<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, 1997
Commission File No.: 0-25664
SGV BANCORP, INC.
(exact name of registrant as specified in its charter)
DELAWARE 95-4524789
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
225 NORTH BARRANCA STREET, WEST COVINA, CALIFORNIA 91791
(Address of principal executive offices)
Registrant's telephone number, including area code: (626) 859-4200
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive amendment to this Form 10-K.
[X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, i.e., persons other than the directors and executive officers of
the registrant, was $36,300,000, based upon the last sales price as quoted on
The Nasdaq Stock Market for September 22, 1997.
The number of shares of Common Stock outstanding as of September 22, 1997:
2,342,176.
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<TABLE>
<CAPTION>
INDEX
PAGE
PART I
<S> <C> <C>
Item 1. Description of Business........................................................... 1
Item 2. Properties........................................................................ 37
Item 3. Legal Proceedings................................................................. 38
Item 4. Submission of Matters to a Vote of Security Holders............................... 38
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters............................................................... 38
Item 6. Selected Financial Data........................................................... 39
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................... 41
Item 8. Financial Statements and Supplementary Data....................................... 58
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............................................ 102
PART III
Item 10. Directors and Executive Officers of the Registrant................................ 102
Item 11. Executive Compensation............................................................ 102
Item 12. Security Ownership of Certain Beneficial Owners
and Management.................................................................... 102
Item 13. Certain Relationships and Related Transactions.................................... 102
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports
on Form 8-K....................................................................... 102
Signatures .................................................................................. 104
</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 seven other offices located in
Covina, Hacienda Heights, La Verne, City of Industry, Arcadia, and Duarte, all
of which are located in the eastern part of the greater Los Angeles metropolitan
area. The Association has been and continues to be a community-oriented savings
institution which primarily originates one- to four-family residential mortgage
loans within its primary market area. The Association's deposit gathering is
concentrated in the communities surrounding its offices in eastern Los Angeles
county. The Association makes
1
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loans secured by deeds of trust in portions of eastern Los Angeles, western San
Bernardino and Riverside, and Orange counties.
The Los Angeles metropolitan area is a highly competitive market. The
Association faces significant competition both in making loans and in attracting
deposits. The Association's share of deposits and loan originations in the Los
Angeles metropolitan area amounts to less than one percent. The Association
faces direct competition from a significant number of financial institutions
operating in its market area, many with a 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 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, 1997 the Association had total loans outstanding of
$286.7 million, of which $250.3 million were one- to four-family, owner-occupied
residential mortgage loans, or 87.3% of the Association's total loans. The
remainder of the portfolio consists of $27.2 million of multi-family mortgage
loans, or 9.5% of total loans; $8.7 million of commercial real estate loans, or
3.0% of total loans; and consumer loans of $533,000 or 0.2% of total loans. The
Association had $230,000 in loans held for sale as of June 30, 1997. At that
same date, 77.7% of the Association's mortgage loans had adjustable interest
rates. Of the Association's adjustable-rate mortgage loans, 23.6% are indexed to
the one-year Constant Maturity Treasury ("CMT") Index and 76.4% 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,
----------------------------------------------------------------------------------
1997 1996 1995
--------------------------- ----------------------- ------------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
------------- ------------ --------- ----------- --------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
REAL ESTATE AND OTHER:
One- to four-family.................... $250,303 87.29% $226,660 87.81% $187,693 85.82%
Multi-family........................... 27,241 9.50 21,690 8.40 20,431 9.34
Commercial............................. 8,660 3.02 9,331 3.62 9,567 4.37
Construction and land.................. - 0.00 - 0.00 415 0.19
Consumer............................... 533 0.19 440 0.17 602 0.28
-------- ------ -------- ------ -------- ------
Total loans....................... 286,737 100.00% 258,121 100.00% 218,708 100.00%
====== ====== ======
LESS:
Undisbursed loan funds................. - - -
Unamortized yield adjustments.......... 121 (64) 45
Deferred loan fees..................... 515 451 472
Allowance for estimated loan losses.... 1,263 1,058 792
-------- -------- --------
Total loans, net.................. 284,838 256,676 217,399
LESS:
Loans receivable held for sale:
One- to four-family.................. 230 723 -
-------- -------- --------
Loans receivable held for
investment........................ $284,608 $255,953 $217,399
======== ======== ========
<CAPTION>
--------------------------------------------------------
1994 1993
------------------------- ------------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
REAL ESTATE AND OTHER:
One- to four-family.................... $177,544 85.00% $164,523 85.11%
Multi-family........................... 20,215 9.68 16,612 8.59
Commercial............................. 9,791 4.69 10,660 5.51
Construction and land.................. 665 0.32 667 0.35
Consumer............................... 643 0.31 841 0.44
-------- ------ ------- ------
Total loans....................... 208,858 100.00% 193,303 100.00%
====== ======
LESS:
Undisbursed loan funds................. - 59
Unamortized yield adjustments.......... 101 63
Deferred loan fees..................... 528 551
Allowance for estimated loan losses.... 562 472
-------- --------
Total loans, net.................. 207,667 192,158
LESS:
Loans receivable held for sale:
One- to four-family.................. - 1,197
-------- --------
Loans receivable held for
investment........................ $207,667 $190,961
======== ========
</TABLE>
3
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Loan Maturity. The following table shows the contractual maturity of the
Association's gross loans at June 30, 1997. The table does not include principal
repayments. Principal repayments on total loans totaled $33.2 million for the
year ended June 30, 1997 and $25.0 million and $19.7 million for the years ended
June 30, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
AT JUNE 30, 1997
--------------------------------------------------------------------------
ONE- TO
FOUR- MULTI- CONSTRUCTION
FAMILY FAMILY COMMERCIAL AND LAND CONSUMER
------------ ------------- -------------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
AMOUNTS DUE:
One year or less.......................... $ 12,521 $ 2,601 $ 1,151 $ - $ 533
After one year:
More than one year to three years...... 3,931 2,070 188 - -
More than three years to five years.... 2,158 2,793 1,612 - -
More than five years to 10 years....... 3,170 5,185 86 - -
More than 10 years to 20 years......... 26,473 385 2,247 - -
More than 20 years..................... 202,050 14,207 3,376 - -
-------- ------- ------ -------- ------
Total due after June 30, 1998.......... 237,782 24,640 7,509 - -
-------- ------- ------ -------- ------
Total amount due....................... 250,303 27,241 8,660 - 533
Less:
Unamortized yield adjustments.......... 81 (202) - - -
Deferred loan fees..................... (321) (169) (25) - -
Allowance for estimated loan losses.... (994) (164) (95) (10)
-------- ------- ------ -------- ------
Total loans, net.......................... 249,069 26,706 8,540 - 523
Loans receivable held for sale............ (230) - - - -
-------- ------- ------ -------- ------
-
Loans receivable held for investment...... $248,839 $26,706 $8,540 $ - $ 523
======== ======= ====== ======== ======
<CAPTION>
-----------------
TOTAL
LOANS
RECEIVABLE
-----------------
<S> <C>
AMOUNTS DUE:
One year or less.......................... $ 16,806
After one year:
More than one year to three years...... 6,189
More than three years to five years.... 6,563
More than five years to 10 years....... 8,441
More than 10 years to 20 years......... 29,105
More than 20 years..................... 219,633
---------
Total due after June 30, 1998.......... 269,913
---------
Total amount due....................... 286,737
Less:
Unamortized yield adjustments.......... (121)
Deferred loan fees..................... (515)
Allowance for estimated loan losses.... (1,263)
---------
Total loans, net.......................... 284,838
Loans receivable held for sale............ (230)
--------
Loans receivable held for investment...... $284,608
========
</TABLE>
4
<PAGE>
The following table sets forth at June 30, 1997, the dollar amount of
gross loans receivable contractually due after June 30, 1998, and whether such
loans have fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER JUNE 30, 1998
----------------------------------
FIXED ADJUSTABLE TOTAL
-------- ------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Real estate loans:
One- to four-family........ $42,823 $194,959 $237,782
Multi-family............... 2,821 21,819 24,640
Commercial real estate..... 1,962 5,547 7,509
Construction and land...... - - -
Consumer...................... - - -
------- -------- --------
Total loans receivable.. $47,606 $222,325 $269,931
======= ======== ========
</TABLE>
Origination, Sale, Servicing and Purchase of Loans. The Association's
mortgage lending activities are conducted primarily by commissioned loan
representatives and through its eight branch offices. The Association originates
both adjustable-rate and fixed-rate mortgage loans. The Association's ability to
originate loans is dependent upon the relative customer demand for fixed-rate or
adjustable-rate mortgage loans, which is affected by the current and expected
future level of interest rates. It is the general policy of the Association to
sell the majority of the fixed-rate mortgage loans that it originates. The
Association may also sell the adjustable-rate mortgage loans that it originates.
The Association utilizes forward commitments to hedge the risks associated with
a change in interest rates between origination and sale of loans. At June 30,
1997, the Association had one forward commitments of $250,000. The Association
retains virtually all servicing of the loans sold. See "Loan Servicing." The
Association recognizes, at the time of sale, the cash gain or loss on the sale
of the loans sold. At June 30, 1997, there were $230,000 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, 1997,
the Association purchased $33.3 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 Association has purchased loans during the
past two years as a supplement to its internal origination process in order to
meet internal goals. The Association has reviewed each loan it purchases to
ensure it meets the Association's underwriting guidelines. The loans were
purchased in several transactions consummated during the year ended June 30,
1997.
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,
-------------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Gross loans (1):
Beginning balance..................... $257,734 $218,191 $208,229
Loans originated:
One- to four-family (2)......... 33,108 31,110 29,062
Multi-family.................... 3,242 1,163 2,873
Commercial...................... 160 70 98
-------- -------- --------
Total loans originated....... 36,510 32,343 32,033
Loans purchased.................... 33,320 48,297 -
-------- -------- --------
Total........................ 327,564 298,831 240,262
Less:
Principal repayments............... 33,216 25,029 19,730
Sales of loans..................... 5,644 13,183 1,382
Transfer to REO.................... 2,603 2,885 959
Undisbursed loan funds............. - - -
-------- -------- --------
Total loans........................... 286,101 257,734 218,191
Loans held for sale................ 230 723 -
-------- -------- --------
Ending balance, loans held
for investment..................... $285,871 $257,011 $218,191
======== ======== ========
</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.
6
<PAGE>
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, 1997, the Association's total loans outstanding were $286.7
million, of which $250.3 million or 87.3% were one- to four-family residential
mortgage loans. Of the one-to four-family residential mortgage loans outstanding
at that date, 21.9% were fixed-rate loans, and 78.1% 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, 1997, approximately $400,000 of the
Association's one- to four-family adjustable-rate mortgage loans had interest
rates that were between 0 to 200 basis points below their lifetime caps, $41.0
million that were between 200 to 400 basis points below their lifetime caps,
with the remainder having interest rates that were more than 400 basis points
below their lifetime caps. The Association currently has $63.4 million in
mortgage loans that may be subject to negative amortization. The negative
amortization is currently capped at up to 115% of the original loan amount.
Negative amortization involves a greater risk to the Association because during
a period of high interest rates, the loan principal may increase above the
amount originally advanced. However, the Association believes that the risk of
default may be reduced by negative amortization caps, underwriting criteria and
the stability provided by payment schedules.
Of the Association's one- to four-family mortgage loans, $48.1 million, or
19.2%, 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.
7
<PAGE>
Multi-Family Lending. The Association originates multi-family mortgage
loans generally secured by five to thirty-six unit apartment buildings located
in the Association's primary market area. As a result of uncertain market
conditions in its primary market area, the Association currently originates
multi-family loans on a limited and highly selective basis. In reaching its
decision on whether to make a multi-family loan, the Association considers the
qualifications of the borrower as well as the underlying property. Some of the
factors to be considered are: the net operating income of the mortgaged premises
before debt service and depreciation; the debt service ratio (the ratio of net
earnings to debt service); and the ratio of loan amount to appraised value.
Pursuant to the Association's current underwriting policies, a multi-family
adjustable-rate mortgage loan may only be made in an amount up to 75% of the
appraised value of the underlying property 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%. 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, 1997, totaled $27.2
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, 1997, had an outstanding balance of $1.1 million,
was current at that date and is secured by a 22-unit apartment complex.
The Association may purchase multi-family loans from other financial
institutions. As part of the review process, the loans being purchased are
appraised and must meet the same underwriting standards as loan processed
internally. During the year ended June 30, 1997, the Association purchased $4.1
million of multi-family loans from another financial institution.
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
8
<PAGE>
buildings or retail facilities located in the Association's primary market area.
The Association's underwriting procedures provide that commercial real estate
loans be made in amounts up to the lesser of 75% of the appraised value of the
property, or at the Association's current loans-to-one borrower limit. These
loans may be made with terms up to thirty years for adjustable-rate loans and
are indexed to CMT or COFI. The Association's underwriting standards and
procedures are similar to those applicable to its multi-family loans, whereby
the Association considers the net operating income of the property and the
borrower's expertise, credit history and profitability. The Association has
generally required that the properties securing commercial real estate loans
have debt service coverage ratios of at least 115%. The largest commercial real
estate loan in the Association's portfolio at June 30, 1997, had an outstanding
balance of $1.0 million, was current at that date and is secured by a mini-
storage warehouse. At June 30, 1997, the Association's commercial real estate
loan portfolio was $8.7 million or 3.0% of total loans. The Association
currently originates commercial real estate loans on a limited and highly
selective basis in its primary market area.
Loans secured by commercial real estate properties, like multi-family
loans, are generally larger and involve a greater degree of risk than one- to
four-family residential mortgage loans. Because payments on loans secured by
commercial real estate properties are often dependent on successful operation or
management of the properties, repayment of such loans may be subject to a
greater extent to adverse conditions in the real estate market or the economy.
The Association seeks to minimize 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, 1997, the Association had no construction or land
loans outstanding.
Construction and land financing is generally considered to involve a higher
degree of credit risk than long-term financing on improved, owner-occupied real
estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction or development compared to the estimated cost (including interest)
of construction. If the estimate of value proves to be inaccurate, the
Association may be confronted with a project, when completed, having a value
which is insufficient to assure full repayment.
Loan Servicing. The Association also services mortgage loans for others.
All of the loans currently being serviced for others are loans which have been
sold by the Association. Loan servicing includes collecting and remitting loan
payments, accounting for principal and interest, making inspections as required
of mortgaged premises, contacting delinquent mortgagors, supervising
foreclosures and property dispositions in the event of unremedied defaults,
making certain insurance and tax payments on behalf of the borrowers and
generally
9
<PAGE>
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. At June 30, 1997, the Association was servicing $93.5 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
10
<PAGE>
activities, but which, unlike specific allowances, have not been allocated to
particular problem assets. When an insured institution classifies one or more
assets, or portions thereof, as "Loss," it is required either to establish a
specific allowance for losses equal to 100% of the amount of the 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 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, 1997, the Association had $2.6 million of assets
classified as Special Mention, $4.8 million of assets classified as Substandard,
$7,000 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, 1997, the largest loan classified as
Special Mention had a loan balance of $611,000.
The Association generally requires appraisals on an annual basis on
foreclosed properties and, to the extent necessary, on impaired loans. The
Association conducts external inspections on foreclosed properties and certain
other properties as deemed necessary.
11
<PAGE>
The following table sets forth delinquencies in the Association's loan
portfolio as of the dates indicated:
<TABLE>
<CAPTION>
AT JUNE 30, 1997 AT JUNE 30, 1996
---------------------------------------------- --------------------------------------------
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................. 3 $ 834 12 $1,699 2 $ 165 6 $ 821
Multi-family........................ - - - - - - 2 473
Commercial.......................... - - - - - - 1 668
Construction and land............... - - - - - - - -
Consumer loans...................... - - - - - - - -
-------- --------- ---- ------ -------- --------- -------- ---------
Total............................. 3 $ 834 12 $1,699 2 $ 165 9 $1,962
======== ========= ==== ====== ======== ========= ======== =========
Delinquent loans to total
gross loans....................... 0.11% 0.29% 0.46% 0.59% 0.09% 0.06% 0.41% 0.76%
<CAPTION>
AT JUNE 30, 1995
--------------------------------------------
60-89 DAYS 90 DAYS OR MORE
--------------------- ----------------------
PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS
---------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS)
One- to four-family.................. 6 $ 895 8 $1,507
Multi-family......................... - - - -
Commercial........................... - - - -
Construction and land................ - - 1 415
Consumer loans....................... - - - -
-------- --------- ---- ------
Total.............................. 6 $ 895 9 $1,922
======== ========= ==== ======
Delinquent loans to total
gross loans........................ 0.25% 0.41% 0.37% 0.88%
</TABLE>
12
<PAGE>
Non-Accrual and Past-Due Loans. The following table sets forth information
regarding non-accrual loans, troubled-debt restructurings and REO. There were
three troubled-debt restructured loans within the meaning of SFAS 15, Accounting
by Debtors and Creditors for Troubled Debt Restructurings, and 12 REO properties
at June 30, 1997. 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, 1997,
1996, 1995, 1994 and 1993, 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 $77,000, $118,000,
$126,000, $54,000 and $75,000, none of which was recognized. For the same
periods, the amount of interest income recognized on troubled debt
restructurings was $55,000, $58,000, $55,000, $16,000 and $0, respectively.
