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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from________________________to______________________
Commission File Number 0-25664
SGV BANCORP, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 95-4524789
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(State or other jurisdiction of (I. R.S. Employer Identification
incorporation or organization) No.)
225 NORTH BARRANCA STREET, WEST COVINA, CALIFORNIA 91791
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(Address of principal executive offices)
(818) 859-4200
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
require to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [_] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 2,591,276 shares of common
stock, par value $0.01 per share, were outstanding as of November 11, 1996.
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SGV BANCORP, INC.
FORM 10-Q
INDEX
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PART I FINANCIAL INFORMATION PAGE
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Item 1 Consolidated Statements of Financial Condition:
September 30, 1996 and June 30, 1996.............................. 1
Consolidated Statements of Operations:
For the Three Months Ended September 30, 1996 and 1995............ 2
Consolidated Statements of Cash Flows:
For the Three Months Ended September 30, 1996 and 1995............ 3
Notes to Consolidated Financial Statements........................ 5
Item 2 Management's Discussion and Analysis of
Results of Operations and Financial Condition..................... 9
PART II OTHER INFORMATION
Item 1 Legal Proceedings................................................. 18
Item 2 Changes in Securities............................................. 18
Item 3 Defaults Upon Senior Securities................................... 18
Item 4 Submission of Matters to a Vote of Security Holders............... 18
Item 5 Other Information................................................. 18
Item 6 Exhibits and Reports on Form 8-K.................................. 18
SIGNATURES.................................................................. 19
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SGV BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------
September 30, June 30,
1996 1996
---- ----
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ASSETS:
Cash and cash equivalents, including short-term bank obligations of $5,800
at September 30, 1996 and $4,025 at June 30, 1996 $ 9,099 $ 8,884
Investment securities available for sale, amortized cost of $17,000
at September 30, 1996 and $15,000 at June 30, 1996 16,932 14,904
Mortgage-backed securities available for sale, amortized cost of
$25,819 at September 30, 1996 and $16,863 at June 30, 1996 25,707 16,614
Mortgage-backed securities held to maturity, estimated fair value of
$26,239 at September 30, 1996 and $27,124 at June 30, 1996 26,719 27,701
Loans receivable held for sale 315 723
Loans receivable held for investment, net of allowance for estimated
loan losses of $1,009 at September 30, 1996 and $1,058 at June 30, 1996 254,155 255,953
Accrued interest receivable 2,696 2,588
Stock of Federal Home Loan Bank of San Francisco, at cost 3,803 3,747
Real estate acquired through foreclosure, net 1,932 1,489
Premises and equipment, net 2,951 3,015
Prepaid expenses and other assets, net 543 437
----------- ---------
Total assets $ 344,852 $336,055
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposit accounts $ 242,262 $234,039
Federal Home Loan Bank advances 67,405 67,509
Accrued expenses and other liabilities 3,924 2,921
----------- ---------
Total liabilities 313,591 304,469
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 2,000,000 shares authorized; none
issued
Common stock, $.01 par value; 10,000,000 shares authorized;
2,727,656 issued; 2,591,276 shares outstanding 27 27
Additional paid-in capital 20,686 20,684
Retained earnings, substantially restricted 14,006 14,470
Net unrealized loss on investment securities and mortgage-backed
securities available for sale, net of taxes (103) (202)
Deferred stock compensation (2,115) (2,153)
Treasury stock (1,240) (1,240)
----------- ---------
Total stockholders' equity 31,261 31,586
----------- ---------
Total liabilities and stockholders' equity $ 344,852 $336,055
=========== =========
</TABLE>
1
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SGV BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)(UNAUDITED)
- --------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
1996 1995
---------------------
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INTEREST INCOME:
Interest on loans $4,910 $ 4,136
Interest on investment securities 312 85
Interest on mortgage-backed securities 740 372
Other 146 253
--------- ---------
Total interest income 6,108 4,846
--------- ---------
INTEREST EXPENSE:
Interest on deposit accounts 2,796 2,426
Interest on borrowings 1,067 596
--------- ---------
Total interest expense 3,863 3,022
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Net interest income before provision
for estimated loan losses 2,245 1,824
PROVISION FOR ESTIMATED LOAN LOSSES 188 111
--------- ---------
Net interest income after provision for
estimated loan losses 2,057 1,713
OTHER INCOME (EXPENSE):
Loan servicing and other fees 109 106
Secondary marketing activity, net (11) (14)
Other income 141 110
Net loss on real estate acquired through foreclosure (56) (17)
--------- ---------
Total other income 183 185
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GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation and other employee expenses 912 878
Office occupancy 188 200
Equipment 183 177
Advertising 30 24
FDIC insurance premiums 128 117
FDIC special assessment 1,332 --
Other operating expenses 269 244
--------- ---------
Total general and administrative expenses 3,042 1,640
