to provide for the issuance of shares of
Preferred Stock in series,
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and by filing a certificate pursuant to the applicable law of the State of
Delaware, to establish from time to time the number of shares to be included in
each such series, and to fix the designation, powers, preferences and rights of
the shares of each such series and the qualifications, limitations or
restrictions thereof.
The authority of the Board of Directors with respect to each series of
Preferred Stock shall include, but not be limited to, determination of the
following:
(a) the number of shares constituting that series and the distinctive
designation of that series;
(b) the dividend rate on the shares of that series, whether dividends
shall be cumulative, and, if so, from which date or dates, and the
relative rights of priority, if any, of payment of dividends on shares of
that series;
(c) whether that series shall have voting rights, in addition to the
voting rights provided by law, and, if so, the terms of such voting
rights;
(d) whether that series shall have conversion privileges, and, if so,
the terms and conditions of such conversion, including provision for
adjustment of the conversion rate in such events as the Board of Directors
shall determine;
(e) whether or not the shares of that series shall be redeemable, and,
if so, the terms and conditions of such redemption, including the date or
date upon or after which they shall be redeemable, and the amount per
share payable in case of redemption, which amount may vary under different
conditions and at different redemption dates;
(f) whether that series shall have a sinking fund for the redemption
or purchase of shares of that series, and, if so, the terms and amount of
such sinking fund;
(g) the rights of the shares of that series in the event of voluntary
or involuntary liquidation, dissolution or winding up of the corporation,
and the relative rights of priority, if any, of payment of shares of that
series;
(h) any other relative rights, preferences and limitations of that
series.
Dividends on outstanding shares of Preferred Stock shall be paid or
declared and set apart for payment before any dividends shall be paid or
declared and set apart for payment on the common shares with respect to the
same dividend period.
If upon any voluntary or involuntary liquidation, dissolution or winding up
of the corporation, the assets available for distribution to holders of shares
of Preferred Stock of all series shall be insufficient to pay such holders the
full preferential amount to which they are entitled, then such assets shall be
distributed ratably among the shares of all series of Preferred Stock in
accordance with the respective preferential amounts (including unpaid
cumulative dividends, if any) payable with respect thereto.
Section 2. All persons who shall acquire stock in the Corporation shall
acquire the same subject to the provisions of this Certificate of Incorporation
and the Bylaws of the Company.
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Section 3. Each share of Common Stock shall entitle the owner thereof to
vote at the rate of one (1) vote for each share of Common Stock held.
ARTICLE V
Provisions For Defining, Limiting and Regulating Certain Powers of the
Corporation and of the Directors and Stockholders
Section 1. The number of Directors shall be determined by or in the manner
provided in the Bylaws of the Corporation, as they may be amended from time to
time. The names and mailing addresses of the persons who shall serve as
directors until the first annual meeting of stockholders or until their
successors are duly elected and qualified are:
David S. Loeb
Countrywide Mortgage Investments, Inc.
155 North Lake Avenue
Pasadena, California 91109
Angelo R. Mozilo
Countrywide Mortgage Investments, Inc.
155 North Lake Avenue
Pasadena, California 91109
Frederick J. Napolitano
Pembroke Enterprises, Inc.
Suite 626
281 Independence Boulevard
Virginia Beach, Virginia 23462
Harley W. Snyder
Harley Snyder Company
407 East Lincoln Way
Valparaiso, Indiana 46383
Jack Carlson
9901 Bluegrass Road
Potomac, Maryland 20854
Robert J. Donato
PaineWebber Incorporated
700 South Flower Street
Los Angeles, California 90017
The powers of the Incorporator shall terminate upon the filing of this
Certificate of Incorporation.
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Section 2. The Board of Directors of the Corporation is hereby empowered to
authorize the issuance from time to time of shares of capital stock, whether
now or hereafter authorized, for such consideration as the Board of Directors
may deem advisable, subject to such limitations as may be set forth in this
Certificate of Incorporation or in the Bylaws of the Corporation or in the
Delaware General Corporation Law.
Section 3. No holder of shares of capital stock of the Corporation shall,
as such holder, have any right to purchase or subscribe for any shares of the
capital stock of the Corporation or any other security of the Corporation which
it may issue or sell (whether out of the number of shares authorized by this
Certificate of Incorporation, or out of any shares of the capital stock of the
Corporation hereafter authorized or acquired by it after the issue thereof, or
otherwise) other than such right, if any, as the Board of Directors, in its
discretion, may determine.
