<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
Annual report pursuant to Section 13 of the
Securities Exchange Act of 1934
For the fiscal year ended June 30, 1996
Commission File No.: 0-25664
SGV BANCORP, INC.
(exact name of registrant as specified in its charter)
DELAWARE 95-4524789
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
225 NORTH BARRANCA STREET, WEST COVINA, CALIFORNIA 91791
(Address of principal executive offices)
Registrant's telephone number, including area code: (818) 859-4200
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __________.
--------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, i.e., persons other than the directors and executive officers of
the registrant, was $24,779,000, based upon the last sales price as quoted on
The Nasdaq Stock Market for September 20, 1996.
The number of shares of Common Stock outstanding as of September 20, 1996:
2,591,276.
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INDEX
<TABLE>
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PAGE
PART I
<S> <C> <C>
Item 1. Description of Business............................ 1
Item 2. Properties......................................... 34
Item 3. Legal Proceedings.................................. 35
Item 4. Submission of Matters to a Vote of Security Holders 35
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................ 35
Item 6. Selected Financial Data............................ 36
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 38
Item 8. Financial Statements and Supplementary Data........ 49
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............. 91
PART III
Item 10. Directors and Executive Officers of the
Registrant........................................ 91
Item 11. Executive Compensation............................ 91
Item 12. Security Ownership of Certain Beneficial Owners
and Management.................................... 91
Item 13. Certain Relationships and Related Transactions.... 91
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K............................... 91
Signatures.................................................... 93
</TABLE>
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PART I
Item 1. Description of Business.
General
SGV Bancorp, Inc. (the "Company") completed its initial public offering of
common stock on June 28, 1995, in connection with the conversion of First
Federal Savings and Loan Association of San Gabriel Valley (the "Association")
from the mutual to stock form of ownership. The Company utilized approximately
50% of the net proceeds of the initial public offering to acquire all of the
issued and outstanding stock of the Association. The Company is headquartered in
West Covina, California and its principal business currently consists of the
operations of its wholly-owned subsidiary, First Federal Savings and Loan
Association of San Gabriel Valley. The Company's only significant assets, other
than its investment in the capital stock of the Association and a loan to the
Association's ESOP, are cash, investments and mortgage-backed securities.
Operational activity of the Savings and Loan Association will hereafter be
referred to as "Association", where applicable. The Company had no operations
prior to June 28, 1995, and accordingly, the results of operations prior to such
date reflect only those of the Association and its subsidiary. The Company, as a
savings and loan holding company, and the Association are subject to regulation
by the Office of Thrift Supervision (the "OTS"), the Federal Deposit Insurance
Corporation (the "FDIC") and the Securities and Exchange Commission (the "SEC").
The principal business of the Association is attracting retail deposits
from the general public and investing those deposits, together with funds
generated from operations and borrowings, primarily in one- to four-family
residential mortgage loans. To a lesser extent, the Association engages in
secondary market activities and invests in multi-family, commercial real estate,
construction, land and consumer loans. Loan sales come from loans held in the
Association's portfolio designated as being held for sale or originated during
the period and being so designated. The Association retains virtually all the
servicing rights of loans sold. 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.
Market Area and Competition
The Association conducts business from its administrative branch office
located in West Covina, California and its five other offices located in Covina,
Hacienda Heights, La Verne, City of Industry and Arcadia, all of which are
located in the eastern part of the greater Los Angeles metropolitan area. The
Association has been and continues to be a community-oriented savings
institution which primarily originates one- to four-family residential mortgage
loans within its primary market area. The Association's deposit gathering is
concentrated in the communities surrounding its offices in eastern Los Angeles
county. The Association makes loans secured by deeds of trust in portions of
eastern Los Angeles, western San Bernardino and Riverside and northern Orange
counties.
The Los Angeles metropolitan area is a highly competitive market. The
Association faces significant competition both in making loans and in attracting
deposits. The Association's share of deposits and loan originations in the Los
Angeles metropolitan area amounts to less than one percent. The Association
faces direct competition from a significant number of financial institutions
operating in its market area, many with a state-wide or regional presence and in
some cases a national presence. Many of these financial institutions are
significantly larger and have greater financial resources than the Association.
The Association's competition for loans comes principally from commercial banks,
savings and loan associations, mortgage banking companies, credit unions and
insurance companies. Its most direct competition for deposits has historically
come from savings and loan associations and commercial banks. In addition, the
Association faces increasing competition for deposits from non-bank institutions
such as
1
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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.
Lending Activities
Loan Portfolio Composition. The Association's loan portfolio consists
primarily of conventional first mortgage loans secured by one- to four-family
residences. At June 30, 1996, the Association had total loans outstanding of
$258.1 million, of which $185.5 million were one- to four-family, owner-occupied
residential mortgage loans, or 71.9% of the Association's total loans and $41.2
million were one- to four-family, non-owner occupied residential loans, or 16.0%
of the Association's total loans. The remainder of the portfolio consists of
$21.7 million of multi-family mortgage loans, or 8.4% of total loans; $9.3
million of commercial real estate loans, or 3.6% of total loans; and consumer
loans of $440,000 or 0.2% of total loans. The Association had $723,000 in loans
held for sale as of June 30, 1996. At that same date, 76.8% of the Association's
mortgage loans had adjustable interest rates. Of the Association's adjustable-
rate mortgage loans, 24.1% are indexed to the one-year Constant Maturity
Treasury ("CMT") Index and 75.9% are indexed to the Cost of Funds Index
("COFI").
The types of loans that the Association may originate are subject to
federal and state law and regulations. Interest rates charged by the Association
on loans are affected by the demand for such loans and the supply of money
available for lending purposes and the rates offered by competitors. These
factors are, in turn, affected by, among other things, economic conditions,
monetary policies of the federal government, including the Federal Reserve
Board, and legislative tax policies.
The following table sets forth the composition of the Association's loan
portfolio in dollar amounts and as a percentage of the portfolio at the dates
indicated.
2
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<TABLE>
<CAPTION>
AT JUNE 30,
---------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------------- -------------------- -------------------- ------------------- -------------------
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........ $226,660 87.81% $187,693 85.82% $177,544 85.00% $164,523 85.11% $151,603 86.78%
Multi-family............... 21,690 8.40 20,431 9.34 20,215 9.68 16,612 8.59 9,788 5.60
Commercial................. 9,331 3.62 9,567 4.37 9,791 4.69 10,660 5.51 11,037 6.32
Construction and land...... - 0.00 415 0.19 665 0.32 667 0.35 1,085 0.62
Consumer................... 440 0.17 602 0.28 643 0.31 841 0.44 1,183 0.68
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans.............. 258,121 100.00% 218,708 100.00% 208,858 100.00% 193,303 100.00% 174,696 100.00%
====== ====== ====== ====== ======
LESS:
Undisbursed loan funds..... - - - 59 318
Unamortized yield
adjustments............... (64) 45 101 63 42
Deferred loan fees......... 451 472 528 551 557
Allowance for estimated 1,058 792 562 472 556
loan losses............... -------- -------- -------- -------- --------
Total loans, net......... 256,676 217,399 207,667 192,158 173,223
LESS:
Loans receivable held for
sale:
One- to four-family...... 723 - - 1,197 1,530
-------- -------- -------- -------- --------
Loans receivable held $255,953 $217,399 $207,667 $190,961 $171,693
for investment.......... ======== ======== ======== ======== ========
</TABLE>
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Loan Maturity. The following table shows the contractual maturity of the
Association's gross loans at June 30, 1996. Loans that have adjustable rates are
shown being due in the period during which the interest rates are next subject
to change. The table does not include principal repayments. Principal
repayments on total loans totalled $25.0 million for the year ended June 30,
1996 and $19.7 million and $41.6 million for the years ended June 30, 1995 and
1994, respectively.
<TABLE>
<CAPTION>
AT JUNE 30, 1996
----------------------------------------------------------------------
ONE- TO TOTAL
FOUR- MULTI- CONSTRUCTION LOANS
FAMILY FAMILY COMMERCIAL AND LAND CONSUMER RECEIVABLE
------------ --------- ------------ ------------ --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
AMOUNTS DUE:
One year or less........................ $ 7,192 $ 674 $1,728 $ - $ 440 $ 10,034
After one year:
More than one year to three years....... 18,172 4,659 1,162 - - 23,993
More than three years to five years..... 1,413 1,832 127 - - 3,372
More than five years to 10 years........ 2,434 2,467 124 - - 5,025
More than 10 years to 20 years.......... 16,194 418 1,659 - - 18,271
More than 20 years...................... 181,255 11,640 4,531 - - 197,426
-------- ------- ------ ------------ -------- --------
Total due after June 30, 1997........... 219,468 21,016 7,603 - - 248,087
-------- ------- ------ ------------ -------- --------
Total amount due........................ 226,660 21,690 9,331 - 440 258,121
Less:
Unamortized yield adjustments........... (64) - - - - (64)
Deferred loan fees...................... 279 143 29 - - 451
Allowance for estimated loan losses..... 696 195 153 - 14 1,058
-------- ------- ------ ------------ -------- --------
Total loans, net........................ 225,749 21,352 9,149 - 426 256,676
Loans receivable held for sale.......... (723) - - - - (723)
-------- ------- ------ ------------ -------- --------
Loans receivable held for investment.... $225,026 $21,352 $9,149 $ - $ 426 $255,953
======== ======= ====== ============ ======== ========
</TABLE>
4
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The following table sets forth at June 30, 1996, the dollar amount of gross
loans receivable contractually due after June 30, 1997, and whether such loans
have fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER JUNE 30, 1997
------------------------------------
FIXED ADJUSTABLE TOTAL
----------- ------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Real estate loans:
One- to four-family........................ $42,984 $176,484 $219,468
Multi-family............................... 5,569 15,447 21,016
Commercial real estate................. 1,479 6,124 7,603
Construction and land.................. - - -
Consumer...................................... - - -
Total loans receivable................ $50,032 $198,055 $248,087
======= ======== ========
</TABLE>
Origination, Sale, Servicing and Purchase of Loans. The Association's
mortgage lending activities are conducted primarily by commissioned loan
representatives and through its six branch offices. The Association originates
both adjustable-rate and fixed-rate mortgage loans. The Association's ability to
originate loans is dependent upon the relative customer demand for fixed-rate or
adjustable-rate mortgage loans, which is affected by the current and expected
future level of interest rates. It is the general policy of the Association to
sell substantially all of the fixed-rate mortgage loans that it originates. The
Association also may sell the adjustable-rate mortgage loans that it originates.
The Association utilizes forward commitments to hedge the risks associated with
a change in interest rates between origination and sale of loans. The
Association retains virtually all servicing of the loans sold. See "- Loan
Servicing." The Association recognizes, at the time of sale, the cash gain or
loss on the sale of the loans based on the difference between the net cash
proceeds received and the carrying value of the loans sold. At June 30, 1996
there were $723,000 in fixed rate mortgage loans categorized as held for sale.
From time to time the Association has purchased loans originated by other
institutions based upon the Association's investment needs and market
opportunities. During the year ended June 30, 1996, the Association purchased
$48.3 million of one-to four-family mortgage loans with adjustable interest
rates indexed to COFI which are secured by properties located in Southern
California. The loans were purchased in three transactions consummated during
the quarter ended March 31, 1996.
5
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The following tables set forth the Association's loan originations,
purchases, sales and principal repayments for the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
---------------------------------
1996 1995 1994
---------- ----------- ----------
<S> <C> <C> <C>
(IN THOUSANDS)
Gross loans(1):
Beginning balance................... $218,191 $208,229 $192,630
Loans originated:
One- to four-family(2)......... 31,110 29,062 77,205
Multi-family................... 1,163 2,873 5,262
Commercial..................... 70 98 737
Construction and land.......... - - 415
-------- -------- --------
Total loans originated.......... 32,343 32,033 83,619
Loans purchased................... 48,297 - 1,647
-------- -------- --------
Total........................... 298,831 240,262 277,896
Less:
Principal repayments.............. 25,029 19,730 41,611
Sales of loans.................... 13,183 1,382 26,151
Transfer to REO................... 2,885 959 1,905
Undisbursed loan funds............ - - -
-------- -------- --------
Total loans......................... 257,734 218,191 208,229
Loans held for sale............... 723 - -
-------- -------- --------
Ending balance, loans held $257,011 $218,191 $208,229
for investment.................... ======== ======== ========
</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.
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One- to Four-Family Mortgage Lending. The Association offers both fixed-
rate and adjustable-rate mortgage loans secured by one- to four-family
residences located in the Association's primary market area, with maturities up
to forty years. Substantially all of such loans are secured by property located
in the Association's primary market area. Loan originations are generally
obtained from the Association's commissioned loan representatives and their
contacts with the local real estate industry, existing or past customers, and
members of the local communities.
At June 30, 1996, the Association's total loans outstanding were $258.1
million, of which $226.7 million or 87.8% were one- to four-family residential
mortgage loans. Of the one- to four-family residential mortgage loans
outstanding at that date, 22.1% were fixed-rate loans, and 77.9% were
adjustable-rate mortgage loans. The Association's adjustable-rate mortgage loans
are generally indexed to COFI and the CMT. The Association currently offers a
number of adjustable-rate mortgage loan programs with interest rates which
adjust monthly, semi-annually or annually. A portion of the Association's
adjustable-rate mortgage loans have introductory terms of three or five years
and at the end of such period will adjust either monthly or annually according
to their terms. The Association's adjustable-rate mortgage loans generally
provide for periodic and overall caps on the increase or decrease in interest
rate at any adjustment date and over the life of the loan. At June 30, 1996,
approximately $53.0 million or 26.7%, of the Association's one- to four-family
adjustable-rate mortgage loans had interest rates that were between 200 to 400
basis points below their lifetime caps, with the remainder having interest rates
that were more than 400 basis points below their lifetime caps. The Association
currently has $42.1 million in mortgage loans that may be subject to negative
amortization. The negative amortization is currently capped at up to 115% of the
original loan amount. Negative amortization involves a greater risk to the
Association because during a period of high interest rates the loan principal
may increase above the amount originally advanced. However, the Association
believes that the risk of default may be reduced by negative amortization caps,
underwriting criteria and the stability provided by payment schedules.
Of the Associations's one-to four-family mortgage loans, $41.2 million, or
18.2%, were secured by non-owner-occupied residences. Loans secured by non-
owner-occupied properties are generally considered to involve a higher degree of
credit risk than loans secured by owner-occupied properties because payment
is generally dependent upon the property producing sufficient income to cover
debt service and any operating expenses.
The Association's policy is to originate one- to four-family residential
mortgage loans in amounts up to 80% of the lower of the appraised value or the
selling price of the property securing the loan and up to 95% of the appraised
value or selling price if private mortgage insurance is obtained. Mortgage loans
originated by the Association generally include due-on-sale clauses which
provide the Association with the contractual right to deem the loan immediately
due and payable in the event the borrower transfers ownership of the property
without the Association's consent. Due-on-sale clauses are an important means of
adjusting the rates on the Association's fixed-rate mortgage loan portfolio and
the Association has generally exercised its rights under these clauses.
Multi-Family Lending. The Association originates multifamily mortgage
loans generally secured by five to thirty-six unit apartment buildings located
in the Association's primary market area. As a result of uncertain market
conditions in its primary market area, the Association currently originates
multi-family loans on a limited and highly selective basis. In reaching its
decision on whether to make a multi-family loan, the Association considers the
qualifications of the borrower as well as the underlying property. Some of the
factors to be considered are: the net operating income of the mortgaged premises
before debt service and depreciation; the debt service ratio (the ratio of net
earnings to debt service); and the ratio of loan amount to appraised value.
Pursuant to the Association's current underwriting policies, a multi-family
adjustable-rate mortgage loan may only be made in an amount up to 75% of the
appraised value of the underlying property to a maximum amount of $750,000.
Subsequent declines in the real estate values in the Association's primary
market area have resulted in some increase in the loan-to-value ratio on some
mortgage loans. In addition, the Association generally requires a minimum debt
service ratio of 115%.
7
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Properties securing a loan are appraised by an independent appraiser and title
insurance is required on all loans. The Association's multi-family loan
portfolio at June 30, 1996, totaled $21.7 million.
When evaluating the qualifications of the borrower for a multi-family loan,
the Association considers the financial resources and income level of the
borrower, the borrower's experience in owning or managing similar property, and
the Association's lending experience with the borrower. The Association's
underwriting policies require that the borrower be able to demonstrate strong
management skills and the ability to maintain the property from current rental
income. The borrower is required to present evidence of the ability to repay the
mortgage and a history of making mortgage payments on a timely basis. In making
its assessment of the creditworthiness of the borrower, the Association
generally reviews the financial statements, employment and credit history of the
borrower, as well as other related documentation. The Association's largest
multi-family loan at June 30, 1996, had an outstanding balance of $1.2 million,
was current at that date and is secured by a 22-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.
The Association seeks to minimize these risks through its underwriting policies,
which require such loans to be qualified at origination on the basis of the
property's income and debt coverage ratio.
Commercial Real Estate Lending. The Association originates commercial real
estate loans that are generally secured by properties used for business purposes
such as small office buildings or retail facilities located in the Association's
primary market area. The Association's underwriting procedures provide that
commercial real estate loans may be made in amounts up to the lesser of 75% of
the appraised value of the property, or at the Association's current loans-to-
one borrower limit. These loans may be made with terms up to thirty years for
adjustable-rate loans and are indexed to CMT or COFI. The Association's
underwriting standards and procedures are similar to those applicable to its
multi-family loans, whereby the Association considers the net operating income
of the property and the borrower's expertise, credit history and profitability.
The Association has generally required that the properties securing commercial
real estate loans have debt service coverage ratios of at least 115%. The
largest commercial real estate loan in the Association's portfolio at June 30,
1996, had an outstanding balance of $1.1 million, was current at that date and
is secured by a mini-storage warehouse. At June 30, 1996, the Association's
commercial real estate loan portfolio was $9.3 million or 3.6% of total loans.
The Association currently originates commercial real estate loans on a limited
and highly selective basis in its primary market area.
Loans secured by commercial real estate properties, like multi-family
loans, are generally larger and involve a greater degree of risk than one- to
four-family residential mortgage loans. Because payments on loans secured by
commercial real estate properties are often dependent on successful operation or
management of the properties, repayment of such loans may be subject to a great
extent to adverse conditions in the real estate market or the economy. The
Association seeks to minimize these risks through its underwriting standards,
which require such loans to be qualified on the basis of the property's income
and debt service ratio.
Construction and Land Lending. The Association has in the past originated
loans for the acquisition and development of property to contractors and
individuals in its primary market area. The Association's construction loans
primarily have been made to finance the construction of one- to four-family,
owner-occupied residential properties. These loans were primarily adjustable-
rate loans with maturities of one year or less. The Association is not currently
originating construction and land loans but may in the future depending on
market conditions. At June 30, 1996, the Association had no construction or land
loans outstanding.
8
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Construction and land financing is generally considered to involve a higher
degree of credit risk than long-term financing on improved, owner-occupied real
estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction or development compared to the estimated cost (including interest)
of construction. If the estimate of value proves to be inaccurate, the
Association may be confronted with a project, when completed, having a value
which is insufficient to assure full repayment.
Loan Servicing. The Association also services mortgage loans for others.
Loan servicing includes collecting and remitting loan payments, accounting for
principal and interest, making inspections as required of mortgaged premises,
contacting delinquent mortgagors, supervising foreclosures and property
dispositions in the event of unremedied defaults, making certain insurance and
tax payments on behalf of the borrowers and generally administering the loans.
In the past the Association has recognized gains from excess servicing, which is
the present value of any difference between the interest rate charged to the
borrower and the interest rate paid to the purchaser after deducting a normal
servicing fee, and is recognizable as an adjustment to the cash gain or loss.
The excess servicing gain or loss is dependent on prepayment estimates and
discount rate assumptions. The decline in loan demand being experienced by the
Association has resulted in a substantial reduction in the ability of the
Association to originate loans for sale in the secondary market. All of the
loans currently being serviced for others are loans which have been sold by the
Association. At June 30, 1996, the Association was servicing $97.8 million of
loans for others.
Delinquencies and Classified Assets. The Board of Directors performs a
monthly review of all delinquent loans ninety days or more past due. In
addition, management reviews on an ongoing basis all loans 15 or more days
delinquent. The procedures taken by the Association with respect to
delinquencies vary depending on the nature of the loan and period of
delinquency. When a borrower fails to make a required payment on a loan, the
Association takes a number of steps to have the borrower cure the delinquency
and restore the loan to current status. The Association generally sends the
borrower a written notice of non-payment after the loan is first past due. In
the event payment is not then received, additional letters and phone calls
generally are made. If the loan is still not brought current and it becomes
necessary for the Association to take legal action, which typically occurs after
a loan is delinquent at least 30 days or more, the Association will commence
foreclosure proceedings against any real property that secures the loan. If a
foreclosure action is instituted and the loan is not brought current, paid in
full, or refinanced before the foreclosure sale, the real property securing the
loan generally is sold at foreclosure.