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EARNINGS(LOSS) BEFORE INCOME TAXES (802) 258
INCOME TAXES (338) 109
--------- ---------
NET EARNINGS(LOSS) $ (464) $ 149
========= =========
EARNINGS(LOSS) PER SHARE $(0.20) $ 0.06
========= =========
Weighted Average Shares Outstanding (000's) 2,350 2,541
========= =========
</TABLE>
2
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SGV BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) (UNAUDITED)
- -------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
1996 1995
------------------------
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (464) $ 149
Adjustments to reconcile net earnings to net
cash used in operating activities:
Depreciation and amortization 85 84
Loans originated for sale (2,632) (730)
Proceeds from sale of loans 2,633 733
Gain on sale of loans, net (1) (3)
Federal Home Loan Bank stock dividend (56) (34)
Increase in prepaid expenses and other assets (108) (21)
Amortization of deferred loan fees (7) (18)
Deferred loan origination costs (45) (33)
Increase (decrease) in accrued expenses and other liabilities 1,090 (627)
Provision for estimated loan losses 188 111
Provision for estimated real estate losses 30 1
Premium amortization, net 61 33
Increase in accrued interest receivable (108) (211)
Other, net (298) 144
--------- ---------
Net cash provided by (used in) operating activities 368 (422)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities available for sale (10,001) (4,000)
Proceeds from sale and redemption of investment securities
available for sale 8,000 1,000
Purchase of mortgage-backed securities available for sale (9,962) (6,780)
Purchase of mortgage-backed securities held to maturity -- (5,607)
Principal repayments on mortgage-backed securities 1,926 978
Loans funded, net (4,296) (4,596)
Loans purchased, net (677) --
Principal repayments on loans 5,822 4,456
Proceeds from sale of real estate 935 151
Purchase of premises and equipment (20) (379)
--------- ---------
Net cash used in investing activities (8,273) (14,777)
</TABLE>
3
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SGV BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) (UNAUDITED)
- ------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
1996 1995
-----------------------
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in certificate accounts $ 8,821 $ 1,853
Net decrease in passbook , money market savings
NOW and noninterest-bearing accounts (597) (2,722)
Proceeds from Federal Home Loan Bank advances 10,000 2,000
Repayment of Federal Home Loan Bank advances (10,104) (111)
--------- --------
Net cash provided by financing activities 8,120 1,020
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 215 (14,179)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 8,884 23,387
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 9,099 $ 9,208
========== =========
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid during the period for:
Interest $ 3,078 $ 3,021
Income taxes, net 0 0
NONCASH INVESTING ACTIVITIES DURING THE PERIOD:
Real estate acquired through foreclosure 1,381 258
Loans to facilitate sales of real estate acquired through
foreclosure 0 153
Change in net unrealized loss on investment securities and
mortgage-backed securities available for sale, net of taxes 99 (16)
</TABLE>
4
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SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
1. Basis of Presentation:
---------------------
SGV Bancorp, Inc. (SGV) is a savings and loan holding company incorporated
in the state of Delaware that was organized for the purpose of acquiring all of
the capital stock of First Federal Savings and Loan Association of San Gabriel
Valley (the Association) upon its conversion from a federally chartered mutual
savings and loan association to a federally chartered stock savings and loan
association. On June 28, 1995, SGV completed its sale of 2,727,656 shares of
its common stock through subscription and community offerings to the
Association's depositors, the Employee Stock Ownership Plan and the public and
used approximately 60% of the net proceeds from such sales to purchase all of
the Association's common stock issued in the Association's conversion to stock
form. Such business combination was accounted for at historical cost in a
manner similar to a pooling of interests.
SGV engages only in limited business operations primarily involving
investments in federal agency securities and mortgage-backed securities, and as
a result, substantially all of the net earnings and performance figures herein
reflect the results of the Association.
The Association is primarily engaged in attracting deposits from the
general public in the areas in which its branches are located and investing such
deposits and other available funds primarily in mortgage loans secured by one-
to-four family residences. To a lesser extent, the Association invests in
multi-family residential mortgages, commercial real estate, land and other
loans. The Association's revenues are derived principally from interest on its
mortgage loans, and to a lesser extent, interest and dividends on its investment
and mortgage-backed securities and income from loan servicing. The
Association's primary sources of funds are deposits, principal and interest
payments on loans, advances from the Federal Home Loan Bank of San Francisco
(the FHLB) and, to a lesser extent, proceeds from the sale of loans. As of
September 30, 1996, the Association operated six branch offices located in the
San Gabriel Valley.
The consolidated financial statements include the accounts of SGV Bancorp,
Inc. and its wholly-owned subsidiary, First Federal Savings and Loan Association
of San Gabriel Valley and its wholly-owned subsidiary, First Covina Service
Company, which is substantially inactive (collectively, the Company). All
material intercompany balances and transactions have been eliminated in
consolidation.