<TABLE>
<CAPTION>
AT JUNE 30,
------------------------------------------------------
1997 1996 1995 1994 1993
---------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Residential real estate:
One- to four-family....................... $1,699 $ 821 $1,507 $1,115 $1,011
Multi-family.............................. - 473 - - 454
Construction and land....................... - - 415 - -
Commercial.................................. - 668 - - -
------ ------ ------ ------ ------
Total..................................... 1,699 1,962 1,922 1,115 1,465
REO, net(3)................................... 1,150 1,489 822 1,005 719
------ ------ ------ ------ ------
Total non-performing assets............... $2,849 $3,451 $2,744 $2,120 $2,184
====== ====== ====== ====== ======
Restructured loans............................ $ 771 $1,130 $1,545 $ 470 $ -
====== ====== ====== ====== ======
Allowance for estimated loan
losses as a percent of gross loans
receivable(1)............................... 0.44% 0.41% 0.36% 0.27% 0.25%
Allowance for estimated loan
losses as a percent of total
non-performing loans(2)..................... 74.34% 53.92% 41.21% 50.40% 32.22%
Non-performing loans as a percent
of gross loans receivable(1)(2)............. 0.59% 0.76% 0.88% 0.54% 0.76%
Non-performing assets as a percent
of total Company assets(2).................. 0.70% 1.03% 1.00% 0.83% 0.87%
</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.
13
<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, 1997, the Association's allowance for estimated loan
losses was 0.44% of gross loans as compared to 0.41% as of June 30, 1996. The
Association had non-accrual loans of $1.7 million and $2.0 million at June 30,
1997 and June 30, 1996, 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, 1997, the Company had classified $530,000 of its loans as
impaired with $100,000 in specific reserves as determined in accordance with
SFAS No. 114, as amended by
14
<PAGE>
SFAS No. 118. At June 30, 1996, the Company had classified $1.1 million of its
loans as impaired with $91,000 in specific reserves. In addition, the Company
has $1.7 million and $821,000 at June 30, 1997 and 1996, respectively, in
impaired loans which were collectively evaluated for impairment with no specific
reserves set aside. The average recorded investment in impaired loans, inclusive
of those evaluated collectively, during the years ended June 30, 1997 and 1996,
was approximately $1.6 million and $2.4 million, respectively. Interest income
on impaired loans of $28,000 and $31,000 was recognized for cash payments
received in the years ended June 30, 1997 and 1996.
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,
------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period............. $1,058 $ 792 $ 562 $ 472 $ 556
Provision for (recapture of)
estimated loan losses.................... 557 575 483 95 (29)
Charge-offs:
Real Estate:
One- to four-family.................... (343) (299) (247) - (29)
Multi-family........................... - - - - -
Commercial............................. - - - - -
Construction and land.................. - - - - -
Consumer............................... (9) (11) (11) (10) (26)
------ ------ ----- ----- -----
Total.............................. (352) (310) (258) (10) (55)
Recoveries................................. - 1 5 5 -
------ ------ ----- ----- -----
Balance at end of period................... $1,263 $1,058 $ 792 $ 562 $ 472
====== ====== ===== ===== =====
</TABLE>
15
<PAGE>
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.
<TABLE>
<CAPTION>
AT JUNE 30,
---------------------------------------------------------------------------------------------------
1997 1996 1995
------------------ -------------- ------- ------------ ------------ ------- ---------- ------------
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 CATEGORY TO TO TOTAL CATEGORY TO
AMOUNT ALLOWANCE TOTAL LOANS AMOUNT ALLOWANCE TOTAL LOANS AMOUNT ALLOWANCE TOTAL LOANS
------ --------- ----------- ------ --------- ---------- ------ --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to
four-family.............. $ 994 78.70% 87.29% $ 696 65.79% 87.82% $466 58.84% 85.82%
Multi-family............... 164 12.99 9.50 195 18.43 8.40 105 13.26 9.34
Commercial................. 95 7.52 3.02 153 14.46 3.61 166 20.96 4.37
Construction
and land................. - 0.00 0.00 - 0.00 0.00 42 5.30 0.19
Consumer................... 10 0.79 0.19 14 1.32 0.17 13 1.64 0.28
------ ------ ------ ------ ------ ------ ---- ------ ------
Total...................... $1,263 100.00% 100.00% $1,058 100.00% 100.00% $792 100.00% 100.00%
====== ====== ====== ====== ====== ====== ==== ====== ======
<CAPTION>
--------------------------------------------------------------------------
1994 1993
--------- ----------- ------------- ------- ---------- -----------
PERCENT OF PERCENT OF
PERCENT OF LOANS IN PERCENT OF LOANS IN
ALLOWANCE EACH ALLOWANCE EACH
TO TOTAL CATEGORY TO TO TOTAL CATEGORY TO
AMOUNT ALLOWANCE TOTAL LOANS AMOUNT ALLOWANCE TOTAL LOANS
-------- ---------- ------------ ------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
One- to
four-family............................. $359 63.88% 85.00% $336 71.19% 85.11%
Multi-family.............................. 88 15.66 9.68 70 14.83 8.59
Commercial................................ 96 17.08 4.69 46 9.74 5.51
Construction
and land................................ 7 1.25 0.32 6 1.27 0.35
Consumer.................................. 12 2.13 0.31 14 2.97 0.44
---- ------ ------ ---- ------ ------
Total..................................... $562 100.00% 100.00% $472 100.00% 100.00%
==== ====== ====== ==== ====== ======
</TABLE>
16
<PAGE>
Real Estate Owned. At June 30, 1997, the Association had $1,150,000 of REO,
net of reserves as compared to $1,489,000 of REO, net of reserves at June 30,
1996. The $339,000 decrease was due primarily to the sale of higher balance REOs
during the year ended June 30, 1997. 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, 1997, the Company had federal
funds sold and other short-term investments, investment securities and mortgage-
backed securities in the aggregate amount of $107.3 million with a market value
of $107.0 million.
At June 30, 1997, the Company had $12.5 million in investment securities
consisting of U.S. agency securities and investments in an adjustable rate
mortgage-backed mutual fund. At June 30, 1997, the majority of the Company's
$76.2 million of mortgage-backed securities were insured or guaranteed by either
FNMA, GNMA or FHLMC, including $37.2 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
17
<PAGE>
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.
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,
---------------------------------------------------------------------------
1997 1996 1995
------------------------ ------------------------ -----------------------
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................................... $29,236 39.00% $15,693 36.07% $14,343 75.93%
FNMA.................................... 13,449 17.94 9,004 20.69 4,547 24.07
GNMA.................................... 29,213 38.97 15,175 34.88 - 0.00
Other................................... 3,061 4.09 3,636 8.36 - 0.00
------- ------ ------- ------ ------- ------
Total mortgage-backed securities..... 74,959 100.00% 43,508 100.00% 18,890 100.00%
====== ====== ======
Plus:
Unamortized premium, net................ 1,277 807 459
------- ------- -------
Total mortgage-backed securities, net 76,236 44,315 19,349
Less:
Mortgage-backed securities available
for sale:
FHLMC................................. 21,908 3,923 3,614
FNMA.................................. 13,445 10,592 -
Other................................. 1,811 2,099 -
------- ------- ------
Mortgage-backed securities
available for sale...................... 37,164 16,614 3,614
------- ------- ------
Mortgage-backed securities held
to maturity............................. $39,072 $27,701 $15,735
======= ======= =======
</TABLE>
18
<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,
----------------------------------------
1997 1996 1995
------------ ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance........................................................ $44,315 $19,349 $23,749
Mortgage-backed securities purchased - held to maturity................. 15,451 21,116 -
Mortgage-backed securities purchased - available for sale............... 35,229 11,914 -
Less:
Principal repayments.................................................. (8,935) (7,647) (4,309)
Sale of mortgage-backed securities available for sale................. (9,866)
Gain on sale of mortgage-backed securities............................ 161
Amortization of premium/(discount), net............................... (209) (228) (159)
Change in net unrealized gain (loss) on available for sale............ 90 (189) 68
------- ------- -------
Ending balance........................................................... $76,236 $44,315 $19,349
======= ======= =======
</TABLE>
The following table sets forth certain information regarding the carrying
and market value of the Company's mortgage-backed securities at the dates
indicated:
<TABLE>
<CAPTION>
AT JUNE 30,
--------------------------------------------------------------------------------
1997 1996 1995
-------------------------- ------------------------ ------------------------
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.................................. $ 208 $ 211 $ 287 $ 295 $ 4,632 $ 4,536
FHLMC................................. 7,745 7,715 10,426 10,361 11,103 11,131
GNMA.................................. 29,842 29,575 15,420 14,903 - -
Other................................. 1,277 1,282 1,568 1,565 - -
------- ------- ------- ------- ------- -------
Total held to maturity............. 39,072 38,783 27,701 27,124 15,735 15,667
------- ------- ------- ------- ------- -------
Available for sale:
FNMA.................................. 13,445 13,445 10,592 10,592 - -
FHLMC................................. 21,908 21,908 3,923 3,923 3,614 3,614
Other................................. 1,811 1,811 2,099 2,099 - -
------- ------- ------- ------- ------- -------
Total available for sale............ 37,164 37,164 16,614 16,614 3,614 3,614
------- ------- ------- ------- ------- -------
Total mortgage-backed
securities...................... $76,236 $75,947 $44,315 $43,738 $19,349 $19,281
======= ======= ======= ======= ======= =======
</TABLE>
19
<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,
-----------------------------------------------------------------------------
1997 1996 1995
-----------------------------------------------------------------------------
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................... $18,600 $18,600 $ 4,025 $ 4,025 $18,850 $18,850
------- ------- ------- ------- ------- -------
Investment securities:
Held to maturity:
U.S. government and federal
agency obligations................... - - - - 3,200 3,190
------- ------- ------- ------- ------- -------
Available for sale:
U.S. government and federal
agency obligations................... 9,473 9,473 5,928 5,928 1,000 1,000
Adjustable interest rate
mutual fund.......................... 2,994 2,994 8,976 8,976 - -
------- ------- ------- ------- ------- -------
Total available for sale............. 12,467 12,467 14,904 14,904 1,000 1,000
------- ------- ------- ------- ------- -------
Total investment securities............ $31,067 $31,067 $18,929 $18,929 $23,050 $23,040
======= ======= ======= ======= ======= =======
</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, 1997.
20
<PAGE>
<TABLE>
<CAPTION>
AT JUNE 30, 1997
-----------------------------------------------------------------------------
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 and
other short-term investments.................... $18,600 6.11% $ - 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 muturity....................... - 0.0% - 0.00% - 0.00%
------- ------ -------
Available for sale:
Money market funds and
adjustable rate mutual funds..................... 2,994 6.15%
U.S. government and
federal agency obligations................... - 0.00% 9,473 6.89% - 0.00%
------- ------ -------
Total available for sale.................... 2,994 6.15% 9,473 6.89% - 0.00%
------- ------ -------
Total investment securities....................... 2,994 6.15% 9,473 6.89% - 0.00%
======= ====== =======
Mortgage-backed securities:
Held to maturity:
FNMA........................................... - 0.00% 208 8.50% - 0.00%
FHLMC.......................................... - 0.00% 2,123 8.30% 3,798 6.99%
GNMA........................................... - 0.00% - 0.00% - 0.00%
Other.......................................... - 0.00% - 0.00% - 0.00%
------- ------ -------
Total held to maturity....................... - 0.00% 2,331 8.32% 3,798 6.99%
------- ------ -------
Available for sale:
FNMA - 0.00% 1,349 6.49% 7,728 6.40%
FHLMC.......................................... - 0.00% 1,352 5.19% 15,403 6.89%
Other.......................................... - 0.00% - 0.00% - 0.00%
------- ------ -------
Total available for sale..................... - 0.00% 2,701 5.84% 23,131 6.73%
------- ------ -------
Total mortgage-backed securities............ $ - $5,032 $26,929
======= ====== =======
<CAPTION>
MORE THAN TEN YEARS TOTAL
------------------------- ------------------------
WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Federal funds sold and
other short-term investments.................... $ - 0.00% $18,600 6.11%
======= =======
Investment securities:
Held to maturity:
U.S. government and federal
agency obligations........................... - 0.00% - 0.00%
------- -------
Total held to maturity.......................
- 0.00% - 0.00%
------- -------
Available for sale:
Money market funds and
adjustable rate mutual funds..................... 2,994 6.15%
U.S. government and
federal agency obligations................... - 0.00% 9,473 6.89%
------- -------
Total available for sale.................... - 0.00% 12,467 6.71%
------- -------
Total investment securities....................... - 0.00% 12,467 6.71%
======= =======
Mortgage-backed securities:
Held to maturity:
FNMA........................................... - 0.00% 208 8.50%
FHLMC.......................................... 1,824 6.80% 7,745 7.30%
GNMA........................................... 29,842 7.46% 29,842 7.46%
Other.......................................... 1,277 7.00% 1,277 7.00%
------- -------
Total held to maturity...................... 32,943 7.41% 39,072 7.42%
------- -------
Available for sale:
FNMA 4,369 6.55% 13,445 6.46%
FHLMC.......................................... 5,153 7.34% 21,908 6.89%
Other.......................................... 1,811 6.87% 1,811 6.87%
------- -------
Total available for sale..................... 11,333 6.96% 37,164 6.73%
------- -------
Total mortgage-backed securities............. $44,276 $76,236
</TABLE>
21
<PAGE>
SOURCES OF FUNDS
General. Deposits, loan repayments and prepayments, proceeds from sales of
loans, cash flows generated from operations and FHLB advances are primary
sources of the Association's funds for use in lending, investing and for other
general purposes.
Deposits. The Association offers a variety of deposit accounts with a range
of interest rates and terms. The Association's deposits consist of passbook
savings, NOW accounts, checking accounts, money market accounts and certificates
of deposit. For the year ended June 30, 1997, certificates of deposit
constituted 77.1% of total average deposits. The flow of deposits is influenced
significantly by general economic conditions, changes in money market rates,
prevailing interest rates and competition. The Association's deposits are
obtained predominantly from the areas in which its branch offices are located.
During the year ended June 30, 1997, the Association acquired $20.2 million in
deposits from another institution and also generated $5.3 million in deposits at
a new branch opened in March 1997. 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,
---------------------------------------
1997 1996 1995
----------- -------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net deposits (withdrawals) $23,345 $20,852 $(3,497)
Deposits acquired by branch purchase 20,159
Interest credited on deposit accounts 10,796 8,923 7,103
------- ------- -------
Total increase (decrease) in deposit accounts $54,300 $29,775 $ 3,606
======= ======= =======
</TABLE>
At June 30, 1997, the Association had $52.8 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 $11,526 5.30%
Over three through six months 14,948 5.65%
Over six through 12 months 19,525 5.67%
Over 12 months 6,772 6.09%
------- ----
Total $52,771 5.64%
======= ====
</TABLE>
22
<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,
----------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------------------------------------------------------------------------
PERCENT PERCENT PERCENT
OF TOTAL WEIGHTED OF TOTAL WEIGHTED OF TOTAL WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE DEPOSITS YIELD BALANCE DEPOSITS YIELD BALANCE DEPOSITS YIELD
--------- ---------- --------- --------- ----------- --------- --------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Money market savings account.... $ 13,334 5.2% 3.70% $ 7,473 3.5% 2.21% $ 10,425 5.1% 2.22%
Passbook accounts............... 17,432 6.7 2.00 18,108 8.4 2.04 21,288 10.5 2.05
NOW accounts............ 20,249 7.8 1.38 20,299 9.4 1.68 20,518 10.1 1.48
Non interest-bearing accounts... 3,998 1.6 0.00 3,905 1.8 0.00 1,988 1.0 0.00
-------- ----- -------- ----- -------- -----
Total......................... $ 55,013 21.3% 2.04% $ 49,785 23.1% 1.43% $ 54,219 26.7% 1.79%
-------- ----- -------- ----- -------- -----
Certificate accounts:
Less than six months.......... 14,487 5.6% 4.09% $ 15,016 7.0% 4.70% $ 9,823 4.9% 3.42%
Over six through 12 months.... 54,112 20.9 5.45 41,471 19.3 5.34 30,082 14.9 4.81
Over 12 through 24 months..... 99,151 38.3 5.49 71,393 33.1 5.67 61,629 30.3 4.59
Over 24 months........... 34,987 13.5 5.77 35,172 16.3 5.93 36,159 17.9 5.72
Certificates over $98,000..... 1,007 0.4 5.26 2,625 1.2 5.47 10,616 5.2 5.02
-------- ----- -------- ----- -------- -----
Total certificate accounts.... $203,744 78.7% 5.44% $165,677 76.9% 5.55% $148,309 73.3% 4.86%
-------- ----- -------- ----- -------- -----
Total average deposits........ $258,757 100.0% 4.71% $215,462 100.0% 4.60% $202,528 100.0% 4.04%
======== ===== ======== ===== ======== =====
</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, 1997.