Section 4. A Director of this Corporation shall not be personally liable to
the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a Director, except for liability (i) for any breach of the
Directors's duty of loyalty to the Corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law, or (iv) for any transaction from which the Director derived
any improper personal benefit. If the Delaware General Corporation Law is
amended after the date hereof to permit the further elimination or limitation
of the personal liability of directors, then the liability of a Director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the Delaware General Corporation Law, as so amended. Any repeal or modification
of this Section 4 of Article V by the stockholders of the Corporation shall not
adversely affect any right or protection of a Director of the Corporation in
respect of any act or omission occurring prior to the time of such repeal or
modification.
Section 5. The Corporation shall indemnify and shall advance expenses to
each Director, officer, employee and agent of this Corporation to the fullest
extent permitted by the Delaware General Corporation Law as now or hereafter in
force. The indemnification provided by this Section shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, and the Board of
Directors is expressly authorized to adopt bylaws and/or enter into agreements
whereby the Corporation agrees to indemnify and advance expenses to its
Directors, officers, employees and agents.
Section 6. The Board of Directors of the Corporation may make, alter or
repeal from time to time any of the Bylaws of the Corporation except any
particular Bylaw which is specified in the Bylaws as not subject to alteration
or repeal by the Board of Directors.
Section 7. The Board of Directors may authorize, subject to such approval
of stockholders and other conditions, if any, as may be required by any
applicable statute, bylaw, rule or regulation, the execution and performance by
the Corporation of one or more agreements with any person, corporation,
association, company, trust, partnership (limited or
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general) or other organization whereby, subject to the supervision and control
of the Board of Directors, any such other person, corporation, association,
company, trust, partnership (limited or general), or other organization shall
render or make available to the Corporation managerial, investment, advisory
and/or related services, office space and other services and facilities
(including the management or supervision of the investments of the Corporation)
upon such terms and conditions as may be provided in such agreement or
agreements (including the compensation payable thereunder by the Corporation).
Section 8. The Board of Directors may authorize any agreement of the
character described in Section 7 of this Article V or other contract or
transaction with any one or more Directors or officers or between the
Corporation and any other corporation, partnership (limited or general),
association, trust, company or other organization in which one or more of the
Corporation's Directors or officers are directors or officers, or similar
parties, or otherwise have a financial interest, and no such agreement,
contract or transaction shall be void or voidable solely by reason of the
existence of any such relationship or solely because the Director or officer so
interested is present at or participates in the meeting of the Board of
Directors or committee thereof which authorizes the agreement, contract or
transaction, or solely because such Director's votes are counted for such
purpose if: (i) the material facts as to the Director's or officer's
relationship or interest and as to the agreement or transaction are disclosed
or are known to the Board of Directors or such committee and the Board of
Directors or committee in good faith authorizes, approves or ratifies the
agreement, contract or transaction by the affirmative vote of a majority of the
disinterested Directors, even though the disinterested Directors be less than a
quorum; or (ii) the material facts as to such Director's or Officer's
relationship or interest and as to the agreement or transaction are disclosed
or are known to the stockholders entitled to vote thereon, and the agreement,
contract or transaction is authorized, approved or ratified in good faith by a
majority of votes cast by the stockholders entitled to vote other than the
votes of shares owned of record or beneficially by the interested Director or
officer; or (iii) the agreement, contract or transaction is fair to the
Corporation as of the time it is authorized, approved or ratified by the Board
of Directors, a committee thereof or the stockholders. Any Director of the
Corporation who is also a director, officer, stockholder or member of such
other entity may be counted in determining the existence of a quorum at any
meeting of the Board of Directors or of a committee which authorizes any such
agreement, contract or transaction. If such a Director votes at a meeting to
approve or disapprove a transaction as described in this Section, such vote
shall not affect the validity of such a transaction provided the provisions of
this Section are otherwise satisfied.
Section 9. Any action required or permitted to be taken by the stockholders
of the Corporation must be effected at a duly called annual meeting or at a
special meeting of stockholders of the Corporation. No action may be taken by
the written consent of the stockholders. Action need not be by written ballot
unless the chairman of the meeting shall so direct.