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted
5
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accounting principles for complete financial statements. In the opinion of
management all necessary adjustments, consisting only of normal recurring
adjustments necessary for a fair presentation have been included. The results of
operations for the three-month period ended September 30, 1996 are not
necessarily indicative of the results that may be expected for the entire fiscal
year.
These consolidated financial statements and the information under the
heading "Management's Discussion and Analysis of Results of Operations and
Financial Condition" should be read in conjunction with the audited consolidated
financial statements and notes thereto of SGV Bancorp, Inc. for the year ended
June 30, 1996 included in the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1996.
2. Earnings Per Share
------------------
Earnings per share for the three months ended September 30, 1996 and
September 30, 1995 are based on the weighted average common shares outstanding
of 2,591,276 and 2,727,656, respectively, as adjusted for weighted average
unallocated shares under the ESOP plan and the stock compensation plan. The
weighted average number of shares unallocated under the ESOP for the three
months ended September 30, 1996 and September 30, 1995 were 159,872 and
186,000, respectively, in accordance with SOP 93-6, "Employers' Accounting for
Employee Stock Ownership Plans." In regards to the stock compensation plan, the
weighted average number of shares reducing shares outstanding for earnings per
share for the three months ended September 30, 1996 was 81,829 shares. Also, in
regards to treasury stock, the weighted average number of shares reducing shares
outstanding for earnings per share was 136,380 shares for the months ended
September 30, 1996. The stock compensation plan was approved by shareholders on
January 17, 1996, therefore, no reduction in outstanding shares was applicable
for the three months ended September 30, 1995.
3. Loans Receivable
----------------
On July 1, 1995, the Company adopted Statement of Financial Accounting
Standards (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." These statements generally require all
creditors to account for impaired loans, except those loans that are accounted
for at fair value or at the lower of cost or fair value, at the present value of
the expected future cash flows discounted at the loan's effective interest rate
or, as a practical expedient, at the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent. SFAS No. 114
indicates that a creditor should evaluate the collectibility of both contractual
interest and contractual principal when assessing the need for a loss accrual.
The adoption of these statements did not have a material impact on the results
of operations or the financial position of the Company, taken as a whole.
6
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The Company considers a loan impaired when it is probable that the Company
will be unable to collect all contractual principal and interest payments under
the terms of the loan agreement. Loans are evaluated for impairment as part of
the Company's normal internal asset review process. The Company applies the
measurement provisions of SFAS No. 114 to all loans in its portfolio with the
exception of one- to four-family residential mortgage loans and consumer lines
of credit which are evaluated on a collective basis. 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 September 30, 1996, the Company had classified
no loans as impaired with no specific reserves set aside as of September 30,
1996 as determined in accordance with SFAS No. 114. In addition, the Company
has $787,000 in loans which are collectively evaluated for impairment with no
specific reserves set aside as of September 30, 1996. The average recorded
investment in impaired loans, inclusive of those evaluated collectively, during
the three months ended September 30, 1996, was $1.2 million.
4. Accounting Principles
---------------------
The FASB has issued SFAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of" and SFAS No. 122,
"Accounting for Mortgage-Servicing Rights" which the Company adopted effective
July 1, 1996. There was no material impact on the Company's financial condition
and results of operations upon adoption of these statements.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation" which became effective for the Company beginning January 1, 1996.
SFAS No. 123 requires expanded disclosures of stock-based compensation
arrangements with employees and encourages (but does not require) compensation
cost to be measured based on the fair value of the equity instrument awarded.
Companies are permitted, however, to continue to apply APB Opinion No. 25, which
recognizes compensation cost based on the intrinsic value of the equity
instrument awarded. The Company will continue to apply APB Opinion No. 25 to
its stock based compensation awards to employees and will disclose the required
pro forma effect on net income and earnings per share.
4. Use of Estimates in the Preparation of Financial Statements
-----------------------------------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities
7
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at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
5. Approved Stock Compensation Plans
---------------------------------
At the Company's Annual Meeting of Shareholders on January 17, 1996, the
shareholders approved the SGV Bancorp, Inc. 1995 Master Stock Option Plan, the
First Federal Savings and Loan Association of San Gabriel Valley 1995 Master
Stock Compensation Plan and the First Federal Savings and Loan Association of
San Gabriel Valley 1995 Directors' Deferred Fee Stock Unit Plan (the Plans).
The Master Stock Option Plan authorizes the granting of options to purchase
272,765 shares to the Company's outside directors, officers and employees. The
Association contributed funds to the Master Stock Compensation Plan trust to
purchase 81,829 shares of Common Stock through purchases in the open market.