Federal regulations and the Association's Classification of Assets Policy
require that the Association utilize an internal asset classification system as
a means of reporting problem and potential problem assets. The Association has
incorporated the OTS internal asset classifications as a part of its credit
monitoring system. The Association currently classifies problem and potential
problem assets as "Substandard," "Doubtful" or "Loss" assets. An asset is
considered "Substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "Doubtful" have all of the weaknesses
inherent in those classified "Substandard" with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "Loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets which do not
currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are required to be designated "Special Mention."
When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, it is required to establish a general
valuation allowance for loan losses in an amount deemed prudent by management.
General valuation allowances, represent loss allowances which have been
established to recognize the inherent risk associated with lending activities,
but which, unlike specific
9
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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 asset so classified or to charge off such amount.
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 institutions have effective systems and controls to
identify, monitor and address asset quality problems; that management has
analyzed all significant factors that affect the collectibility of the portfolio
in a reasonable manner; and that management has established acceptable allowance
evaluation processes that meet the objectives set forth in the policy statement.
As a result of the declines in local and regional real estate market values and
the significant losses experienced by many financial institutions, there has
been a greater level of scrutiny by regulatory authorities of the loan
portfolios of financial institutions undertaken as part of the examination of
institutions by the OTS and the FDIC. While the Association believes that it has
established an adequate allowance for loan losses, there can be no assurance
that regulators, in reviewing the Association's loan portfolio, will not request
the Association to materially increase at that time its allowance for loan
losses, thereby negatively affecting the Association's financial condition and
earnings at that time. Although management believes that adequate specific and
general loan loss allowances have been established, actual losses are dependent
upon future events and, as such, further additions to the level of specific and
general loan loss allowances may become necessary.
The Association's Internal Asset Review Committee reviews and classifies
the Association's assets monthly and reports the results of its review to the
Board of Directors. The Association classifies assets in accordance with the
management guidelines described above. Real Estate Owned ("REO") is classified
as Substandard. At June 30, 1996, the Association had $1.4 million of assets
classified as Special Mention, $6.0 million of assets classified as Substandard,
$19,000 of assets classified as Doubtful with no assets classified as Loss.
Loans classified as Special Mention are a result of past delinquencies or other
identifiable weaknesses. At June 30, 1996, the largest loan classified as
Special Mention had a loan balance of $630,000.
The Association generally requires appraisals on an annual basis on
foreclosed properties and, to the extent necessary, properties deemed to be in-
substance foreclosures. The Association conducts external inspections on
foreclosed properties and properties deemed in-substance foreclosures as deemed
necessary.
10
<PAGE>
The following table sets forth delinquencies in the Association's loan
portfolio as of the dates indicated:
<TABLE>
<CAPTION>
AT JUNE 30, 1996 AT JUNE 30, 1995
------------------------------------------------- --------------------------------------------------
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............ 2 $ 165 6 $ 821 6 $ 895 8 $1,507
Multi-family................... - - 2 473 - - - -
Commercial..................... - - 1 668 - - - -
Construction and land.......... - - - - - - 1 415
Consumer loans................. - - - - - - - -
---- ----- ---- ------ ---- ----- ---- ------
Total....................... 2 $ 165 9 $1,962 6 $ 895 9 $1,922
==== ===== ==== ====== ==== ===== ==== ======
Delinquent loans to total 0.09% 0.06% 0.41% 0.76% 0.25% 0.41% 0.37% 0.88%
gross loans.................
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1994
----------------------------------------------------------
60-89 DAYS 90 DAYS OR MORE
-------------------------- ------------------------------
PRINCIPAL NUMBER PRINCIPAL
NUMBER BALANCE OF BALANCE
OF LOANS OF LOANS LOANS OF LOANS
---------- -------------- ---------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
One- to four-family............ 2 $ 289 11 $1,115
Multi-family................... - - - -
Commercial..................... - - - -
Construction and land.......... - - - -
Consumer loans................. - - - -
---- ----- ---- ------
Total....................... 2 $ 289 11 $1,115
==== ===== ==== ======
Delinquent loans to total
gross loans.................... 0.10% 0.14% 0.54% 0.54%
</TABLE>
11
<PAGE>
Non-Accrual and Past-Due Loans. The following table sets forth information
regarding non-accrual loans, troubled-debt restructurings and REO. There were 2
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, 1996. It is the policy of the Association to cease accruing interest on
loans 90 days or more past due. For the years ended June 30, 1996, 1995, 1994,
1993 and 1992, 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 $118,000, $126,000, $54,000, $75,000
and $141,000, none of which was recognized. For the same periods, the amount of
interest income recognized on troubled debt restructurings was $58,000, $55,000,
$16,000, $0 and $0, respectively.
<TABLE>
<CAPTION>
AT JUNE 30,
-----------------------------------------------
1996 1995 1994 1993 1992
-------- -------- ------- -------- -------
Non-accrual loans:
Residential real estate:
<S> <C> <C> <C> <C> <C>
One- to four-family................ $ 821 $1,507 $1,115 $1,011 $ 896
Multi-family....................... 473 - - 454 -
Construction and land................. - 415 - - 1,483
Commercial............................ 668 - - - -
------ ------ ------ ------ ------
Total.............................. 1,962 1,922 1,115 1,465 2,379
REO, net(3)............................. 1,489 822 1,005 719 279
------ ------ ------ ------ ------
Total non-performing assets........ $3,451 $2,744 $2,120 $2,184 $2,658
====== ====== ====== ====== ======
Restructured loans...................... $1,130 $1,545 $ 470 $ - $ -
====== ====== ====== ====== ======
Allowance for estimated loan losses as a
percent of gross loans receivable(1).... 0.41% 0.36% 0.27% 0.25% 0.32%
Allowance for estimated loan losses as
a percent of total non-performing
loans(2).............................. 53.92% 41.21% 50.40% 32.22% 23.37%
Non-performing loans as a percent of
gross loans receivable(1)(2).......... 0.76% 0.88% 0.54% 0.76% 1.37%
Non-performing assets as a percent of
total Company assets(2)............... 1.03% 1.00% 0.83% 0.87% 1.05%
</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.
12
<PAGE>
Allowance for Estimated Loan Losses. The allowance for estimated loan
losses is established through a provision for loan losses based on management's
evaluation of the risks inherent in its loan portfolio and the general economy.
The allowance for loan losses is maintained at an amount management considers
adequate to cover estimated losses in loans receivable which are deemed probable
and estimable. The allowance is based upon a number of factors, including
current economic conditions, actual loss experience and industry trends. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Association's allowance for estimated loan
losses. Such agencies may require the Association to make additional provisions
for estimated loan losses based upon judgments different from those of
management. As of June 30, 1996, the Association's allowance for estimated loan
losses was 0.41% of gross loans as compared to 0.36% as of June 30, 1995. The
Association had non-accrual loans of $2.0 million and $1.9 million at June 30,
1996 and June 30, 1995, respectively. The Association will continue to monitor
and modify its allowances for loan losses as conditions dictate.
On July 1, 1995, the Company adopted 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. SFAS No. 114
generally requires 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 this statement did not
have a material impact on the results of operations or the financial position of
the Company, taken as a whole.
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 4 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, 1996, the Company had classified $1.1 million of its loans as
impaired with $91,000 in specific reserves as determined in accordance with SFAS
No. 114, as amended by SFAS No 118. In addition, the Company has $821,000 in
loans which are collectively evaluated for impairment with no specific reserves
set aside as of June 30, 1996. The average recorded investment in impaired
loans, inclusive of those evaluated collectively, during the year ended June 30,
1996, was $2.4 million. Interest income on impaired loans of $31,000 was
recognized for cash payments received in the year ended June 30, 1996.
13
<PAGE>
The following table sets forth activity in the Association's allowance for
estimated loan losses for the periods set forth in the table.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED JUNE 30,
------------------------------------------
1996 1995 1994 1993 1992
-------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period.......... $ 792 $ 562 $ 472 $ 556 $ 436
Provision for (recapture of) estimated 575 483 95 (29) 164
loan losses...........................
Charge-offs:............................
Real Estate:
One- to four-family................... (299) (247) - (29) -
Multi-family.......................... - - - - -
Commercial............................ - - - - -
Construction and land................. - - - - -
Consumer.............................. (11) (11) (10) (26) (44)
------ ----- ----- ----- -----
Total................................. (310) (258) (10) (55) (44)
Recoveries.............................. 1 5 5 - -
------ ----- ----- ----- -----
Balance at end of period................ $1,058 $ 792 $ 562 $ 472 $ 556
====== ===== ===== ===== =====
</TABLE>
The following tables set forth the Association's percent of allowance for
estimated loan losses to total allowance for estimated loan losses and the
percent of loans to total loans in each of the categories listed at the dates
indicated.
14
<PAGE>
<TABLE>
<CAPTION>
AT JUNE 30,
-------------------------------------------------------------------------------
1996 1995
---------------------------------------- --------------------------------------
PERCENT PERCENT OF
PERCENT OF OF LOANS PERCENT OF LOANS IN
ALLOWANCE IN EACH ALLOWANCE EACH
TO TOTAL CATEGORY TO TO TOTAL CATEGORY TO
AMOUNT ALLOWANCE TOTAL LOANS AMOUNT ALLOWANCE TOTAL LOANS
---------- ----------- ---------------- -------- ----------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
One- to $ 696 65.79% 87.82% $466 58.84% 85.82%
four-family
Multi-family............... 195 18.43 8.40 105 13.26 9.34
Commercial................ 153 14.46 3.61 166 20.96 4.37
Construction and land..... - 0.00 0.00 42 5.30 0.19
Consumer.................. 14 1.32 0.17 13 1.64 0.28
------ ------ ------ ---- ------ ------
Total............... $1,058 100.00% 100.00% $792 100.00% 100.00%
====== ====== ====== ==== ====== ======
<CAPTION>
AT JUNE 30,
--------------------------------------------------------------------------------------------------------
1994 1993 1992
---------------------------------- -------------------------------- ------------------------------------
PERCENT OF PERCENT OF PERCENT OF
PERCENT OF LOANS IN PERCENT OF LOANS IN PERCENT OF LOANS IN
ALLOWANCE EACH ALLOWANCE EACH ALLOWANCE EACH
TO TOTAL CATEGORY TO TO TOTAL TO TOTAL TO TOTAL CATEGORY TO
AMOUNT ALLOWANCE TOTAL LOANS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE TOTAL LOANS
--------- ---------- ------------- -------- ----------- ---------- --------- ---------- ----------------
(DOLLARS IN THOUSANDS)
<C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to $359 63.88% 85.00% $336 71.19% 85.11% $292 52.52% 86.78%
four-family
Multi-family............... 88 15.66 9.68 70 14.83 8.59 24 4.32 5.60
Commercial................ 96 17.08 4.69 46 9.74 5.51 53 9.53 6.32
Construction and land..... 7 1.25 0.32 6 1.27 0.35 166 29.85 0.62
Consumer.................. 12 2.13 0.31 14 2.97 0.44 21 3.78 0.68
---- ------ ------ ---- ------ ------ ---- ------ ------
Total............... $562 100.00% 100.00% $472 100.00% 100.00% $556 100.00% 100.00%
==== ====== ====== ==== ====== ====== ==== ====== ======
</TABLE>
15
<PAGE>
Real Estate Owned. At June 30, 1996, the Association had $1,489,000 of REO,
net of reserves as compared to $822,000 of REO, net of reserves at June 30,
1995. The $667,000 increase was due primarily to an additional REO at June 30,
1996 as compared to the prior year-end and to the REOs at June 30, 1996 having
higher average values than at June 30, 1995. If the Association acquires any
REO, it is initially recorded at the lower of the recorded investment in the
loan or the fair value of the related assets at the date of foreclosure, less
costs to sell. Thereafter, if there is a further deterioration in value, the
Association provides for a specific valuation allowance and charges operations
for the diminution in value. It is the policy of the Association to obtain an
appraisal on all real estate acquired through foreclosure at the time of
possession.
INVESTMENT ACTIVITIES
Federally chartered savings institutions have the authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certificates of deposit of insured banks
and savings institutions, bankers' acceptances, repurchase agreements and
federal funds. Subject to various restrictions, federally chartered savings
institutions may also invest their assets in commercial paper, investment-grade
corporate debt securities and mutual funds whose assets conform to the
investments that a federally chartered savings institution is otherwise
authorized to make directly. Additionally, the Association must maintain minimum
levels of investments that qualify as liquid assets under OTS regulations. See
"Regulation - Federal Savings Institution Regulation -Liquidity." Historically,
the Association has maintained liquid assets above the minimum OTS requirements
and at a level considered to be adequate to meet its normal daily activities.
The investment policy of the Company as established by the Board of
Directors attempts to provide and maintain liquidity, generate a favorable
return on investments without incurring undue interest rate and credit risk, and
complement the Company's lending activities. Specifically, the Company's
policies generally limit investments to government and federal agency-backed
securities and other non-government guaranteed securities, including corporate
debt obligations, that are investment grade. The Company's policies provide the
authority to invest in marketable equity securities meeting the Company's
guidelines and in mortgage-backed securities guaranteed by the U.S. government
and agencies thereof and other financial institutions. The Company's policies
provide that all investment purchases must be approved by two officers (either a
Senior Vice President, Executive Vice President or the President) and be
ratified by the Board of Directors. At June 30, 1996, the Company had federal
funds sold and other short-term investments, investment securities and mortgage-
backed securities in the aggregate amount of $63.2 million with a market value
of $62.7 million.
At June 30, 1996, the Company had $14.9 million in investment securities
consisting of U.S. agency securities and investments in an adjustable rate
mortgage-backed security mutual fund and a short-term U.S.Treasury and agency
money market fund. The Company's mortgage-backed securities portfolio consists
of seasoned fixed-rate mortgage-backed, adjustable-rate mortgage-backed and
fixed-rate balloon mortgage-backed securities. At June 30, 1996, the majority of
the Company's $44.3 million of mortgage-backed securities were insured or
guaranteed by either FNMA, GNMA or FHLMC, including $16.6 million in mortgage-
backed securities available for sale. Investments in mortgage-backed securities
involve a risk that actual prepayments will be greater than estimated
prepayments over the life of the security which may require adjustments to the
amortization of any premium or accretion of any discount relating to such
instruments thereby reducing the net yield on such securities. There is also
reinvestment risk associated with the cash flows from such securities. In
addition, the market value of such securities may be adversely affected by
changes in interest rates.
16
<PAGE>
In November 1995, the FASB issued a "Guide to Implementation of Statement
115 on Accounting for Certain Investments in Debt and Equity Securities:
Questions and Answers" (the "Guide"). The Guide allows for a one time
reassessment of the classification of securities and, in connection with such a
reassessment, permits the reclassification of securities from the held-to-
maturity classification to the available-for-sale classification as of a single
date no later than December 31, 1995, without calling into question management's
intent to hold to maturity the remaining securities classified as held-to-
maturity. On December 31, 1995, the Company transferred $4.8 million of
mortgage-backed securities from held-to-maturity to the available-for-sale
classification to provide for greater liquidity and flexibility. The transfer
resulted in an unrealized loss of $36,000, net of tax, which is included in the
unrealized gains/losses on available for sale securities as of such date set
forth as a separate component of stockholders' equity.
The following table sets forth the composition of the Company's mortgage-
backed securities portfolio in dollar amounts and in percentages of the
portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
---------------------------------------------------------------------------
1996 1995 1994
---------------------- ----------------------- -------------------------
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 $15,693 36.07% $14,343 75.93% $17,921 77.48%
FNMA............................... 9,004 20.69 4,547 24.07 5,210 22.52
GNMA............................... 15,175 34.88 - 0.00 - 0.00
Other.............................. 3,636 8.36 - 0.00 - 0.00
------- ------ ------- ------ ------- ------
Total mortgage-backed
securities....................... 43,508 100.00% 18,890 100.00% 23,131 100.00%
====== ====== ======
Plus:
Unamortized premium, net......... 807 459 618
------- ------- ------
Total mortgage-backed
securities, net ................. 44,315 19,349 23,749
Less:
Mortgage-backed securities
available for sale:
FHLMC......................... 3,923 3,614 4,140
FNMA.......................... 10,592 - -
Other......................... 2,099 - -
------- ------- ------
Mortgage-backed securities available 16,614 3,614 4,140
for sale............................... ------- ------- -------
Mortgage-backed securities held to
maturity .............................. $27,701 $15,735 $19,609
======= ======= =======
</TABLE>
17
<PAGE>
The following tables set forth the Company's mortgage-backed securities
activities for the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30,
--------------------------------
1996 1995 1994
----------- ---------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Beginning balance............................................................ $19,349 $23,749 $ 32,680
Mortgage-backed securities purchased - held to maturity.................... 21,116 -- 5,013
Mortgage-backed securities purchased - available for sale.................. 11,914 -- 2,063
Less:
Principal repayments.................................................... (7,647) (4,309) (15,497)
Amortization of premium/(discount), net.................................... (228) (159) (382)
Change in net unrealized gain (loss) on available for sale................. (189) 68 (128)
------- ------- --------
Ending balance............................................................... $44,315 $19,349 $ 23,749
======= ======= ========
</TABLE>
The following table sets forth certain information regarding the carrying
and market values of the Company's mortgage-backed securities at the dates
indicated:
<TABLE>
<CAPTION>
AT JUNE 30,
-----------------------------------------------------------------------
1996 1995 1994
--------------------- ----------------------- -------------------------
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............................................ $ 287 $ 295 $ 4,632 $ 4,536 $ 5,315 $ 5,133
FHLMC........................................... 10,426 10,361 11,103 11,131 14,294 14,092
GNMA............................................ 15,420 14,903 -- -- -- --
Other........................................... 1,568 1,565 -- -- -- --
------- ------- ------- ------- ------- -------
Total held to maturity......................... 27,701 27,124 15,735 15,667 19,609 19,225
------- ------- ------- ------- ------- -------
Available for sale:
FNMA............................................ 10,592 10,592 -- -- -- --
FHLMC........................................... 3,923 3,923 3,614 3,614 4,140 4,140
Other........................................... 2,099 2,099 -- -- -- --
------- ------- ------- ------- ------- -------
Total available for sale....................... 16,614 16,614 3,614 3,614 4,140 4,140
------- ------- ------- ------- ------- -------
Total mortgage-backed securities............... $44,315 $43,738 $19,349 $19,281 $23,749 $23,365
======= ======= ======= ======= ======= =======
</TABLE>
18
<PAGE>
The following table sets forth certain information regarding the carrying
and market values of the Company's federal funds sold and other short-term
investments and investment securities at the dates indicated:
<TABLE>
<CAPTION>
AT JUNE 30,
---------------------------------------------------------------
1996 1995 1994
------------------- --------------------- ---------------------
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............ $ 4,025 $ 4,025 $18,850 $18,850 $ 2,425 $ 2,425
------- ------- ------- ------- ------- -------
Investment securities:
Held to maturity:
U.S. government and federal
agency obligations........... - - 3,200 3,190 3,200 3,200
------- ------- ------- ------- ------- -------
Available for sale:
U.S. government and federal
agency obligations........... 5,928 5,928 1,000 1,000 1,975 1,975
Adjustable interest rate
mutual fund.................. 8,976 8,976 - - 2,923 2,923
------- ------- ------- ------- ------- -------
Total available for sale..... 14,904 14,904 1,000 1,000 4,898 4,898
------- ------- ------- ------- ------- -------
Total investment securities.. $18,929 $18,929 $23,050 $23,040 $10,523 $10,523
======= ======= ======= ======= ======= =======
</TABLE>
The table below sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of the Company's
federal funds sold and other short-term investments, investment securities and
mortgage-backed securities as of June 30, 1996.
19
<PAGE>
<TABLE>
<CAPTION>
AT JUNE 30, 1996
---------------------------------------------------------------------------------------
MORE THAN ONE MORE THAN FIVE
ONE YEAR OR LESS YEAR TO FIVE YEARS YEARS TO TEN YEARS
--------------------------- -----------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD
-------------- ------------ ----------- ------------- ----------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold andother short-term
investments............................. $ 13,001 5.56% $ - 0.00% $ - 0.00%
Investment securities: ============= ====== =============
Held to maturity:
U.S. government and federal agency
obligations........................... - 0.00% - 0.00% - 0.00%
------------- ------ -------------
Total held to maturity............