Section 10. The enumeration and definition of particular powers of the
Board of Directors included in the foregoing shall in no way be limited or
restricted by reference to or
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inference from the terms of any other clause of this or any other Article of
the Certificate of Incorporation of the Corporation, or construed as or deemed
by inference or otherwise in any manner to exclude or limit the powers
conferred upon the Board of Directors under the General Corporation Law of the
State of Delaware as now or hereafter in force.
[THE FOLLOWING ARTICLE VI TO BE DELETED IF APPROVED BY THE
REQUISITE VOTE OF THE INDYMAC STOCKHOLDERS]
ARTICLE VI
Restriction on Acquisition and Transfer of Shares
Section 1. Whenever it is deemed by the Board of Directors to be prudent in
protecting the status of the Corporation as a "real estate investment trust"
under the Internal Revenue Code of 1986, as amended (the "Code"), the Board of
Directors may require to be filed with the Corporation as a condition to
permitting any proposed transfer, and/or the registration of any transfer, of
shares of the Corporation a statement or affidavit from any proposed transferee
setting forth the number of shares already owned after application of the
attribution rules (the "Attribution Rules") of Section 544 of the Code by the
transferee and any related person(s) specified in the form prescribed by the
Board of Directors for that purpose. All contracts for the sale or other
transfer of shares of the Corporation shall be subject to this provision.
Section 2. As a condition to the transfer and/or registration of transfer
of any shares of capital stock of the Corporation which would result in any
stockholder owning, directly or indirectly, shares in excess of 9% of the
outstanding shares of capital stock of the Corporation, the transferee of such
shares shall file with the Corporation an affidavit setting forth the number of
shares of capital stock of the Corporation owned directly and indirectly by the
person filing the affidavit. For purposes of this Section, shares of capital
stock not owned directly shall be deemed to be owned indirectly by a person if
that person or a group of which he is a member would be the beneficial owner of
such shares for purposes of Rule 13d-3, or any successor rule thereto,
promulgated by the Securities and Exchange Commission under the Securities
Exchange Act of 1934 (the "Exchange Act"), and/or would be considered to own
such shares by reason of the Attribution Rules. The affidavit to be filed with
the Corporation shall set forth all information required to be reported in
returns filed by stockholders under Regulation 1.857-9 issued by the Internal
Revenue Service, or similar provisions of any successor regulation, and in
reports to be filed under Section 13(d) of the Exchange Act. The affidavit, or
an amendment thereto, must be filed with the Corporation within 10 days after
demand therefor and in any event at least 15 days prior to any transfer,
registration of transfer or transaction which, if consummated, would cause the
filing person to hold shares in excess of 9% of the outstanding shares of
capital stock of the Corporation. No transfer nor any registration of any
purported transfer in violation of the notice provisions of this Section shall
be valid or be given effect. Notwithstanding the foregoing, compliance with the
requirements of this
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Section 2 shall not validate any purported transfer which would result in any
stockholder owning, directly or indirectly, shares in excess of the "Limit" as
defined in Section 4 of this Article VI.
Section 3. Any acquisition of shares of capital stock of the Corporation
that would result in any stockholder owning, directly or indirectly, shares in
excess of the "Limit" as defined in Section 4 of this Article VI shall be void
ab initio to the fullest extent permitted under applicable law and the intended
transferee of "Excess Shares," as defined in Section 4 of this Article VI,
shall be deemed never to have had an interest therein. If the foregoing
provision is determined to be void, voidable or invalid by virtue of any legal
decision, statute, rule or regulation, then the transferee of such shares shall
be deemed to have acted as agent on behalf of the Corporation in acquiring such
shares and to hold such shares on behalf of the Corporation.
Section 4. Notwithstanding any other provision hereof to the contrary, and
subject to the provisions of Section 5 of this Article VI, no person, or
persons acting as a group, shall at any time directly or indirectly acquire
ownership in the aggregate of more than 9.8% of the outstanding shares of
capital stock of the Corporation (the "Limit"). Shares which would, but for
this Section 4, be owned by a person or a group of persons in excess of the
Limit at any time shall be deemed "Excess Shares." For the purposes of
determining and dealing with Excess Shares, the term "ownership" shall be
defined to include shares of capital stock constructively owned by a person
under the Attribution Rules and shall also include shares of capital stock
beneficially owned by a person for purposes of Rule 13d-3, or any successor
rule thereto, promulgated by the Securities and Exchange Commission under the
Exchange Act and the term "group" shall have the same meaning as that term has
for purposes of Section 13(d)(3) of such Act. All shares of the Corporation
which any person has the right to acquire upon exercise of outstanding rights,
options and warrants, and upon conversion of any securities convertible into
shares, if any, shall be considered outstanding for purpose of the Limit if
such inclusion will cause such person to own more than the Limit. Unless
otherwise required by applicable law, the Corporation shall refuse to transfer
or register the transfer of, and shall instruct the transfer agent of the
Corporation to refuse to transfer or register the transfer of, shares to the
extent that, as a result of such transfer or registration of transfer, any
person would hold Excess Shares.