The Master Stock Compensation Plan is reflected as deferred compensation
representing a reduction in stockholders' equity in the consolidated statements
of financial condition as of September 30, 1996. These Plans became effective
as of the date of approval.
6. FDIC Special Assessment
-----------------------
On September 30, 1996, federal legislation was enacted to recapitalize the
SAIF insurance fund of the Federal Insurance Deposit Corporation through a one-
time special assessment on SAIF-insured deposits. The recapitalization of SAIF
is expected to result in lower deposit insurance costs for the Association in
future periods. This one-time special assessment represents 65.7 basis points
of the deposits held by the Association as of March 31, 1995. Although the
Association is expecting to pay this assessment in November 1996, the
Association was required to accrued for the assessment as of September 30, 1996.
8
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Item 2. Management's Discussion and Analysis of Results of Operations and
-----------------------------------------------------------------
Financial Condition
-------------------
This Management's Discussion and Analysis should be read in conjunction
with the Management's Discussion and Analysis contained in the Company's Annual
Report on Form 10-K, which focuses upon relevant matters occurring during the
year ended June 30, 1996. Accordingly, the ensuing discussion focuses upon the
material matters at and for the three months ended September 30, 1996.
GENERAL
- -------
The principal business of the Company is attracting retail deposits from
the general public and investing those deposits, together with funds generated
from operations and borrowings, primarily in one- to four-family residential
mortgage loans. To a lesser extent, the Company engages in secondary marketing
activities and invests in multi-family, commercial real estate, construction,
land and consumer loans. Loan sales come from loans held in the Company's
portfolio designated as being held for sale or originated during the period and
being so designated. The Company retains virtually all the servicing rights of
loans sold. The Company's revenues are derived principally from interest on its
mortgage loans, and to a lesser extent, interest and dividends on its investment
and mortgage-backed securities and income from loan servicing. The Company's
primary sources of funds are deposits, principal and interest payments on loans,
advances from the FHLB and, to a lesser extent, proceeds from the sale of loans.
RESULTS OF OPERATIONS
- ---------------------
The Company recorded a net loss of $464,000 for the three months ended
September 30, 1996 compared to net earnings of $149,000 for the three months
ended September 30, 1995. The loss for the three months ended September 30,
1996 was due to the accrual for the one-time special assessment to recapitalize
the SAIF insurance fund. This one-time special assessment (of approximately
$1.3 million on a pre-tax basis) represents 65.7 basis points of the deposits
held by the Association as of March 31, 1995. See "Recent Legislative
Developments." Excluding the accrual for the special assessment, the net
earnings for the three months ended September 30, 1996 would have been
approximately $302,000. For the three months ended September 30, 1996, the net
loss was $0.20 per share compared to net earnings of $0.06 per share for the
three months ended September 30, 1995. A discussion of the specific components
of net earnings is set forth in the Notes to Consolidated Financial Statements.
Net Interest Income
- -------------------
Net interest income before the provision for estimated loan losses was $2.2
million for the three months ended September 30, 1996 and $1.8 million for the
three months ended September 30, 1995.
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Interest Income
- ---------------
Total interest income for the three months ended September 30, 1996 was
$6.1 million, an increase of $1.3 million from the comparable period a year ago.
The increase in interest income was primarily due to a $57.5 million increase in
the average balance of interest-earning assets to $320.9 million for the three
months ended September 30, 1996 from $263.4 million for the three months ended
September 30, 1995. Interest income on loans increased to $4.9 million for the
three months ended September 30, 1996 from $4.1 million for the three months
ended September 30, 1995. The increase in interest on loans was due to the
increase in the average balance of loans receivable outstanding to $255.6
million for the three months ended September 30, 1996 from $217.3 million for
the three months ended September 30 ,1995. The interest income on mortgage-
backed securities increased to $740,000 for the three months ended September 30,
1996 from $372,000 from the three months ended September 30, 1995. The increase
in interest on mortgage-backed securities was a result of the increase in
average balances outstanding to approximately $45.8 million for the three months
ended September 30, 1996 from $23.9 million for the three months ended September
30, 1995. The yield on total interest-earning assets was 7.39% for the three
months ended September 30, 1996 compared to 7.36% for the three months ended
September 30, 1995.
Interest Expense
- ----------------
Total interest expense for the three months ended September 30, 1996 was
$3.9 million, an increase of $0.8 million from the three months ended September
30, 1995. The increase in interest expense was primarily due to the increase in
the average balance of interest-bearing liabilities to $303.1 million for the
three months ended September 30, 1996 from $235.5 million for the three months
ended September 30, 1995. The increase in average interest-bearing liabilities
was comprised of the $33.8 million increase in average interest-bearing savings
accounts and $33.8 million in average borrowings from the FHLB. The average
cost of funds decreased slightly to 5.10% for the three months ended September
30, 1996 from 5.13% for the three months ended September 30, 1995.