<TABLE>
<CAPTION>
PERIOD TO MATURITY FROM JUNE 30, 1997 AT JUNE 30,
----------------------------------------------------- -----------------------------------
LESS THAN ONE TO TWO TO THREE TO FOUR TO
ONE YEAR TWO YEARS THREE YEARS FOUR YEARS FIVE YEARS 1997 1996 1995
---------- --------- ----------- ---------- ---------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts:
0 to 4.00% $ - $ - $ - $ - $ - $ - $ 33 $ 11,169
4.01 to 5.00% 24,862 687 8 - - 25,557 41,779 34,881
5.01 to 6.00% 159,312 10,723 1,288 2,367 2,797 176,487 125,492 50,156
6.01 to 7.00% 3,668 9,866 4,318 402 1,494 19,748 16,210 53,774
7.01 to 8.00% 263 140 75 126 - 604 2,527 3,467
8.01 to 9.00% - - - - - - - 890
Over 9.01% - - - - - - - -
-------- ------- ------ ------ ------ -------- -------- --------
Total $188,105 $21,416 $5,689 $2,895 $4,291 $222,396 $186,041 $154,337
======== ======= ====== ====== ====== ======== ======== ========
</TABLE>
23
<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, 1997, the Association repaid approximately
$63.4 million in FHLB advances. At June 30, 1997, the Association had $77.9
million in outstanding advances from the FHLB.
The following table sets forth certain information regarding the
Association's borrowed funds from the FHLB at or for the periods ended on the
dates indicated:
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED JUNE 30,
----------------------------------
1997 1996 1995
----------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FHLB advances:
Average balance outstanding........... $73,513 $49,419 $39,329
Maximum amount outstanding at
any month-end during the period..... 78,172 74,115 42,642
Balance outstanding at end of period.. 77,907 67,509 33,447
Weighted average interest rate
during the period................... 6.25% 6.50% 6.79%
Weighted average interest rate at
end of period....................... 6.27% 6.23% 7.01%
</TABLE>
As part of its funding strategy, the Company may obtain funds from approved
securities dealers through securities sold under agreements to repurchase. The
collateral used in such borrowings is normally agency securities or mortgage-
backed securities. At June 30, 1997, the Company had $9.4 million outstanding
of such borrowings. During the year ended June 30, 1997, the Company repaid
approximately $170,000 of such borrowings.
24
<PAGE>
The following table sets forth certain information regarding the
Association's borrowed funds from securities sold under agreements to repurchase
at or for the periods ended on the dates indicated:
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED JUNE 30,
------------------------------------
1997 1996 1995
----------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Securities sold under agreements to repurchase:
Average balance outstanding.................... $8,729 N/A N/A
Maximum amount outstanding at
any month-end during the period.............. 9,600 N/A N/A
Balance outstanding at end of period........... 9,430 N/A N/A
Weighted average interest rate
during the period............................ 5.93% N/A N/A
Weighted average interest rate at
end of period................................ 5.95% N/A N/A
</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, 1997, the Company had 73 full-time employees and 28 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.
25
<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 certain
activities authorized by OTS regulation and no multiple savings and loan holding
company may acquire more than 5% of the voting stock of a company engaged in
impermissible activities.
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
26
<PAGE>
holding company thereof, without prior written approval of the OTS 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 Tier I (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight 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.
27
<PAGE>
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 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. At June 30, 1997, the
Association met each of its capital requirements and it is anticipated that the
Association will not be subject to the interest rate risk component.
<TABLE>
<CAPTION>
EXCESS CAPITAL(1)
--------------------
ACTUAL REQUIRED (DEFICIENCY) ACTUAL REQUIRED
CAPITAL CAPITAL AMOUNT PERCENT PERCENT
--------- ---------- -------------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Tangible $25,800 $ 6,103 $19,697 6.34% 1.50%
Core (Leverage) 25,800 12,205 13,595 6.34 3.00
Risk-based 26,963 14,949 12,014 14.43 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.
28
<PAGE>
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 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. Deposits of the Association are presently
insured by the SAIF. Both the SAIF and the Bank Insurance Fund ("BIF"), (the
deposit insurance fund that covers most commercial bank deposits), are
statutorily required to be recapitalized to a 1.25% of insured reserve deposits
ratio. Until recently, members of the SAIF and BIF were paying average deposit
insurance premiums of between 24 and 25 basis points. The BIF met the required
reserve in 1995, whereas the SAIF was not expected to meet or exceed the
required level until 2002 at the earliest. This situation was primarily due to
the statutory requirement that SAIF members make payments on bonds issued in the
late 1980s by the Financing Corporation ("FICO") to recapitalize the predecessor
to the SAIF.
In view of the BIF's achieving the 1.25% ratio, the FDIC ultimately adopted
a new assessment rate schedule of from 0 to 27 basis points under which 92% of
BIF members paid an annual premium of only $2,000. With respect to SAIF member
institutions, the FDIC adopted a final rule retaining the previously existing
assessment rate schedule applicable to SAIF member institutions of 23 to 31
basis points. As long as the premium differential continued, it may have had
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, were placed at a substantial competitive
disadvantage to BIF members with respect to pricing of loans and deposits and
the ability to achieve lower operating costs.
On September 30, 1996, the President signed into law the Deposit Insurance
Funds Act of 1996 (the "Funds Act") which, among other things, imposed a special
one-time assessment of SAIF member institutions, including the Association, to
recapitalize the SAIF. As required by the Funds Act, the FDIC imposed a special
assessment of 65.7 basis points on SAIF assessable deposits held as of March 31,
1995, payable November 27, 1996. The special assessment was recognized as an
expense in the quarter ended September 30, 1996, and is generally tax
deductible. The Association took a pre-tax charge of $1.3 million as a result
of the FDIC special assessment.
29
<PAGE>
The Funds Act also spreads the obligations for payment of the Financing
Corporation ("FICO") bonds across all SAIF and BIF members. Beginning on
January 1, 1997, BIF deposits were assessed for a FICO payment of approximately
1.3 basis points, while SAIF deposits pay an approximately 6.4 basis points on
the FICO bonds. Full pro rata sharing of the FICO payments between BIF and SAIF
members will occur on the earlier of January 1, 2000, or the date the BIF and
SAIF are merged. The Funds Act specifies that the BIF and SAIF will be merged
on January 1, 1999, provided no savings associations remain as of that time.
As a result of the Funds Act, the FDIC voted to effectively lower SAIF
assessments to 0 to 27 basis points effective January 1, 1997, a range
comparable to that of BIF members. SAIF members will also continue to make the
FICO payments described above. The FDIC also lowered the SAIF assessment
schedule for the third quarter of 1997 to 18 to 27 basis points. Management
cannot predict the level of FDIC insurance assessments on an on-going basis,
whether the savings association charter will be eliminated or whether the BIF
and SAIF will eventually be merged.
The Association's assessment rate for fiscal 1997 ranged from 6.4 to 23.0
basis points and the premium paid for this period was $313,000. A significant
increase in SAIF insurance premiums would likely have an adverse effect on the
operating expenses and results of operations of the Association.
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.
Thrift Rechartering Legislation. The Funds Act provides that the BIF and
SAIF will merge on January 1, 1999 if there are no more savings associations as
of that date. That legislation also required that the Department of Treasury
submit a report to Congress that makes recommendations regarding a common
financial institutions charter, including whether the separate charter for
thrifts and banks should be abolished. Various proposals to eliminate the
federal thrift charter, create a uniform financial institutions charter and
abolish the OTS have been introduced in Congress. The bills would require
federal savings institutions to convert to a national bank or some type of state
charter by a specified date under some bills, or they would automatically become
national banks. Under the same proposals, converted federal thrifts would
generally be required to conform their activities to those permitted for the
charter selected and divestiture of nonconforming assets would be required over
a two year period, subject to two possible one year extensions. State chartered
thrifts would become subject to the same federal regulation as applies to state
commercial banks. A more recent bill passed by the House Banking Committe would
allow savings institutions to continue to exercise activities being conducted
when they convert to a bank regardless of whether a national bank could engage
in such activities. Holding companies for savings institutions would become
subject to the same regulation as holding companies that control commercial
banks, with a limited grandfather provision for savings and loan holding company
activities. The Bank is unable to predict whether such legislation would be
enacted or the extent to which the legislaiton would restrict or disrupt its
operations.
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,
30
<PAGE>
if such loan is secured by readily-marketable collateral, which is defined to
include certain financial instruments and bullion. At June 30, 1997, the
Association's limit on loans to one borrower was $3.9 million. At June 30, 1997,
the Association's largest aggregate outstanding balance of loans to one borrower
totaled $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, 1997, the Association maintained 96.4% of its portfolio assets in
qualified thrift investments and, therefore, met the QTL test. Recent
legislation has expanded the extent to which education loans, credit card loans
and small business loans may be considered "qualified thrift investments."
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by 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 capital level. An institution that exceeds
all fully phased-in capital requirements before and after a proposed capital
distribution ("Tier I 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. In December 1994, the OTS proposed
amendments to its capital distribution regulation that would generally authorize
the payment of capital distributions without OTS approval provided that the
payment does not cause the institution to be undercapitalized within the meaning
of the prompt corrective action regulation. However, institutions in a holding
company structure would still have a prior notice requirement. At March 31,
1997, the Association was a Tier I Bank.
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
31
<PAGE>
in one year or less. The OTS has recently proposed to lower the liquidity
requirement from 5% to 4% and eliminate the 1% short term liquid asset
requirement. Monetary penalties may be imposed for failure to meet these
liquidity requirements. The Association's liquidity and short-term liquidity
ratios for June 30, 1997 were 9.49% and 6.98% 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, 1997 totaled $1,645,000 and included $1,332,000 for the one-
time special assessment to recapitalize SAIF.
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'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.
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. Recent legislation created an exception for
loans made pursuant to a benefit or compensation program that is widely
available to all employees of the instituion and does not give preference to
insiders over other employees. 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
32
<PAGE>
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 institutions. 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 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 a
deadline 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, 1997, of $4.0 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 FHLBs
imposing a higher rate of interest on advances to their members. For the years
ended June 30, 1997, 1996, and 1995, dividends from the FHLB-San Francisco to
the Association amounted to $237,000, $152,000, and $144,000, 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
33
<PAGE>
accounts aggregating $49.3 million or less (subject to adjustment by the Federal
Reserve Board) the reserve requirement is 3%; and for accounts greater than
$49.3 million, the reserve requirement is $1.48 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 $49.3 million. The first $4.4 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.
34
<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 Internal Revenue Service (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"). Annual additions to the reserve, within specified formula limits, may
be deducted in arriving at taxable income.
Under the reserve method, qualifying institutions were generally allowed to
use either of two alternative computations: Under the "percentage of taxable
income" method computation, qualifying institutions could claim a bad debt
deduction computed as a percentage of taxable income adjusted for certain items.
Alternatively, a qualifying institution could elect to utilize its own bad debt
loss experience to compute its annual addition to its bad debt reserves (the
"experience method").
Under Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes, savings associations were not required to provide a federal
deferred tax liability for the bad debt reserves that arose in tax years
beginning before January 1, 1988. Such reserves were, however, subject to
recapture in whole or in part upon the occurrence of certain events such as
failure to remain a qualified institution, distributions to shareholders in
excess of the association's current and accumulated earnings and profits, a
redemption of shares, or upon a partial or complete liquidation of the
association. Upon the occurrence of such events, the association would be
required to provide federal deferred taxes in their financial statements for the
recaptured portion of the tax reserve.
Legislation enacted in 1996, repealed the special bad debt rules applicable
to savings associations for taxable years beginning after December 31, 1995.
Under these provisions, savings associations will follow the same rules for
purposes of computing allowable bad debt deductions as banks, which allows an
annual addition to the association's bad debt reserve under the experience
method as long as total assets do not exceed $500 million, but does not allow
for an addition based on the percentage of taxable income method.
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 provisions that effectively grandfathers the bad debt reserve
as of December 31, 1987 from the current recapture provisions.
35
<PAGE>
Under the 1996 Legislation, if a savings association converts to a bank or
is merged into a bank, the association's bad debt reserve will not automatically
be subject to recapture. Recapture of the grandfathered bad debt reserve would
still occur in the event of certain distributions, redemptions or partial
liquidations, as previously discussed. As of June 30, 1997, the Association's
tax bad debt reserve grandfathered under the new law for which federal deferred
taxes have not been provided totaled approximately $2.7 million. The Association
does not intend to pay dividends or enter into any other type of transaction as
noted above, that would result in the recapture of any portion of its
grandfathered bad debt reserve.
STATE AND LOCAL TAXATION
State of California. The California franchise tax rate applicable to the
Association equals the franchise tax rate applicable to corporations generally,
plus an "in lieu" rate approximately equal to personal property taxes and
business license taxes paid by such corporations (but not generally paid by
banks or financial corporations such as the Association); however, the total tax
rate is approximately 11.0%. 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.
36
<PAGE>
ITEM 2. PROPERTIES
- ------------------
The Company neither owns nor leases any real property. For the time being,
it utilizes the property and equipment of the Association without payment to the
Association.
The Association conducts its business through an administrative and full
service office located in West Covina and seven other full service offices. The
Company believes that the Association's current facilities are adequate to meet
the present and immediately foreseeable needs of the Association and the
Company.
<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, 1997
- ------------------------------------- -------- ---------- ------------ ----------------
<S> <C> <C> <C> <C>
ADMINISTRATIVE/BRANCH OFFICE:
225 North Barranca Street Owned 1984 - $1,464,000
West Covina, California 91791
BRANCH OFFICES:
Covina:
144 North Second Avenue Owned 1952 - 133,000
Covina, California 91723
Hacienda Heights:
2233 South Hacienda Boulevard Owned 1970 - 548,000
Hacienda Heights, California 91745
La Verne:
2111 Bonita Avenue Owned 1972 - 200,000
La Verne, California 91750
City of Industry:
220 North Hacienda Boulevard Leased 1977 9/11/98(1) 3,000
City of Industry, California 91744
Arcadia:
One East Foothill Boulevard Leased 1986 12/31/05 23,000
Arcadia, California 91006
North La Verne:
1413 Foothill Boulevard Leased 1997 1/31/00 16,000
La Verne, California 91750
Duarte:
1475 East Huntington Drive Leased 1997 6/30/05 60,000
Duarte, California 91010
</TABLE>
(1) The Association has options to extend the lease term for five consecutive
five-year periods.
37
<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 Common Stock. As of June 30, 1997,
there were 205 holders of record of the Common Stock of the Company (not
including the number of persons holding stock in nominee or street name through
various nominee holders), and 2,342,176 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, 1997 (1)
----------------------------------------------------
4TH QUARTER 3RD QUARTER 2ND QUARTER 1ST QUARTER
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
High.......................... 14 1/4 13 7/8 11 11/16 9 3/4
Low........................... 11 11 1/8 9 3/8 7 3/4
</TABLE>
(1) The Company's initial public offering was completed on June 28, 1995.