Section 5. The Limit set forth in Sections 3 and 4 of this Article VI and
the filing requirements of Section 2 of this Article VI shall not apply to the
acquisition of shares of the Corporation by the Corporation, by an underwriter
in connection with a public offering of shares of the Corporation, or in any
transaction involving the issuance of shares by the Corporation, in which the
Board of Directors determines that the underwriter or other person or party
initially acquiring such shares will timely distribute such shares to or among
others such that, following such distribution, none of such shares will be
Excess Shares. The Board of Directors in its discretion may exempt from the
Limit under Sections 3 and 4 of this Article VI and from the filing
requirements of Section 2 of this Article VI ownership or transfers of certain
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designated shares while owned by or transferred to any subsidiary of this
Corporation or to any other person in connection with a reorganization,
recapitalization, merger, liquidation or similar transaction approved by the
Board of Directors, provided that such person has given the Board of Directors
evidence and assurances acceptable to the Board of Directors that the
qualification of the Corporation as a "real estate investment trust" under the
Code would not be jeopardized thereby.
Section 6. Notwithstanding Sections 3 and 4 of this Article VI, if at any
time more than 9.8% of the shares of capital stock of the Corporation has
become concentrated in the hands of a "beneficial owner" (as such term is
defined for purposes of Rule 13d-3, or any successor rule thereto promulgated
by the Securities and Exchange Commission, under the Exchange Act), such
beneficial owner and each of his "affiliates" (as such term is defined on
December 1, 1986 in Rule 12b-2 under the Exchange Act) owning any shares of
capital stock of the Corporation shall be deemed to have offered to sell to the
Corporation or its designee, on a date fixed by the Corporation, as specified
in the Corporation's notice of its or its designee's acceptance of such offer
of sale, such a number of shares of capital stock sufficient, in the opinion of
the Board of Directors, to maintain or bring the direct or indirect ownership
of shares of capital stock of the Corporation of such beneficial owner to no
more than the Limit. The price at which the Corporation or its designee may
purchase the outstanding shares of capital stock of the Corporation pursuant to
the preceding sentence of this Section (the "Purchase Price") shall be equal to
the closing sales price for the shares, if then listed on a national securities
exchange, or the average of the closing sales prices for the shares if then
listed on more than one national securities exchange, or if the shares are not
then listed on a national securities exchange, the latest bid quotation for the
shares if then traded over-the-counter, on the last business day immediately
preceding the day on which the Corporation's notice of its acceptance of the
beneficial owner's and/or his affiliates' offer of sale is sent, or, if no such
closing sales prices or quotations are available, then the Purchase Price shall
be equal to the net asset value of such stock (determined on the basis of the
fair market value of the assets of the Corporation) as determined by the Board
of Directors in accordance with the provisions of applicable law. The Purchase
Price of any shares acquired by the Corporation or its designee shall be paid,
at the option of the Corporation, in cash or in the form of an unsecured,
subordinated promissory note of the Corporation or its designee bearing
interest and having a term to maturity (to be not less than five nor more than
twenty years) as shall be determined by the Board of Directors. Payment of the
Purchase Price shall be made at such time and in such manner as may be
determined by the Board of Directors and specified in the notice of acceptance
sent to the beneficial owner and/or his affiliates. From and after the date
fixed for purchase by the Board of Directors and the tender by the Corporation
of the Purchase Price therefor, each as specified in the Corporation's notice
of its acceptance of the offer of sale, the holder of any shares to be so
purchased shall cease to be entitled to any rights as a holder of such shares,
excepting only the right to payment of the Purchase Price fixed as aforesaid.
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Section 7. Nothing contained in this Article VI or in any other provision
hereof shall limit the authority of the Board of Directors to take such other
action as it deems necessary or advisable to protect the Corporation and the
interests of its stockholders by preservation of the Corporation's status as a
"real estate investment trust" under the Code.