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Analysis of Net Interest Income
- -------------------------------
The following table sets forth average interest rates on the Company's
interest-earning assets and interest-bearing liabilities for the three month
period ended September 30, 1996 and September 30, 1995 (dollars are in thousands
and average balances are based on month-end amounts):
<TABLE>
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Three Months Ended September 30
---------------------------------------
1996 1995
----- -----
Average Yield Average Yield
Balance Rate Balance Rate
----------------- -----------------
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ASSETS:
Interest-earning assets:
Loans receivable $255,586 7.68% $217,348 7.61%
Mortgage-backed securities 45,796 6.46 23,913 6.22
Investment securities and other 29,090 6.30 22,112 6.11
-------- --------
Total interest-earning assets 330,472 7.39% 263,373 7.36%
Non-interest earning assets 10,518 9,432
-------- --------
Total assets $340,990 $272,805
======== ========
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
Savings accounts $235,139 4.76% $201,389 4.82%
Borrowings 67,935 6.28 34,089 7.02
-------- --------
Total interest-bearing liabilities 303,074 5.10% 235,478 5.13%
Non-interest-bearing liabilities 6,322 4,255
Stockholders' equity 31,594 33,072
-------- --------
Total liabilities and equity $340,990 $272,805
======== ========
Net interest rate spread 2.29% 2.23%
Net interest margin 2.72% 2.77%
Ratio of interest-earning assets
to interest-bearing liabilities 109.99% 111.47%
</TABLE>
The Company's average net interest rate spread increased slightly to 2.29%
for the three months ended September 30, 1996 as compared 2.23% for the three
months ended September 30, 1995. The increase was due partially to an increase
in the yield on interest earning assets to 7.39% for the three months ended
September 30, 1996 from 7.36% for the three months ended September 30, 1995 and
due to the decrease in the cost of interest-
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bearing liabilities to 5.10% for the three months ended September 30, 1996 from
5.13% for the three months ended September 30, 1995.
The average yield on loans receivable increased slightly to 7.68% for the
three months ended September 30, 1996 from 7.61% for the three months ended
September 30, 1995. The increase in yield was due partially to the decrease in
loans on non-accrual for the three months ended September 30, 1996 compared to
the three months ended September 30, 1995. The average yield on mortgage-backed
securities increased to 6.46% for the three months ended September 30, 1996 from
6.22% for the three months ended September 30, 1995. The increase was due to
the Company's purchase of fixed and adjustable rate mortgage-backed securities
with higher yields during the past year. The average balance of mortgage-backed
securities increased to $45.8 million for the three months ended September 30,
1996 from $23.9 million for the three months ended September 30, 1995.
The majority of the Association's savings accounts are relatively short
term (less than two years) and therefore the average cost of deposits adjusts
relatively rapidly to market rates. The average cost of savings accounts
decreased by 6 basis points to 4.76% for the three months ended September 30,
1996 from 4.82% for the three months ended September 30, 1995. The average
balance of savings accounts increased to $235.1 million for the three months
ended September 30, 1996 from $201.4 million for the three months ended
September 30, 1995. Also, the average balance of borrowings, principally from
the FHLB, increased to $67.9 million for the three months ended September 30,
1996 from $34.1 million for the three months ended September 30, 1995. The
increase in savings accounts and borrowings funded the growth of the interest-
earning assets.
Provision for Estimated Loan Losses
- -----------------------------------
The provision for estimated loan losses for the three months ended
September 30, 1996 was $188,000 compared with $111,000 for the three months
ended September 30, 1995. The increase in the provision for estimated loan
losses for the three months ended September 30, 1996 was due primarily to an
additional fair value writedown of approximately $100,000 related to a single
multi-unit residential property. See "Financial Condition."
Other Income (Expense)
- ----------------------
Other income (expense) was relatively unchanged for the three months ended
September 30, 1996 at $183,000 as compared to $185,000 for the three months
ended September 30, 1995. Although the total was virtually the same, there was
an increase in the net loss on real estate owned operations to $56,000 for the
three months ended September 30, 1996 from $17,000 for the three months ended
September 30, 1995. See "Financial Condition."
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General and Administrative Expenses
- -----------------------------------
For the three months ended September 30, 1996, general and administrative
expenses increased to $3.0 million from $1.6 million for the three months ended
September 30, 1995. The increase was due primarily to the $1.3 million (pre-
tax) accrual for the one-time special assessment to recapitalize the SAIF
insurance fund. Excluding this special assessment, general and administrative
expenses increased by $70,000 in the three months ended September 30, 1996
compared to the three months ended September 30, 1995. Of this increase,
approximately $34,000 was related to compensation related costs for the
establishment of a stock compensation plan which was approved in the annual
meeting of shareholders in January 1996.