38
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE COMPANY
<TABLE>
<CAPTION>
AT JUNE 30,
--------------------------------------------------
1997 1996 1995 1994 1993
---------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets....................... $409,340 $336,055 $273,396 $255,410 $252,148
Investment securities available
for sale(1)...................... 12,467 14,904 1,000 4,898 5,928
Investment securities held to
maturity(1)...................... - - 3,200 3,200 -
Mortgage-backed securities
available for sale(1)............ 37,164 16,614 3,614 4,140 4,262
Mortgage-backed securities
held to maturity(1).............. 39,072 27,701 15,735 19,609 28,418
Loans receivable held for sale..... 230 723 - - 1,197
Loans receivable held for
investment, net(2)............... 284,608 255,953 217,399 207,667 190,961
Deposit accounts................... 288,339 234,039 204,264 200,658 202,143
FHLB advances...................... 77,907 67,509 33,447 37,799 31,982
Stockholders' equity, substantially
restricted....................... 29,903 31,586 33,006 13,581 13,007
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30,
--------------------------------------------------
1997 1996 1995 1994 1993
---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income........................ $26,700 $21,259 $17,855 $16,971 $18,552
Interest expense....................... 17,138 13,304 10,900 9,363 10,459
------- ------- ------- ------- -------
Net interest income before
provision for (recapture of)
estimated loan losses.............. 9,562 7,955 6,955 7,608 8,093
Provision for (recapture of)
estimated loan losses................ 557 575 483 95 (29)
------- ------- ------- ------- -------
Net interest income after provision
for (recapture of) estimated loan
losses............................. 9,005 7,380 6,472 7,513 8,122
Other income........................... 1,218 612 538 447 722
General and administrative expenses.... 8,958 6,966 6,705 6,775 6,893
------- ------- ------- ------- -------
Earnings before income tax expense..... 1,265 1,026 305 1,185 1,951
Income tax expense..................... 534 432 128 493 669
------- ------- ------- ------- -------
Net earnings........................... $ 731 $ 594 $ 177 $ 692 $ 1,282
======= ======= ======= ======= =======
Earnings per share..................... $0.31 $0.24 N/A N/A N/A
======= =======
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED JUNE 30,
--------------------------------------------
1997 1996 1995 1994 1993
-------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND
OTHER DATA(3):
PERFORMANCE RATIOS:
Return on average assets................. 0.20% 0.20% 0.07% 0.28% 0.51%
Return on average equity................. 2.38 1.81 1.16 5.16 10.29
Average equity to average assets......... 8.22 11.00 5.86 5.33 4.96
Equity to total assets at end of period 7.31 9.40 12.07 5.32 5.16
Average interest rate spread (4)......... 2.27 2.28 2.61 3.01 3.22
Net interest margin (5).................. 2.65 2.76 2.79 3.15 3.37
Average interest-earning assets to
average interest-bearing liabilities... 107.98 110.37 103.97 103.81 103.45
General and administrative expenses
to average assets (6).................. 2.40 2.33 2.58 2.69 2.74
REGULATORY CAPITAL RATIOS:
Tangible capital......................... 6.34% 7.63% 9.04% 5.31% 5.16%
Core capital............................. 6.34 7.63 9.04 5.31 5.16
Risk-based capital....................... 14.43 16.51 18.56 11.03 11.02
ASSET QUALITY RATIOS:
Non-performing loans as a percent of
gross loans receivable(7)(8)........... 0.59% 0.76% 0.88% 0.54% 0.76%
Non-performing assets as a percent
of total assets(8)...................... 0.70 1.03 1.00 0.83 0.87
Allowance for estimated loan losses
as a percent of gross loans
receivable(7)........................... 0.44 0.41 0.36 0.27 0.25
Allowance for estimated loan losses
as a percent of non-performing
loans(8)............................... 74.34 53.92 41.21 50.40 32.22
NUMBER OF FULL-SERVICE CUSTOMER
FACILITIES............................... 8 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, 1997, 1996, 1995, 1994
and 1993 was $1,263,000, $1,058,000, $792,000, $562,000, and $472,000,
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) Includes the one-time special assessment to recapitalize SAIF of $1.3
million in 1997.
(7) Gross loans receivable include loans receivable held for investment and
loans held for sale, less undisbursed loan funds, deferred loan fees and
unamortized discounts/premiums.
(8) 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.
40
<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 rate risk: (i) emphasizing the origination or purchase of adjustable-rate
one- to four-family mortgage loans for portfolio; (ii) selling to the secondary
market the majority of fixed-rate mortgage loans originated; and, (iii)
attempting to reduce the overall interest rate sensitivity of liabilities
emphasizing core and longer-term deposits and utilizing FHLB advances.
Net Portfolio Value. The Association's interest rate sensitivity is
monitored by management through the use of an internally generated model which
estimates the change in net portfolio value ("NPV") over a range of interest
rate scenarios. NPV is the present value of expected cash flows from assets,
liabilities and off-balance sheet contracts. An NPV Ratio, in any interest rate
scenario, is defined as the NPV in that scenario divided by the market value of
assets in the same scenario. The Sensitivity Measure is the decline in the NPV
Ratio, in basis points, caused by a 2% increase or decrease in rates, whichever
produces a larger decline. The higher an institution's Sensitivity Measure is,
the greater its exposure to interest rate risk is considered to be. The OTS
also produces a similar analysis using its own model, based upon data submitted
on the Association's quarterly Thrift Financial Reports.
As of June 30, 1997, the Association's Sensitivity Measure, as measured by
the OTS, was 2.02%. At that same date, the Sensitivity Measure as measured by
the Association, was 1.47%. The differences between the two measurements is
partially attributed to differences in assigning various prepayment rates, decay
rates and discount rates. The Association compares the results from the OTS
with its internally generated results and provides the Board of Directors a
comparison to determine if there is any additional risk.
In addition to monitoring selected measures of NPV, management also
monitors effects on net interest income resulting from changes in interest
rates. These measures are used in conjunction with NPV measures to identify
potential interest rate risk. The Association projects net interest income for
the next twelve month period, based upon certain specific assumptions. For the
years ended June 30, 1997, 1996 and 1995, the forecasted net interest income in
the existing rate environment (held constant for the period) for interest rate
risk management purposes was $8.1 million, $7.3 million, and $7.0 million,
respectively, compared to the actual net interest income recorded of $9.6
million, $8.0 million, and $7.0 million, respectively.
41
<PAGE>
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in NPV requires the making of
certain assumptions which may tend to oversimplify the manner in which actual
yields and costs respond to changes in market interest rates. First, the models
assume that the composition of the Association's interest sensitive assets and
liabilities existing at the beginning of a period remains constant over the
period being measured. Second, the models assume that a particular change in
interest rates is reflected uniformly across the yield curve regardless of
duration to maturity or repricing of specific assets and liabilities. Third,
the model does not take into account the Association's business or strategic
plans. Accordingly, although the NPV measurements and interest income models do
provide an indication of the Association's interest rate risk exposure at a
particular point in time, such measurements are not intended to and do not
provide a precise forecast of the effect of changes in market interest rates on
the Association's net interest income and will differ from actual results.
The following table sets forth, at June 30, 1997, an analysis of the
Association's internal analysis of its interest rate risk 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> <C>
400 $21,489 $(15,674) (42.2)%
300 25,801 (11,362) (30.6)
200 30,011 (7,152) (19.3)
100 33,890 (3,273) (8.8)
-- 37,163 -- --
(100) 38,033 870 2.3
(200) 36,430 (734) (2.0)
(300) 35,887 (1,276) (3.4)
(400) 36,027 (1,136) (3.1)
</TABLE>
42
<PAGE>
The following table provides information regarding the Company's primary
categories of assets and liabilities which are sensitive to changes in interest
rates. The information presented reflects the expected cash flows of the primary
categories by year including the related weighted average interest rate. The
cash flows for loans and mortgage-backed securities are based on maturity date
and are adjusted for expected prepayments which are based on historical and
current market information. The loans and mortgage-backed securities which have
adjustable rate features are presented in accordance with their next interest-
repricing date. Cash flow information on interest-bearing liabilities such as
passbooks, NOW accounts and money market accounts also is adjusted for expected
decay rates which are based on historical information. Also, for purposes of
cash flow presentation, premiums or discounts on purchased assets, mark-to-
market adjustments and loans on non-accrual are excluded from the amounts
presented. Investment securities are presented as to maturity date as are all
certificates of deposit and borrowings.
<TABLE>
<CAPTION>
(Amounts in thousands) Year 1 Year 2 Year 3 Year 4 Year 5 Thereafter
------ ------ ------ ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C>
SELECTED ASSETS:
Investments and Fed Funds $ 21,594 $ 1,000 $ 2,000 $ 3,500 $ 3,000
Average interest rate 6.12% 6.24% 6.64% 6.58% 7.18%
Mortgage-backed securities -
fixed-rate 9,556 9,552 7,063 6,050 5,184 $ 28,638
Average interest rate 7.39% 7.35% 7.42% 7.44% 7.45% 7.51%
Mortgage-backed securities -
adjustable rate 9,133
Average interest rate 7.43%
Loans - fixed rates 10,514 20,539 10,962 3,658 3,036 15,046
Average interest rate 8.33% 8.18% 8.48% 8.35% 8.33% 8.33%
Loans - adjustable rates 193,199 27,775 307
Average interest rate 7.44% 7.65% 11.62%
SELECTED LIABILITIES:
Interest-bearing NOW
passbook and MMDA's 12,600 9,867 7,748 6,102 4,818 18,938
Average interest rate 2.57% 2.56% 2.55% 2.54% 2.52% 2.37%
Certificates of deposit 188,095 21,433 5,680 2,896 4,292
Average interest rate 5.47% 5.73% 6.31% 5.83% 5.83%
FHLB advances and securities
sold under agreements to
repurchase 15,430 37,400 21,900 9,000 3,607
Average interest rate 6.22% 6.16% 6.38% 6.16% 6.49%
</TABLE>
The Company does not have any foreign exchange exposure nor any commodity
exposure and therefore does not have any market risk exposure for these issues.
43
<PAGE>
AVERAGE BALANCE SHEET
The following table sets forth certain information relating to the Company
for the fiscal years ended June 30, 1997, 1996 and 1995. 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,
----------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------ ------------------------------ ------------------------------
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......... $ 7,176 $ 389 5.42% $ 8,491 $ 522 6.15% $ 6,354 $ 366 5.76%
Investment securities, net....... 17,222 1,133 6.58 9,454 601 6.36 5,531 319 5.77
Loans receivable................. 273,469 20,890 7.64 233,356 17,798 7.63 213,846 15,647 7.32
Mortgage-backed securities,
net............................ 59,733 4,051 6.78 33,944 2,186 6.44 21,136 1,378 6.52
FHLB stock.................. 3,884 237 6.10 3,175 152 4.79 2,806 145 5.17
-------- ------- -------- ------- -------- -------
Total interest-earning assets 361,484 $26,700 7.39% 288,420 $21,259 7.37% 249,673 $17,855 7.15%
======= ======= =======
Non-interest-earning assets 11,773 10,612 10,059
-------- -------- --------
Total assets................. $373,257 $299,032 $259,732
======== ======== ========
Liabilities and Equity:
Interest-bearing liabilities:
Money market savings
accounts....................... $ 13,334 $ 493 3.70% $ 7,473 $ 166 2.21% $ 10,425 $ 232 2.22%
Passbook accounts................ 17,432 348 2.00 18,108 370 2.04 21,288 436 2.05
NOW accounts..................... 20,249 280 1.38 20,299 341 1.68 20,518 303 1.48
Certificate accounts............. 203,744 11,074 5.44 165,677 9,194 5.55 148,309 7,208 4.86
-------- ------- ---- -------- ------- -------- -------
Total savings accounts......... 254,759 12,195 4.79 211,557 10,071 4.76 200,540 8,179 4.08
FHLB advances.................... 73,513 4,569 6.22 49,419 3,212 6.50 39,327 2,713 6.90
Securities sold under
agreements to repurchase....... 6,043 349 5.78
Impounds & other
borrowings...................... 443 25 5.64 346 21 6.07 275 8 2.00
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities.................. 334,758 $17,138 5.12% 261,322 $13,304 5.09% 240,142 $10,900 4.54%
======= ======= =======
Non-interest bearing liabilities 7,821 4,831 4,378
-------- -------- --------
Total liabilities.............. 342,579 266,153 244,520
Equity............................. 30,678 32,879 15,212
-------- -------- --------
Total liabilities and equity... $373,257 $299,032 $259,732
======== ======== ========
Net interest rate spread........... 2.27% 2.28% 2.61%
Net interest margin................ 2.65% 2.76% 2.79%
Ratio of interest-earning assets
to interest-bearing liabilities.. 107.98% 110.37% 103.97%
</TABLE>
44
<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, 1997 YEAR ENDED JUNE 30, 1996
COMPARED TO COMPARED TO
YEAR ENDED JUNE 30, 1996 YEAR ENDED JUNE 30, 1995
---------------------------------- -----------------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
AVERAGE AVERAGE
VOLUME RATE NET VOLUME RATE NET
----------- ---------- --------- ----------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-earning deposits and
short-term investments............... $ (75) $ (58) $ (133) $ 130 $ 26 $ 156
Investment securities, net (1)......... 510 22 532 246 36 282
Loans receivable, net (1).............. 3,069 23 3,092 1,469 682 2,151
Mortgage-backed securities, net (1). 1,744 121 1,865 825 (17) 808
FHLB stock............................. 38 47 85 17 (10) 7
------ ----- ------ ------ ------ ------
Total interest-earning assets........ 5,286 155 5,441 2,687 717 3,404
------ ----- ------ ------ ------ ------
INTEREST-BEARING LIABILITIES:
Money market savings accounts.......... 176 151 327 (65) (1) (66)
Passbook accounts...................... (15) (7) (22) (64) (2) (66)
NOW accounts........................... (1) (60) (61) (3) 41 38
Certificate accounts................... 2,057 (177) 1,880 897 1,089 1,986
FHLB advances.......................... 1,488 (131) 1,357 644 (145) 499
Securities sold under agreement to
repurchase.......................... 349 - 349 - - -
Impounds & other borrowings............ 5 (1) 4 1 12 13
------ ----- ------ ------ ------ ------
Total interest-bearing liabilities... 4,059 (225) 3,834 1,410 994 2,404
------ ----- ------ ------ ------ ------
Net change in net interest income........ $1,227 $ 380 $1,607 $1,277 $ (277) $1,000
====== ===== ====== ====== ====== ======
</TABLE>
_______________
(1) Includes assets available for sale.
45
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1997 AND JUNE 30,
1996
GENERAL
The net earnings for the year ended June 30, 1997 were $731,000, an
increase of $137,000, or 23.1%, from the $594,000 in net earnings for the year
ended June 30, 1996. The improvement in operating results was due to the
increase in average interest-earning assets which resulted in a $1.6 million net
increase in net interest income which was partially offset by the $2.0 million
increase in general and administrative expenses, resulting primarily from the
payment of a special assessment totaling $1.3 million for the recapitalization
of the insurance fund (SAIF).
INTEREST INCOME
Interest income for the year ended June 30, 1997 was $26.7 million compared
to $21.3 million for the year ended June 30, 1996, an increase of $5.4 million,
or 25.4%. The increase in interest income was primarily due to the increase in
average balance of interest-earning assets to $361.5 million for the year ended
June 30, 1997 from $288.4 million for the year ended June 30, 1996. The increase
in the average balance of interest-earning assets was the result of a
continuation of the growth strategy begun in the previous fiscal year to enhance
the Company's earning ability. Key elements of the growth strategy continued to
be the purchase of mortgage loans and mortgage-backed securities funded
primarily by the growth in deposits, including the branch purchase, and the use
of borrowings such as FHLB advances.
Interest income on loans receivable increased $3.1 million to $20.9 million
for the year ended June 30, 1997 from $17.8 million for the year ended June 30,
1996. The increase in interest income was the result of the $40.1 million
increase in the average balance of loans receivable for the year ended June 30,
1997 primarily as a result of the purchase of $33.3 million of adjustable rate
loans from other financial institutions. The loans purchased were indexed to the
Eleventh District Cost of Funds Index (COFI) and were primarily seasoned, fully-
indexed loans. Furthermore, the loans purchased were $4.1 million of multi-
family and $29.2 million of one- to four-family mortgage loans. The average
yield on loans receivable for the year ended June 30, 1997 was 7.64%, which
approximated the 7.63% yield for loans receivable for the year ended June 30,
1996.
Interest income on mortgage-backed securities increased by $1.9 million to
$4.1 million for the year ended June 30, 1997 from $2.2 million for the year
ended June 30, 1996. The increase in interest income was due to the increase in
the average balance of mortgage-backed securities to $59.7 million for the year
ended June 30, 1997 from $33.9 million for the year ended June 30, 1996 and to
the increase in the average yield to 6.78% for the year ended June 30, 1997 from
6.44% for the year ended June 30, 1996. The increase in the average balance
during the year ended June 30, 1997 was the result of the purchase of $50.7
million in mortgage-backed securities, both available for sale and held to
maturity, partially offset by the sale of $9.9 million in mortgage-backed
securities available for sale. The Company utilized acquisitions of mortgage-
backed securities during the year to increase the Company's interest-earning
assets and
46
<PAGE>
as a substitute for mortgage loans. The average yield on mortgage-backed
securities increased in the year ended June 30, 1997 primarily due to the higher
yields on the securities purchased, which were principally fixed rate.
Interest income on investment securities increased by $532,000 to $1.1
million for the year ended June 30, 1997 from $601,000 for the year ended June
30, 1996. The increase was primarily due to the $7.7 million increase in the
average balance of investment securities to $17.2 million for the year ended
June 30, 1997 from $9.5 million for the year ended June 30, 1996 and to the
increase in the average yield to 6.58% for the year ended June 30, 1997 from
6.36% for the year ended June 30, 1996. The increase in yield was primarily due
to the increase in U.S. agency callable securities during the year ended June
30, 1997 as compared to June 30, 1996. Interest income on interest-earning
deposits and daily investments decreased by $48,000 to $626,000 for the year
ended June 30, 1997 from $674,000 for the year ended June 30, 1996. The decrease
in interest income on interest-earning deposits and daily investments was due to
the decrease in the average balance to $7.2 million for the year ended June 30,
1997 from $8.5 million for the year ended June 30, 1996 and to the decrease in
the average yield to 5.42% for the year ended June 30, 1997 from 6.15% for the
year ended June 30, 1996.