Available for sale: - 0.00% - 0.00% - 0.00%
------------- ------ -------------
U.S. government and federal agency
obligations......................... - 0.00% 5,928 6.53% - 0.00%
------------- ------ -------------
Total available for sale.......... - 0.00% 5,928 6.53% - 0.00%
------------- ------ -------------
Total investment securities.............. - 0.00% 5,928 6.53% - 0.00%
============= ====== =============
Mortgage-backed securities:
Held to maturity:
FNMA................................ - 0.00% - 0.00% 287 8.50%
FHLMC............................... - 0.00% 124 8.50% 6,042 7.09%
GNMA................................ - 0.00% - 0.00% - 0.00%
Other............................... - 0.00% - 0.00% - 0.00%
------------- ------ -------------
Total held to maturity............ - 0.00% 124 8.50% 6,329 7.16%
------------- ------ -------------
Available for sale:
FNMA - 0.00% 5,045 6.32% 0.00%
FHLMC............................... - 0.00% 3,815 5.59% 0.00%
Other................................ - 0.00% - 0.00% - 0.00%
------------- ------ -------------
Total available for sale.......... - 0.00% 8,860 6.00% - 0.00%
------------- ------ -------------
Total mortgage-backed securities.. $ - $8,984 $6,329
============= ====== =============
<CAPTION>
MORE THAN TEN YEARS TOTAL
----------------------------- ----------------------
WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD
-------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Federal funds sold andother short-term
investments............................. $ - 0.00% $13,001 5.56%
Investment securities: ======= =======
Held to maturity:
U.S. government and federal agency
obligations...........................
- 0.00% - 0.00%
Total held to maturity............ ------- -------
Available for sale: - 0.00% - 0.00%
------- -------
U.S. government and federal agency
obligations......................... - 0.00% 5,928 6.53%
------- -------
Total available for sale.......... - 0.00% 5,928 6.53%
------- -------
Total investment securities.............. - 0.00% 5,928 6.53%
======= =======
Mortgage-backed securities:
Held to maturity:
FNMA................................ - 0.00% 287 8.50%
FHLMC............................... 4,260 6.06% 10,426 6.69%
GNMA................................ 15,420 7.09% 15,420 7.09%
Other............................... 1,568 6.10% 1,568 6.10%
------- -------
Total held to maturity............ 21,248 6.81% 27,701 6.90%
------- -------
Available for sale:
FNMA 5,547 6.22% 10,592 6.27%
FHLMC............................... 108 9.28% 3,923 5.69%
Other................................ 2,099 7.13% 2,099 7.13%
------- -------
Total available for sale.......... 7,754 6.51% 16,614 6.24%
------- -------
Total mortgage-backed securities.. $29,002 $44,315
======= =======
</TABLE>
20
<PAGE>
SOURCES OF FUNDS
General. Deposits, loan repayments and prepayments, proceeds from sales of
loans, cash flows generated from operations and FHLB advances are the primary
sources of the Association's funds for use in lending, investing and for other
general purposes.
Deposits. The Association offers a variety of deposit accounts with a
range of interest rates and terms. The Association's deposits consist of
passbook savings, NOW accounts, checking accounts, money market accounts and
certificates of deposit. For the year ended June 30, 1996, certificates of
deposit constituted 79.5% of total average deposits. The flow of deposits is
influenced significantly by general economic conditions, changes in money market
rates, prevailing interest rates and competition. The Association's deposits are
obtained predominantly from the areas in which its branch offices are located.
The Association relies primarily on customer service and long-standing
relationships with customers to attract and retain these deposits; however,
market interest rates and rates offered by competing financial institutions
significantly affect the Association's ability to attract and retain deposits.
Certificate accounts in excess of $100,000 are not actively solicited by the
Association nor has the Association since 1992 used brokers to obtain deposits.
The following table presents the deposit activity of the Association for
the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30,
-----------------------------------------
1996 1995 1994
---------- ------------ -------------
<S> <C> <C> <C>
Net deposits (withdrawals) $20,852 $(3,497) $(7,421)
Interest credited on deposit accounts 8,923 7,103 5,936
------- ------- -------
Total increase (decrease) in deposit $29,775 $ 3,606 $(1,485)
accounts ======= ======= =======
</TABLE>
At June 30, 1996, the Association had $41.6 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................ $ 8,581 5.20%
Over three through six months....... 12,891 5.50%
Over six through 12 months.......... 13,381 5.37%
Over 12 months...................... 6,747 5.97%
-------
Total............................. $41,600 5.47%
=======
</TABLE>
21
<PAGE>
The following table sets forth the distribution of the Association's
average deposit accounts for the periods indicated and the weighted average
interest rates on each category of deposits presented.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30,
----------------------------------------------------------------------
1996 1995
--------------------------------- -----------------------------------
PERCENT PERCENT
OF TOTAL WEIGHTED OF TOTAL WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE DEPOSITS YIELD BALANCE DEPOSITS YIELD
---------- --------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Money market savings accounts.. $ 7,473 3.5% 2.21% $ 10,425 5.1% 2.22%
Passbook accounts.............. 18,108 8.4 2.04 21,288 10.5 2.05
NOW accounts................... 20,299 9.4 1.68 20,518 10.1 1.48
Non-interest-bearing accounts.. 3,905 1.8 0.00 1,988 1.0 0.00
-------- ----- -------- -----
Total.......................... $ 49,785 23.1% 1.43% $ 54,219 26.7% 1.79%
-------- ----- -------- -----
Certificate accounts:
Less than six months........... $ 15,016 7.0% 4.70% $ 9,823 4.9% 3.42%
Over six through 12 months..... 41,471 19.3 5.34 30,082 14.9 4.81
Over 12 through 24 months...... 58,846 27.3 5.70 48,949 24.1 4.60
Over 24 months................. 35,172 16.3 5.93 36,159 17.9 5.72
IRA/KEOGH...................... 12,547 5.8 5.54 12,680 6.3 4.53
Certificates over $98,000...... 2,625 1.2 5.47 10,616 5.2 5.02
-------- ----- -------- -----
Total certificate accounts.... $165,677 76.9% 5.55% $148,309 73.3% 4.86%
-------- ----- -------- -----
Total average deposits........ $215,462 100.0% 4.60% $202,528 100.0% 4.04%
======== ===== ======== =====
<CAPTION>
1994
----------------------------------------------
PERCENT
OF TOTAL WEIGHTED
AVERAGE AVERAGE AVERAGE
BALANCE DEPOSITS YIELD
---------- ---------------- ------------------
<S> <C> <C> <C>
Money market savings accounts............................. $ 13,024 6.6% 2.33%
Passbook accounts......................................... 25,132 12.7 2.13
NOW accounts.............................................. 23,023 11.6 1.56
Non-interest-bearing accounts............................. 1,117 0.5 0.00
-------- -----
Total..................................................... $ 62,296 31.4% 1.92%
-------- -----
Certificate accounts:
Less than six months...................................... $ 12,581 6.3% 2.84%
Over six through 12 months................................ 17,479 8.8 3.12
Over 12 through 24 months................................. 45,342 22.9 3.81
Over 24 months............................................ 34,559 17.4 5.86
IRA/KEOGH................................................. 13,586 6.9 4.51
Certificates over $98,000................................. 12,588 6.3 4.39
-------- -----
Total certificate accounts............................... $136,135 68.6% 4.28%
-------- -----
Total average deposits................................... $198,431 100.0% 3.54%
======== =====
</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, 1996.
<TABLE>
<CAPTION>
PERIOD TO MATURITY FROM JUNE 30, 1996 At June 30,
----------------------------------------------------------- --------------------------------
LESS THAN ONE TO TWO TO THREE TO FOUR TO
ONE YEAR TWO YEARS THREE YEARS FOUR YEARS FIVE YEARS 1996 1995 1994
----------- --------- ----------- ---------- ---------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Certificate accounts:
0 to 4.00%............. $ 33 $ - $ - $ - $ - $ 33 $ 11,169 $ 79,452
4.01 to 5.00%.......... 39,744 1,239 796 - - 41,779 34,881 36,294
5.01 to 6.00%.......... 106,570 13,675 1,816 513 2,918 125,492 50,156 11,456
6.01 to 7.00%.......... 9,307 1,809 359 4,384 351 16,210 53,774 6,413
7.01 to 8.00%.......... 2,175 116 236 - - 2,527 3,467 3,190
8.01 to 9.00%.......... - - - - - - 890 3,292
Over 9.01%............. - - - - - - - 7
-------- ------- ------ ------ ------ -------- -------- --------
Total................. $157,829 $16,839 $3,207 $4,897 $3,269 $186,041 $154,337 $140,104
======== ======= ====== ====== ====== ======== ======== ========
</TABLE>
22
<PAGE>
BORROWINGS
From time to time the Association has obtained advances from the FHLB as an
alternative to retail deposit funds and may do so in the future as part of its
operating strategy. FHLB advances may also be used to acquire certain other
assets as may be deemed appropriate for investment purposes. These advances are
collateralized primarily by certain of the Association's mortgage loans and
mortgage-backed securities and secondarily by the Association's investment in
capital stock of the FHLB. See "Regulation - Federal Home Loan Bank System."
Such advances are made pursuant to several different credit programs, each of
which has its own interest rate and range of maturities. The maximum amount
that the FHLB will advance to member institutions, including the Association,
fluctuates from time to time in accordance with the policies of the OTS and the
FHLB. During the year ended June 30, 1996, the Association repaid approximately
$15.9 million in FHLB advances. At June 30, 1996, the Association had $67.5
million in outstanding advances from the FHLB.
The following table sets forth certain information regarding the
Association's borrowed funds at or for the periods ended on the dates indicated:
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED JUNE 30,
------------------------------------------
1996 1995 1994
------------ --------- ---------------
<S> <C> <C> <C>
FHLB advances:
Average balance outstanding................... $49,419 $39,329 $34,904
Maximum amount outstanding at any
month-end during the period................. 74,115 42,642 37,880
Balance outstanding at end of period.......... 67,509 33,447 37,799
Weighted average interest rate during
the period.................................. 6.50% 6.79% 6.70%
Weighted average interest rate at end
of period................................... 6.23% 7.01% 6.51%
</TABLE>
SUBSIDIARY ACTIVITIES
First Covina Service Corp., a wholly-owned subsidiary of the Association,
is not currently conducting any activities other than acting as trustee for
deeds of trust on behalf of the Association. The assets of First Covina
primarily consist of a $625,000 loan to the Association.
PERSONNEL
As of June 30, 1996, the Company had 72 full-time employees and 14 part-
time employees. The employees are not represented by a collective bargaining
unit and the Company considers its relationship with its employees to be good.
23
<PAGE>
REGULATION AND SUPERVISION
GENERAL
The Company, as a savings and loan holding company, is required to file
certain reports with, and otherwise comply with the rules and regulations of the
OTS under the Home Owners' Loan Act, as amended (the "HOLA"). In addition, the
activities of savings institutions, such as the Association, are governed by the
HOLA and the Federal Deposit Insurance Act ("FDI Act").
The Association is subject to extensive regulation, examination and
supervision by the OTS, as its primary federal regulator, and the FDIC, as the
insurer of its deposits. The Association is a member of the Federal Home Loan
Bank ("FHLB") System and its deposit accounts are insured up to applicable
limits by the Savings Association Insurance Fund ("SAIF") managed by the FDIC.
The Association must file reports with the OTS and the FDIC concerning its
activities and financial condition in addition to obtaining regulatory approvals
prior to entering into certain transactions such as mergers with, or
acquisitions of, other savings institutions. The OTS and/or the FDIC conduct
periodic examinations to test the Association's compliance with various
regulatory requirements. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulatory requirements and policies, whether by the OTS, the
FDIC or the Congress could have a material adverse impact on the Company, the
Association and their operations. Certain of the regulatory requirements
applicable to the Association and to the Company are referred to below or
elsewhere herein. The description of statutory provisions and regulations
applicable to savings institutions and their holding companies set forth herein
does not purport to be a complete description of such statutes and regulations
and their effects on the Association and the Company.
HOLDING COMPANY REGULATION
The Company is a nondiversified unitary savings and loan holding company
within the meaning of the HOLA. As a unitary savings and loan holding company,
the Company generally will not be restricted under existing laws as to the types
of business activities in which it may engage, provided that the Association
continues to be a qualified thrift lender ("QTL"). Upon any non-supervisory
acquisition by the Company of another savings institution or savings bank that
meets the QTL test and is deemed to be a savings institution by the OTS, the
Company would become a multiple savings and loan holding company (if the
acquired institution is held as a separate subsidiary) and would be subject to
extensive limitations on the types of business activities in which it could
engage. The HOLA limits the activities of a multiple savings and loan holding
company and its non-insured institution subsidiaries primarily to activities
permissible for bank holding companies under Section 4(c)(8) of the Bank Holding
Company Act ("BHC Act"), subject to the prior approval of the OTS, and
activities authorized by OTS regulation. Recently proposed legislation could
restrict the activities of unitary savings and loan holding companies to those
permissible for multiple savings and loan holding companies.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution or holding company thereof,
without prior written approval of the OTS; acquiring or retaining, with certain
exceptions, more than 5% of a nonsubsidiary company engaged in activities other
than those permitted by the HOLA;
24
<PAGE>
or acquiring or retaining control of a depository institution that is not
insured by the FDIC. In evaluating applications by holding companies to acquire
savings institutions, the OTS must consider the financial and managerial
resources and future prospects of the company and institution involved, the
effect of the acquisition on the risk to the insurance funds, the convenience
and needs of the community and competitive factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies and (ii) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions. The
states vary in the extent to which they permit interstate savings and loan
holding company acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, HOLA does prescribe such restrictions on subsidiary
savings institutions, as described below. The Association must notify the OTS 30
days before declaring any dividend to the Company. In addition, the financial
impact of a holding company on its subsidiary institution is a matter that is
evaluated by the OTS and the agency has authority to order cessation of
activities or divestiture of subsidiaries deemed to pose a threat to the safety
and soundness of the institution.
FEDERAL SAVINGS INSTITUTION REGULATION
Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 3% leverage (core capital) ratio and an 8% risk-based capital ratio.
In addition, the prompt corrective action standards discussed below also
establish, in effect, a minimum 2% tangible capital standard, a 4% leverage
(core) capital ratio (3% for institutions receiving the highest rating on the
CAMEL financial institution rating system), and, together with the risk-based
capital standard itself, a 4% Tier I risk-based capital standard. Core capital
is defined as common stockholder's equity (including retained earnings), certain
noncumulative perpetual preferred stock and related surplus, and minority
interests in equity accounts of consolidated subsidiaries less intangibles other
than certain purchased mortgage servicing rights and credit card relationships.
The OTS regulations also require that, in meeting the leverage ratio, tangible
and risk-based capital standards, institutions must generally deduct investments
in and loans to subsidiaries engaged in activities not permissible for a
national bank.
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and supplementary
capital) to risk-weighted assets of 8%. 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 Tier I (core) capital are equivalent to those discussed above.
The components of supplementary capital currently include cumulative preferred
stock, long-term perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock and the allowance for loan
and lease losses limited to a maximum of 1.25% of risk-weighted assets.
Overall, the amount of supplementary capital included as part of total capital
cannot exceed 100% of core capital.
The OTS regulatory capital requirements also incorporate an interest rate
risk component. Savings institutions with "above normal" interest rate risk
exposure are subject to a deduction from total capital for purposes of
calculating their risk-based capital requirements. A savings institution's
interest rate risk is
25
<PAGE>
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200 basis point increase or decrease in market interest rates
divided by the estimated economic value of the institution's assets. In
calculating its total capital under the risk-based capital rule, a savings
institution whose measured interest rate risk exposure exceeds 2% must deduct an
amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
institution's assets. The Director of the OTS may waive or defer a savings
institution's interest rate risk component on a case-by-case basis. A savings
institution with assets of less than $300 million and risk-based capital ratios
in excess of 12% is not subject to the interest rate risk component, unless the
OTS determines otherwise. For the present time, the OTS has deferred
implementation of the interest rate risk component. If the Association had been
subject to an interest rate risk capital component as of June 30, 1996, the
Association's total risk-weighted capital would not have been subject to a
deduction based on interest rate risk. At June 30, 1996, the Association met
each of its capital requirements, in each case on a fully phased-in basis.
<TABLE>
<CAPTION>
EXCESS CAPITAL(1)
-----------------------------
ACTUAL REQUIRED (DEFICIENCY) ACTUAL REQUIRED
CAPITAL CAPITAL AMOUNT PERCENT PERCENT
------------- -------------- ------------------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Tangible.............. $25,380 $ 4,992 $20,388 7.63% 1.50%
Core (Leverage)....... 25,380 9,984 15,396 7.63 3.00
Risk-based............ 26,438 12,810 13,628 16.51 8.00
</TABLE>
_______________________
(1) Although the OTS capital regulations require savings institutions to meet a
1.5% tangible capital ratio and a 3% leverage (core) capital ratio, the
prompt corrective action standards discussed below also establish, in
effect, a minimum 2% tangible capital standard, a 4% leverage (core)
capital ratio (3% for institutions receiving the highest rating on the
CAMEL financial institution rating system), and, together with the risk-
based capital standard itself, a 4% Tier I risk-based capital standard.
26
<PAGE>
A reconciliation between the Association's regulatory capital and GAAP
capital at June 30, 1996 as stated in the accompanying consolidated financial
statements is also presented below:
<TABLE>
<CAPTION>
TOTAL
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
------------ -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
GAAP capital-originally reported to
regulatory authorities and on
accompanying consolidated financial
statements $25,224 $25,224 $25,224
Adjustment for net unrealized losses
on certain available for sale
securities.............................. 156 156 156
General valuation allowances............ - - 1,058
------- ------- -------
Regulatory Capital................. $25,380 $25,380 $26,438
======= ======= =======
</TABLE>
Prompt Corrective Regulatory Action. Under the OTS prompt corrective
action regulations, the OTS is required to take certain supervisory actions
against undercapitalized institutions, the severity of which depends upon the
institution's degree of undercapitalization. Generally, a savings institution
that has a ratio of total capital to risk-weighted assets of less of than 8%, a
ratio of Tier I (core) capital to risk-weighted assets of less than 4% or a
ratio of core capital to total assets of less than 4% (3% or less for
institutions with the highest examination rating) is considered to be
"undercapitalized." A savings institution that has a total risk-based capital
ratio less than 6%, a Tier 1 risk-based capital ratio of less than 3% or a
leverage ratio that is less than 3% is considered to be "significantly
undercapitalized" and a savings institution that has a tangible capital to
assets ratio equal to or less than 2% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the banking regulator is
required to appoint a receiver or conservator for an institution that is
"critically undercapitalized." The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date a savings
institution receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." Compliance with the plan
must be guaranteed by any parent holding company. In addition, numerous
mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The OTS could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
Insurance of Deposit Accounts. The FDIC has adopted a risk-based deposit
insurance system that assesses deposit insurance premiums according to the level
of risk involved in an institution's activities. An institution's risk category
is based upon whether the institution is classified as "well capitalized,"
"adequately capitalized" or "under capitalized" and one of three supervisory
subcategories within each capital group. The supervisory subgroup to which an
institution is assigned is based on a supervisory evaluation and information
which the FDIC determines to be relevant to the institution's financial
condition and the risk posed to the deposit insurance fund. Based on its capital
and supervisory subgroups, each Bank Insurance Fund ("BIF") and SAIF member
institution is assigned an annual FDIC assessment rate between 23 basis points
for an institution in the highest category (i.e., well-capitalized and healthy)
and 31 basis points for an institution in the lowest category (i.e.,
undercapitalized and posing substantial supervisory concern). The Association's
assessment rate for the fiscal year ended June 30, 1996 was 0.23% of deposits.
The FDIC has authority to further raise premiums if deemed necessary. If such
action is taken, it could have an adverse effect on the earnings of the
institution.
The FDIC recently adopted a new assessment rate schedule of 4 to 31
basis points for BIF members beginning in the fourth quarter of 1995. Under
that schedule, approximately 91% of BIF members will pay
27
<PAGE>
the lowest assessment rate of 4 basis points. The FDIC retained the existing
assessment rate schedule of 23 to 31 basis points applicable to SAIF member
institutions. In announcing the new schedule, the FDIC noted that the premium
differential may have adverse consequences for SAIF members, including reduced
earnings and an impaired ability to raise funds in the capital markets. In
addition, SAIF members, such as the Association, could be placed at a
substantial disadvantage to BIF members with respect to pricing of loans and
deposits and the ability to achieve lower operating costs.
Several bills have been introduced in Congress to mitigate the effect of
the BIF/SAIF premium disparity. Among other things, these bills would impose a
special assessment on SAIF-member institutions, including the Association, to
recapitalize the SAIF fund and would spread the FICO payments across all BIF and
SAIF members. It is presently estimated that the amount of the one-time fee
would range from 65 to 70 basis points on the amount of deposits held by SAIF-
member institutions as of a date to be determined. Certain pending legislation
would also require the BIF and the SAIF to be merged by January 1, 1998 provided
that subsequent legislation is adopted to eliminate the federal thrift charter.
The payment of the special assessment would have the effect of immediately
reducing the capital of SAIF-member institutions by the amount of the fee, net
of any tax effect. It is not possible to predict whether legislation imposing
such a special assessment will be enacted, or, if enacted, the amount of any
such assessment, or whether ongoing SAIF premiums will be reduced to a level of
that of BIF premiums or whether the BIF and SAIF will eventually be merged.
Under the FDI Act, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Association does not know of any practice, condition
or violation that might lead to termination of deposit insurance.