Income Taxes
- ------------
The Company recorded a tax benefit of approximately $338,000 for the three
months ended September 30, 1996 related to the loss for the period. In
comparison, the Company recorded $109,000 in income tax expense for the three
months ended September 30, 1995. The effective tax rates for the three months
ended September 30, 1996 and September 30, 1995 were approximately (42.1)% and
42.2%, respectively.
FINANCIAL CONDITION
- -------------------
The Company's total assets were $344.9 million at September 30, 1996, an
increase of $8.8 million from the $336.1 million in total assets at June 30,
1996. The Company's loans receivable held for investment decreased slightly by
$1.8 million to $254.2 million at September 30, 1996 as compared to $256.0
million at June 30, 1996. The decrease is primarily due to the continuation of a
slow real estate market. The Company increased its investment in mortgage-
backed securities by $8.1 million to $52.4 million at September 30, 1996 from
$44.3 million at June 30, 1996. The increase in mortgage-backed securities was
funded by the $8.3 million increase in deposit accounts.
During the three months ended September 30, 1996, the Company originated
and purchased for investment a total of $5.0 million in mortgage loans, which
was slightly higher than the $4.6 million originated in the three month period
ended September 30, 1995. The Company also originated and sold $2.6 million in
mortgage loans to the secondary market during the three months ended September
30, 1996 as compared to approximately $700,000 for the same period a year ago.
As stated above, the Company also purchased approximately $10 million in
mortgage-backed securities in the three months ended September 30, 1996, as
compared to $12.4 million in mortgage-backed securities purchases in the three
months ended September 30, 1995. The purchases for both periods were made with
the intent to enhance net interest income.
The Company's non-performing assets totaled $2.4 million at September 30,
1996 compared to $3.4 million at June 30, 1996. The decrease in non-performing
assets was due primarily to the substantial reduction in the amount of loans on
non-accrual status at
13
<PAGE>
September 30, 1996 in comparison to the amount at June 30, 1996. During the
three months ended September 30, 1996, the Company foreclosed on six real estate
mortgage loans which totaled $1.6 million in remaining principal balance. This
increase in the amount of real estate owned (REO) was offset by the sale of REOs
totaling approximately $900,000 during this same time period. The overall result
was a decrease in the Company's ratio of non-performing assets to total assets
to 0.70% at September 30, 1996 from 1.03% at June 30, 1996. From September 30,
1996 through November 8, 1996, the Company had reduced its REOs by approximately
$900,000 related to the sale of foreclosed properties. The following table sets
forth the non-performing assets at September 30, 1996 and June 30, 1996:
<TABLE>
<CAPTION>
September 30, 1996 June 30, 1996
------------------- --------------
(dollars in thousands)
<S> <C> <C>
Non-accrual loans $ 469 $1,962
Real estate acquired through foreclosure 1,932 1,489
------ ------
Non-performing assets $2,401 $3,451
====== ======
Non-performing assets as a percent of total
assets 0.70% 1.03%
Non-performing loans as a percent of gross
loans receivable 0.18% 0.76%
</TABLE>
The Company adopted SFAS No. 114, as amended by SFAS No. 118 as of July 1,
1995 in regards to the accounting for impaired loans. As of the date of
adoption, there was no impact to the Company. See Note 3 of Notes to
Consolidated Financial Statements for a further discussion of the Company's
adoption of SFAS No. 114. The Company considers a loan impaired when it is
probable that the Company will be unable to collect all contractual principal
and interest payments under the terms of the loan agreement. Loans are
evaluated for impairment as part of the Company's normal internal asset review
process. The Company applies the measurement provisions of SFAS No. 114 to all
loans in its portfolio with the exception of one- to four-family residential
mortgage loans and consumer lines of credit which are evaluated on a collective
basis for impairment. Also, loans which have delays in payments of less than
four months are not necessarily considered impaired unless other factors apply
to the loans. The accrual of interest income on impaired loans is discontinued
when, in management's opinion, the borrower may be unable to meet payments as
they become due. When the interest accrual is discontinued, all unpaid accrued
interest is reversed. Interest income is subsequently recognized only to the
extent cash payments are received. Where impairment is considered temporary, an
allowance is established. Impaired loans which are performing under the
contractual terms are reported as performing loans, and cash payments are
allocated to principal and interest in accordance with the terms of the loan.
At September 30, 1996, the Company had classified $787,000 of its loans as
impaired with no specific reserves set aside as of September 30, 1996 as
determined in accordance with SFAS No. 114. In addition, the Company has no
loans which are collectively evaluated for impairment with no specific reserves
set aside as of September 30, 1996. The average recorded investment in impaired
loans, inclusive of those
14
<PAGE>
evaluated collectively, during the three months ended September 30, 1996, was
$1.2 million.