INTEREST EXPENSE
Interest expense for the year ended June 30, 1997 was $17.1 million from
$13.3 million for the year ended June 30, 1996, an increase of $3.8 million, or
28.6%. The increase in interest expense was due to the $73.4 million increase in
the average balances of interest-bearing liabilities to $334.7 million for the
year ended June 30, 1997 from $261.3 million for the year ended June 30, 1996.
The increase in interest expense was also due to the slight increase in the
average cost of interest-bearing liabilities to 5.12% for the year ending June
30, 1997 from 5.09% for the year ending June 30, 1996. Interest expense on
deposit accounts increased to $12.2 million for the year ended June 30, 1997
from $10.1 million for the year ended June 30, 1996. The increase in interest
expense on deposit accounts reflects the $43.2 million increase in the average
balance of deposit accounts to $254.8 million for the year ending June 30, 1997
from $211.6 million for the year ending June 30, 1996 which was partially the
result of the purchase of $20.2 million in deposits from another institution in
February 1997 and due to the establishment of a new branch in March 1997 which
generated $5.3 million in deposits in its first three months of operation.
The Company's use of borrowed funds, including FHLB advances and securities
sold under agreements to repurchase, increased during the year ended June 30,
1997. The Company increased its usage of such borrowings to fund the growth in
assets to enhance net interest income and to extend the average maturities of
the liabilities of the Company. Interest expense on borrowings increased $1.7
million to $4.9 million for the year ended June 30, 1997 from $3.2 million for
the year ended June 30, 1996. The increase in interest expense was primarily due
to the increase in average borrowings to $79.6 million for the year ended June
30, 1997 from $49.4 million for the year ended June 30, 1996, partially offset
by the decrease in the average cost of borrowings to 6.18% for the year ended
June 30, 1997 from 6.50% for the year ended June 30 1996.
47
<PAGE>
PROVISION FOR ESTIMATED LOAN LOSSES
The Company's provision for estimated loan losses decreased slightly to
$557,000 for the year ended June 30, 1997 from $575,000 for the year ended June
30, 1996. The current year's allowance for estimated loan losses reflects
$352,000 in loan charge-offs as compared to $310,000 for the year ended June 30,
1996. The difference between the actual amount of charge-offs for the current
year and the amount reflected in the provision represents an allocation for the
growth in the loan portfolio during the year ended June 30, 1997 and
management's concerns regarding the general market conditions continuing and the
overall decline in real estate activity as well as the continuation of soft real
estate values in our primary market area. The allowance for estimated loan
losses increased to $1.3 million, or 0.44% of gross loans receivable, at June
30, 1997 from $1.1 million, or 0.41% of gross loans receivable at June 30, 1996.
As a percentage of non-performing loans, the allowance for loan losses increased
to 74.34% at June 30, 1997 compared to 53.92% at June 30, 1996. 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
Other income for the Company increased to $1.2 million for the year ended
June 30, 1997 compared to $612,000 for the year ended June 30, 1996, an increase
of $606,000, or 99.0%. The increase in non-interest income was primarily due to
the improvement in the activity on real estate owned and to net gains recorded
on sales of mortgage-backed securities and other investments available for sale.
The Company posted a net gain on real estate owned activity totaling $157,000
for the year ending June 30, 1997 as compared to a net loss of $271,000 for the
year ending June 30, 1996, an increase of $428,000. This improvement was
primarily the result of a $344,000 favorable litigation settlement received in
May 1997; culminating a litigation process relating to a land development real
estate owned foreclosed on by the Company in 1992. The Company posted a net gain
of $148,000 in regards to sales of investments and mortgage-backed securities
during the year ended June 30, 1997 as compared to a net loss of $12,000 for the
year ended June 30, 1996. The Company's income derived from loan servicing
operations and deposit fees were approximately the same for both the years ended
June 30, 1997 and 1996.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased by $2.0 million to $9.0
million for the year ended June 30, 1997 from $7.0 million for the year ended
June 30, 1996. Included in the expenses for the year ended June 30, 1997, was
the $1.3 million one-time special assessment to recapitalize the SAIF insurance
fund. This special assessment represented 65.7 basis points of
48
<PAGE>
the deposits held by the Association as of March 31, 1995. Compensation and
other employee benefits increased by $539,000 to $4.1 million for the year ended
June 30, 1997 from $3.6 million for the year ended June 30, 1996. The increase
in compensation costs was primarily attributable to the increase in staff
primarily due to the addition of two branches. Employee benefits increased as a
result of the costs related to the employee stock ownership and the stock
compensation plans which increased to $472,000 for the year ended June 30, 1997
from $302,000 for the year ended June 30, 1996. Equipment and data processing
costs increased to $932,000 for the year ended June 30, 1997 from $748,000 for
the year ended June 30, 1996 primarily as a result of the completion of a
conversion to a new data processor which included approximately $100,000 in non-
recurring expenses. The increase in costs was due to the replacement of outdated
equipment, to the initial costs of the conversion and to the deconversion costs
of the previous data processor. The regular insurance assessments paid to the
FDIC decreased to $313,000 for the year ended June 30, 1997 from $472,000 for
the year ended June 30, 1996 as a result of the lowering of the assessment rate
as of January 1, 1997, following the recapitalization of SAIF.
INCOME TAX
Income tax expense was $534,000 for the year ended June 30, 1997 compared
to $432,000 for the year ended June 30, 1996, representing an increase of
$102,000. This increase is principally due to the increase in taxable income in
fiscal 1997 as compared to fiscal 1996. See Note 11 of the Notes to the
Consolidated Financial Statements for additional information on the Company's
income taxes.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1997 AND JUNE 30, 1996
The Company's total assets increased to $409.3 million at June 30, 1997
from $336.1 million at June 30, 1996, an increase of $73.2 million. During the
year, the Company increased its loans receivable held for investment by $28.6
million to $284.6 million at June 30, 1997 from $256.0 million at June 30, 1996
primarily as a result of the $33.3 million in loans purchased throughout the
year. All of the loans purchased were adjustable rate mortgage loans indexed to
COFI, with $4.1 million being multi-family loans and the remainder single-family
mortgages. The properties securing the loans purchased are located primarily in
southern California, but are dispersed throughout a wider area than the
Company's normal lending area.
The Company's investment in mortgage-backed securities increased to a total
of $76.2 million at June 30, 1997 from $44.3 million at June 30, 1996. The
increase in this portfolio reflects the continuation of management's strategy to
increase the interest-earning assets of the Company to enhance the net interest
income of the Company. Cash and short-term bank obligations increased to $22.7
million at June 30, 1997 from $8.9 million at June 30, 1996 primarily as a
result of the increase in cash flow generated from the loans receivable
portfolio due to a slower than expected lending market and the desire of
management to maintain more additional liquid assets.
49
<PAGE>
The Company's investment in premises and equipment increased to $3.9
million at June 30, 1997 from $3.0 million at June 30, 1996 due to the purchase
of new computer equipment as part of the Company's conversion to a new data
processor, and due to the improvements required as part of two additional
branches and other branch upgrades. Prepaid expenses and other assets increased
to $1.2 million at June 30, 1997 from $437,000 primarily as a result of the
premium paid on the branch acquisition of approximately $500,000.
The total liabilities of the Company increased to $379.4 million at June
30, 1997 from $304.5 million at June 30, 1996. The increase in liabilities was
in support of the strategy to enhance net interest income. Total deposit
accounts increased to $288.3 million at June 30, 1997 from $234.0 million aided
by the acquisition of $20.2 million in deposits acquired in a branch
acquisition. Core deposits (excluding certificates of deposit) increased to
$65.9 million, or 22.9% of total deposits, at June 30, 1997 from $48.0 million,
or 20.5% of total deposits, at June 30, 1996. The growth of core deposits is an
integral part of management's strategy to enhance net interest income and build
customer relationships. The Company continued to utilize borrowings as a means
to enhance net interest income and provide for longer-term financing of its
asset base. As of June 30, 1997, the Company increased its borrowings from the
FHLB to $77.9 million from $67.5 million at June 30, 1996. Also, the Company
borrowed $9.4 million through securities sold under agreements to repurchase.
The Company's stockholders' equity was $29.9 million at June 30, 1997, a
decrease of $1.7 million from the $31.6 million in stockholders' equity at June
30, 1996. The decrease in stockholders' equity in fiscal 1997 was due primarily
to the repurchase of 249,100 shares of stock to be held as treasury stock with a
total value of $2.9 million. The reduction of stockholders' equity caused by the
stock repurchase was partially offset by the $731,000 in net earnings and the
$273,000 in amortization of deferred stock compensation.
COMPARISON OF OPERATING RESULTS FOR THE YEAR 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
50
<PAGE>
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 million 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.
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
51
<PAGE>
period ended June 30, 1995. The increase 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% for the period ended 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 in 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 $1.1 million,
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.
OTHER INCOME
Other 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
52
<PAGE>
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
53
<PAGE>
located in southern California, but are dispersed throughout a wider area than
the Company's normal lending area.
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 million 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.
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, securities sold
under agreements to repurchase 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
estate market have decreased loan origination and loan sale activity. For the
years ended June 30, 1997, 1996 and 1995, the Company received $5.7 million,
$13.2 million and $1.4 million, respectively, in proceeds from the sale of loans
to the secondary market.
54
<PAGE>
The Company's most significant source of funds is repayments on its loan
portfolio. For the years ended June 30, 1997, 1996 and 1995, principal
repayments on loans were $33.2 million, $25.0 million and $19.7 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, 1997, 1996 and 1995, the Company received
$69.8 million, $28.7 million and $4.9 million, respectively, in proceeds for the
sale or redemption of mortgage-backed securities and other investments. The
increase in activity in fiscal 1997 represents the purchase and sale of units in
the Company's investment in money market and mutual funds which are viewed by
management as short-term investment alternatives. The principal repayments on
mortgage-backed securities represent a significant source of liquidity for the
Company. For the years ended June 30, 1997, 1996 and 1995, the Company received
$8.9 million, $7.6 million and $4.3 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, 1997, 1996 and 1995, the net increase in deposit accounts (net of
interest credited) was $23.3 million, $29.8 million and 3.6 million,
respectively. Additionally, in the year ended June 30, 1997 the Company
purchased a branch from another financial institution which provided $20.2
million in additional funds. For the year ended June 30, 1997, 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, 1997, 1996 and 1995,
the net proceeds (repayments) from FHLB advances were $10.4 million, $34.1
million and $(4.4) million, respectively. The net repayment of FHLB advances in
fiscal 1995 was due to the receipt of conversion proceeds in June 1995. The
Company also borrowed funds totalling $9.6 million via securities sold under
agreements to repurchase in the year ended June 30, 1997.
In June 1995, the Company received net funds of $20.7 million as the result
of the Association's conversion from mutual 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 have been used to support growth.
At June 30, 1997, the Association exceeded all of its regulatory capital
requirements. The Association's tangible capital level was $25.8 million, or
6.34% of total adjusted assets, which is above the required level of $6.1
million, or 1.50%; core capital of $25.8 million, or 6.34% of total adjusted
assets, which is above the required level of $12.2 million, or 3.00%; and risk-
based capital of $27.0 million, or 14.43% of risk-weighted assets, which is
above the required level of $14.9 million, or 8.0%.
55
<PAGE>
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, 1997, 1996 and 1995, the liquidity
ratios were 9.81%, 9.23% and 7.15%, 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 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.
On July 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock-
Based Compensation, which establishes financial accounting and reporting
standards for stock-based employee compensation plans. This statement
establishes a fair value based method of accounting for stock-based compensation
plans. It encourages, but does not require, entities to adopt that method in
place of the provisions of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, for all arrangements under which
employees receive shares of stock or other equity instruments of the employer or
the employer incurs liabilities to employees in amounts based on the price of
its stock. SFAS No. 123 also applies to transactions in which an entity issues
its equity instruments to acquire goods or services from nonemployees. Those
transactions must be accounted for based on the fair value of the consideration
received or the fair value of the equity instruments issued, whichever is more
reliably measurable.
The Company has elected to continue to apply the accounting provisions of
APB No. 25 to its stock-based compensation awards to employees and discloses 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.
In June 1996, the FASB issued SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, which was
amended by SFAS No. 127,
56
<PAGE>
Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125.
These statements provide accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. SFAS No. 125,
as amended, is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996 or December 31,
1997 for certain transactions.
In February 1997, the FASB issued SFAS No. 128, Earnings Per Share, which
is effective for financial statements issued for periods ending after December
15, 1997. It replaces the presentation of primary earnings per share with the
presentation of basic earnings per share. It also requires the presentation of
diluted earnings per share for entities with complex capital structures.
Diluted earnings per share takes into account the potential dilution that could
occur if securities or other contracts to issue common stock, such as options,
were exercised or converted into common stock. The Company does not believe
that SFAS No. 128 will have a material impact on its financial statements.
In February 1997, the FASB issued SFAS No. 129, Disclosure of Information
About Capital Structure. The statement establishes standards for disclosing
information about an entity's capital structure. The disclosure requirements of
SFAS No. 129 are effective for periods ending after December 15, 1997. The
Company does not believe that the adoption of SFAS No. 129 will have a
significant impact on its financial statements.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income
and SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. SFAS No. 131 establishes standards of reporting by
publicly-held business enterprises and disclosure of information about operating
segments in annual financial statements to a lesser extent, in interim financial
reports issued to shareholders. SFAS No. 130 and 131 are effective for fiscal
years beginning after December 15, 1997. As both SFAS No. 130 and 131 deal with
financial statement disclosure, the Company does not anticipate the adoption of
these new standards will have a material impact on its financial statements.
57
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report................................................................................. 59
Consolidated Statements of Financial Condition as of June 30, 1997 and 1996.................................. 60
Consolidated Statements of Operations for Each of the Three Years in the Period Ended June 30, 1997.......... 62
Consolidated Statements of Stockholders' Equity for Each of the Three Years in the Period
Ended June 30, 1997........................................................................................ 64
Consolidated Statements of Cash Flows for Each of the Three Years in the Period
Ended June 30, 1997........................................................................................ 65
Notes to Consolidated Financial Statements for Each of the Three Years in the Period
Ended June 30, 1997........................................................................................ 68
</TABLE>
58
<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, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended June 30, 1997. 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, 1997 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended June 30, 1997 in
conformity with generally accepted accounting principles.