Loans to One Borrower. Under the HOLA, savings institutions are generally
subject to the limits on loans to one borrower applicable to national banks.
Generally, savings institutions may not make a loan or extend credit to a single
or related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if such loan is secured by readily-marketable collateral, which is
defined to include certain financial instruments and bullion. At June 30, 1996,
the Association's limit on loans to one borrower was $3.8 million. At June 30,
1996, the Association's largest aggregate outstanding balance of loans to one
borrower totalled $1.3 million. All loans to this borrower were current.
QTL Test. The HOLA requires savings institutions to meet a QTL test.
Under the QTL test, a savings and loan association is required to maintain at
least 65% of its "portfolio assets" (total assets less (i) specified liquid
assets up to 20% of total assets; (ii) intangibles, including goodwill; and
(iii) the value of property used to conduct business) in certain "qualified
thrift investments" (primarily residential mortgages and related investments,
including certain mortgage-backed securities) in at least 9 months out of each
12 month period.
A savings institution that fails the QTL test is subject to certain
operating restrictions and may be required to convert to a bank charter. As of
June 30, 1996, the Association maintained 96.1% of its portfolio assets in
qualified thrift investments and, therefore, met the QTL test.
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's
28
<PAGE>
capital level. An institution that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
Association") and has not been advised by the OTS that it is in need of more
than normal supervision, could, after prior notice but without obtaining
approval of the OTS, make capital distributions during a calendar year equal to
the greater of (i) 100% of its net earnings to date during the calendar year
plus the amount that would reduce by one-half its "surplus capital ratio" (the
excess capital over its fully phased-in capital requirements) at the beginning
of the calendar year or (ii) 75% of its net income for the previous four
quarters. Any additional capital distributions would require prior regulatory
approval. In the event the Association's capital fell below its regulatory
requirements or the OTS notified it that it was in need of more than normal
supervision, the Association's ability to make capital distributions could be
restricted. In addition, the OTS could prohibit a proposed capital distribution
by any institution, which would otherwise be permitted by the regulation, if the
OTS determines that such distribution would constitute an unsafe or unsound
practice.
Liquidity. The Association is required to maintain an average daily
balance of specified liquid assets equal to a monthly average of not less than a
specified percentage of its net withdrawable deposit accounts plus short-term
borrowings. This liquidity requirement is currently 5% but may be changed from
time to time by the OTS to any amount within the range of 4% to 10% depending
upon economic conditions and the savings flows of member institutions. OTS
regulations also require each member savings institution to maintain an average
daily balance of short-term liquid assets at a specified percentage (currently
1%) of the total of its net withdrawable deposit accounts and borrowings payable
in one year or less. Monetary penalties may be imposed for failure to meet
these liquidity requirements. The Association's liquidity and short-term
liquidity ratios for June 30, 1996 were 8.71% and 5.52% respectively, which
exceeded the then applicable requirements. The Association has never been
subject to monetary penalties for failure to meet its liquidity requirements.
Assessments. Savings institutions are required to pay assessments to the
OTS to fund the agency's operations. The general assessment, paid on a semi-
annual basis, is computed upon the savings institution's total assets, including
consolidated subsidiaries, as reported in the Association's latest quarterly
thrift financial report. The assessments paid by the Association for the fiscal
year ended June 30, 1996 totalled $472,000.
Branching. OTS regulations permit nationwide branching by federally
chartered savings institutions to the extent allowed by federal statute. This
permits federal savings institutions to establish interstate networks and to
geographically diversify their loan portfolios and lines of business. The OTS
authority preempts any state law purporting to regulate branching by federal
savings institutions.
Transactions with Related Parties. The Association's authority to engage
in transactions with related parties or "affiliates" (e.g.., any company that
controls or is under common control with an institution, including the Company
and its non-savings institution subsidiaries) is limited by Sections 23A and 23B
of the Federal Reserve Act ("FRA"). Section 23A limits the aggregate amount of
covered transactions with any individual affiliate to 10% of the capital and
surplus of the savings institution. The aggregate amount of covered
transactions with all affiliates is limited to 20% of the savings institution's
capital and surplus. Certain transactions with affiliates are required to be
secured by collateral in an amount and of a type described in Section 23A and
the purchase of low quality assets from affiliates is generally prohibited.
Section 23B generally provides that certain transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the institution as those prevailing at the time for comparable
transactions with non-affiliated companies. In addition, savings institutions
are prohibited from lending to any affiliate that is engaged in activities that
are not permissible for bank holding companies and no savings institution may
purchase the securities of any affiliate other than a subsidiary.
29
<PAGE>
The Association's authority to extend credit to executive officers,
directors and 10% shareholders, as well as entities such persons control, is
governed by Sections 22(g) and 22(h) of the FRA and Regulation O thereunder.
Among other things, such loans are required to be made on terms substantially
the same as those offered to unaffiliated individuals and to not involve more
than the normal risk of repayment. Regulation O also places individual and
aggregate limits on the amount of loans the Association may make to such persons
based, in part, on the Association's capital position and requires certain board
approval procedures to be followed.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring actions
against the institution and all "institution-affiliated parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors to institution of receivership, conservatorship or termination of
deposit insurance. Civil penalties cover a wide range of violations and an
amount to $25,000 per day, or even $1 million per day in especially egregious
cases. Under the FDI Act, the FDIC has the authority to recommend to the
Director of the OTS enforcement action to be taken with respect to a particular
savings institution. If action is not taken by the Director, the FDIC has
authority to take such action under certain circumstances. Federal law also
establishes criminal penalties for certain violations.
Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") and a final rule to implement safety and soundness standards
required under the FDI Act. The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes impaired. The
standards set forth in the Guidelines address internal controls and information
systems; internal audit system; credit underwriting; loan documentation;
interest rate risk exposure; asset growth; and compensation, fees and benefits.
The agencies are expected to adopt a proposed rule that proposes asset quality
and earnings standards which, if adopted in final, would be added to the
Guidelines. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard, as required by the FDI Act. The final
rule establishes deadlines for the submission and review of such safety and
soundness compliance plans when such plans are required.
FEDERAL HOME LOAN BANK SYSTEM
The Association is a member of the FHLB System, which consists of 12
regional FHLBs. The FHLB provides a central credit facility primarily for
member institutions. The Association, as a member of the FHLB-San Francisco, is
required to acquire and hold shares of capital stock in that FHLB in an amount
at least equal to 1% of the aggregate principal amount of its unpaid residential
mortgage loans and similar obligations at the beginning of each year, or 1/20 of
its advances (borrowings) from the FHLB-San Francisco, whichever is greater.
The Association was in compliance with this requirement, with an investment in
FHLB-San Francisco stock at June 30, 1996, of $3.7 million. FHLB advances must
be secured by specified types of collateral and may be obtained primarily for
the purpose of providing funds for residential housing finance.
The FHLBs are required to provide funds to cover certain obligations
on bonds issued to fund the resolution of insolvent thrifts and to contribute
funds for affordable housing programs. These requirements could reduce the
amount of dividends that the FHLBs pay to their members and could also result in
the
30
<PAGE>
FHLBs imposing a higher rate of interest on advances to their members. For the
years ended June 30, 1996, 1995, and 1994, dividends from the FHLB-San Francisco
to the Association amounted to $152,000, $144,000 and $103,000, respectively. If
dividends were reduced, or interest on future FHLB advances increased, the
Association's net interest income might also be reduced.
FEDERAL RESERVE SYSTEM
The regulations of the Board of Governors of the Federal Reserve System
("Federal Reserve Board") require savings institutions to maintain non-interest
earning reserves against their transaction accounts (primarily NOW and regular
checking accounts). The Federal Reserve Board regulations generally require
that reserves be maintained against aggregate transaction accounts as follows:
for accounts aggregating $52.0 million or less (subject to adjustment by the
Federal Reserve Board) the reserve requirement is 3%; and for accounts greater
than $52.0 million, the reserve requirement is $1.6 million plus 10% (subject to
adjustment by the Federal Reserve Board between 8% and 14%) against that portion
of total transaction accounts in excess of $52.0 million. The first $4.3
million of otherwise reservable balances (subject to adjustments by the Federal
Reserve Board) are exempted from the reserve requirements. The Association is
in compliance with the foregoing requirements. The balances maintained to meet
the reserve requirements imposed by the Federal Reserve Board may be used to
satisfy liquidity requirements imposed by the OTS.
FEDERAL SECURITIES LAWS
The Company's Common Stock is registered with the SEC under Section 12(g)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act").The
Company is subject to the periodic reporting requirements, proxy solicitation
rules, insider trading restrictions, tender offer rules and other requirements
under the Exchange Act.
The registration under the Securities Act of 1933 (the "Securities Act") of
shares of the common Stock that were issued in the Association's conversion from
mutual to stock form does not cover the resale of such shares. Shares of the
Common Stock purchased by persons who are not affiliates of the Company may be
resold without registration. Shares purchased by an affiliate of the Company
will be subject to the resale restrictions of Rule 144 under the Securities Act.
If the Company meets the current public information requirements of Rule 144
under the Securities Act, each affiliate of the Company who complies with the
other conditions of Rule 144 (including those that require the affiliate's sale
to be aggregated with those of certain other persons) would be able to sell in
the public market, without registration, a number of shares not to exceed, in
any three-month period, the greater of (i) 1% of the outstanding shares of the
Company or (ii) the average weekly volume of trading in such shares during the
preceding four calendar weeks. Shares acquired through the Company's option
plans have been registered under the Securities Act and, therefore, are not
subject to resale restrictions.
31
<PAGE>
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
General. The Company and the Association report their income on a fiscal
year ending June 30 using the accrual method of accounting and are subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Association's reserve for bad debts
discussed below. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to the Association or the Company. The Association has been audited
by the IRS and the California Franchise Tax Board through tax year 1990.
Bad Debt Reserve. For tax years beginning prior to January 1, 1996, savings
institutions such as the Association which met certain definitional tests
primarily related to their assets and the nature of their business ("qualified
institutions") were permitted to establish a reserve for bad debts ("reserve
method") and to make annual additions thereto, which additions may, within
specified formula limits, be deducted in arriving at their 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 Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes, savings associations were not required to provide a federal
deferred tax liability for the bad debt reserves that arose in tax years
beginning before January 1, 1988. Such reserves were, however, subject to
recapture in whole or in part upon the occurrence of certain events such as
failure to remain a qualified institution, distributions to shareholders in
excess of the association's current and accumulated earnings and profits, a
redemption of shares, or upon a partial or complete liquidation of the
association. Upon the occurrence of such events, the association would be
required to provide federal deferred taxes in their financial statements for the
recaptured portion of the tax reserve.
Recently enacted legislation repealed the special bad debt rules applicable
to savings associations for taxable years beginning after December 31, 1995.
Under the new provisions, savings associations will follow the same rules for
purposes of computing allowable bad debt deductions as banks, which allows an
annual addition to the association's bad debt reserve under the experience
method as long as total assets do not exceed $500 million, but do not allow for
an addition based on the percentage of taxable income method.
To the extent the bad debt reserve of the savings association exceeds the
allowable reserve as computed under the rules applicable to banks, such excess
will be subject to recapture. Current projections indicate the Association's
reserve balance as of June 30, 1996 will not exceed the amount that would have
been allowable if it had been computed using the rules applicable to banks,
therefore no portion of the reserve will be subject to recapture. An exception
is provided in the new provisions that effectively grandfathers the bad debt
reserve as of December 31, 1987 from the current recapture provisions.
Under the newly enacted law, if a savings association converts to a bank or
is merged into a bank, the association's bad debt reserve will not automatically
be subject to recapture. Recapture of the grandfathered bad debt reserve would
still occur in the event of certain distributions, redemptions or partial
32
<PAGE>
liquidations, as previously discussed. As of June 30, 1996, the Association's
tax bad debt reserve grandfathered under the new law for which federal deferred
taxes have not been provided totaled approximately $2.7 million. The Association
does not intend to pay dividends or enter into any other type of transaction as
noted above, that would result in the recapture of any portion of its
grandfathered bad debt reserve.
Corporate Alternative Minimum Tax. The Internal Revenue Code of 1986, as
amended (the "Code") imposes a tax on alternative minimum taxable income
("AMTI") at a rate of 20%. The excess of the bad debt reserve deduction using
the percentage of taxable income method over the deduction that would have been
allowable under the experience method is treated as a preference item for
purposes of computing the AMTI. Only 90% of AMTI can be offset by net operating
loss carryovers of which the Association currently has none. AMTI is increased
by an amount equal to 75% of the amount by which the Association's adjusted
current earnings exceeds its AMTI (determined without regard to this preference
and prior to reduction for net operating losses). In addition, for taxable years
beginning after December 31, 1986 and before January 1, 1996, an environmental
tax of .12% of the excess of AMTI (with certain modifications) over $2.0 million
is imposed on corporations, including the Association, whether or not an
Alternative Minimum Tax ("AMT") is paid. The Association does not expect to be
subject to the AMT, but may be subject to the environmental tax liability.
Dividends Received Deduction and Other Matters. The Company may exclude
from its income 100% of dividends received from the Association as a member of
the same affiliated group of corporations. The corporate dividends received
deduction is generally 70% in the case of dividends received from unaffiliated
corporations with which the Company and the Association will not file a
consolidated tax return, except that if the Company or the Association own more
than 20% of the stock of a corporation distributing a dividend then 80% of any
dividends received may be deducted.
STATE AND LOCAL TAXATION
State of California. The California franchise tax rate applicable to the
Association equals the franchise tax rate applicable to corporations generally,
plus an "in lieu" rate approximately equal to personal property taxes and
business license taxes paid by such corporations (but not generally paid by
banks or financial corporations such as the Association); however, the total tax
rate cannot exceed 11.7%. Under California regulations, bad debt deductions are
available in computing California franchise taxes using a three or six year
weighted average loss experience method. The Association and its California
subsidiary file California state franchise tax returns on a combined basis.
Assuming that the holding company form of organization is utilized, the Company,
as a savings and loan holding company commercially domiciled in California, will
generally be treated as a financial corporation and subject to the general
corporate tax rate plus the "in lieu" rate as discussed previously for the
Association.
Delaware Taxation. As a Delaware holding company not earning income in
Delaware, the Company is exempted from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
33
<PAGE>
ITEM 2. PROPERTIES.
- -------------------
The Company neither owns or leases any real property. For the time being,
it utilizes the property and equipment of the Association without payment to the
Association.
The Association conducts its business through an administrative and full
service office located in West Covina and five other full service offices. The
Company believes that the Association's current facilities are adequate to meet
the present and immediately foreseeable needs of the Association and the
Company.
<TABLE>
<CAPTION>
ORIGINAL NET BOOK VALUE
YEAR OF PROPERTY OR
LEASED LEASED DATE OF LEASEHOLD
OR OR LEASE IMPROVEMENTS AT
LOCATION OWNED ACQUIRED EXPIRATION JUNE 30, 1996
--------------------------------- ----- -------- ------------ -----------------
<S> <C> <C> <C> <C>
ADMINISTRATIVE/BRANCH OFFICE:
225 North Barranca Street Owned 1984 - $1,499,000
West Covina, California 91791
BRANCH OFFICES:
Covina:
144 North Second Avenue Owned 1952 - 122,000
Covina, California 91723
Hacienda Heights:
2233 South Hacienda Boulevard Owned 1970 - 579,000
Hacienda Heights, California
91745
La Verne:
2111 Bonita Avenue Owned 1972 - 178,000
La Verne, California 91750
City of Industry:
220 North Hacienda Boulevard Leased 1977 11/30/97(1) 5,000
City of Industry, California
91744
Arcadia:
One East Foothill Boulevard Leased 1986 12/31/04 6,000
Arcadia, California 91006
</TABLE>
(1) The Association has options to extend the lease term for five consecutive
five-year periods.
34
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
- --------------------------
The Company is not involved in any pending legal proceeding other than
routine proceedings occurring in the ordinary course of business, which in the
aggregate are believed by management to be immaterial to the Company's financial
condition or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------------------------------------------------------------
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock of SGV Bancorp, Inc. is traded over-the-counter on the
Nasdaq Stock Market under the symbol "SGVB." To date, the Company has not paid a
dividend to its shareholders. In the future, the Board of Directors may consider
a policy of paying cash dividends on the Commmon Stock. As of June 30, 1996
there were 215 holders of record of the Common Stock of the Company, (not
including the number of persons holding stock in nominee or street name through
various nonimee holders) and 2,591,276 shares outstanding. The following table
sets forth for the quarters indicated the range of high and low bid price
information for the Common Stock of the Company as reported on the Nasdaq
National Market.
<TABLE>
<CAPTION>
Year ended June 30, 1996(1)
-------------------------------------------------------------
4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
High............ 9 1/2 10 10 1/8 9 3/4
Low............. 8 1/2 8 7/8 9 7 5/16
</TABLE>
(1) The Company's initial public offering was completed on June 28, 1995.
35
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE COMPANY
<TABLE>
<CAPTION>
AT JUNE 30,
------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------- ------------- ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets.................................. $336,055 $273,396 $255,410 $252,148 $253,798
Investment securities
available for sale(1)........................ 14,904 1,000 4,898 5,928 1,988
Investment securities held to
maturity(1)................................. - 3,200 3,200 - -
Mortgage-backed securities available
for sale(1)................................. 16,614 3,614 4,140 4,262 -
Mortgage-backed securities
held to maturity(1).......................... 27,701 15,735 19,609 28,418 50,533
Loans receivable held for
sale......................................... 723 - - 1,197 1,530
Loans receivable held for
investment, net(2).......................... 255,953 217,399 207,667 190,961 171,693
Deposit accounts.............................. 234,039 204,264 200,658 202,143 211,898
FHLB advances................................. 67,509 33,447 37,799 31,982 24,000
Stockholders' equity, substantially
restricted................................... 31,586 33,006 13,581 13,007 11,725
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30,
--------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income................................ $ 21,259 $ 17,855 $ 16,971 $ 18,552 $ 22,554
Interest expense............................... 13,304 10,900 9,363 10,459 14,818
-------- -------- -------- -------- --------
Net interest income before provision
for (recapture of) estimated
loan losses................................ 7,955 6,955 7,608 8,093 7,736
Provision for (recapture of) estimated
loan losses................................. 575 483 95 (29) 164
-------- -------- -------- -------- --------
Net interest income after provision
for (recapture of)estimated loan losses.... 7,380 6,472 7,513 8,122 7,572
Other income................................... 612 538 447 722 1,949
General and administrative expenses............ 6,966 6,705 6,775 6,893 7,556
-------- -------- -------- -------- --------
Earnings before income tax expense.............. 1,026 305 1,185 1,951 1,965
Income tax expense.............................. 432 128 493 669 826
-------- -------- -------- -------- --------
Net earnings.................................... $ 594 $ 177 $ 692 $ 1,282 $ 1,139
======== ======== ======== ======== ========
Earnings per share.............................. $ .24 N/A N/A N/A N/A
========
</TABLE>
36
<PAGE>
<TABLE>
AT OR FOR THE YEAR ENDED JUNE 30,
---------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------- -------- --------- ---------- -------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS
AND OTHER DATA(3):
PERFORMANCE RATIOS:
Return on average assets........................ 0.20% 0.07% 0.28% 0.51% 0.43%
Return on average equity........................ 1.81 1.16 5.16 10.29 10.21
Average equity to average assets................ 11.00 5.86 5.33 4.96 4.24
Equity to total assets
at end of period............................... 9.40 12.07 5.32 5.16 4.62
Average interest rate
spread(4)...................................... 2.28 2.61 3.01 3.22 2.89
Net interest margin(5).......................... 2.76 2.79 3.15 3.37 3.07
Average interest-earning
assets to average interest-bearing
liabilities.................................... 110.37 103.97 103.81 103.45 102.98
General and administrative
expenses to average assets.................... 2.33 2.58 2.69 2.74 2.87
REGULATORY CAPITAL RATIOS:
Tangible capital................................ 7.63% 9.04% 5.31% 5.16% 4.62%
Core capital.................................... 7.63 9.04 5.31 5.16 4.62
Risk-based capital.............................. 16.51 18.56 11.03 11.02 9.98
ASSET QUALITY RATIOS:
Non-performing loans as a percent of gross
loans receivable(6)(7).......................... 0.76% 0.88% 0.54% 0.76% 1.37%
Non-performing assets as a percent
of total assets(7)............................. 1.03 1.00 0.83 0.87 1.05
Allowance for estimated loan losses as a
percent of gross loans receivable(6).......... 0.41 0.36 0.27 0.25 0.32
Allowance for estimated loan losses as a
percent of non-performing loans(7)............ 53.92 41.21 50.40 32.22 23.37
NUMBER OF FULL-SERVICE CUSTOMER
FACILITIES...................................... 6 6 6 6 6
</TABLE>
(1) The Company has historically classified its investment and mortgage-backed
securities as "held to maturity" or "available for sale." The Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," as of
June 30, 1994.
(2) The allowance for estimated loan losses at June 30, 1996, 1995, 1994, 1993
and 1992 was $1,058,000, $792,000, $562,000, $472,000, and $556,000,
respectively.