Section 8. For purposes of this Article VI only, the term "person" shall
include individuals, corporations, limited partnerships, general partnerships,
joint stock companies or associations, joint ventures, associations, consortia,
companies, trusts, banks, trust companies, land trusts, common law trusts,
business trusts and other entities, and governments and agencies and political
subdivisions thereof; provided, however, that such term shall not include this
Corporation or any of its subsidiaries.
Section 9. If any provision of this Article VI or any application of any
such provision is determined to be invalid by any federal or state court having
jurisdiction over the issues, the validity of the remaining provisions shall
not be affected and other applications of such provision shall be affected only
to the extent necessary to comply with the determination of such court.
[END OF ARTICLE VI]
[THE FOLLOWING ARTICLE VII TO BE DELETED IF APPROVED BY THE REQUISITE VOTE OF
THE INDYMAC STOCKHOLDERS]
ARTICLE VII
Acquisition Of Shares By Certain Organizations
Section 1. Whenever it is deemed by the Board of Directors to be prudent in
avoiding
(a) the direct or indirect imposition of a penalty tax on the
Corporation (including the imposition of an entity-level tax on one or
more real estate mortgage investment conduits ("REMICs") or one or more
taxable mortgage pools in which the Corporation has acquired or plans to
acquire an interest) or
(b) the endangerment of the tax status of one or more REMICs or one or
more taxable mortgage pools in which the Corporation has acquired or plans
to acquire an interest, the Board of Directors may require to be filed
with the Corporation a statement or affidavit from any holder or proposed
transferee of capital stock of the Corporation stating whether the holder
or proposed transferee is
(i) the United States, any state or political subdivision thereof,
any possession of the United States, any foreign government, any
international organization, or any agency or instrumentality of the
foregoing, or any other organization that is exempt from federal income
taxation (including taxation under the unrelated business taxable income
provisions of the Code) (a "Disqualified Organization") or
E-9
<PAGE>
(ii) a partnership, trust, real estate investment trust, regulated
investment company, or other pass-through entity in which a Disqualified
Organization holds or is permitted to hold a direct or indirect beneficial
interest (a "Pass-Through Entity").
Any contract for the sale or other transfer of shares of capital stock of
the Corporation shall be subject to this provision. Furthermore, the Board of
Directors shall have the right, but shall not be required, to refuse to
transfer any shares of capital stock of the Corporation purportedly
transferred, if either
(a) a statement or affidavit requested pursuant to this Section 1 has
not been received, or
(b) the proposed transferee is a Disqualified Organization or Pass-
Through Entity.
Section 2. Any acquisition of shares of capital stock of the Corporation
that could or would
(a) result in the direct or indirect imposition of a penalty tax on
the Corporation (including the imposition of an entity-level tax on one or
more REMICs or one or more taxable mortgage pools in which the Corporation
has acquired or plans to acquire an interest) or
(b) endanger the tax status of one or more REMICs or one or more
taxable mortgage pools in which the Corporation has acquired or plans to
acquire an interest shall be void ab initio to the fullest extent
permitted under applicable law and the intended transferee of the subject
shares shall be deemed never to have had an interest therein.
If the foregoing provision is determined to be void or invalid by virtue of
any legal decision, statute, rule or regulation, then the transferee of those
shares shall be deemed, at the option of the Corporation, to have acted as
agent on behalf of the Corporation in acquiring those shares and to hold those
shares on behalf of the Corporation.
Section 3. Whenever it is deemed by the Board of Directors to be prudent in
avoiding
(a) the direct or indirect imposition of a penalty tax on the
Corporation (including the imposition of an entity-level tax on one or
more REMICs or one or more taxable mortgage pools in which the Corporation
has acquired or plans to acquire an interest) or
(b) the endangerment of the tax status of one or more REMICs or one or
more taxable mortgage pools in which the Corporation has acquired or plans
to acquire an interest, the Corporation may redeem shares of its capital
stock.
Any such redemption shall be conducted in accordance with the procedures
set forth in Section 6 of Article VI.
E-10
<PAGE>
Section 4. Nothing contained in this Article or in any other provision
hereof shall limit the authority of the Board of Directors to take any and all
other action as it in its sole discretion deems necessary or advisable to
protect the Corporation or the interests of its stockholders by avoiding
(a) the direct or indirect imposition of a penalty tax on the
Corporation (including the imposition of an entity-level tax on one or
more REMICs or one or more taxable mortgage pools in which the Corporation
has acquired or plans to acquire an interest) or
(b) the endangerment of the tax status of one or more REMICs or one or
more taxable mortgage pools in which the Corporation has acquired or plans
to acquire an interest.