/S/Deloitte & Touche LLP
Costa Mesa, California
August 29, 1997
59
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF JUNE 30, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash, including short-term bank obligations of $ 18,600 and $4,025
at June 30, 1997 and 1996, respectively $ 22,664 $ 8,884
Investment securities available for sale, amortized cost of $ 12,500 and
$15,000 at June 30, 1997 and 1996, respectively (Note 3) 12,467 14,904
Mortgage-backed securities available for sale, amortized cost of $ 37,323
and $16,863 at June 30, 1997 and 1996, respectively (Notes 3 and 10) 37,164 16,614
Mortgage-backed securities held to maturity, estimated fair value of $38,783
and $27,124 at June 30, 1997 and 1996, respectively (Notes 4 and 10) 39,072 27,701
Loans receivable held for investment, net of allowance for estimated loan
losses of $ 1,263 and $1,058 at June 30, 1997 and 1996, respectively
(Notes 5 and 10) 284,608 255,953
Loans receivable held for sale (Note 5) 230 723
Accrued interest receivable (Note 6) 2,911 2,588
Stock of Federal Home Loan Bank of San Francisco, at cost (Note 10) 3,987 3,747
Real estate acquired through foreclosure, net (Note 7) 1,150 1,489
Premises and equipment, net (Note 8) 3,866 3,015
Prepaid expenses and other assets, net 1,221 437
-------- --------
Total assets $409,340 $336,055
======== ========
</TABLE>
See notes to consolidated financial statements
60
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF JUNE 30, 1997 AND 1996 (CONTINUED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
(DOLLARS IN THOUSANDS)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposit accounts (Note 9) $288,339 $234,039
Federal Home Loan Bank advances (Note 10) 77,907 67,509
Securities sold under agreements to repurchase (Note 10) 9,430 -
Accrued expenses and other liabilities (Note 11) 3,761 2,921
-------- --------
Total liabilities 379,437 304,469
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 (1997 and 1996); 2,342,176 (1997) and 2,591,276 (1996)
shares outstanding 27 27
Additional paid-in capital 20,789 20,684
Retained earnings, substantially restricted 15,201 14,470
Net unrealized loss on securities available for sale, net of taxes (110) (202)
Deferred stock compensation (1,880) (2,153)
Treasury stock, 385,480 (1997) and 136,380 (1996) shares (4,124) (1,240)
-------- --------
Total stockholders' equity 29,903 31,586
-------- --------
Total liabilities and stockholders' equity $409,340 $336,055
======== ========
</TABLE>
See notes to consolidated financial statements
61
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
INTEREST INCOME:
Interest on loans $20,890 $17,798 $15,647
Interest on investment securities 1,133 601 319
Interest on mortgage-backed securities 4,051 2,186 1,378
Other 626 674 511
------- ------- -------
Total interest income 26,700 21,259 17,855
INTEREST EXPENSE:
Interest on deposit accounts (Note 9) 12,195 10,071 8,179
Interest on borrowings 4,943 3,233 2,721
------- ------- -------
Total interest expense 17,138 13,304 10,900
------- ------- -------
NET INTEREST INCOME BEFORE PROVISION FOR
ESTIMATED LOAN LOSSES 9,562 7,955 6,955
PROVISION FOR ESTIMATED LOAN LOSSES (Note 5) 557 575 483
------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR
ESTIMATED LOAN LOSSES 9,005 7,380 6,472
OTHER INCOME (EXPENSE):
Loan servicing and other fees 450 446 445
Secondary market activity, net (42) (56) (75)
Gain (loss) on sale or redemption of investment securities
available for sale, net (Note 3) 148 (12) (78)
Net gain (loss) on real estate acquired through foreclosure (Note 7) 157 (271) (217)
Other income 505 505 463
------- ------- -------
Total other income 1,218 612 538
</TABLE>
See notes to consolidated financial statements
62
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation and other employee expenses $ 4,129 $ 3,590 $3,398
Office occupancy 834 789 864
Equipment 932 748 725
Advertising 137 121 127
FDIC insurance premiums 313 472 457
SAIF special assessment 1,332 - -
Other operating expenses 1,281 1,246 1,134
---------- ---------- ------
Total general and administrative expenses 8,958 6,966 6,705
---------- ---------- ------
EARNINGS BEFORE INCOME TAXES 1,265 1,026 305
INCOME TAXES (Note 11) 534 432 128
---------- ---------- ------
NET EARNINGS $ 731 $ 594 $ 177
========== ========== ======
EARNINGS PER SHARE $0.31 $0.24 N/A
========== ========== ======
WEIGHTED AVERAGE SHARES OUTSTANDING 2,335,254 2,519,090 N/A
========== ========== ======
</TABLE>
See notes to consolidated financial statements
63
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997
- -------------------------------------------------------------------------------
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN RETAINED
PREFERRED STOCK COMMMON STOCK CAPITAL EARNINGS
-------------------- ------------------ -------- --------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C> <C> <C>
BALANCE, July 1, 1994 - $ - - $ - $ - $13,699
Net earnings - - - - - 177
Change in net unrealized loss on securities
available for sale, net - - - - - -
of taxes
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
Net earnings - - - - - 594
Common stock acquired by stock
compensation plan - - - - - -
Amortization of deferred compensation - - - - 18 -
Repurchase of stock (136,380 shares) - - - - - -
Change in net unrealized loss on securities
available for sale, net of taxes - - - - - -
--------- --------- ------ -------- ------- -------
BALANCE, June 30, 1996 - - 2,728 27 20,684 14,470
Net earnings - - - - - 731
Amortization of deferred compensation - - - - 105 -
Repurchase of stock (249,100 shares) - - - - - -
Change in net unrealized loss on securities
available for sale, net of taxes - - - - - -
--------- --------- ------ -------- ------- -------
BALANCE, June 30, 1997 - $ - 2,728 $ 27 $20,789 $15,201
========= ========= ====== ======== ======= =======
<CAPTION>
NET UNREALIZED
LOSS ON SECURITIES DEFERRED TOTAL
AVAILABLE FOR SALE, STOCK TREASURY STOCKHOLDERS'
NET OF TAXES COMPENSATION STOCK EQUITY
------------ ------------ -------- ------
<S> <C> <C> <C> <C>
BALANCE, July 1, 1994 $ (118) $ - $ - $ 13,581
Net earnings - - - 177
Change in net unrealized loss on securities
available for sale, net 83 - - 83
of taxes
Issuance of common stock,net of
underwriting expenses - - - 20,693
Common stock acquired by ESOP - (1,528) - (1,528)
----------- ------------ ------- ---------
BALANCE, June 30, 1995 (35) (1,528) - 33,006
Net earnings - - - 594
Common stock acquired by stock
compensation plan - (844) - (844)
Amortization of 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) - - (167)
----------- ------------ ------- ---------
BALANCE, June 30, 1996 (202) (2,153) (1,240) 31,586
Net earnings - - - 731
Amortization of deferred compensation - 273 - 378
Repurchase of stock (249,100 shares) - - (2,884) (2,884)
Change in net unrealized loss on securities
available for sale, net of taxes 92 - - 92
----------- ------------ ------- ---------
BALANCE, June 30, 1997 $ (110) $ (1,880) $(4,124) $ 29,903
=========== ============ ======= =======
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
64
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 731 $ 594 $ 177
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 430 370 418
Loans originated for sale (5,644) (13,906) (1,382)
Proceeds from sale of loans 5,657 13,152 1,389
Loss (gain) on sale of loans, net (13) 31 (7)
Loss on sale or redemption of investment securities
available for sale, net 13 12 78
Gain on sale of mortgage-backed securities available for
sale, net (161)
Federal Home Loan Bank stock dividend (237) (152) (144)
Decrease (increase) in prepaid expenses and other assets (835) 15 (14)
Amortization of deferred loan fees (74) (80) (87)
Deferred loan origination costs (147) (194) (183)
Increase (decrease) in accrued expenses and other
liabilities 267 (204) (277)
Deferred income taxes 266 (2) 362
Provision for estimated loan losses 557 575 483
Provision for estimated real estate losses 95 204 10
Premium (discount) amortization on securities, net 235 246 157
Increase in accrued interest receivable (323) (534) (67)
Other, net 164 481 (730)
------- -------- -------
Net cash provided by operating activities 981 608 183
</TABLE>
65
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities available for sale $(57,451) $(42,650) $ (1,000)
Proceeds from sale and redemption of investment
securities available for sale 59,936 28,683 4,895
Purchase of mortgage-backed securities available for sale (35,229) (11,914) -
Proceeds from sale of mortgage-backed securities
available for sale 9,866
Proceeds from call of investment securities held to
maturity 3,200
Purchase of mortgage-backed securities held to maturity (15,451) (21,116) -
Principal repayments on mortgage-backed securities 8,935 7,647 4,309
Loans funded, net (30,955) (17,719) (29,738)
Loans purchased, net (33,320) (48,297) -
Principal repayments on loans 33,216 25,029 19,730
Proceeds from sale of real estate 2,935 1,451 143
Purchase of premises and equipment (1,242) (517) (371)
Purchase of FHLB stock (3) (730) -
-------- -------- --------
Net cash used in investing activities (58,763) (76,933) (2,032)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in certificate accounts 21,347 31,704 14,233
Net increase (decrease) in passbook, money market
savings, NOW, and noninterest-bearing accounts 12,794 (1,929) (10,627)
Purchase of deposit accounts 20,159
Proceeds from Federal Home Loan Bank advances 73,800 50,000 31,000
Repayment of Federal Home Loan Bank advances (63,402) (15,938) (35,352)
Proceeds from securities sold under agreements to
repurchase 9,600
Repayment of securities sold under agreements to
repurchase (170)
Purchase of treasury stock (2,884) (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
Other,net 318 - -
-------- -------- --------
Net cash provided by financing activities 71,562 61,822 18,419
-------- -------- --------
</TABLE>
See notes to consolidated statements
66
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
(IN THOUSANDS)
<S> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS $13,780 $(14,503) $16,570
CASH AND CASH EQUIVALENTS,beginning of year 8,884 23,387 6,817
------- -------- -------
CASH AND CASH EQUIVALENTS, end of year $22,664 $ 8,884 $23,387
======= ======== =======
SUPPLEMENTAL CASH FLOW DISCLOSURES -
Cash paid during the year for:
Interest $17,214 $ 12,930 $10,903
Income taxes 188 324 641
NONCASH INVESTING ACTIVITIES DURING THE YEAR:
Real estate acquired through foreclosure $ 2,603 $ 2,885 $ 959
Mortgage-backed securities transferred from held to
maturity to available for sale classification 4,775 -
Loans to facilitate sales of real estate acquired through
foreclosure 641 896
Change in net unrealized loss on securities available for
sale, net 92 167 (83)
Common stock acquired by ESOP - 1,528
</TABLE>
See notes to consolidated financial statements
67
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- -------------------------------------------------------------------------------
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, 1997, the Association operated eight branch offices
located in the San Gabriel Valley.
Principles of Consolidation - The consolidated financial statements include the
accounts of SGV Bancorp, Inc. and its wholly-owned subsidiary, First Federal
Savings and Loan Association of San Gabriel Valley and its wholly-owned
subsidiary, First Covina Service Company, which was substantially inactive
during 1997, 1996 and 1995 (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.
68
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (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 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 present value of the expected
69
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- -------------------------------------------------------------------------------
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.
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.
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.
70
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- -------------------------------------------------------------------------------
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, 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 bases
of certain assets and liabilities for tax and financial statement purposes,
calculated at currently effective tax rates, of future deductible or taxable
amounts attributable to events that have been recognized on a cumulative basis
in the financial statements.
The Company files its tax returns on a fiscal year basis.
Recent Accounting Developments - 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,
71
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- -------------------------------------------------------------------------------
1996. There was no material impact on the Company's financial condition
and results of operations upon adoption of these statements.
On July 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based
Compensation, which establishes financial accounting and reporting standards for
stock-based employee compensation plans. This statement establishes a fair
value based method of accounting for stock-based compensation plans. It
encourages, but does not require, entities to adopt that method in place of the
provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, for all arrangements under which employees receive
shares of stock or other equity instruments of the employer or the employer
incurs liabilities to employees in amounts based on the price of its stock.
SFAS No. 123 also applies to transactions in which an entity issues its equity
instruments to acquire goods or services from nonemployees. Those transactions
must be accounted for based on the fair value of the consideration received or
the fair value of the equity instruments issued, whichever is more reliably
measurable.
The Company has elected to continue to apply the accounting provisions of APB
No. 25 to its stock-based compensation awards to employees and discloses 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 (Note 12).
In June 1996, the FASB issued SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, which was
amended by SFAS No. 127, Deferral of the Effective Date of Certain Provisions of
FASB Statement No. 125. These statements provide accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities. SFAS No. 125, as amended, is effective for transfers and servicing
of financial assets and extinguishments of liabilities occurring after December
31, 1996 or December 31, 1997 for certain transactions.
In February 1997, the FASB issued SFAS No. 128, Earnings Per Share, which is
effective for financial statements issued for periods ending after December 15,
1997. It replaces the presentation of primary earnings per share with the
presentation of basic earnings per share. It also requires the presentation of
diluted earnings per share for entities with complex capital structures.
Diluted earnings per share takes into account the potential dilution that could
occur if securities or other contracts to issue common stock, such as options,
were exercised or converted into common stock. The Company does not believe
that SFAS No. 128 will have a material impact on its financial statements.
In February 1997, the FASB issued SFAS No. 129, Disclosure of Information About
Capital Structure. The statement establishes standards for disclosing
information about an entity's
72
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- -------------------------------------------------------------------------------
capital structure. The disclosure requirements of SFAS No. 129 are effective for
periods ending after December 15, 1997. The Company does not believe that the
adoption of SFAS No. 129 will have a significant impact on its financial
statements.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income and
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. SFAS No. 131 establishes standards of reporting by
publicly-held business enterprises and disclosure of information about operating
segments in annual financial statements to a lesser extent, in interim financial
reports issued to shareholders. SFAS No. 130 and 131 are effective for fiscal
years beginning after December 15, 1997. As both SFAS No. 130 and 131 deal with
financial statement disclosure, the Company does not anticipate the adoption of
these new standards will have a material impact on its financial statements.
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 years ended June 30, 1997 and
1996 are based on weighted average common shares outstanding of 2,335,254 and
2,519,090, respectively. The total issued shares of 2,727,656 have been
adjusted for the weighted average of: unallocated shares under the ESOP of
153,053 and 180,329 at June 30, 1997 and 1996, respectively, the reduction of
outstanding shares purchased for the stock compensation plan of 71,556 and
22,030 at June 30, 1997 and 1996, respectively, the acquisition of treasury
stock of 199,412 and 6,207 at June 30, 1997 and 1996, respectively, and the
common stock equivalent shares of stock options of 31,619 at June 30, 1997.
Earnings per share are not presented for the year ended June 30, 1995 (period
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 1996 and 1995 financial statements
have been reclassified to conform with classifications in 1997.
73
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (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.
Quantitative measures that have been established by regulation to ensure capital
adequacy require the Association to maintain minimum capital amounts and ratios
(set forth in the following table). The Association's primary regulatory
agency, the Office of Thrift Supervision (OTS), requires that the Association
maintain minimum ratios of tangible capital (as defined in the regulations) of
1.5%, core capital (as defined) of 3%, and total risk-based capital (as defined)
of 8%. The Association is also subject to prompt corrective action capital
requirement regulations set forth by the Federal Deposit Insurance Corporation
(FDIC). The FDIC requires the Association to maintain minimum of total and Tier
I capital (as defined in the regulations) to risk-weighted assets (as defined)
and of Tier I capital (as defined) to average assets (as defined). Management
believes, as of June 30, 1997, that the Association meets all capital adequacy
requirements to which it is subject.
As of June 30, 1997 and 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.
74
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- -------------------------------------------------------------------------------
The Association's actual capital amounts and ratios are also presented in the
table.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
----------- ------------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
AS OF JUNE 30, 1997:
Total Capital
(to Risk Weighted Assets) $26,963 14.43% $14,949 8.00% $18,686 10.00%
Core Capital
(to Adjusted Tangible Assets) $25,800 6.34% $12,205 3.00% $20,342 5.00%
Tangible Capital
(to Tangible Assets) $25,800 6.34% $ 6,103 1.50% N/A
Tier I Capital
(to Risk Weighted Assets) $25,800 13.81% N/A $11,211 6.00%
AS OF JUNE 30, 1996:
Total Capital
(to Risk Weighted Assets) $26,438 16.51% $12,810 8.00% $16,013 10.00%
Core Capital
(to Adjusted Tangible Assets) $25,380 7.63% $ 9,984 3.00% $16,640 5.00%
Tangible Capital
(to Tangible Assets) $25,380 7.63% $ 4,992 1.50% N/A
Tier I Capital
(to Risk Weighted Assets) $25,380 15.85% N/A $ 9,608 6.00%
</TABLE>
The OTS issued final regulations which set forth the methodology for calculating
an interest rate risk component that is being incorporated into the OTS
regulatory capital rules. Under the new regulations, only savings institutions
with above normal interest rate risk exposure are required to maintain
additional capital. This additional capital would increase the amount of a
savings institution's otherwise required risk-based capital requirement. The
final rule became effective January 1, 1994 and implementation will not begin
until the Association has been notified by the OTS.
Management believes that, under current regulations, the Association will
continue to meet its minimum capital requirements in the foreseeable future.
However, events beyond the control of
75
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- -------------------------------------------------------------------------------
the Association, such as changing interest rates or a further downturn in the
economy in areas where the Association has most of its loans, could adversely
affect future earnings and, consequently, the ability of the Association to meet
its future minimum capital requirements.
At periodic intervals, both the OTS and the FDIC routinely examine the
Association's financial statements as part of their legally prescribed oversight
of the savings and loan industry. Based on these examinations, the regulators
can direct that the Association's financial statements be adjusted in accordance
with their findings.
The OTS concluded an examination of the Association in July 1997. 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 1997
financial statements. Adjustments, if any, cannot presently be determined.
On September 30, 1996, the President signed into law the Deposit Insurance Funds
Act of 1996 (the Funds Act), which, among other things, imposes a special one-
time assessment on Savings Association Insurance Fund (SAIF) member
institutions, including the Association, to recapitalize the SAIF. As required
by the Funds Act, the FDIC imposed a special assessment of 65.7 basis points on
SAIF-assessable deposits held as of March 31, 1995, payable November 27, 1996.
The special assessment was recognized as an expense in the quarter ended
September 30, 1996 and is tax deductible. The Association took a pre-tax charge
of $1,332,000 as a result of the SAIF special assessment.
The Funds Act also spreads the obligations for payment of the Financing
Corporation (FICO) bonds across all SAIF and Bank Insurance Fund (BIF) members.
Beginning on January 1, 1997, BIF deposits are assessed for FICO payments at a
rate of 20% of the rate assessed on SAIF deposits. Based on current estimates
by the FDIC, BIF deposits will be assessed a FICO payment of 1.3 basis points,
while SAIF deposits will pay an estimated 6.4 basis points on the FICO bonds.
Full pro rata sharing of the FICO payments between BIF and SAIF members will
occur on the earlier of January 1, 2000 or the date the BIF and SAIF are merged.