(3) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. With the exception of end of period ratios, all ratios are based on
average monthly balances during the indicated periods and are annualized
where appropriate.
(4) The average interest rate spread represents the difference between the
weighted average yield on interest-earning assets and the weighted average
cost of interest-bearing liabilities.
(5) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(6) Gross loans receivable includes loans receivable held for investment and
loans held for sale, less undisbursed loan funds, deferred loan fees and
unamortized discounts/premiums.
(7) Non-performing assets consist of non-performing loans and real estate
acquired through foreclosure ("REO"). Non-performing loans consist of all
loans 90 days or more past due. It is the Association's policy to cease
accruing interest on all such loans.
37
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -------------------------------------------------------------------------
RESULTS OF OPERATIONS.
- ---------------------
MANAGEMENT OF INTEREST RATE RISK
The principal objective of the Association's interest rate risk
management function is to evaluate the interest rate risk included in certain
balance sheet accounts, determine the level of risk appropriate given the
Association's business focus, operating environment, capital and liquidity
requirements and performance objectives, and manage the risk consistent with
Board approved guidelines. Through such management, the Association seeks to
reduce the vulnerability of its operations to changes in interest rates. The
Association monitors its interest rate risk as such risk relates to its
operating strategies. The Association's Board of Directors has established an
Asset/Liability Committee, responsible for reviewing its asset/liability
policies and interest rate risk position, which meets monthly and reports trends
to the Board of Directors on a monthly basis and the Association's interest rate
risk position on a quarterly basis. The extent of the movement of interest
rates, higher or lower, is an uncertainty that could have a negative impact on
the earnings of the Association.
In recent years, the Association has utilized the following strategies
to manage interest rate risk: (i) emphasizing the origination or purchase of
adjustable-rate one- to four-family mortgage loans for portfolio; (ii) selling
to the secondary market substantially all fixed-rate mortgage loans originated;
and, (iii) attempting to reduce the overall interst rate sensitivity of
liabilities by emphasizing core and longer-term deposits and utilizing FHLB
advances.
Net Portfolio Value. The Association's interest rate sensitivity is
monitored by management through the use of an internally generated model which
estimates the change in net portfolio value ("NPV") over a range of interest
rate scenarios. NPV is the present value of expected cash flows from assets,
liabilities and off-balance sheet contracts. An NPV Ratio, in any interest rate
scenario, is defined as the NPV in that scenario divided by the market value of
assets in the same scenario. The Sensitivity Measure is the decline in the NPV
Ratio, in basis points, caused by a 2% increase or decrease in rates, whichever
produces a larger decline. The higher an institution's Sensitivity Measure is,
the greater its exposure to interest rate risk is considered to be. The OTS
also produces a similar analysis using its own model, based upon data submitted
on the Association's quarterly Thrift Financial Reports.
As of June 30, 1996, the Association's Sensitivity Measure, as
measured by the OTS, was 2.09%. At that same date, the Sensitivity Measure as
measured by the Association, was 1.02%. The Association compares the results
from the OTS with its internally generated results and provides the Board of
Directors a comparison to determine if there is any additional risk.
In addition to monitoring selected measures of NPV, management also
monitors effects on net interest income resulting from changes in interest
rates. These measures are used in conjunction with NPV measures to identify
potential interest rate risk. The Association projects net interest income for
the next twelve month period, based upon certain specific assumptions. For the
year ended June 30, 1996, 1995, and 1994, the forecasted net interest income in
the existing rate environment (held constant for the period) for interest rate
risk management purposes was $7.3 million, $7.0 million and $7.8 million,
respectively, compared to the actual net interest income recorded of $8.0
million, $7.0 million and $7.6 million, respectively.
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modelling changes in NPV requires the making
of certain assumptions which may tend to oversimplify the manner in which actual
yields and costs respond to changes in market interest rates. First, the models
assume that the composition of the Association's interest sensitive assets and
liabilities existing
38
<PAGE>
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 the duration to
maturity or repricing of specific assets and liabilities. Third, the model does
not take into account the Association's business or strategic plans.
Accordingly, although the NPV measurements and net interest income models do
provide an indication of the Association's interest rate risk exposure at a
particular point in time, such measurements are not intended to and do not
provide a precise forecast of the effect of changes in market interest rates on
the Association's net interest income and will differ from actual results.
The following table sets forth, at June 30, 1996, an analysis of the
Association's interest rate risk as measured by the estimated changes in the NPV
resulting from instantaneous and sustained parallel shifts in the yield curve
(400 basis points, measured in 100 basis point increments).
<TABLE>
<CAPTION>
CHANGE IN
INTEREST RATES NET PORTFOLIO VALUE
-----------------------------------------
IN BASIS POINTS CHANGE CHANGE
(RATE SHOCK) AMOUNT $ %
----------------- ----------- ----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
400 $21,016 $(9,705) (31.6)%
300 23,849 (6,872) (22.4)%
200 26,575 (4,146) (13.5)%
100 29,148 (1,573) (5.1)%
- 30,721 - -
(100) 31,189 468 1.5%
(200) 30,685 (36) (0.1)%
(300) 30,889 168 0.6%
(400) 31,485 764 2.5%
</TABLE>
39
<PAGE>
AVERAGE BALANCE SHEET
The following table sets forth certain information relating to
the Company for the fiscal years ended June 30, 1996, 1995 and 1994.
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,
----------------------------------------------------------------------------------------------------------
1996 1995 1994
----------------------------------- ----------------------------- ---------------------------------
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... $ 8,491 $ 522 6.15% $ 6,354 $ 366 5.76% $ 6,123 $ 224 3.66%
Investment securities,
net......................... 9,454 601 6.36 5,531 319 5.77 7,369 304 4.13
Loans receivable............. 233,356 17,798 7.63 213,846 15,647 7.32 198,344 14,819 7.47
Mortgage-backed
securities, net............. 33,944 2,186 6.44 21,136 1,378 6.52 26,706 1,521 5.70
FHLB stock................... 3,175 152 4.79 2,806 145 5.17 2,677 103 3.85
-------- ------- -------- ------- -------- -------
Total interest-earning
assets..................... 288,420 $21,259 7.37% 249,673 $17,855 7.15% 241,219 $16,971 7.04%
======= ======= =======
Non-interest-earning
assets...................... 10,612 10,059 10,327
-------- -------- --------
Total assets............... $299,032 $259,732 $251,546
======== ======== ========
Liabilities and Equity:
Interest-bearing liabilities:
Money market savings
accounts.................... $ 7,473 $ 166 2.21% $ 10,425 $ 232 2.22% $ 13,024 $ 304 2.33%
Passbook accounts........... 18,108 370 2.04 21,288 436 2.05 25,132 536 2.13
NOW accounts................ 20,299 341 1.68 20,518 303 1.48 23,023 359 1.56
Certificate accounts......... 165,677 9,194 5.55 148,309 7,208 4.86 136,135 5,820 4.28
-------- ------- -------- ------- -------- -------
Total savings
accounts................... 211,557 10,071 4.76 200,540 8,179 4.08 197,314 7,019 3.56
FHLB advances................ 49,419 3,212 6.50 39,327 2,713 6.90 34,904 2,340 6.70
Impounds& other
borrowings.................. 346 2 6.07 275 8 2.00 155 4 2.00
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities................. 261,322 $13,304 5.09% 240,142 $10,900 4.54% 232,373 $ 9,363 4.03%
======= ======= =======
Non-interest bearing
liabilities................... 4,831 4,378 5,767
-------- -------- --------
Total liabilities............ 266,153 244,520 238,140
Equity......................... 32,879 15,212 13,406
-------- -------- --------
Total liabilities and
equity...................... $299,032 $259,732 $251,546
======== ======== ========
Net interest rate spread....... 2.28% 2.61% 3.01%
Net interest margin............ 2.76% 2.79% 3.15%
Ratio of interest-earning
assets to interest-bearing
liabilities................... 110.37% 103.97% 103.81%
</TABLE>
40
<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 the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to: (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume); and (iii) the net change. The changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
Year Ended June 30, 1996 Year Ended June 30, 1995
Compared to Compared to
Year Ended June 30, 1995 Year Ended June 30, 1994
---------------------------- -----------------------------
Increase (decrease) due to Increase (decrease) due to
Average Average
Volume Rate Net Volume Rate Net
--------- ------ -------- --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-earning deposits and
short-term investments................ $ 130 $ 26 $ 156 $ 8 $ 134 $ 142
Investment securities, net (1)......... 246 36 282 (25) 40 15
Loans receivable, net(1)............... 1,469 682 2,151 1,125 (297) 828
Mortgage-backed securities, net(1)..... 825 (17) 808 (467) 324 (143)
FHLB stock............................. 17 (10) 7 5 37 42
------ ------ ------ ------ ----- ------
Total interest-earning assets........... 2,687 717 3,404 646 238 884
------ ------ ------ ------ ----- ------
INTEREST-BEARING LIABILITIES:
Money market savings accounts.......... (65) (1) (66) (59) (13) (72)
Passbook accounts...................... (64) (2) (66) (79) (21) (100)
NOW accounts........................... (3) 41 38 (38) (18) (56)
Certificate accounts................... 897 1,089 1,986 548 840 1,388
FHLB advances.......................... 644 (145) 499 304 69 373
Impounds & other borrowings............ 1 12 13 4 - 4
------ ------ ------ ------ ----- ------
Total interest-bearing liabilities...... 1,410 994 2,404 680 857 1,537
------ ------ ------ ------ ----- ------
Net change in net interest income....... $1,277 $ (277) $1,000 $ (34) $(619) $ (653)
====== ====== ====== ====== ===== ======
</TABLE>
____________________________
(1) Includes assets available for sale.
41
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1996 AND JUNE 30,
1995
GENERAL
The net earnings for the year ended June 30, 1996 were $594,000, an
increase of $417,000, or 235.6%, from the $177,000 in net earnings for the year
ended June 30, 1995. The improvement in operating results was due to the
increase in the average balance of interest-earning assets resulting in a $1.0
million net increase in net interest income which was partially offset by: (1)
an increase in the provision for estimated loan losses, (2) an increase in the
net loss on real estate acquired through foreclosure and (3) an increase in
general and administrative expenses, resulting primarily from an increase in
compensation related expenses from the implementation of stock related
compensation programs.
INTEREST INCOME
Interest income for the year ended June 30, 1996 was $21.3 million
compared to $17.9 million for the year ended June 30, 1995, an increase of $3.4
million, or 19.1%. The increase in interest income was primarily due to the
increase in the average balance of interest-earning assets to $288.4 million for
the year ended June 30, 1996 from $249.7 million for the year ended June 30,
1995 and to the increase in the average yield on interest-earning assets to
7.37% for the year ended June 30, 1996 from 7.15% for the year ended June 30,
1995. The increase in the average balance of interest-earning assets was the
result of a growth strategy employed throughout the year to increase the
earnings capacity of the Company. Key elements of the growth strategy included
purchases of mortgage loans and mortgage-backed securities funded primarily by
FHLB advances and deposits.
Interest income on loans receivable increased $2.1 million to $17.8
million for the year ended June 30, 1996 compared to $15.7 million for the year
ended June 30, 1995. The increase in interest income was the result of the $19.5
million increase in the average balance of loans receivable for the year ended
June 30, 1996 primarily as a result of the purchase of approximately $48 million
in adjustable rate loans from three financial institutions. The loans purchased
were indexed to the Eleventh District Cost of Funds Index (COFI) and were
primarily seasoned, fully indexed loans. The weighted average interest rate of
the loans purchased was 7.26% and the weighted average margin which is added to
the index was 2.54%. The benefit of the loan purchases and the repricing of
loans indexed to the One Year Constant Maturity Treasury Index (CMT) was an
increase in the average yield on loans receivable to 7.63% for the year ended
June 30, 1996 compared to 7.32% for the year ended June 30, 1995.
Interest income on mortgage-backed securities increased by $808,000
due to the increase in the average balance of mortgage-backed securities to
$33.9 million for the year ended June 30, 1996 compared to $21.1 for the period
ended June 30, 1995. The increase in mortgage-backed securities was the result
of various purchases totaling $33.0 million, of which $15.4 million had
adjustable rate features and were tied to various indexes including COFI, CMT
and LIBOR. The average yield on mortgage-backed securities fell slightly to
6.44% for the year ended June 30, 1996 from 6.52% for the year ended June 30,
1995. The decrease in yield was primarily due to the increase in prepayments
which increased the amortization of the related premiums on mortgage-backed
securities, thereby decreasing their average life and portfolio yields.
Interest income on investment securities increased by $282,000 to
$601,000 for the year ended June 30, 1996 from $319,000 for the year ended June
30, 1995. The increase was due to the $3.9 million increase in the average
balance of securities to $9.5 million for the year ended June 30, 1996 from $5.5
million for the year ended June 30, 1995. Interest income on interest-earning
deposits and daily investments increased by $163,000 to $674,000 for the year
ended June 30, 1996 compared to $511,000 for the year ended June 30, 1995
primarily due to an increase in the average balance of the related investments.
42
<PAGE>
INTEREST EXPENSE
Interest expense for the year ended June 30, 1996 was $13.3 million
compared to $10.9 million for the year ended June 30, 1995, an increase of $2.4
million, or 22.0%. The increase in interest expense was due to the $21.2 million
increase in the average balances of interest-bearing liabilities to $261.3
million for the period ended June 30, 1996 from $240.1 million for the period
ended June 30, 1995. The increased in interest expense was also due to the
increase in the average cost of interest-bearing liabilities which increased to
5.09% for the period ended June 30, 1996 from 4.54% from June 30, 1995. Interest
expense on deposit accounts increased $1.9 million to $10.1 million for the year
ended June 30, 1996 from $8.2 million for the year ended June 30, 1995. The
increase in interest expense on deposit accounts reflects the $17.4 million
increase in the average balance of certificate accounts to $165.7 million for
the period ended June 30, 1996 from $148.3 million for the year ended June 30,
1995.
The Company's use of FHLB advances (to aid in the funding of the
increase in earning assets) increased during the year ended June 30, 1996.
Interest expense on FHLB advances increased by $512,000 to $3.2 million for the
year ended June 30, 1996 from $2.7 million for the year ended June 30, 1995. The
increase in interest expense was due to an increase in the average balance of
FHLB advances of $10.1 million to $49.4 million during the year ended June 30,
1996 from $39.3 million over the year ended June 30, 1995.
PROVISION FOR ESTIMATED LOAN LOSSES
The Company's provision for estimated loan losses increased by $92,000
to $575,000 for the year ended June 30, 1996 from $483,000 for the year ended
June 30, 1995. The increase in the provision for estimated loan losses is
partially due to the increase charge-offs which were $310,000 for the year ended
June 30, 1996 compared to the $258,000 in charge-offs for the year ended June
30, 1995. Also, the Company's $38.6 million increase in loans receivable during
the year and the reevaluation of the risk characteristics of the current loan
portfolio contributed to the increase in the provision for loan losses. The
increase in the provision for estimated loan losses during fiscal 1996 reflects
management's concerns regarding the possible adverse effects upon the
Association's loan portfolio of the continuation of higher unemployment in its
market area and the continuation of a general decline in real estate activity
and values. The allowance for estimated loan losses increased to $1,058,000, or
0.41% of gross loans receivable, at June 30, 1996 from $792,000, or 0.36% of
gross loans receivable at June 30, 1995. As a percentage of non-performing
loans, the allowance for loan losses increased to 53.92% at June 30, 1996 from
41.21% at June 30, 1995. The amount of the provision and allowance for loan
losses is influenced by current economic conditions, actual loss experience,
industry trends and other factors such as adverse economic conditions. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Association's allowance for estimated loan
losses. Such agencies may require the Association to recognize additions to the
allowance based upon judgments which differ from those of management. Although
management uses the best information available, future adjustments to the
allowance may be necessary due to economic, operating, regulatory and other
conditions that may be beyond management's control.
43
<PAGE>
OTHER INCOME
The non-interest income for the year ended June 30, 1996 was $612,000
compared to $538,000 for the year ended June 30, 1995, an increase of $74,000,
or 13.8%. The Company's loan servicing and other fees collected remained
approximately the same at $446,000 for the year ended June 30, 1996 compared
to $445,000 in the year ended June 30, 1995. The Company continued to be
negatively impacted by the losses incurred related to REO activities as such
losses totaled $271,000 for the year ended June 30, 1996 compared to $217,000
for the comparable period a year ago. The increase was attributable to an
increase in the subsequent fair value writedowns of real estate owned during the
year ended June 30, 1996. Although the Company's secondary marketing activity
accelerated in terms of loans sold to the secondary market during the year ended
June 30, 1996 ($13.2 million in loan sales in current year versus $1.4 million
in prior year), a net loss on operations of $56,000 resulted. This compares with
the net loss of $75,000 during the year ended June 30, 1995. The continuation of
the loss on secondary marketing activities was the result of increased
competition among institutions selling loans which resulted in aggressive
pricing on salable products to FNMA or FHLMC. Also, the Company posted $12,000
in losses due to the redemption of securities available for sale in the year
ended June 30, 1996 compared to a net loss of $78,000 during the year ended June
30, 1995.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the year ended June 30, 1996
were $7.0 million compared to $6.7 million for the year ended June 30, 1995, a
3.9% increase. Compensation and other employee benefits increased $192,000 in
fiscal 1996 from fiscal 1995 due primarily to the implementation of certain
stock-related compensation programs. Expenses related to the employee stock
ownership plan and the stock compensation plan were approximately $302,000
during the fiscal year ended June 30, 1996. Office occupancy expenses decreased
by $75,000 primarily due to the reduction in depreciation expense related to the
Company's leased facilities. Other operating costs increased to $1.2 million
from $1.1 million partially due to increased loan origination and servicing
costs related to the review and inspection of the individual properties involved
in the bulk loan purchases.
INCOME TAX
Income tax expense was $432,000 for the year ended June 30, 1996
compared to $128,000 for the year ended June 30, 1995, representing an increase
of $304,000. This increase is principally due to the increase in taxable income
in fiscal 1996 compared to fiscal 1995. See Note 11 of the Notes to the
Consolidated Financial Statements for additional information on the
Association's income taxes.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1996 AND JUNE 30, 1995
The total assets of the Company at June 30, 1996 were $336.1 million
compared to $273.4 million at June 30, 1995, an increase of $62.7 million. The
Company increased the loans receivable held for investment by $38.6 million to
$256.0 million at June 30, 1996 from $217.4 million at June 30, 1995. primarily
due to the three bulk loan purchases. The Company purchased a total of
approximately $48 million in three separate loan acquisitions. In all of the
acquisitions, the Company purchased adjustable rate loans which were indexed to
COFI and reprice at intervals between one and six months. Properties securing
the loans purchased are located in southern California, but are dispersed
throughout a wider area than the Company's normal lending area.
44
<PAGE>
The Company's mortgage-backed securities portfolio increased to $44.3
million at June 30, 1996 compared to $19.3 million at June 30, 1995. The
increase in this portfolio reflects management's strategy to increase the
Company's interest-earning assets to enhance the net interest income of the
Company. Cash and short-term bank obligations decreased to $8.9 million at June
30, 1996 from $23.4 million at June 30, 1995 due primarily to the use of cash
and other short-term bank obligations for the purpose of purchasing other
investments classified as available for sale. Investments available for sale
increased to $14.9 million at June 30, 1996 from $1.0 million at June 30, 1995
as the Company utilized excess cash available from the Company's conversion to
stock form on June 28, 1995 to acquire higher yielding investments.
Total liabilities increased $64.1 million to $304.5 million at June
30, 1996 compared to $240.4 million at June 30, 1995. The increase in
liabilities was to support the strategy of increasing the interest-earning
assets of the Company to enhance net interest income. Total deposit accounts of
the Company increased to $234.0 million at June 30, 1996 from $204.3 million at
June 30, 1995, an increase of $29.7 million. The Company also increased FHLB
advances by $34.1 at June 30, 1996 to $67.5 million from $33.4 million at June
30, 1995.
The Company's stockholders' equity was $31.6 million at June 30, 1996,
a decrease of $1.4 million from the $33.0 million in stockholders' equity at
June 30, 1995. The decrease in stockholders' equity was primarily due to the
repurchase of 136,280 shares of stock to be held as treasury stock with a total
value of $1.2 million and the purchase of 81,929 shares of stock (at a total
value of $775,000) to fund the stock compensation plan approved at the January
17, 1996 annual meeting of shareholders. These reductions in stockholders'
equity were offset by the net earnings of $594,000.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1995 AND JUNE 30,
1994
GENERAL
The net earnings for the year ended June 30, 1995 were $177,000, a
decrease of $515,000, or 74.4%, from the $692,000 net earnings for the year
ended June 30, 1994. The operating results were primarily influenced by the
rising interest rate environment, an increase in the provision for estimated
loan losses, a decrease in non-interest income from the decline in income from
secondary marketing activities. The decrease in the net loss from real estate
acquired through foreclosure (REO) during fiscal 1995 partially offset these
reductions in income. The increase in interest rates resulted in a decrease in
net interest income of $653,000 as the average net interest margin decreased to
2.79% for the year ended June 30, 1995 compared to 3.15% for the year ended June
30, 1994.