Section 5. If any provision of this Article or any application of any such
provision is determined to be invalid by any federal or state court having
jurisdiction over the issue, the validity of the remaining provisions shall be
affected only to the extent necessary to comply with the determination of that
court.
[END OF ARTICLE VII]
ARTICLE VIII
Amendments
The Corporation reserves the right to adopt, repeal, rescind, alter,
restate or amend in any respect any provision contained in this Certificate of
Incorporation in the manner now or hereafter prescribed by applicable law, and
all rights conferred on stockholders herein are granted subject to this
reservation.
ARTICLE IX
Incorporator
The name of the incorporator is Andrea J. Melville. The Incorporator's
mailing address is 400 South Hope Street, Los Angeles, California 90071-2899.
* This Appendix E reflects all amendments to IndyMac's Certificate of
Incorporation which have not been integrated into the original certificate.
E-11
<PAGE>
APPENDIX F
FORM OF REVOCABLE PROXY
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF SGV BANCORP, INC.
SGV BANCORP, INC.
SPECIAL MEETING OF STOCKHOLDERS
----------------
December 14, 1999, 10:00 a.m. Pacific Time
The undersigned hereby appoints the Board of Directors of SGV Bancorp, Inc.
(the "Company") to act as proxy for the undersigned, and to vote all shares of
Common Stock of the Company that the undersigned is entitled to vote only at
the Special Meeting of Stockholders, to be held on December 14, 1999, 10:00
a.m. Pacific Time, at the Radisson Hotel San Gabriel Valley, located at 14635
Baldwin Park Town Center in Baldwin Park, California, and at any and all
adjournments thereof, as indicated on the reverse side of this proxy.
This proxy is revocable and will be voted as directed, but if no
instructions are specified, this proxy will be voted FOR each of the proposals
listed. If any other business is presented at the Special Meeting, including
whether or not to adjourn the meeting, this proxy will be voted by the Board of
Directors in their best judgment. At the present time, the Board of Directors
knows of no other business to be presented at the Special Meeting.
PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY PROMPTLY
IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
----------------
F-1
<PAGE>
The Board of Directors recommends a vote "FOR" each of the proposals presented.
1. Approval of the Agreement and Plan of Merger, dated as of July 12, 1999 and
amended and restated as of October 25, 1999, by and between SGV Bancorp,
Inc. and IndyMac Mortgage Holdings, Inc. ("IndyMac") and the related plan
of merger by and between IndyMac Merger Subsidiary, Inc. and SGV Bancorp,
Inc., pursuant to which IndyMac Merger Subsidiary, Inc. will merge with and
into the Company and each share of common stock of the Company, par value
$0.01 per share, will be converted into the right to receive $25.00 in
cash, subject to certain adjustments, all on and subject to the terms and
conditions contained therein.
FOR AGAINST ABSTAIN
[_] [_] [_]
The undersigned acknowledges receipt from the Company prior to the
execution of this proxy of a Notice of Special Meeting of Stockholders and of a
Joint Proxy Statement dated November 5, 1999.
_____________________________________ Date: _______________________________
Signature of Stockholder
_____________________________________ Date: _______________________________
Signature of Stockholder
Please sign exactly as your name appears on this card. When signing as
attorney, executor, administrator, trustee or guardian, please give full title.
If shares are held jointly, each holder may sign, but only one signature is
required.
F-2
<PAGE>
APPENDIX G
FORM OF REVOCABLE PROXY
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
OF INDYMAC MORTGAGE HOLDINGS, INC.
INDYMAC MORTGAGE HOLDINGS, INC.
SPECIAL MEETING OF STOCKHOLDERS -- DECEMBER 14, 1999
----------------
The undersigned hereby appoints David S. Loeb or Angelo R. Mozilo, or
either of them, with full power of substitution and resubstitution, the
attorney and proxy for the undersigned, and to vote all shares of Common Stock
of IndyMac Mortgage Holdings, Inc. ("IndyMac") that the undersigned is entitled
to vote only at the Special Meeting of Stockholders, to be held on December 14,
1999 at 10:00 a.m. Pacific Time, at the Pasadena Hilton, located at 168 South
Los Robles Avenue in Pasadena, California, and at any and all adjournments
thereof, as indicated on the reverse side of this proxy.