The Funds Act specifies that the BIF and SAIF will be merged on January 1, 1999
provided no savings associations remain as of that time.
As a result of the Funds Act, the FDIC lowered SAIF assessments to 0 to 27 basis
points effective January 1, 1997, a range comparable to that of BIF members.
However, SAIF members will continue to make the higher FICO payments described
above. Management cannot predict the level of FDIC insurance assessments on an
ongoing basis, whether the savings association will be eliminated or whether the
BIF and SAIF will eventually be merged.
76
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (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>
1997
----------------------------------------------
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 $ 3,000 $ - $ 6 $ 2,994
U.S. Government and federal
agency obligations 9,500 4 31 9,473
------- --- ---- -------
Total investment securities 12,500 4 37 12,467
------- --- ---- -------
FHLMC mortgage-backed securities 21,987 32 111 21,908
FNMA mortgage-backed securities 13,464 60 79 13,445
Other mortgage-backed securities 1,872 - 61 1,811
------- --- ---- -------
Total mortgage-backed securities 37,323 92 251 37,164
------- --- ---- -------
Total $49,823 $96 $288 $49,631
======= === ==== =======
</TABLE>
<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>
77
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- -------------------------------------------------------------------------------
During the year ended June 30, 1997, the Company sold $9.7 million in mortgage-
backed securities which resulted in gains totaling $161,000. Also, the Company
sold $1.5 million in investment securities resulting in losses totaling $13,000
and had $2.0 million in investment securities called during the year at par.
There were no sales of investment securities and mortgage-backed securities
available for sale during the year ended June 30, 1996. Proceeds from the
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.
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.
The weighted average interest rates on investment securities available for sale
were 6.69% and 6.61% at June 30, 1997 and 1996, respectively. The weighted
average interest rates on mortgage-backed securities available for sale were
7.08% and 6.89% at June 30, 1997 and 1996, respectively.
At June 30, 1997, $6.2 million of mortgage-backed securities available for sale
had adjustable interest rates, with the remaining $31.1 million having fixed
interest rates. The weighted average remaining years to maturity of the
mortgage-backed securities available for sale is 10.8 years at June 30, 1997.
At June 30, 1997, all investment securities available for sale (excluding money
market funds and adjustable interest rate mutual funds) are scheduled to mature
in one to five years.
78
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (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>
1997
-------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(IN THOUSANDS)
<S> <C> <C> <C> <C>
FHLMC mortgage-backed securities $ 7,745 $11 $ 41 $ 7,715
FNMA mortgage-backed securities 208 3 - 211
GNMA mortgage-backed securities 29,842 - 267 29,575
Other mortgage-backed securities 1,277 5 - 1,282
------- --- ---- -------
Total mortgage-backed securities $39,072 $19 $308 $38,783
======= === ==== =======
</TABLE>
<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>
Mortgage-backed securities totaling approximately $423,000 were pledged at June
30, 1997 for public funds on deposit. Also, mortgage-backed securities totaling
approximately $19.7 million were pledged at June 30, 1997 as collateral for FHLB
borrowings and $9.7 million of mortgage-backed securities were used as
collateral for securities sold under repurchase agreements.
The Company did not sell any investment securities or mortgage-backed securities
held to maturity during the years ended June 30, 1997, 1996, and 1995.
79
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- -------------------------------------------------------------------------------
The weighted average interest rate on mortgage-backed securities held to
maturity was 7.85% and 7.75% at June 30, 1997 and 1996, respectively. At June
30, 1997, $3.0 million of the Company's mortgage-backed securities held to
maturity had adjustable interest rates with the remaining $36.1 million having
fixed interest rates. 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. The weighted average
remaining years to maturity of the mortgage-backed securities held to maturity
is 25.3 years at June 30, 1997.
5. LOANS RECEIVABLE
A summary of loans receivable at June 30 follows:
<TABLE>
<CAPTION>
1997 1996
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Conventional trust deed loans on real estate:
Single family 1-4 units $250,303 $226,660
Multifamily 27,241 21,690
Commercial loans secured by trust deeds 8,660 9,331
Consumer 533 440
-------- --------
Total 286,737 258,121
Less (plus):
Unamortized yield adjustments 121 (64)
Deferred loan fees 515 451
Allowance for estimated loan losses 1,263 1,058
-------- --------
Total 284,838 256,676
Less - Loans held for sale 230 723
-------- --------
Loans receivable held for investment, net $284,608 $255,953
======== ========
Weighted average interest rate at end of period 7.69% 7.77%
======== ========
</TABLE>
80
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
At June 30, 1997, adjustable rate loans approximated $222.9 million. 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 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>
1997 1996 1995
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year $ 1,058 $ 792 $ 562
Provision for estimated loan losses 557 575 483
Charge-offs (352) (310) (258)
Recoveries - 1 5
------- ------- -----
Balance, end of year $ 1,263 $ 1,058 $ 792
======= ======= =====
</TABLE>
At June 30, 1997, the Company had classified $530,000 of its loans as impaired
with $100,000 in specific reserves as determined in accordance with SFAS No.
114, as amended by SFAS No. 118. At June 30, 1996, the Company had classified
$1.1 million of its loans as impaired with $91,000 in specific reserves. In
addition, the Company has $1.7 million and $821,000 at June 30, 1997 and 1996,
respectively, in impaired loans which were collectively evaluated for impairment
with no specific reserves set aside. The average recorded investment in
impaired loans, inclusive of those evaluated collectively, during the year ended
June 30, 1997 and 1996, was approximately $1.6 million and $2.4 million,
respectively. Interest income on impaired loans of $28,000 and $31,000 was
recognized for cash payments received in the year ended June 30, 1997 and 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, 1997, 1996 and 1995,
contractually due interest of approximately $77,000, $118,000 and $126,000,
respectively, was not recognized in income. At June 30, 1997, 1996 and 1995,
nonaccrual loans approximated $1,699,000, $1,962,000 and $1,922,000,
respectively. At June 30, 1997, the Company had three troubled-debt
restructured loans totaling approximately $771,000.
81
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
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, 1997, 1996 and 1995, the Company was servicing loans for others
amounting to approximately $94,000,000, $98,000,000 and $96,000,000,
respectively.
Under FIRREA, a federally chartered savings and loan association's aggregate
commercial real estate loans may not exceed 400% of its capital as determined
under the capital standards provisions of FIRREA. FIRREA does not require
divestiture of any loan that was lawful when it was originated. At June 30,
1997, the Association estimates that, while complying with this limitation, it
may originate an additional $95,906,000 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 $3,928,000 at June 30, 1997.
Transactions in loans to officers, directors and employees are as follows for
the years ended
June 30:
<TABLE>
<CAPTION>
1997 1996 1995
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year $ 1,010 $ 1,192 $ 1,645
New loans to employees 92 - -
Principal paydowns and payoffs (314) (182) (453)
------- ------- -------
Balance, end of year $ 788 $ 1,010 $ 1,192
======= ======= =======
</TABLE>
82
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
6. ACCRUED INTEREST RECEIVABLE
A summary of accrued interest receivable at June 30 follows:
<TABLE>
<CAPTION>
1997 1996
(IN THOUSANDS)
<S> <C> <C>
Loans receivable $ 2,238 $ 2,148
Mortgage-backed securities 512 333
Investment securities and other 161 107
------- -------
Total $ 2,911 $ 2,588
======= =======
</TABLE>
7. REAL ESTATE ACQUIRED THROUGH FORECLOSURE
A summary of real estate acquired through foreclosure at June 30 follows:
<TABLE>
<CAPTION>
1997 1996
(IN THOUSANDS)
<S> <C> <C>
One- to four-unit properties $ 1,210 $ 1,185
Land - 861
Allowance for estimated real estate losses (60) (557)
------- -------
Total $ 1,150 $ 1,489
======= =======
</TABLE>
Activity in the allowance for estimated real estate losses is as follows for
the years ended
June 30:
<TABLE>
<CAPTION>
1997 1996 1995
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year $ 557 $ 569 $ 838
Provision for estimated real estate losses 95 204 10
Charge-offs (592) (216) (279)
----- ----- -----
Balance, end of year $ 60 $ 557 $ 569
===== ===== =====
</TABLE>
83
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
Net loss on real estate acquired through foreclosure is summarized as follows
for the years ended June 30:
<TABLE>
<CAPTION>
1997 1996 1995
(IN THOUSANDS)
<S> <C> <C> <C>
Net gain (loss) on sales of real estate $ 49 $ 95 $ (81)
Other income (expenses), net 203 (162) (126)
Provision for estimated real estate losses (95) (204) (10)
----- ------ ------
Net gain (loss) on real estate acquired through
foreclosure $ 157 $ (271) $ (217)
===== ====== ======
</TABLE>
8. PREMISES AND EQUIPMENT
A summary of premises and equipment at June 30 follows:
<TABLE>
<CAPTION>
1997 1996
(IN THOUSANDS)
<S> <C> <C>
Land $ 523 $ 523
Office buildings 5,052 4,868
Furniture, fixtures and equipment 3,279 2,839
------- -------
Total 8,854 8,230
Less accumulated depreciation and amortization (4,988) (5,215)
------- -------
Total $ 3,866 $ 3,015
======= =======
</TABLE>
84
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
9. DEPOSIT ACCOUNTS
Deposit accounts are summarized as follows at June 30:
<TABLE>
<CAPTION>
1997 1996
---------------------------- ---------------------------
INTEREST INTEREST
BALANCE RATE* BALANCE RATE*
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Passbook accounts $ 19,161 2.00% $ 17,638 2.00%
Money market savings accounts 19,620 4.01% 7,409 2.51%
NOW accounts 21,292 1.34% 20,270 1.47%
Noninterest-bearing accounts 5,870 - 2,681 -
---------- ---------
Total 65,943 2.21% 47,998 1.74%
Certificates of deposit:**
Less than three months 4,105 4.15% 4,508 4.41%
Three to six months 7,625 4.42% 10,437 4.49%
Six to twelve months 52,577 5.36% 61,021 5.26%
Twelve months and greater 158,089 5.68% 110,075 5.53%
---------- ---------
Total 222,396 5.53% 186,041 5.36%
---------- ---------
Total $ 288,339 4.76% $ 234,039 4.62%
========== =========
</TABLE>
* Based on weighted average stated interest rates.
** At June 30, 1997, included in certificate accounts are 440 accounts totaling
$52,800,000, with balances of $100,000 or more.
Certificate accounts are scheduled to mature as follows at June 30, 1997:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Within one year $ 188,105
One to two years 21,416
Two to three years 5,689
Three to four years 2,895
Four to five years 4,291
----------
Total $ 222,396
==========
</TABLE>
85
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
Interest expense on deposit accounts is summarized as follows for the year ended
June 30:
<TABLE>
<CAPTION>
1997 1996 1995
(IN THOUSANDS)
<S> <C> <C> <C>
Passbook accounts $ 348 $ 370 $ 436
NOW accounts 280 341 303
Money market savings accounts 493 166 232
Certificate accounts 11,074 9,194 7,208
-------- -------- -------
Total $ 12,195 $ 10,071 $ 8,179
======== ======== =======
</TABLE>
10. OTHER BORROWED FUNDS
Advances from the Federal Home Loan Bank (FHLB) are scheduled to mature as
follows at June 30, 1997:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Year ending June 30:
1998 $ 12,000
1999 31,400
2000 21,900
2001 9,000
Thereafter through 2004 3,607
----------
Total $ 77,907
==========
</TABLE>
At June 30, 1997 and 1996, the weighted average interest rate on FHLB advances
was 6.27% and 6.23%, respectively. At June 30, 1997, the advances, all of which
are fixed rate, were collateralized by certain real estate loans with aggregate
unpaid principal balances of approximately $101,289,000 and by certain mortgage-
backed securities with an aggregate remaining principal balance of approximately
$19,705,000 and the Company's investment in the capital stock of the FHLB of San
Francisco.
86
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
The following summarizes activities in advances from the FHLB for the year ended
June 30:
<TABLE>
<CAPTION>
1997 1996 1995
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Average amount outstanding during the period $ 73,513 $ 49,419 $ 39,329
======== ======== ========
Maximum amount outstanding at any month-end
during the period $ 78,172 $ 74,115 $ 42,642
======== ======== ========
Weighted average interest rate during the period 6.25% 6.50% 6.79%
==== ==== ====
</TABLE>
The following summarizes activities in securities sold under agreements to
repurchase as of June 30:
<TABLE>
<CAPTION>
1997 1996 1995
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Average amount outstanding during the period $ 8,729 N/A N/A
======= === ===
Maximum amount outstanding at any month-end
during the period $ 9,600 N/A N/A
======= === ===
Weighted average interest rate during the period 5.93% N/A N/A
==== === ===
</TABLE>
At June 30, 1997, $6 million and $3.4 million of the securities sold under
agreements to repurchase mature on October 30, 1998 and August 21, 1997,
respectively. The market value of the mortgage-backed securities underlying the
agreements was $9.8 million as of June 30, 1997. The Company enters into these
agreements only with primary government securities dealers. The lender
maintains possession of the collateral securities for these agreements.
87
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
11. INCOME TAXES
Income taxes are summarized as follows for the year ended June 30:
<TABLE>
<CAPTION>
1997 1996 1995
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal $ 225 $ 354 $(200)
State 43 80 (34)
----- ----- -----
Total current 268 434 (234)
Deferred:
Federal 173 (22) 289
State 93 20 73
----- ----- -----
Total deferred 266 (2) 362
----- ----- -----
Total $ 534 $ 432 $ 128
===== ===== =====
</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>
1997 1996 1995
<S> <C> <C> <C>
Federal income tax rate 35.0% 35.0% 35.0%
State taxes, net of federal benefit 7.1 8.0 8.0
Other, net 0.1 (0.9) (1.0)
---- ---- ----
Total 42.2% 42.1% 42.0%
==== ==== ====
</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, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
At June 30, 1997 and 1996, 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>
1997 1996
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Federal Home Loan Bank stock dividends $ 792 $ 695
Depreciation 368 308
Loan fees 830 793
Prepaid expenses 79 67
Other - 4
-------- ------
Gross deferred tax liabilities 2,069 1,867
Deferred tax assets:
Bad debt reserve (510) (702)
State taxes (142) (113)
Deferred Compensation (189) -
Capital loss carryforward (20) (40)
Unrealized losses on securities (81) (143)
Amortization of deposit premium (10)
Other (23) (87)
-------- ------
Gross deferred tax assets (975) (1,085)
Valuation allowance - -
-------- ------
Net deferred tax liability $ 1,094 $ 782
======== ======
</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, 1997, 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.
89
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (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 $206,000, $143,000 and
$136,000 for the years ended June 30, 1997, 1996 and 1995, respectively.
Sublease payments were $121,000, $107,000 and $109,000 for the years ended June
30, 1997, 1996 and 1995, respectively. Minimum rental commitments for
noncancelable leases follow at June 30, 1997:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
First year $ 431
Second year 398
Third year 363
Fourth year 168
Fifth year 168
Thereafter 552
-------
Total $ 2,080
=======
</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 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, 1997 and 1996, the Company had loan funding commitments of
approximately $1.4 million and $1.1 million, respectively. At June 30, 1997 and
1996, the majority were fixed rate mortgage loans. Loan funding commitments are
generally for a period of 15 to 45 days.
90
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
The Company uses forward sales contracts to hedge interest rate exposure
generally on secondary mortgage market operations. As of June 30, 1997 the
Company had $250,000 in open forward sales contracts with no material unrecorded
gains/losses. As of June 30, 1996, the Company had $500,000 in open forward
sales contracts.
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 $68,000, $39,000 and $142,000 for the
years ended June 30, 1997, 1996 and 1995, 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 $15,000, $16,000 and $26,000 for the years
ended June 30, 1997, 1996 and 1995, respectively. The accrued pension liability
cost was approximately $177,000 at June 30, 1997.
The Association established for eligible employees an ESOP and related trust
that became effective upon the conversion of the Association from a mutual to a
stock savings and loan association (the Conversion). Full-time employees
employed with the Association as of January 1, 1995 and full-time employees of
the Company or the Association employed after such date, who have been credited
with at least 1,000 hours during a 12-month period and who have attained the age
of 21 will become participants. The ESOP purchased 7% of the common stock
issued by SGV Bancorp, Inc. (see Note 1).
The ESOP borrowed $1,528,000 from the Company in order to purchase the common
stock. The loan will be repaid principally from the Association's contributions
to the ESOP over a period of seven years, and the collateral for the loan will
be the common stock purchased by the ESOP. The interest rate for the loan is 8%.
At June 30, 1997 the outstanding balance of the loan was $1,200,000 and a total
of 40,915 shares of common stock has been allocated to employee accounts.