INTEREST INCOME
Interest income for the year ended June 30, 1995 was $17.9 million
compared to $17.0 million for the year ended June 30, 1994, an increase of
$884,000, or 5.21%. The increase in interest income was primarily due to the
increase in average total earning assets to $249.7 million for the year ended
June 30, 1995 from $241.2 million for the year ended June 30, 1994 and to the
increase in the average yield on earning assets to 7.15% for the year ended June
30, 1995 from 7.04% for the year ended June 30, 1994. The increase in the
average earning assets was the result of a $15.5 million increase in the average
balance of loans receivable offset by the $5.6 million planned decrease in the
average balance of mortgage-backed securities. The average yield on loans
receivable declined from 7.47% over fiscal 1994 to 7.32% over the comparable
1995 period. This decline was primarily the result of a lower 11th District Cost
of Funds Index (COFI), which lags the current trend in interest rates by several
months. The average yield on the mortgage-backed securities portfolio increased
to 6.52% for the year ended June 30, 1995 from 5.70% for
45
<PAGE>
the year ended June 30, 1994. The increase in yield was primarily due to a
decrease in prepayments which reduced the amortization of the related premiums
on mortgage-backed securities, thereby increasing their average life and
portfolio yields. All other interest sensitive asset categories reflected higher
yields primarily related to the increasing interest rate environment.
INTEREST EXPENSE
Interest expense for the year ended June 30, 1995 was $10.9 million
compared to $9.4 million for the year ended June 30, 1994, an increase of $1.5
million, or 16.4%. The increase in interest expense was due to the $7.8 million
increase in the average balances of interest bearing liabilities from $232.4
million over the fiscal 1994 period to $240.1 million for the comparable 1995
period. Interest expense on deposit accounts increased $1.2 million to $8.2
million for the year ended June 30, 1995 from $7.0 million for the year ended
June 30, 1994. Interest expense on FHLB advances increased $381,000 for the year
ended June 30, 1995 to $2.7 million from $2.3 million due to the $4.4 million
increase in average borrowings and to the 0.20% increase in the related cost of
funds. The increase in interest expense also reflects the rising interest rate
environment as the average cost of interest-bearing liabilities was 4.54% during
the year ended June 30, 1995 compared to 4.03% for the year ended June 30, 1994.
PROVISION FOR ESTIMATED LOAN LOSSES
For the year ended June 30, 1995, the Association's earnings were
reduced by the $483,000 provision for estimated loan losses. In comparison, the
provision for estimated loan losses for the year ended June 30, 1994 was
$95,000, representing an increase of $388,000. The increase in the provision for
estimated loan losses is partially due to the increase in non-accrual loans to
$1.92 million at June 30, 1995 compared to $1.1 million at June 30, 1994, the
charge-off of $258,000 in loans during the year and, in part, to the $9.7
million increase from June 30, 1994 in the amount of loans receivable and an
increase in the number of loans being monitored internally for increased risk.
The allowance for estimated loan losses increased to $792,000, or 0.36% of gross
loans receivable, at June 30, 1995 from $562,000, or 0.27% of gross loans
receivable at June 30, 1994. The allowance for loan losses decreased as a
percentage of non-performing loans from 50.40% at June 30, 1994 to 41.21% at
June 30, 1995. The increase in the provision for estimated loan losses during
fiscal 1995 also reflects management's concerns regarding the possible adverse
effects upon the Association's loan portfolio of the continuation of higher
unemployment in its market area and the continuation of a general decline in
real estate activity and values. The amount of the provision and allowance for
loan losses is influenced by current economic conditions, actual loss
experience, industry trends and other factors such as adverse economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Association's allowance for
estimated loan losses. Such agencies may require the Association to recognize
additions to the allowance based upon judgments which differ from those of
management. Although management uses the best information available, future
adjustments to the allowance may be necessary due to economic, operating,
regulatory and other conditions that may be beyond management's control.
OTHER INCOME (EXPENSE)
The non-interest income for the year ended June 30, 1995 was $538,000
compared to $447,000 for the year ended June 30, 1994, an increase of $91,000,
or 20.36%. The increase was primarily due to the $299,000 decrease in the net
loss on REO activities as the net loss was $217,000 for the year ended June 30,
1995 compared to $516,000 for the year ended June 30, 1994. The decrease was
attributable to a reduction in the net maintenance costs of REOs and a decrease
in REO writedowns. Partially offsetting this reduction in net REO losses was the
$75,000 net loss on secondary marketing activities for the year ended June 30,
1995 compared to a net income of $164,000 for the year ended June 30, 1994, a
reduction of $239,000.
46
<PAGE>
This substantial change in secondary marketing income was the result of the
rising interest rate environment which virtually eliminated loan sales by the
Association to the secondary market entities (FNMA and FHLMC). The Association's
loan servicing and other fees increased by $120,000 to $445,000 for the year
ended June 30, 1995 compared to $325,000 for the year ended June 30, 1994. This
increase was related to the substantial writedown of the remaining amount of
excess servicing gains occurring during fiscal 1994, not recurring in fiscal
1995. The Association also incurred $78,000 in losses on sales of securities
which were available for sale during the year ended June 30, 1995.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the year ended June 30, 1995
were $6.7 million compared to $6.8 million for the year ended June 30, 1994, a
1.0% decrease. Compensation and other employee benefits decreased $129,000 in
fiscal 1995 from fiscal 1994 due primarily to a reduction in staff. Office
occupancy expense decreased by $93,000 due to a reduction in required repair and
maintenance costs. Other operating costs increased to $1.1 million from $1.0
million partially due to increased loan origination and servicing costs.
INCOME TAX
Income tax expense was $128,000 for the year ended June 30, 1995
compared to $493,000 for the year ended June 30, 1994, representing a decline of
$365,000. This decrease is due to the decline in taxable income in fiscal 1995
compared to fiscal 1994. See Note 11 of the Notes to the Consolidated Financial
Statements for additional information on the Association's income taxes.
LIQUIDITY AND CAPITAL RESOURCES
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 Company offers both adjustable and fixed rate loans to its
customers so that it can be competitive. Historically, the Company has sold the
majority of the fixed rate loans that it originates to the secondary market. The
proceeds of the sale of loans can be a significant source of liquidity, although
the changing interest rate environment and the depressed Southern California
real estaten market have decreased loan origination and loan sale activity. For
the years ended June 30, 1996, 1995 and 1994, the Company received $13.2
million, $1.4 million and $26.2 million, respectively, in proceeds from the sale
of loans to the secondary market.
The Company's most significant largest source of funds is repayments
on its loan portfolio. For the years ended June 30, 1996, 1995 and 1994,
principal repayments on loans were $25.0 million, $19.7 million and $41.6
million, respectively.
The Company may sell or redeem mortgage-backed securities and other
investments from its available for sale portfolio, primarily for liquidity
purposes. For the years ended June 30, 1996, 1995 and 1994, the Company received
$28.7 million, $4.9 million and $2.0 million, respectively, in proceeds for the
sale or redemption of mortgage-backed securities and other investments. The
increase in activity in fiscal 1996 represents the purchase and sale of units in
the Company's investment in money market and mutual funds which are viewed my
management as short-term investment alternatives. The principal repayments
47
<PAGE>
on mortgage-backed securities represent a significant source of liquidity for
the Company. For the years ended June 30, 1996, 1995 and 1994, the Company
received $7.6 million, $4.3 million and $15.5 million, respectively, in
principal repayments.
Deposit accounts may represent a significant source of liquidity for
the Company. During recent years, increased competition from financial and non-
financial companies and the relatively lower interest rate environment has
increasingly made it difficult to attract new depositors. For the years ended
June 30, 1996, 1995 and 1994, the net increase(decrease) in deposit accounts
(net of interest credited) was $29.8 million, $3.6 million and ($1.5 million),
respectively. For the year ended June 30, 1996, the Company emphasized
certificates of deposits in varying terms to attract deposit accounts to aid in
the funding of the increase in interest-earning assets.
The Association historically has borrowed from the FHLB to provide for
additional sources of funds. For the years ended June 30, 1996, 1995 and 1994,
the net proceeds (repayments) from FHLB advances were $34.1 million, $(4.4)
million and $5.8 million, respectively. The net repayment of FHLB advances in
fiscal 1995 was due to the receipt of conversion proceeds in June 1995.
In June 1995, the Company received net funds of $20.7 million as the
result of the Association's conversion from mutual to stock form and the
concurrent stock offering by the Company. As part of the conversion process, 60%
of the net proceeds were contributed to the Association as additional capital.
The remainder of the net proceeds will be used to support future growth.
At June 30, 1996, the Association exceeded all of its regulatory
capital requirements. The Association's tangible capital level was $25.4
million, or 7.63% of total adjusted assets, which is above the required level of
$5.0 million, or 1.50%; core capital of $25.4 million, or 7.63% of total
adjusted assets, which is above the required level of $10.0 million, or 3.00%;
and risk-based capital of $26.4 million, or 16.51% of risk-weighted assets,
which is above the required level of $12.8 million, or 8.0%.
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. For the periods ended June 30, 1996, 1995 and 1994, the liquidity
ratios were 9.23%, 7.15% and 8.01%, respectively.
IMPACT OF INFLATION
The Consolidated Financial Statements and Notes thereto presented
herein have been prepared in accordance with GAAP, which require the measurement
of financial position and operating results in terms of historical dollar
amounts without considering the changes in the relative purchasing power of
money over time due to inflation. The impact of inflation is reflected in the
increased cost of the Company's operations. Unlike industrial companies, nearly
all of the assets and liabilities of the Company are monetary in nature. As a
result, interest rates have a greater impact on the Company's performance than
do the effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the price of goods and
services.
IMPACT OF NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board (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
48
<PAGE>
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. SFAS No. 123 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 transaction 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 and, in the
future, will disclose the pro forma effect on net earnings and earnings per
share as if the fair value based method of accounting defined in SFAS No. 123
had been adopted.
The accounting requirements of SFAS No. 123 are effective for
transactions entered into in fiscal years that begin after December 15, 1995.
Management does not believe that the adoption of SFAS No. 123 will have a
significant impact on its stock-based arrangements with nonemployees.
The disclosure requirements of SFAS No. 123 are effective for
financial statements for fiscal years beginning after December 15, 1995
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- ----------------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report.......................................................... 50
Consolidated Statements of Financial Condition as of June 30, 1996 and 1995........... 51
Consolidated Statements of Operations for Each of the Three Years in the Period
Ended June 30, 1996................................................................. 53
Consolidated Statements of Stockholders' Equity for Each of the Three Years in the
Period Ended June 30, 1996.......................................................... 55
Consolidated Statements of Cash Flows for Each of the Three Years in the Period
Ended June 30, 1996................................................................. 56
Notes to Consolidated Financial Statements for Each of the Three Years in the Period
Ended June 30,1996.................................................................. 59
</TABLE>
49
<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 as of June 30, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended June 30, 1996. 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, 1996 and 1995, and the results of their operations and their cash
flows for each of the three years in the period ended June 30, 1996 in
conformity with generally accepted accounting principles.
Deloitte & Touche, LLP
Costa Mesa, California
August 23, 1996
50
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF JUNE 30, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash, including short-term bank
obligations of $4,025 and $18,850
at June 30, 1996 and 1995,
respectively $ 8,884 $ 23,387
Investment securities available for
sale, amortized cost of $15,000 and
$1,000 at June 30, 1996 and 1995,
respectively (Note 3) 14,904 1,000
Investment securities held to maturity,
estimated fair value of $3,190
at June 30, 1995 (Note 4) 3,200
Mortgage-backed securities available
for sale, amortized cost of
$16,863 and $3,674 at June 30, 1996
and 1995, respectively (Notes 3 and 10) 16,614 3,614
Mortgage-backed securities held to
maturity, estimated fair value of
$27,124 and $15,667 at June 30, 1996
and 1995, respectively (Notes 4 and 10) 27,701 15,735
Loans receivable held for investment,
net of allowance for estimated loan
losses of $1,058 and $792 at June 30,
1996 and 1995, respectively
(Notes 5 and 10) 255,953 217,399
Loans receivable held for sale (Note 5) 723
Accrued interest receivable (Note 6) 2,588 2,054
Stock of Federal Home Loan Bank of San 3,747 2,865
Francisco, at cost (Note 10)
Real estate acquired through
foreclosure, net (Note 7) 1,489 822
Premises and equipment, net (Note 8) 3,015 2,868
Prepaid expenses and other assets, net 437 452
-------- --------
Total assets $336,055 $273,396
======== ========
</TABLE>
See notes to consolidated financial statements
51
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF JUNE 30, 1996 AND 1995 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
(DOLLARS IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
<S> <C> <C>
Deposit accounts (Note 9) $234,039 $204,264
Federal Home Loan Bank advances
(Note 10) 67,509 33,447
Accrued expenses and other liabilities 2,456 2,660
Income taxes (Note 11) 465 19
-------- --------
Total liabilities 304,469 240,390
COMMITMENTS AND CONTINGENT LIABILITIES
(Note 12)
STOCKHOLDERS' EQUITY (Notes 1, 2, 11,
12 and 14):
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 (1996 and 1995); 2,591,276
(1996) and 2,727,656 (1995) shares
outstanding 27 27
Additional paid-in capital 20,684 20,666
Retained earnings, substantially
restricted 14,470 13,876
Net unrealized loss on securities
available for sale, net of taxes (202) (35)
Deferred stock compensation (2,153) (1,528)
Treasury stock, 136,380 shares (1,240)
-------- --------
Total stockholders' equity 31,586 33,006
-------- --------
Total liabilities and $336,055 $273,396
stockholders' equity ======== ========
</TABLE>
See notes to consolidated financial statements
52
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
INTEREST INCOME:
Interest on loans $ 17,798 $ 15,647 $ 14,819
Interest on investment securities 601 319 304
Interest on mortgage-backed securities 2,186 1,378 1,521
Other 674 511 327
-------- -------- --------
Total interest income 21,259 17,855 16,971
INTEREST EXPENSE:
Interest on deposit accounts (Note 9) 10,071 8,179 7,019
Interest on borrowings 3,233 2,721 2,344
-------- -------- --------
Total interest expense 13,304 10,900 9,363
-------- -------- --------
NET INTEREST INCOME BEFORE PROVISION FOR
ESTIMATED LOAN LOSSES 7,955 6,955 7,608
PROVISION FOR ESTIMATED LOAN LOSSES
(Note 5) 575 483 95
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR
ESTIMATED LOAN LOSSES 7,380 6,472 7,513
OTHER INCOME (EXPENSE):
Loan servicing and other fees 446 445 325
Secondary market activity, net (56) (75) 164
Loss on sale or redemption of
investment securities
available for sale, net (12) (78) (14)
Net loss on real estate acquired
through foreclosure (Note 7) (271) (217) (516)
Other income 505 463 488
-------- -------- --------
Total other income 612 538 447
</TABLE>
See notes to consolidated financial statements
53
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1996 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation and other
employee expenses $ 3,590 $ 3,398 $ 3,527
Office occupancy 789 864 957
Equipment 748 725 721
Advertising 121 127 93
FDIC insurance premiums 472 457 457
Other operating expenses 1,246 1,134 1,020
------------ ------------ --------------
Total general and 6,966 6,705 6,775
administrative ------------ ------------ --------------
expenses
EARNINGS BEFORE INCOME TAXES 1,026 305 1,185
INCOME TAXES (Note 11) 432 128 493
------------ ------------ --------------
NET EARNINGS $ 594 $ 177 $ 692
============ ============ ==============
EARNINGS PER SHARE $ 0.24 N/A N/A
============ ============ ==============
WEIGHTED AVERAGE SHARES
OUTSTANDING 2,519,090 N/A N/A
============ ============ ==============
</TABLE>
See notes to consolidated financial statements
54
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1996
- --------------------------------------------------------------------------------
(IN THOUSANDS)
<TABLE>
<CAPTION>
NET UNREALIZED
ADDITIONAL LOSS ON SECURITIES
PAID-IN RETAINED AVAILABLE FOR SALE,
PREFERRED STOCK COMMON STOCK CAPITAL EARNINGS NET OF TAXES
--------------- --------------- ---------- -------- -------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C> <C>
BALANCE, July 1, 1993 - $ - - $ - $ - $ 13,007 $ -
Net earnings 692
Change in net unrealized loss on
securities available for sale, net of taxes (118)
______ ______ ______ ______ __________ ________ ___________________
BALANCE, June 30, 1994 13,699 (118)
Net earnings 177
Change in net unrealized loss on
securities available for sale, net of taxes 83
Issuance of common stock, net
of underwriting expenses 2,728 27 20,666
Common stock acquired by ESOP
______ ______ ______ ______ __________ ________ ___________________
BALANCE, June 30, 1995 2,728 27 20,666 13,876 (35)
Net earnings 594
Common stock acquired by stock
compensation plan
Amortization off deferred compensation 18
Repurchase of stock (136,380 shares)
Change in net unrealized loss on
securities available for sale, net of taxes (167)
______ ______ ______ ______ __________ ________ ___________________
BALANCE, June 30, 1996 $ 2,728 $ 27 $ 20,684 $ 14,470 $ (202)
====== ====== ====== ====== ========== ======== ===================
</TABLE>
<TABLE>
<CAPTION>
DEFERRED TOTAL
STOCK TREASURY STOCKHOLDERS'
COMPENSATION STOCK EQUITY
------------ -------- -------------
<S> <C> <C> <C>
BALANCE, July 1, 1993 $ - $ - $ 13,007
Net earnings 692
Change in net unrealized loss on
securities available for sale, net of taxes (118)
------------ -------- -------------
BALANCE, June 30, 1994 13,581
Net earnings 177
Change in net unrealized loss on
securities available for sale, net of taxes 83
Issuance of common stock, net
of underwriting expenses 20,693
Common stock acquired by ESOP (1,528) (1,528)
------------ -------- ------------
BALANCE, June 30, 1995 (1,528) 33,006
Net earnings 594
Common stock acquired by stock
compensation plan (844) (844)
Amortization off deferred compensation 219 237
Repurchase of stock (136,380 shares) (1,240) (1,240)
Change in net unrealized loss on
securities available for sale, net of taxes (167)
------------ -------- ------------
BALANCE, June 30, 1996 $ (2,153) $ (1,240) $ 31,586
=========== ======== ============
</TABLE>
See notes to consolidated financial statements
55
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 594 $ 177 $ 692
Adjustments to reconcile net earnings
to net cash provided by
(used in) operating activities:
Depreciation and amortization 370 418 429
Loans originated for sale (13,906) (1,382) (26,151)
Proceeds from sale of loans 13,152 1,389 26,223
Loss (gain) loss on sale of loans, net 31 (7) (72)
Loss on sale or redemption of
investment securities
available for sale, net 12 78 14
Federal Home Loan Bank stock dividend (152) (144) (103)
Decrease (Increase) in prepaid
expenses and other assets 15 (14) 66
Amortization of deferred loan fees (80) (87) (275)
Deferred loan origination costs (194) (183) (410)
Decrease in accrued expenses and
other liabilities (204) (277) (1,303)
Deferred income taxes (93) 362 (240)
Provision for estimated loan losses 575 483 95
Provision for estimated real estate
losses 204 10 205
Premium (discount) amortization on
securities, net 246 157 325
(Increase) decrease in accrued
interest receivable (534) (67) 247
Other, net 572 (730) 77
-------- ------- --------
Net cash provided by (used in)
operating activities 608 183 (181)
</TABLE>
See notes to consolidated financial statements
56
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1996 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities
available for sale $(42,650) $ (1,000) $ (3,000)
Proceeds from sale and redemption of
investment securities
available for sale 28,683 4,895 2,000
Proceeds from maturity of investment
securities available for sale 2,000
Purchase of investment securities held (3,200)
to maturity
Purchase of mortgage-backed securities
available for sale (11,914) (2,063)
Proceeds from call of investment
securities held to maturity 3,200
Purchase of mortgage-backed securities
held to maturity (21,116) (5,013)
Principal repayments on mortgage-backed
securities 7,647 4,309 15,497
Loans funded, net (17,719) (29,738) (56,317)
Loans purchased, net (48,297) (1,647)
Principal repayments on loans 25,029 19,730 41,611
Proceeds from sale of real estate 1,451 143 1,381
Purchase of premises and equipment (517) (371) (499)
Purchase of FHLB stock (730)
Other, net (227)
-------- -------- --------
Net cash used in investing (76,933) (2,032) (9,477)
activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in certificate accounts 31,704 14,233 1,925
Net decrease in passbook, money market
savings, NOW and noninterest-bearing
accounts (1,929) (10,627) (3,410)
Proceeds from Federal Home Loan Bank
advances 50,000 31,000 22,000
Repayment of Federal Home Loan Bank
advances (15,938) (35,352) (16,183)
Purchase of treasury stock (1,240)
Purchase of stock for deferred
compensation plans (775)
Issuance of common stock, net of
underwriting expenses and
excluding common stock acquired by
ESOP 19,165
-------- -------- --------
Net cash provided by financing 61,822 18,419 4,332
activities -------- -------- --------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (14,503) 16,570 (5,326)
CASH AND CASH EQUIVALENTS, beginning of
year 23,387 6,817 12,143
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of year $ 8,884 $ 23,387 $ 6,817
======== ======== ========
</TABLE>
See notes to consolidated financial statements
57
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1996 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
(IN THOUSANDS)
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOW DISCLOSURES -
Cash paid during the year for:
Interest $ 12,930 $ 10,903 $ 9,368
Income taxes 324 641 770
NONCASH INVESTING ACTIVITIES DURING THE
YEAR:
Real estate acquired through foreclosure $ 2,885 $ 959 $ 1,905
Mortgage-backed securities transferred
from held to maturity
to available for sale classification 4,775
Loans to facilitate sales of real
estate acquired throughforeclosure 641 896 1,259
Change in net unrealized loss on
securities available for sale, net
of taxes 167 (83) 118
Common stock acquired by ESOP 1,528
</TABLE>
See notes to consolidated financial statements
58
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1996
- --------------------------------------------------------------------------------
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 12 and 15). 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, land and
other loans. As of June 30, 1996, the Association operated six 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, which was substantially
inactive during 1996, 1995 and 1994 (collectively, the Company). All
material intercompany balances and transactions have been eliminated in
consolidation.