This proxy is revocable and will be voted as directed, but if no
instructions are specified, this proxy will be voted FOR each of the proposals
listed. If any other business is presented at the Special Meeting, including
whether or not to adjourn the meeting, this proxy will be voted by the Board of
Directors in their best judgment. At the present time, the Board of Directors
knows of no other business to be presented at the Special Meeting.
Receipt is hereby acknowledged from IndyMac prior to the execution of this
proxy of a notice of special meeting of stockholders and of a joint proxy
statement dated November 5, 1999.
(continued and to be signed on reverse side.)
INDYMAC MORTGAGE HOLDINGS, INC.
P.O. BOX 11262
NEW YORK, NY 10203-0262
----------------
VOTE BY TELEPHONE OR INTERNET
24 HOURS A DAY, 7 DAYS A WEEK
<TABLE>
<CAPTION>
TELEPHONE INTERNET MAIL
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
800-650-0913 Use any touch- http://proxy.shareholder.com/nde Mark, sign and date your
tone telephone to vote your Use the Internet to vote your proxy card and return it in
proxy. Have your proxy in proxy. Have your proxy card in the postage-paid envelope we
hand when you call. You will hand when you access the have provided.
be prompted to enter your website. You will be prompted to
control number, located in enter your control number,
the box below, and then located in the box below, to
follow the simple create an electronic ballot.
directions.
- -----------------------------------------------------------------------------------------------
</TABLE>
[CONTROL NUMBER FOR TELEPHONE OR INTERNET VOTING]
Your telephone or Internet vote authorizes the named proxies to vote your
shares in the same manner as if you had marked, signed and returned the proxy
card.
If you have submitted your proxy by telephone or the Internet there is no
need for you to mail back your proxy card.
G-1
<PAGE>
CALL TOLL FREE TO VOTE. IT'S FAST AND CONVENIENT.
800-650-0913
Detach Proxy Card Here If You Are Not Voting By Telephone Or Internet.
- --------------------------------------------------------------------------------
The Board of Directors recommends a vote "FOR" each of the proposals presented.
1. Approval of IndyMac Mortgage Holdings, Inc. ("IndyMac") terminating its
status as a real estate investment trust, or REIT, under the Internal
Revenue Code of 1986, as amended, so that IndyMac will not be a REIT
effective January 1, 2000.
FOR AGAINST ABSTAIN
[_] [_] [_]
2. Approval of the Amended and Restated Agreement and Plan of Merger, dated as
of July 12, 1999 and amended and restated as of October 25, 1999, by and
between IndyMac and SGV Bancorp, Inc. ("SGV") and the transactions
contemplated by that Agreement and Plan of Merger, including IndyMac's
formation of a new, wholly-owned subsidiary and the merger of that
subsidiary with and into SGV.
FOR AGAINST ABSTAIN
[_] [_] [_]
3. Approval of the amendment to Article I of IndyMac's Certificate of
Incorporation to change the name of the corporation from IndyMac Mortgage
Holdings, Inc. to IndyMac Bancorp, Inc.
FOR AGAINST ABSTAIN
[_] [_] [_]
4. Approval of the deletion of Article VI of IndyMac's Certificate of
Incorporation. Article VI has the effect described in the notice of special
meeting of stockholders and the joint proxy statement dated November 5,
1999.
FOR AGAINST ABSTAIN
[_] [_] [_]
5. Approval of the deletion of Article VII of IndyMac's Certificate of
Incorporation. Article VII has the effect described in the notice of
special meeting of stockholders and the joint proxy statement dated
November 5, 1999.
FOR AGAINST ABSTAIN
[_] [_] [_]
G-2
<PAGE>
The undersigned acknowledges receipt from IndyMac prior to the execution of
this proxy of a Notice of Special Meeting of Stockholders and of a Joint Proxy
Statement dated November 5, 1999. Please sign exactly as your name appears on
this card. Joint owners should each sign. If the signer is a corporation,
please sign full corporate name by a duly authorized officer. When signing as
attorney, executor, administrator, trustee or guardian, please give full title.
_____________________________________ Date: _______________________________
Signature of Stockholder
_____________________________________ Date: _______________________________
Signature of Stockholder
G-3