Shares purchased by the ESOP are pledged as collateral for the loan and will be
held in a suspense account until released for allocation among participants as
the loan is repaid. The pledged shares will be released annually from the
suspense account in an amount proportional to the repayment of the ESOP loan for
each plan year. The released shares will be allocated among
91
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENEDED JUNE 30, 1997 (CONTINUED)
- -------------------------------------------------------------------------------
the accounts of participants on the basis of the participant's compensation for
the year of allocation. Participants generally become 100% vested in their ESOP
account after six years of credited service or if their service was terminated
due to death, early retirement, permanent disability or a change in control.
Prior to the completion of two years of credited service, a participant who
terminates employment for reasons other than death, retirement, disability, or
change of control of the Association or Company will not receive any benefit.
Forfeitures will be reallocated among remaining participating employees, in the
same proportion as contributions. Benefits may be payable upon death,
retirement, disability or separation from service. The contributions to the ESOP
are not fixed, so benefits payable under the ESOP cannot be estimated.
The expense related to the ESOP for the year ended June 30, 1997 was
approximately $303,000. At June 30, 1997, unearned compensation related to the
ESOP approximated $1,109,000 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, 1997 are
$20,000 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, 1997 are $158,000 of deferrals related
to the Deferred Fee Plan.
At the Company's Annual Meeting of Stockholders on January 17, 1996, the
stockholders approved the First Federal Savings and Loan Association of San
Gabriel Valley 1995 Master Stock Compensation Plan (the Stock Compensation
Plan). The Stock Compensation Plan, which
92
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENEDED JUNE 30, 1997 (CONTINUED)
- -------------------------------------------------------------------------------
is a non-qualified plan, was authorized to acquire up to 81,829 shares of the
Company common stock either directly for the Company or through purchases in the
open market to be used for the granting of plan share grants and plan share
allocations. The Association contributed funds to the Stock Compensation Plan to
enable the Stock Compensation Plan trustees to acquire the necessary shares of
the common stock. The 81,829 shares were acquired in several transactions at an
average market price of $9.469 per share. These shares represent deferred
compensation and have been accounted for as a reduction in stockholders' equity
in the accompanying consolidated statement of financial condition. Such shares
are held in trust.
The Stock Compensation Plan allocated 16,366 shares to current and future
directors with the remaining shares allocated to employees. The shares
allocated to directors are granted in equal installments over a five year
period. The shares allocated to employees are granted over a five year period
with a percentage considered as a base grant, and the remaining percentages
granted if the Company achieves certain performance levels. The percentage are
determined by the Company's compensation committee. The expense related to the
Stock Compensation Plan for the year ended June 30, 1997 was approximately
$169,000.
At the Company's Annual Meeting of Stockholders on January 17, 1996, the
stockholders approved the SGV Bancorp, Inc. 1995 Master Stock Option Plan (the
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 Company applies APB No. 25 and related interpretations in accounting for the
Plan. Under APB No. 25, compensation cost for stock options is measured as the
excess, if any, of the fair market value of the Company's stock at the date of
grant over the amount the director or employee must pay to acquire the stock.
Because the plan provides for the issuance of options at a price of no less than
the fair market value at the date of grant, no compensation cost has been
recognized for the stock option components of the Plan.
93
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- -------------------------------------------------------------------------------
Had compensation costs for the stock option components of the Plan been
determined based upon the fair value at the date of grant consistent with SFAS
No. 123, Accounting for Stock Based Compensation, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated as
follow as of June 30 for the years indicated:
<TABLE>
<CAPTION>
1997 1996
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Net income:
As reported $ 731 $ 594
Pro forma 469 463
Primary earnings per common share:
As reported $ 0.31 $ 0.24
Pro forma $ 0.20 $ 0.18
Shares utilized in EPS calculations 2,319,723 2,519,090
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions: dividend
yield of 0% for both years; risk-free interest rate of 6.50% for 1997 and 6.75%
for 1996; expected life of 10 years for both years; and a volatility factor of
18.79% for both years.
Stock options granted, exercised or forfeited were as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
WEIGHTED AVERAGE FAIR VALUE OF
NUMBER OF EXERCISE PRICE OPTION SHARES
OPTION SHARES OF OPTION SHARES GRANTED
<S> <C> <C> <C>
Outstanding July 1, 1995: -
Granted during year 261,851 $ 9.63 $ 9.63
------- ------
Outstanding June 30, 1996 261,851 9.63
Granted during year 8,183 12.88 12.88
Forfeited during year (2,182) 9.63
------- ------
Outstanding June 30, 1997 267,852 $ 9.73
======= ======
</TABLE>
94
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- -------------------------------------------------------------------------------
Financial data pertaining to outstanding stock options as of June 30, 1997 were
as follows:
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED WEIGHTED AVERAGE
AVERAGE AVERAGE NUMBER OF EXERCISE PRICE
NUMBER OF REMAINING EXERCISE PRICE EXERCISABLE OF EXERCISABLE
EXERCISE PRICE OPTION CONTRACUAL LIFE OF OPTION SHARES OPTION SHARES OPTION SHARES
- -------------- ------ --------------- ---------------- ------------- -------------
SHARES
------
<S> <C> <C> <C> <C> <C>
$ 9.63 259,669 8.5 years $ 9.63 51,934 $ 9.63
12.88 8,183 9.6 years 12.88 - -
------- --------- -------- ------ --------
267,852 8.5 years $ 9.73 51,934 $ 9.63
======= ========= ======== ====== ========
</TABLE>
During the year ended June 30, 1995, the Company entered into employment
agreements (Agreements) with its president/chief executive officer and its
executive vice president/chief financial officer. The Agreements provide for
three-year terms for both individuals commencing on June 28, 1995. The
employment agreements provide that, commencing on the first anniversary 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. The employment agreements provide for the payment of severance benefits
upon termination.
95
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (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, 1997 and 1996:
<TABLE>
<CAPTION>
1997
----------------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
(IN THOUSANDS)
<S> <C> <C>
Assets:
Cash, including short-term bank obligations $ 22,664 $ 22,664
Investment securities available for sale 12,467 12,467
Mortgage-backed securities available for sale 37,164 37,164
Mortgage-backed securities held to maturity 39,072 38,783
Loans receivable:
Fixed 63,756 64,499
Variable 221,282 221,282
Federal Home Loan Bank stock 3,987 3,987
Liabilities:
Term deposit accounts 222,396 223,055
Other deposit accounts 65,943 65,942
Borrowings 87,337 87,280
Off-balance sheet unrealized gains (losses) -
Loan funding commitments -
Forward sales contracts 1
</TABLE>
96
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996
------------------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
(IN THOUSANDS)
<S> <C> <C>
Assets:
Cash, including short-term bank obligations $ 8,884 $ 8,884
Investment securities available for sale 14,904 14,904
Mortgage-backed securities available for sale 16,614 16,614
Mortgage-backed securities held to maturity 27,701 27,124
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>
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
$1,699,000 and $1,962,000 at June 30, 1997 and 1996, 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.
97
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENEDED JUNE 30, 1997 (CONTINUED)
- -------------------------------------------------------------------------------
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, 1997 and 1996.
Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate the fair value of borrowings.
For fixed-rate loan funding commitments, the fair value is estimated based on
the difference between current levels of interest rates and the committed rates.
The fair value of forward sales contracts is based on dealer quotes.
The fair value estimates presented herein are based on pertinent information
available to management as of June 30, 1997 and 1996. 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.
98
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (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, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------------------------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 204 $ 828
Investment securities available for sale 1,485 2,943
Mortgage-backed securities available for sale 1,349 1,707
Investment in subsidiary 25,526 24,450
Receivable from subsidiary 1,200 1,418
Other assets 139 240
------- ------
Total assets $29,903 $31,586
======= ======
TOTAL STOCKHOLDERS' EQUITY: $29,903 $31,586
======= =======
</TABLE>
SGV BANCORP, INC. (PARENT COMPANY ONLY)
STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
1997 1996 1995
(IN THOUSANDS)
<S> <C> <C> <C>
Interest income $ 360 $ 420 $
Other expenses (212) (168) -
Income taxes (62) (106) -
----- ----- -----
Earnings before equity in net earnings of subsidiary 86 146 -
Equity in net earnings of subsidiary 645 448 177
----- ----- -----
Net earnings $ 731 $ 594 $ 177
===== ===== =====
</TABLE>
99
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
SGV BANCORP, INC. (PARENT COMPANY ONLY)
SUMMARY STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
1997 1996 1995
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net earnings $ 731 $ 594 $ 177
Adjustments to reconcile net earnings to cash
used in operating activities -
Loss on sale or redemption of investment securities
available for sale 13
Equity in net earnings of subsidiary (645) (448) (177)
Premium amortization on securities 19 16 -
Decrease (increase) in other assets 74 (206) -
------- ------- --------
Net cash provided by (used in) operating activities 192 (44) -
CASH FLOWS FROM INVESTING ACTIVITIES:
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 1,487 4,000 -
Purchase of mortgage-backed securities available for
sale (2,105) -
Principal repayments on mortgage-backed securities 363 358 -
Principal repayment on loan to subsidiary 218 110 -
------- ------- --------
Net cash provided by (used in) investing activities 2,068 (4,637) (13,944)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock - 20,693
Purchase of treasury stock (2,884) (1,240) -
------- ------- --------
Net cash (used in) provided by financing activities (2,884) (1,240) 20,693
Net (decrease) increase in cash and cash equivalents (624) (5,921) 6,749
Cash and cash equivalents, beginning of year 828 6,749 -
------- ------- --------
Cash and cash equivalents, end of year $ 204 $ 828 $ 6,749
======= ======= ========
</TABLE>
100
<PAGE>
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOE EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
NONCASH INVESTING ACTIVITIES DURING
THE YEAR:
Change in net unrealized gain/loss on securities
available for sale, net of taxes $ (39) $ 80 $ -
</TABLE>
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
1997
<S> <C> <C> <C> <C>
Interest income $6,108 $6,441 $6,865 $7,286
Interest expense 3,863 4,120 4,431 4,724
Provision for estimated loan losses 188 105 194 70
Net earnings (loss) (464) 416 285 494
Earnings per share (loss) (.20) .18 .13 .21
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
</TABLE>
101
<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 1997
Annual Meeting of Stockholders (the "1997 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 1997 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
Incorporated herein by this reference is the information set forth in the
sections entitled "Security Ownership of Certain Beneficial Owners" and
"Information with Respect to Nominees, Continuing Directors and Executive
Officers" contained in the 1997 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" contained in the
1997 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
(a)(1) Financial Statements
Description
-----------
Independent Auditors' Report
Consolidated Statements of Financial Condition as of June 30, 1997 and
1996
Consolidated Statements of Operations for Each of the Three Years in the
Period Ended June 30, 1997
Consolidated Statements of Stockholders' Equity for Each of the Three
Years in the Period Ended June 30, 1997
Consolidated Statements of Cash Flows for Each of the Three Years in the
Period Ended June 30, 1997
Notes to Consolidated Financial Statements for Each of the Three Years
in the Period Ended June 30, 1997
102
<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 of Control Agreement between First Federal Savings
and Loan Association of San Gabriel Valley and certain
executive officers*
10.4 Form of Change of 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 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
None
__________________________
* Incorporated herein by reference from the S-1, as amended, filed on March
6, 1995, Exhibits to the Registration Statement on Form Registration
No. 33-90018.
** Incorporated herein by reference from the 1995 Annual Meeting of
Stockholders, filed on Definitive Proxy material for the Registrant's
December 7, 1995.
103
<PAGE>
CONFORMED SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
SGV BANCORP, INC.
By: /s/ Barrett G. Andersen
-----------------------
Barrett G. Andersen
DATED: September 26, 1997 President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dated indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Barrett G. Andersen President, Chief Executive Officer September 26, 1997
- -------------------------
Barrett G. Andersen and Director
(principal executive officer)
/s/ Ronald A. Ott Executive Vice President, Chief September 26, 1997
- -------------------------
Ronald A. Ott Financial Officer and Treasurer
(principal accounting officer)
/s/ Benjamin S. Wong Chairman of the Board September 26, 1997
- -------------------------
Benjamin S. Wong of Directors
/s/ Royce A. Stutzman Director September 26, 1997
- -------------------------
Royce A. Stutzman
/s/ Irven G. Reynolds Director September 26, 1997
- -------------------------
Irven G. Reynolds
/s/ John D. Randall Director September 26, 1997
- -------------------------
John D. Randall
/s/ Thomas A. Patronite Director September 26, 1997
- -------------------------
Thomas A. Patronite
</TABLE>
104
<PAGE>
CORPORATE INFORMATION
<TABLE>
<S> <C> <C>
EXECUTIVE OFFICES SPECIAL COUNSEL TRANSFER AGENT AND REGISTRAR
SGV Bancorp, Inc. Muldoon, Murphy & Faucette Chase Mellon
225 North Barranca Street 400 South Hope Street
West Covina, CA 91791 4th Floor
Los Angeles, CA 90071
CERTIFIED PUBLIC ACCOUNTANTS
Deloitte & Touche, LLP
FINANCIAL INFORMATION ANNUAL MEETING
For Information about SGV The Annual Meeting of
Bancorp, Inc. and its Stockholders will be held at 2:00 p.m. on
subsidiaries, contact: MARKET INFORMATION November 20, 1997, at the South
Ronald A. Ott Hill Country Club
225 North Barranca Street Symbol: SGVB 2655 S. Citrus Street
West Covina, CA 91791 Quoted: NASDAQ-NMS West Covina, CA 91791
(626)859-4210
BRANCH LOCATIONS
Corporate Office
225 North Barranca Street
West Covina, CA 91791
Covina Hacienda Heights La Verne
144 North Second Avenue 2233 South Hacienda Boulevard 2111 Bonita Avenue
Covina, CA 91723 Hacienda Heights, CA 91745 La Verne, CA 91750
City of Industry Arcadia North La Verne
220 North Hacienda Boulevard One East Foothill Boulevard 1413 Foothill Boulevard
City of Industry, CA 91744 Arcadia, CA 91006 La Verne, CA 91750
Duarte
1475 East Huntington Drive
Duarte, CA 91010
</TABLE>
105
<PAGE>
SGV BANCORP, INC.
<TABLE>
<S> <C> <C>
DIRECTORS
Benjamin S. Wong, Ph.D. Barrett Andersen Irven G. Reynolds
General Manager President Owner
The Great Wall Restaurant Chief Executive Officer Reynolds Buick/GMC Trucks
Royce A. Stutzman, CPA John D. Randall, Ed.D. Thomas A. Patronite
Managing Partner Educational Consultant President
Vicente, Lloyd, & Stutzman Azusa Engineering, Inc.
CPAs
OFFICERS
Barrett Andersen Ronald A. Ott Edie J. Beachboard
President Executive Vice President Corporate Secretary
Chief Executive Officer Chief Financial Officer Vice President
Human Resources
</TABLE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION
OF SAN GABRIEL VALLEY
<TABLE>
<S> <C> <C>
Barrett Andersen Ronald A. Ott Jeanne R. Thompson
President Executive Vice President Senior Vice President
Chief Executive Officer Chief Financial Officer Retail Banking
Michael A. Quigley Dale J. Schiering Edie J. Beachboard
Senior Vice President Senior Vice President Corporate Secretary
Retail Banking, Marketing Chief Lending Officer Vice President
Administrative Services Human Resources
Douglas E. Nigbor Raymond A. Spirko Jeffrey E. Foreman
Vice President Vice President Vice President
Marketing and Corporate Asset/Liability Management Director of Internal Audit
Communications Information Systems
</TABLE>
106
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 4,064,000
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 18,600,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 49,631,000
<INVESTMENTS-CARRYING> 39,072,000
<INVESTMENTS-MARKET> 38,783,000
<LOANS> 285,871,000
<ALLOWANCE> 1,263,000
<TOTAL-ASSETS> 409,340,000
<DEPOSITS> 288,339,000
<SHORT-TERM> 9,430,000
<LIABILITIES-OTHER> 3,761,000
<LONG-TERM> 77,907,000
0
0
<COMMON> 27,000
<OTHER-SE> 29,876,000
<TOTAL-LIABILITIES-AND-EQUITY> 409,340,000
<INTEREST-LOAN> 20,890,000
<INTEREST-INVEST> 5,184,000
<INTEREST-OTHER> 626,000
<INTEREST-TOTAL> 26,700,000
<INTEREST-DEPOSIT> 12,195,000
<INTEREST-EXPENSE> 17,138,000
<INTEREST-INCOME-NET> 9,562,000
<LOAN-LOSSES> 557,000
<SECURITIES-GAINS> 148,000
<EXPENSE-OTHER> 7,888,000
<INCOME-PRETAX> 1,265,000
<INCOME-PRE-EXTRAORDINARY> 1,265,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 731,000
<EPS-PRIMARY> 0.31
<EPS-DILUTED> 0.31
<YIELD-ACTUAL> 7.39
<LOANS-NON> 1,699,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 771,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,058,000
<CHARGE-OFFS> 352,000
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,263,000
<ALLOWANCE-DOMESTIC> 1,263,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