Investment Securities and Mortgage-Backed Securities - The Company
classifies investments in debt and equity securities into three categories:
held to maturity, trading and available for sale. Debt securities that the
Company has the positive intent and ability to hold to maturity are
classified as held to maturity securities and reported at amortized cost.
Debt and equity securities that are bought and held principally for the
purpose of selling them in the near-term are classified as trading
securities and reported at fair value, with unrealized gains and losses
included in earnings. The Company has no trading securities. Debt and
equity securities not classified as either held to maturity securities or
trading securities are classified as available for sale securities and
reported at fair value, with unrealized gains and losses excluded from
earnings and reported as a separate component of stockholders' equity, net
of deferred taxes.
59
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1996 (CONTINUED)
- --------------------------------------------------------------------------------
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.
In November 1995, the Financial Accounting Standards Board (FASB) issued a
"Guide to Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities: Questions and Answers" (the
Guide). The Guide allows for a one time reassessment of the classification
of securities and, in connection with such a reassessment, permits the
reclassification of securities from the held-to-maturity classification to
the available-for-sale classification as of a single date no later than
December 31, 1995, without calling into question management's intent to hold
to maturity the remaining securities classified as held-to-maturity. On
December 31, 1995, the Company transferred $4.8 million of mortgage-backed
securities from held-to-maturity to the available-for-sale classification to
provide for greater liquidity and flexibility. The transfer resulted in an
unrealized loss of $36,000, net of tax, which was included as of such date
in the unrealized gains (losses) on available for sale securities set forth
as a separate component of stockholders' equity.
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.
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. SFAS No. 114 generally requires 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.
60
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1996 (CONTINUED)
- --------------------------------------------------------------------------------
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.
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.
Gains or losses resulting from sales of loans are recorded at the time of
sale and are determined by the difference between the net sales proceeds and
the carrying value of the assets sold. Additionally, excess servicing fees
receivable may also be recorded and represent the present value, if any, of
the portion of estimated future interest income retained on loans sold based
on certain prepayment assumptions and net of a normal servicing fee. These
receivables are amortized in proportion to and over the estimated period
that such interest will be 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 Estimated Loan and Real Estate Losses - Valuation allowances
for estimated 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,
61
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1996 (CONTINUED)
- --------------------------------------------------------------------------------
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.
Premises and Equipment - Premises and equipment are stated at cost less
accumulated depreciation and amortization. The Company depreciates its
premises and equipment primarily by use of the straight-line method over the
estimated useful lives as follows:
office buildings 20 to 40 years
Furniture, fixtures and equipment 3 to 10 years
Income Taxes - The Company accounts for income taxes under SFAS No. 109,
Accounting for Income Taxes. Under this standard, deferred tax assets and
liabilities represent the tax effects of the temporary differences in the
basis 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.
Recent Accounting Development.- 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. SFAS No. 123 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
62
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1996 (CONTINUED)
- --------------------------------------------------------------------------------
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 and, in the
future, will disclose the pro forma effect on net earnings and earnings per
share as if the fair value based method of accounting defined in SFAS No.
123 had been adopted.
The accounting requirements of SFAS No. 123 are effective for transactions
entered into in fiscal years that begin after December 15, 1995. Management
does not believe that the adoption of SFAS No. 123 will have a significant
impact on its stock-based arrangements with nonemployees.
The disclosure requirements of SFAS No. 123 are effective for financial
statements for fiscal years beginning after December 15, 1995.
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.
Stockholders' Equity - Earnings per share for the year ended june 30, 1996
are based on weighted average common shares outstanding of 2,519,090. The
total issued shares of 2,727,656 have been adjusted for the weighted average
of: unallocated shares under the ESOP of 180,329, reduction of outstanding
shares purchased for the stock compensation plan of 22,030 and the
acquisition of treasury stock of 6,207.
Earnings per share are not presented for periods prior to conversion to
stock form, as the Association was a mutual savings and loan association and
no stock was outstanding.
Reclassifications - Certain amounts in the 1995 and 1994 financial
statements have been reclassified to conform with classifications in 1996.
63
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1996 (CONTINUED)
- --------------------------------------------------------------------------------
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. Management believes, as of
June 30, 1996, that the Association meets all capital adequacy requirements
to which it is subject.
Qualitative measures established by regulation to ensure capital adequacy
require the Association to maintain minimum amounts and ratios (set forth in
the table below) 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).
As of June 30, 1996, the most recent notification from the 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.
64
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1996 (CONTINUED)
- --------------------------------------------------------------------------------
The Association's actual capital amounts and ratios are also presented in
the table.
<TABLE>
<CAPTION>
To be well
capitalized under
prompt corrective
Actual actual provisions:
---------------------- -------------------
Amount Ratio Amount Ratio
(dollars in thousands)
<S> <C> <C> <C> <C>
As of June 30, 1996:
Total Capital (to Risk Weighted Assets) $26,438 16.51% $16,013 10.0%
Tier I Capital (to Risk Weighted Assets) 25,380 15.85 9,608 6.0
Tier I Capital (to Average Assets) 25,380 8.49 14,943 5.0
As of June 30, 1995:
Total Capital (to Risk Weighted Assets) $25,558 18.56% $13,773 10.0%
Tier I Capital (to Risk Weighted Assets) 24,766 17.98 8,264 6.0
Tier I Capital (to Average Assets) 24,766 9.47 13,079 5.0
</TABLE>
In accordance with the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 (FIRREA), the Office of Thrift Supervision (OTS)
established regulations requiring the Association to maintain (i) tangible
capital equal to 1.5% of adjusted total assets, (ii) core capital equal to
3% of adjusted total assets, and (iii) risk-based capital equal to 8% of
risk-weighted assets.
The following table summarizes the OTS regulatory capital requirements under
FIRREA for the Association at June 30, 1996. As indicated in the table, the
Association's capital levels exceed all three of the currently applicable
minimum capital requirements.
65
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1996 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOTAL
TANGIBLE CAPITAL CORE CAPITAL RISK-BASED CAPITAL
---------------------- ------------------------ -----------------------
AMOUNT % AMOUNT % AMOUNT %
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at end of year:
Equity per Association
financial statements $ 25,224 $ 25,224 $ 25,224
Adjustments for regulatory
capital purposes:
Net unrealized loss on debt
securities available for sale,
net of taxes 156 156 156
General valuation allowance 1,058
-------- -------- --------
Regulatory capital 25,380 7.63% 25,380 7.63% 26,438 16.51%
Minimum capital requirement 4,992 1.50% 9,984 3.00% 12,810 8.00%
-------- ---- -------- ---- -------- -----
Excess regulatory capital $ 20,388 6.13% $ 15,396 4.63% $ 13,628 8.51%
======== ==== ======== ==== ======== =====
</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 Federal Deposit Insurance
Corporation (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.
The OTS concluded an examination of the Association in June 1996.
Examination results have been reflected in the consolidated financial
statements presented herein. Future examinations by the OTS or FDIC could
include a review of certain transactions or other amounts reported in the
Association's 1996 financial statements. Adjustments, if any, cannot
presently be determined.
66
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1996 (CONTINUED)
- --------------------------------------------------------------------------------
As of June 30, 1996, there is legislation pending in Congress that would
impose a one-time assessment expected to be between 65 and 70 basis points
on the amount of deposits as of a date to be determined, held by the Savings
Associations Insurance Fund (SAIF) member institutions to recapitalize SAIF.
Based on the level of the Association's deposit accounts at June 30, 1996,
management estimates that the one-time insurance assessment would
approximate $1.5 million to $1.7 million prior to any tax effects.
Management believes that the Association's capital would continue to exceed
regulatory capital requirements for a well capitalized institution. It is
anticipated by management that if the one-time assessment is levied, the
annual deposit insurance premiums in future periods would decrease. In
addition, other pending legislation includes the requirement that federal
chartered thrifts convert to national banks or state-chartered institutions
and that the Bank Insurance Fund (BIF) and SAIF insurance funds would merge.
No assurances can be given as to whether the legislation discussed above
will be enacted or, if enacted, what the terms of such legislation would be.
Management cannot predict the ultimate impact the final legislation and
regulatory actions will have on the Association and its operations.
67
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1996 (CONTINUED)
- --------------------------------------------------------------------------------
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>
1996
---------------------------------------------------------------
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 $ 9,000 $ - $ 24 $ 8,976
U.S. Government and federal agency
obligations 6,000 4 76 5,928
-------- ------- ------ --------
Total investment securities 15,000 4 100 14,904
-------- ------- ------ --------
FHLMC mortgage-backed securities 3,987 8 72 3,923
FNMA mortgage-backed securities 10,746 154 10,592
Other mortgage-backed securities 2,130 31 2,099
-------- ------- ------ --------
Total mortgage-backed securities 16,863 8 257 16,614
-------- ------- ------ --------
Total $ 31,863 $ 12 $ 357 $ 31,518
======== ======= ====== ========
</TABLE>
<TABLE>
<CAPTION>
1995
---------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(IN THOUSANDS)
<S> <C> <C> <C> <C>
FHLB step bond $ 1,000 $ - $ - $ 1,000
FHLMC mortgage-backed securities 3,674 10 70 3,614
------- ------- ------ --------
Total $ 4,674 $ 10 $ 70 $ 4,614
======= ======= ====== ========
</TABLE>
There were no sales of investment securities and mortgage-backed securities
available for sale during the year ended June 30, 1996. Proceeds from
redemption of the adjustable interest rate mutual fund during the year ended
June 30, 1996 were $2,000,000. A loss of $12,000 was realized on the
redemption.
68
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1996 (CONTINUED)
- --------------------------------------------------------------------------------
During the year ended June 30, 1995, the Company redeemed the balance of its
investment in the adjustable interest rate mutual fund and sold its
investment in a U.S. Treasury note. The proceeds from these transactions
were $4,895,000 and resulted in a total loss of $78,000. There were no sales
of mortgage-backed securities available for sale during the year ended June
30, 1995.
There were no sales of investment securities and mortgage-backed securities
available for sale during the year ended June 30, 1994. Proceeds from
redemption of the adjustable interest rate mutual fund during the year ended
June 30, 1994 were $2,000,000. A loss of $14,000 was realized on the
redemption.
The FHLB step bond is a bond with interest rates that rise on a
predetermined schedule and a call feature at par retained by the issuing
agency. No other imbedded options apply to this investment. At June 30,
1995, the FHLB step bond had contractual maturities between one and five
years. The bond was called during fiscal 1996.
The weighted average interest rate on investment securities available for
sale was 6.61% and 7.00% at June 30, 1996 and 1995, respectively. The
weighted average interest rate on mortgage-backed securities available for
sale was 6.89% and 6.30% at June 30, 1996 and 1995, respectively.
At June 30, 1996, $7.7 million of mortgage-backed securities available for
sale had adjustable interest rates, with the remaining $9.2 million having
fixed interest rates. At June 30, 1995, all mortgage-backed securities
available for sale had fixed interest rates. The weighted average remaining
years to maturity of the mortgage-backed securities available for sale are
14.3 years at June 30, 1996.
At June 30, 1996, all investment securities available for sale (excluding
money market funds and adjustable rate mutual funds) are scheduled to mature
in one to five years.
69
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1996 (CONTINUED)
- --------------------------------------------------------------------------------
4. INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES HELD TO MATURITY
A summary of investment securities and mortgage-backed securities held to
maturity at June 30 follows:
<TABLE>
<CAPTION>
1996
-------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(IN THOUSANDS)
<S> <C> <C> <C> <C>
FHLMC mortgage-backed securities $10,426 $ 26 $ 91 $ 10,361
FNMA mortgage-backed securities 287 8 295
GNMA mortgage-backed securities 15,420 517 14,903
Other mortgage-backed securities 1,568 3 1,565
------- ----- ----- --------
Total mortgage-backed securities $27,701 $ 34 $ 611 $ 27,124
======= ===== ===== ========
</TABLE>
<TABLE>
<CAPTION>
1995
------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(IN THOUSANDS)
<S> <C> <C> <C> <C>
FHLB step bond $ 3,200 $ - $ 10 $ 3,190
FHLMC mortgage-backed securities 11,103 101 73 11,131
FNMA mortgage-backed securities 4,632 15 111 4,536
-------- ----- ----- --------
Total mortgage-backed securities 15,735 116 184 15,667
-------- ----- ----- --------
Total $ 18,935 $ 116 $ 194 $ 18,857
======== ===== ===== ========
</TABLE>
Mortgage-backed securities totaling approximately $538,000 were pledged at
June 30, 1996 for public funds on deposit. Also, mortgage-backed securities
totaling approximately $16.8 million were pledged at June 30, 1996 as
collateral for FHLB borrowings.
The Company did not sell any investment securities or mortgage-backed
securities held to maturity during the years ended June 30, 1996, 1995, and
1994.
The rate on the FHLB step bond rises on a predetermined schedule with a call
feature at par retained by the issuing agency. No other imbedded options
apply to this investment. At June 30,
70
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1996 (CONTINUED)
- --------------------------------------------------------------------------------
1995, the FHLB step bond had contractual maturities between 5 and 10 years.
The bond was called during fiscal 1996.
The weighted average interest rate on investment securities held to maturity
was 6.50% at June 30, 1995.
The weighted average interest rate on mortgage-backed securities held to
maturity was 7.75% and 7.83% at June 30, 1996 and 1995, respectively. At
June 30, 1996, $4.2 million of the Company's mortgage-backed securities held
to maturity had adjustable interest rates with the remaining $23.5 million
having fixed interest rates. At June 30, 1995, all mortgage-backed
securities held to maturity have fixed interest rates. The weighted average
remaining years to maturity of the mortgage-backed securities held to
maturity are 23.1 years at June 30, 1996.
5. LOANS RECEIVABLE
A summary of loans receivable at June 30 follows:
<TABLE>
<CAPTION>
1996 1995
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Conventional trust deed loans on real estate:
Single family 1-4 units $ 226,660 $ 187,693
Multifamily 21,690 20,431
Commercial loans secured by trust deeds 9,331 9,567
Construction and land 415
Consumer 440 602
--------- ---------
258,121 218,708
Less (plus):
Unamortized yield adjustments (64) 45
Deferred loan fees 451 472
Allowance for estimated loan losses 1,058 792
--------- ---------
256,676 217,399
Less Loans held for sale 723
--------- --------
Loans receivable held for investment, net $ 255,953 $ 217,399
========= =========
Weighted average interest rate at end of period 7.77% 7.66%
===== =====
</TABLE>
At June 30, 1996, adjustable rate loans approximated $198,100,000. The
adjustable rate loans have interest rate adjustment limitations and are
generally indexed to the Eleventh District Cost of Funds and the weekly one-
year Treasury constant maturity index. Future market factors may
71
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1996 (CONTINUED)
- --------------------------------------------------------------------------------
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 estimated loan losses is summarized as follows
for the year ended June 30:
<TABLE>
<CAPTION>
1996 1995 1994
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year $ 792 $ 562 $ 472
Provision for estimated loan losses 575 483 95
Charge-offs (310) (258) (10)
Recoveries 1 5 5
------- ------ ------
Balance, end of year $ 1,058 $ 792 $ 562
======= ====== ======
</TABLE>
At June 30, 1996, the Company had classified $1.1 million of its loans as
impaired with $91,000 in specific reserves as determined in accordance with
SFAS No. 114, as amended by SFAS No 118. In addition, the Company has
$821,000 in impaired loans which were collectively evaluated for impairment
with no specific reserves set aside as of June 30, 1996. The average
recorded investment in impaired loans, inclusive of those evaluated
collectively, during the year ended June 30, 1996, was approximately $2.4
million. Interest income on impaired loans of $31,000 was recognized for
cash payments received in the year ended June 30, 1996.
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, 1996, 1995 and 1994, contractually due interest of approximately
$118,000, $126,000 and $54,000, respectively, was not recognized in income.
At June 30, 1996, 1995 and 1994, nonaccrual loans approximated $1,962,000,
$1,922,000 and $1,115,000, respectively. At June 30, 1996, the Company had
two troubled-debt restructured loans totaling approximately $1.1 million, of
which, one for approximately $667,000 is considered an impaired loan.
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, 1996, 1995 and 1994, the Company was servicing loans for others
amounting to approximately $ 98,000,000, $96,000,000 and $104,000,000,
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
72
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1996 (CONTINUED)
- --------------------------------------------------------------------------------
provisions of FIRREA. FIRREA does not require divestiture of any loan that
was lawful when it was originated. At June 30, 1996 and 1995, the
Association estimates that, while complying with this limitation, it may
originate an additional $91,565,000 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 $3,784,000 at June 30, 1996.
Transactions in loans to officers, directors and employees are as follows
for the years ended June 30:
<TABLE>
<CAPTION>
1996 1995 1994
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year $ 1,192 $ 1,645 $ 1,297
New loans to employees 492
Principal paydowns and payoffs (182) (453) (144)
------- ------- -------
Balance, end of year $ 1,010 $ 1,192 $ 1,645
======= ======= =======
</TABLE>
On May 22, 1991, the Board of Directors of the Association adopted a
resolution prohibiting future loans to affiliated persons (i.e., directors
and senior officers).
6. ACCRUED INTEREST RECEIVABLE
A summary of accrued interest receivable at June 30 follows:
<TABLE>
<CAPTION>
1996 1995
(IN THOUSANDS)
<S> <C> <C>
Loans receivable $ 2,148 $ 1,805
Mortgage-backed securities 333 181
Investment securities and other 107 68
------- -------
$ 2,588 $ 2,054
======= =======
</TABLE>
73
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1996 (CONTINUED)
- --------------------------------------------------------------------------------
7. REAL ESTATE ACQUIRED THROUGH FORECLOSURE
A summary of real estate acquired through foreclosure at June 30 follows:
<TABLE>
<CAPTION>
1996 1995
(IN THOUSANDS)
<S> <C> <C>
One- to four-unit properties $ 1,185 $ 489
Land 861 902
Allowance for estimated real estate losses (557) (569)
------- ------
$ 1,489 $ 822
======= ======
</TABLE>
Activity in the allowance for estimated real estate losses is as follows for
the years ended June 30:
<TABLE>
<CAPTION>
1996 1995 1994
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year $ 569 $ 838 $ 633
Provision for estimated real estate losses 204 10 205
Chargeoffs (216) (279)
------ ------- ______
Balance, end of year $ 557 $ 569 $ 838
====== ======= ======
</TABLE>
Net loss on real estate acquired through foreclosure is summarized as
follows for the years ended June 30:
<TABLE>
<CAPTION>
1996 1995 1994
(IN THOUSANDS)
<S> <C> <C> <C>
Net gain (loss) on sales of real estate $ 95 $ (81) $ (8)
Other expenses, net (162) (126) (303)
Provision for estimated real estate losses (204) (10) (205)
------ ------- ------
Net loss on real estate acquired
through foreclosure $ (271) $ (217) $ (516)
====== ======= ======
</TABLE>
74
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1996 (CONTINUED)
- --------------------------------------------------------------------------------
8. PREMISES AND EQUIPMENT
A summary of premises and equipment at June 30 follows:
<TABLE>
<CAPTION>
1996 1995
( IN THOUSANDS)
<S> <C> <C>
Land $ 523 $ 523
Office buildings 4,868 4,648
Furniture, fixtures and equipment 2,839 3,093
------- -------
8,230 8,264
Less accumulated depreciation and amortization (5,215) (5,396)
------- -------
$ 3,015 $ 2,868
======= =======
</TABLE>
9. DEPOSIT ACCOUNTS
Deposit accounts are summarized as follows at June 30:
<TABLE>
<CAPTION>
1996 1995
---------------------------- ------------------------------
INTEREST INTEREST
BALANCE RATE* BALANCE RATE*
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Passbook accounts $ 17,638 2.00% $ 19,643 2.05%
Money market savings accounts 7,409 2.51% 8,016 2.25%
NOW accounts 20,270 1.47% 20,764 1.64%
Noninterest-bearing accounts 2,681 1,504
--------- ---------
47,998 1.74% 49,927 1.85%
Certificates of deposit:**
Less than three months 4,508 4.41% 1,007 3.83%
Three to six months 10,437 4.49% 8,951 4.18%
Six to twelve months 61,021 5.26% 37,658 5.75%
Twelve months and greater 110,075 5.53% 106,721 5.68%
--------- ---------
186,041 5.36% 154,337 5.59%
--------- ---------
$ 234,039 4.62% $ 204,264 4.68%
========= =========
</TABLE>
* Based on weighted average stated interest rates.