The Company, in consideration of the current economic environment and the
condition of the loan portfolio, maintained the allowance for estimated loan
losses at September 30, 1996 at $1,009,000. The allowance for estimated loan
losses is maintained at an amount management considers adequate to cover
estimated losses in loans receivable which are deemed probable and estimable.
The allowance is based upon a number of factors, including current economic
conditions, actual loss experience and industry trends. The Company's non-
performing loans are primarily made up of one-to four-family residential
mortgage loans. The following table sets forth the activity in the Company's
allowance for estimated loan losses for the three months ended September 30,
1996:
<TABLE>
<CAPTION>
Activity for the three months ended
September 30, 1996
-----------------------------------
<S> <C>
Balance at June 30, 1996 $1,058,000
Add:
Provision for estimated loan losses 188,000
Recoveries of previous charge-offs -
Less:
Charge-offs 237,000
----------
Balance at September 30, 1996 $1,009,000
==========
</TABLE>
The Company's total liabilities increased to $313.6 million at September
30, 1996 from $304.5 million at June 30, 1996. Total deposit accounts increased
$8.3 million to $242.3 million at September 30, 1996 from $234.0 million at June
30, 1996. The Company did not increase its borrowings from the FHLB during the
three months ended September 30, 1996 as the increase in deposit accounts
provided the necessary funds for the growth in earning assets. The Company
continues to utilize FHLB advances as part of its asset and liability management
strategy.
The Company's stockholders' equity decreased to $31.3 million at September
30, 1996 from $31.6 million at June 30, 1996 primarily due to the loss from
operations resulting from the accrual for the one-time special assessment to
recapitalize the SAIF insurance fund.
MANAGEMENT OF INTEREST RATE RISK
- --------------------------------
The Company's profitability is dependent to a large extent upon its net
interest income, which is the difference between its interest income on
interest-earning assets, such as loans and investments, and its interest expense
on interest-bearing liabilities, such as deposits and borrowings. To manage its
interest rate risk, the Company has utilized the following strategies : (i)
emphasizing the origination and/or purchase of adjustable-rate one- to four-
family mortgage loans for portfolio; (ii) selling to the secondary market
substantially all fixed-rate mortgage loans originated; (iii) holding primarily
short-term mortgage-backed and
15
<PAGE>
investment securities; and (iv) attempting to reduce the overall interest rate
sensitivity of liabilities by emphasizing core and longer-term deposits and
utilizing FHLB advances.
LIQUIDITY
- ---------
The Company's primary sources of funds are deposits, principal and interest
payments on loans and mortgage-backed securities, FHLB advances and increases in
deposits and, to a lesser extent, proceeds from the sale of loans and
investments. While maturities and scheduled amortization of loans are
predictable sources of funds, deposit flows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions and competition.
The Association, by regulation, must maintain its liquidity ratio at no
less than 5.0% of deposits and short-term borrowings. Liquidity represents cash
and certain investments which are not committed or pledged to specific
liabilities. The Association's average liquidity ratio for September 30, 1996
and September 30, 1995 was 11.11% and 6.54%, respectively.
COMMITMENTS AND CONTINGENT LIABILITIES
- --------------------------------------
At September 30, 1996, there were no material changes to the Company's
commitments or contingent liabilities from the period ended June 30, 1996 as
discussed in the Company's notes to the consolidated financial statements
reflected in the audited consolidated financial statements of SGV Bancorp, Inc.,
for the year ended June 30, 1996 included in the Annual Report on Form 10-K for
the year ended June 30, 1996. At September 30, 1996, the Company had
outstanding commitments to originate or purchase mortgage loans of $6.3 million
as compared to $1.1 million at June 30, 1996.
REGULATORY CAPITAL
- ------------------
The Office of Thrift Supervision (OTS) capital regulations require savings
institutions to meet three minimum capital requirements: a 1.5% tangible capital
ratio, a 3% leverage (core capital) ratio and an 8% risk-based capital ratio.
The core capital requirement has been effectively increased to 4% because the
prompt corrective action legislation provides that institutions with less than
4% core capital will be deemed "undercapitalized". In addition, the OTS, under
the prompt corrective action regulation can impose various constraints on
institutions depending on their level of capitalization ranging from well-
capitalized to critically undercapitalized. At September 30, 1996, the
Association was considered "well-capitalized".