** At June 30, 1996, included in certificate accounts are 353 accounts
totaling $41,600,000, with balances of $100,000 or more.
75
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1996 (CONTINUED)
- --------------------------------------------------------------------------------
Certificate accounts are scheduled to mature as follows at June 30, 1996:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Within one year $ 157,829
One to two years 16,839
Two to three years 3,207
Three to four years 4,897
Four to five years 3,269
---------
$ 186,041
=========
</TABLE>
Savings deposits of approximately $100,000, obtained from governmental
agencies within California, are secured by mortgage-backed securities with
carrying values of approximately $539,000 at June 30, 1996.
Interest expense on deposit accounts is summarized as follows for the year
ended June 30:
<TABLE>
<CAPTION>
1996 1995 1994
(IN THOUSANDS)
<S> <C> <C> <C>
Passbook accounts $ 370 $ 436 $ 536
NOW accounts 341 303 359
Money market savings accounts 166 232 304
Certificate accounts 9,194 7,208 5,820
-------- ------- -------
$ 10,071 $ 8,179 $ 7,019
======== ======= =======
</TABLE>
10. FEDERAL HOME LOAN BANK ADVANCES
Advances from the Federal Home Loan Bank (FHLB) are scheduled to mature as
follows at June 30, 1996:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Year ending June 30:
1997 $ 28,000
1998 17,000
1999 12,500
2000 2,000
2001 4,000
Thereafter through 2004 4,009
---------
$ 67,509
=========
</TABLE>
76
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD JUNE 30, 1996 (Continued)
- --------------------------------------------------------------------------------
At June 30, 1996 and 1995, the weighted average interest rate on FHLB
advances was 6.23% and 7.01% respectivety. At June 30, 1996, the advances,
all of which are fixed rate, were collateralized by certain real estate
loans with aggregate unpaid principal balance of approximately $86,093,000
and by certain mortgage-backed securities with an aggregate remaining
principal balance of approximately $16,812,000 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>
1996 1995 1994
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Average amount outstanding during the period $49,419 $39,329 $34,904
======= ======= =======
Maximum amount outstanding at any month-end
during the period $74,115 $42,642 $37,880
======= ======= =======
Weighted average interest rate during the period 6.50% 6.79% 6.70%
======= ======= =======
</TABLE>
77
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD JUNE 30, 1996 (Continued)
- --------------------------------------------------------------------------------
11. INCOME TAXES
Income taxes are summarized as follows for the year ended June 30:
<TABLE>
<CAPTION>
1996 1995 1994
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal $ 354 $(200) $ 363
State 80 (34) 370
----- ----- -----
Total current 434 (234) 733
Deferred:
Federal (22) 289 (5)
State 20 73 (235)
----- ----- -----
Total deferred (2) 362 (240)
----- ----- -----
$ 432 $ 128 $ 493
===== ===== =====
</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>
1996 1995 1994
<S> <C> <C> <C>
Federal income tax rate 35.0 % 35.0 % 35.0 %
State taxes, net of federal benefit 8.0 % 8.0 % 7.5 %
Other, net (1.0)% (1.0)% (0.9)%
----- ----- -----
42.0% 42.0% 41.6%
===== ===== =====
</TABLE>
78
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD JUNE 30, 1996 (Continued)
- --------------------------------------------------------------------------------
At June 30, 1996 and 1995, 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>
1996 1995
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Federal Home Loan Bank stock dividends $ 695 $ 626
Depreciation 308 272
Loan fees 793 761
Prepaid expenses 67 105
Other 4 97
------- ------
Gross deferred tax liabilities 1,867 1,861
Deferred tax assets:
Bad debt reserve (702) (603)
State taxes (113) (146)
Excess servicing gain (2)
Capital loss carryforward (40) (35)
California AMT credit carryforward (30) (30)
Unrealized losses on securities (1) (25)
Other (199) (146)
------- ------
Gross deferred tax assets (1,085) (987)
Valuation allowance
------- ------
Net deferred tax liability $ 782 $ 874
======= ======
</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, 1996, 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.
79
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD JUNE 30, 1996 (Continued)
- --------------------------------------------------------------------------------
12. COMMITMENTS AND CONTINGENT LIABILITIES
The Company conducts a portion of its operations from premises under
operating leases. Rental expense, net of sublease payments, was $143,000,
$136,000 and $139,000 for the years ended June 30, 1996, 1995 and 1994,
respectively. Sublease payments were $107,000, $109,000 and $132,000 for
the years ended June 30, 1996, 1995 and 1994, respectively. Minimum rental
commitments for noncancelable leases follow at June 30, 1996:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
First year $ 284
Second year 259
Third year 241
Fourth year 241
Fifth year 96
Thereafter 431
------
$1,552
======
</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 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, 1996 and 1995, the Company has loan funding commitments of
approximately $1,118,000 and $1,071,000, respectively. At June 30, 1996 and
1995, the majority were fixed rate mortgage loans. Loan funding commitments
are generally for a period of 15 to 45 days.
The Company uses forward sales contracts to hedge interest rate exposure
generally on secondary mortgage market operations. As of June 30, 1996, the
Company had $500,000 in open forward
80
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD JUNE 30, 1996 (Continued)
- --------------------------------------------------------------------------------
sales contracts with no material unrecorded gains/losses. There were no
open forward sales contracts as of June 30, 1995.
The Company provides a profit-sharing plan which is offered to officers and
full-time employees meeting the eligibility requirements specified in the
plan. The plan provides for optional annual contributions by the Company at
the discretion of the Board of Directors. On September 1, 1993, the Company
added a 401(k) plan option to the existing profit-sharing plan. The 401(k)
plan is a defined contributory plan which allows employee contributions.
Total profit-sharing and 401(k) plan expenses were $39,000, $142,000, and
$106,000 for the years ended June 30, 1996, 1995 and 1994, 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 $16,000, $26,000 and $28,000
for the years ended June 30, 1996, 1995 and 1994, respectively. The accrued
pension liability cost was approximately $193,000 at June 30, 1996.
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 Associations
contributions to the ESOP over a period of seven years, and the collateral
for the loan will be the common stock purchased by the ESOP. The interest
rate for the loan is 8%. At June 30, 1996, the outstanding balance of the
loan was $1,418,000 and a total of 13,638 shares of common stock was
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
participants 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
in 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
81
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD JUNE 30, 1996 (Continued)
- --------------------------------------------------------------------------------
death, retirement, early 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, 1996 was
approximately $248,000. At June 30, 1996, unearned compensation related to
the ESOP approximated $1,309,000 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
accrued expenses at June 30, 1996 are $9,000 of benefits related to the
SERP.
The Association has implemented a Directors' Deferred Fee Stock Unit Plan
(Deferred Fee Plan) for its directors. The Deferred Fee Plan permits
directors to defer receipt of directors' fees paid by the Association until
their service with the Board of Directors terminates. The Deferred Fee Plan
also permits directors to defer receipt of the vested accrued benefit
otherwise payable from the terminated Director's Retirement Plan into the
director's account under the terms of the Deferred Fee Plan. The directors'
deferred fees are credited to the account of participating directors under
the terms of the Deferred Fee Plan and are credited with earnings based on
several investment choices, including Company stock. If a participant
chooses to have deferred fees credited to a stock unit account with the
Deferred Fee Plan, the participant will receive a benefit based on the value
and appreciation in the stock of the Company. Included in accrued expenses
at June 30, 1996 are $75,000 of deferrals related to the Deferred Fee Plan.
At the Companys 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
82
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD JUNE 30, 1996 (Continued)
- --------------------------------------------------------------------------------
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 Companys compensation committee. Shares
vest in equal annual installments of 20% over a five year period. The
expense related to the Stock Compensation Plan for the year ended June 30,
1996 was approximately $53,000.
At the Companys Annual Meeting of Stockholders on January 17, 1996, the
stockholders approved the SGV Bancorp, Inc. 1995 Master Stock Option Plan
(the 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 Stock Option Plan will be made at an exercisable
price equal to the fair market value on the date of grant. Options expire
ten years from the date of the grant.
Awards granted to employees may include incentive stock options,
nonstatutory stock options and limited rights which are exercisable only
upon a change in control of the Company. Awards granted to nonemployee
directors are nonstatutory options. Options are exercisable in five equal
annual installments of 20%, commencing one year from the date of the grant.
The following is a summary of activity in the Stock Option Plan during 1996:
Shares granted (average exercise price of $9.63) 261,851
=======
Shares outstanding at June 30, 1996 (average exercise
price of $9.63) 261,851
=======
No options were exercised, forfeited or expired during 1996 and none were
exercisable at June 30, 1996.
At June 30, 1996, shares reserved for future grants are 10,914.
During the year ended June 30, 1996, 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. The
employment agreements provide that, commencing on the first annivesary date
and continuing each anniversary date thereafter, the Board of Directors may
extend the agreement for an additional year so that the remaining term shall
be three years.
83
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD JUNE 30, 1996 (Continued)
- --------------------------------------------------------------------------------
13. 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, 1996 and 1995:
<TABLE>
<CAPTION>
1996
-------------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
(IN THOUSANDS)
<S> <C> <C>
Assets:
Cash, including short-term bank $ 8,884 $ 8,884
obligations
Investment securities available for sale 14,904 14,904
Mortgage-backed securities available 16,614 16,614
for sale
Mortgage-backed securities held to 27,701 27,124
maturity
Loans receivable:
Fixed 59,482 59,248
Variable 196,677 196,677
Federal Home Loan Bank stock 3,747 3,747
Liabilities:
Term deposit accounts 186,041 186,382
Other deposit accounts 47,998 47,998
Borrowings 67,509 67,267
Off-balance-sheet unrealized gains
(losses) -
Loan funding commitments -
Forward sales contracts (4)
</TABLE>
84
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD JUNE 30, 1996 (Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
----------------------------
1995
----------------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
(IN THOUSANDS)
<S> <C> <C>
Assets:
Cash, including short-term bank $ 23,387 $ 23,387
obligations
Investment securities available for sale 1,000 1,000
Investment securities held to maturity 3,200 3,190
Mortgage-backed securities available 3,614 3,614
for sale
Mortgage-backed securities held to 15,735 15,667
maturity
Loans receivable:
Fixed 59,800 60,943
Variable 156,986 156,986
Federal Home Loan Bank stock 2,865 2,865
Liabilities:
Term deposit accounts 154,337 154,753
Other deposit accounts 49,927 49,927
Borrowings 33,447 33,848
Off-balance sheet unrealized gains
(losses) -
Loan funding commitments -
</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.
The fair value of nonperforming loans with a carrying value of approximately
$1,962,000 and $1,922,000 at June 30, 1996 and 1995, 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,
1996 and 1995.
85
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1996 (Continued)
- -----------------------------------------------------------------------------
Rates currently available to the Company for debt with similar terms and
remaining maturities were used to estimate the fair value of borrowings.
For fixed-rate loan funding commitments, the fair value was estimated based
on the difference between current levels of interest rates and the
committed rates.
The fair value estimates presented herein are based on pertinent
information available to management as of June 30, 1996 and 1995. 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.
14. CONVERSION TO CAPITAL STOCK FORM OF OWNERSHIP
On June 28, 1995, the Association converted from a federally chartered
mutual savings and loan association to a federally chartered stock savings
and loan association. At that time, the Association established a
liquidation account in an amount equal to its equity as reflected in the
latest statement of financial condition used in the final conversion
prospectus. The amount of the liquidation account as of March 31, 1995 was
$13,763,000. The liquidation account will be maintained for the benefit of
eligible account holders and supplemental eligible account holders who
continue to maintain their accounts at the Association after the
conversion. The liquidation account will be reduced annually to the extent
that eligible account holders and supplemental eligible account holders
have reduced their qualifying deposits as of each anniversary date.
Subsequent increases will not restore an eligible account holder's or
supplemental eligible account holder's interest in the liquidation account.
In the event of a complete liquidation of the Association, each eligible
account holder and supplemental eligible account holder will be entitled to
receive a distribution from the liquidation account in an amount
proportionate to the current adjusted qualifying balances for accounts then
held.
Subsequent to the conversion, the Association may not declare or pay cash
dividends on or repurchase any of its shares of common stock if the effect
thereof would cause equity to be reduced below applicable regulatory
capital maintenance requirements or if such declaration and payment would
otherwise violate regulatory requirements.
86
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1996 (Continued)
- -----------------------------------------------------------------------------
15. 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, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
--------------------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 828 $ 6,749
Investment securities available for sale 2,943
Mortgage-backed securities available for sale 1,707
Investment in subsidiary 24,450 24,729
Receivable from subsidiary 1,418 1,528
Other assets 240
------- ------
Total assets $31,586 $33,006
======= =======
TOTAL STOCKHOLDERS' EQUITY: $31,586 $33,006
======= =======
</TABLE>
87
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1996 (Continued)
- ----------------------------------------------------------------------------
SGV BANCORP, INC. (PARENT COMPANY ONLY)
STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
1996 1995 1994
(IN THOUSANDS)
<S> <C> <C> <C>
Interest income $ 420 $ - $ -
Other expenses (168)
Income taxes (106)
----- ------ -------
Earnings before equity in net earnings of subsidiary 146
Equity in net earnings of subsidiary 448 177 692
----- ------ -----
Net earnings $ 594 $ 177 $ 692
===== ====== =====
SGV BANCORP, INC. (PARENT COMPANY ONLY)
SUMMARY STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED JUNE 30, 1996
1996 1995 1994
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 594 $ 177 $ 692
Adjustments to reconcile net earnings to cash
used in operating activities -
Equity in net earnings of subsidiary (448) (177) (692)
Premium amortization on securities 16
Increase in other assets (206)
----- ----- -----
Net cash used in operating activities (44)
</TABLE>
88
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1996 (Continued)
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
CASH FLOWS FROM INVESTING ACTIVITIES:
<S> <C> <C> <C>
Capital contribution to subsidiary $ - $(12,416) $ -
Loan to subsidiary (1,528)
Purchase of investment securities available for sale (7,000)
Proceeds from sale or redemption of investment
securities available for sale 4,000
Purchase of mortgage-backed securities available for sale (2,105)
Principal repayments on mortgage-backed securities 358
Principal repayment on loan to subsidiary 110
------- -------- -------
Net cash used in investing activities (4,637) (13,944)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 20,693
Purchase of treasury stock (1,240)
-------- -------- -------
Net cash (used in) provided by financing activities (1,240) 20,693
Net (decrease) increase in cash and cash equivalents (5,921) 6,749
Cash and cash equivalents, beginning of year 6,749
------- -------- -------
Cash and cash equivalents, end of year $ 828 $ 6,749 $
======= ======== =======
NONCASH INVESTING ACTIVITIES DURING THE YEAR:
Change in net unrealized gain/loss on securities
available for sale, net of taxes $ 80 $ - $ -
</TABLE>
89
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1996 (Continued)
- -----------------------------------------------------------------------------
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of quarterly results for the years ended June
30:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
(in thousands, except per share data) QUARTER QUARTER QUARTER QUARTER
<S> <C> <C> <C> <C>
1996
Interest income $4,846 $5,051 $5,319 $6,043
Interest expense 3,022 3,149 3,324 3,809
Provision for estimated loan losses 111 64 144 256
Net earnings 149 152 6 287
Earnings per share .06 .06 .01 .12
1995
Interest income 4,274 4,411 4,486 4,684
Interest expense 2,445 2,608 2,789 3,058
Provision for estimated loan losses 1 233 126 123
Net earnings (loss) 137 (59) 80 19
</TABLE>
90
<PAGE>
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -----------------------------------------------------------------------
FINANCIAL DISCLOSURE.
- --------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- ------------------------------------------------------------
Incorporated herein by this reference is the information set forth in
the section entitled "Information with Respect to Nominees, Continuing Directors
and Executive Officers" contained in the Company's Proxy Statement for its 1996
Annual Meeting of Stockholders to be held on November 21, 1996 (the "1996 Proxy
Statement").
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
Incorporated herein by this reference is the information set forth in
the section entitled "Executive Compensation" contained in the 1996 Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
Incorporated herein by this reference is the information set forthin
the sections entitled "Security Ownership of Certain Beneficial Owners" and
"Information with Respect to Nominees, Continuing Directors and Executive
Officers" contained in the 1996 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
Incorporated herein by this reference is the information set forth in
the section entitled "Transactions with Certain Related Persons" containued in
the 1996 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
- -------------------------------------------------------------------------
(a)(1) Financial Statements
Description
-----------
<TABLE>
<S> <C>
Independent Auditors' Report................................................................ 50
Consolidated Statements of Financial Condition as of June 30, 1996 and 1995................. 51
Consolidated Statements of Operations for Each of the Three Years in the Year Period
Ended June 30, 1996......................................................................... 53
Consolidated Statements of Stockholders' Equity for Each of the Three Years in the Year
Period Ended June 30, 1996.................................................................. 55
Consolidated Statements of Cash Flows for Each of the Three Years in the Year Period
Ended June 30, 1996......................................................................... 56
Notes to Consolidated Financial Statements for Each of the Three Years in the Year Period
Ended June 30,1996.......................................................................... 59
</TABLE>
91
<PAGE>
(a)(2) Financial Statement Schedules
All schedules are omitted as the required information is inapplicable
or the information is presented in the consolidated financial
statements or the notes thereto.
(a)(3) Exhibits
(a) The following exhibits are filed as part of this report:
3.1 Certificates of Incorporation of SGV Bancorp, Inc.*
3.2 Bylaws of SGV Bancorp, Inc.*
4.0 Stock Certificate of SGV Bancorp, Inc.*
10.1 Form of Employment Agreement between First Federal Savings and
Loan Association of San Gabriel Valley and certain executive
officers*
10.2 Form of Employment Agreement between SGV Bancorp, Inc. and
certain executive officers*
10.3 Form of Change in Control Agreement between First Federal
Savings and Loan Association of San Gabriel Valley and certain
executive officers*
10.4 Form of Change in Control Agreement between SGV Bancorp, Inc.
and certain executive officers*
10.5 Form of Proposed First Federal Savings and Loan Association of
San Gabriel Valley Employee Severance Compensation Plan*
10.6 First Federal Savings and Loan Association of San Gabriel
Valley Employees' Savings & Profit Sharing Plan and Trust*
10.7 Form of First Federal Savings and Loan Association of San
Gabriel Valley 1995 Supplemental Executive Retirement Plan*
10.8 First Federal Savings and Loan Association of San Gabriel
Valley 1995 Directors Deferred Fee Stock Unit Plan**
10.9 First Federal Savings and Loan Association of San Gabriel
Valley 1995 Master Stock Compensation Plan**
10.10 SGV Bancorp, Inc. 1995 Master Stock Option Plan*
(b) Reports on Form 8-K
- ---------------------
* Incorporated herein by reference from the Exhibits to the Registration
Statement on Form S-1, as amended, filed on March 6, 1995,
Registration No. 33-90018.
** Incorporated herein by reference from the Definitive Proxy Material
for the Registrant's 1995 Annual Meeting of Stockholders, filed on
December 7, 1995.
92
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SGV BANCORP, INC.
By: /s/ Barrett G. Andersen
----------------------------
Barrett G. Andersen
DATED: September 30, 1996 President, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Barrett G. Andersen President, Chief Executive September 30, 1996
- ---------------------------- Officer and Director
Barrett G. Andersen (principal executive officer)
/s/ Ronald A. Ott Executive Vice President, Chief September 30, 1996
- ---------------------------- Financial Officer and Treasurer
Ronald A. Ott (principal accounting officer)
/s/ Royce A. Stutzman Chairman of the Board September 30, 1996
- ---------------------------- of Directors
Royce A. Stutzman
/s/ Irven G. Reynolds Director September 30, 1996
- ----------------------------
Irven G. Reynolds
/s/ John D. Randall Director September 30, 1996
- ----------------------------
John D. Randall
/s/ Benjamin S. Wong Director September 30, 1996
- ----------------------------
Benjamin S. Wong
/s/ Thomas A. Patronite Director September 30, 1996
- ----------------------------
Thomas A. Patronite
</TABLE>
93
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