The Association was in compliance with the capital requirements in effect
as of September 30, 1996. The following table reflects the required ratios and
the actual capital ratios of the Association at September 30, 1996:
16
<PAGE>
<TABLE>
<CAPTION>
Capital
-------
Actual Required Excess Actual Required
Capital Capital Amount Percent Percent
------- -------- ------- -------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tangible $24,928 $ 5,125 $19,803 7.30% 1.50%
Core $24,928 $10,250 $14,678 7.30% 3.00%
Risk-based $25,937 $12,935 $13,002 16.04% 8.00%
</TABLE>
Recent Legislative Developments
- -------------------------------
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 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 $1.3 million as a result of the FDIC
special assessment
The Funds Act also spreads the obligations for payment of the Financing
Corporation ("FICO") bonds across all SAIF and BIF members. Beginning on
January 1, 1997, BIF deposits will be assessed for FICO payments at a rate of
20% of the rate assessed on SAIF deposits. Based on current estimates by the
FDIC, BIF deposits will be assessed a FICO payment of 1.3 basis points, while
SAIF deposits will pay an estimated 6.5 basis points on the FICO bonds. Full
pro rata sharing of the FICO payments between BIF and SAIF members will occur on
the earlier of January 1, 2000, or the date the BIF and SAIF are merged. The
Funds Act specifies that the BIF and SAIF will be merged on January 1, 1999
provided no savings associations remain as of that time.
As a result of the Funds Act, the FDIC recently proposed to lower SAIF
assessments to 0 to 27 basis points effective January 1, 1997, a range
comparable to that of BIF members. However, SAIF members will continue to make
the higher FICO payments described above. Management cannot predict the level
of FDIC insurance assessments on an on-going basis whether the savings
association charter will be eliminated or whether the BIF and SAIF will
eventually be merged.
17
<PAGE>
PART II. OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings
-----------------
The Company is involved as plaintiff or defendant in various legal actions
incident to its business, none of which is believed by management to be material
to the financial condition of the Company.
Item 2. Changes in Securities
---------------------
None.
Item 3. Defaults in Securities
----------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
Item 5. Other Information
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) The following exhibits are filed as part of this report:
3.1 Certificate of Incorporation of SGV Bancorp, Inc. *
3.2 Bylaws of SGV Bancorp, Inc. *
11.0 Computation of per share earnings (filed herewith).
27.0 Financial data schedule (filed herewith).
(b) Reports on Form 8-K
The Company filed a Report on Form 8-K on July 19, 1996 with respect
to a press release issued by the Company announcing that the Board of
Directors of the Company had set the 1996 Annual Meeting of
Shareholders for November 21, 1996.
___________________
* Incorporated herein by reference from the Exhibits to the Registration
Statement on Form S-1, as amended, filed on March 6, 1995, Registration No.
33-90018.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SGV BANCORP, INC.
November 14, 1996 /s/ Barrett G. Andersen
- ----------------- ------------------------
Date Barrett G. Andersen
President and Chief Executive Officer
November 14, 1996 /s/ Ronald A. Ott
- ----------------- -----------------
Date Ronald A. Ott
Executive Vice President
Chief Financial Officer and Treasurer
19
<PAGE>
SGV BANCORP, INC.
EXHIBIT NO. 11: STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended
September 30, 1996
------------------
(in thousands except per share amounts)
<S> <C>
Net Loss $ (464)
======
Weighted average shares outstanding 2,350
Common stock equivalents due to dilutive
effect on stock options 0
------
Total weighted average common shares
and equivalents outstanding 2,350
======
Primary earnings per share $(0.20)
======
Total weighted average common shares
and equivalent outstanding 2,350
Additional dilutive shares using the end of
period market value versus the average
market value when applying the treasury
stock method 0
------
Total weighted average common shares and
equivalent outstanding for fully diluted
computation 2,350
======
Fully diluted earnings per share $(0.20)
=======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FORM 10-Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 3,299,000
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 5,800,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 42,639,000
<INVESTMENTS-CARRYING> 26,719,000
<INVESTMENTS-MARKET> 0
<LOANS> 0
<ALLOWANCE> 1,009,000
<TOTAL-ASSETS> 344,852,000
<DEPOSITS> 242,262,000
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,924,000
<LONG-TERM> 67,405,000
0
0
<COMMON> 27,000
<OTHER-SE> 31,234,000
<TOTAL-LIABILITIES-AND-EQUITY> 344,852,000
<INTEREST-LOAN> 4,910,000
<INTEREST-INVEST> 1,052,000
<INTEREST-OTHER> 146,000
<INTEREST-TOTAL> 6,108,000
<INTEREST-DEPOSIT> 2,796,000
<INTEREST-EXPENSE> 3,863,000
<INTEREST-INCOME-NET> 2,245,000
<LOAN-LOSSES> 188,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,859,000
<INCOME-PRETAX> (802,000)
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (464,000)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> (0.20)
<YIELD-ACTUAL> 7.39
<LOANS-NON> 469,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 787,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,058,000
<CHARGE-OFFS> 237,000
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,009,000
<ALLOWANCE-DOMESTIC> 1,009,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
