<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________to___________________________
Commission File Number 0-25664
SGV BANCORP, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 95-4524789
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or (I. R. S. Employer
organization) Identification No.)
225 NORTH BARRANCA STREET, WEST COVINA, CALIFORNIA 91791
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(626) 859-4200
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
require to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. X Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 2,176,323 shares of common
stock, par value $0.01 per share, were outstanding as of May 12, 1999.
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SGV BANCORP, INC.
FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION PAGE
----
Item 1 Consolidated Statements of Financial Condition:
March 31, 1999 (unaudited) and June 30, 1998....................1
Consolidated Statements of Operations (unaudited):
For the Nine Months Ended March 31, 1999 and 1998 and for the
Three Months Ended March 31, 1999 and 1998 .....................2
Consolidated Statements of Cash Flows (unaudited):
For the Nine Months Ended March 31, 1999 and 1998...............3
Notes to Consolidated Financial Statements......................5
Item 2 Management's Discussion and Analysis of
Results of Operations and Financial Condition...................8
Item 3 Quantitative and Qualitative Disclosure Regarding Market Risk...20
PART II OTHER INFORMATION
Item 1 Legal Proceedings...............................................21
Item 2 Changes in Securities...........................................21
Item 3 Defaults Upon Senior Securities.................................21
Item 4 Submission of Matters to a Vote of Security Holders.............21
Item 5 Other Information...............................................21
Item 6 Exhibits and Reports on Form 8-K................................21
SIGNATURES..................................................................22
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<TABLE>
<CAPTION>
SGV BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
- ---------------------------------------------------------------------------------------------------------
March 31, June 30,
1999 1998
--------------- -----------
(Unaudited)
<S> <C> <C>
ASSETS:
Cash and cash equivalents, including short-term bank obligations of
$16,475 at March 31, 1999 and $16,202 at June 30, 1998 $ 21,288 $ 20,008
Investment securities available for sale, amortized cost of $16,668
at March 31, 1999 and $19,241 at June 30, 1998 16,571 19,221
Mortgage-backed securities available for sale, amortized cost of
$22,883 at March 31, 1999 and $29,386 at June 30, 1998 22,814 29,383
Mortgage-backed securities held to maturity, estimated fair value of
$35,661 at March 31, 1999 and $30,089 at June 30, 1998 35,711 29,936
Loans receivable held for sale 1,382 391
Loans receivable held for investment, net of allowance for estimated
loan losses of $1,732 at March 31, 1999 and $1,425 at June 30, 1998 350,231 295,739
Accrued interest receivable 2,975 2,774
Stock of Federal Home Loan Bank of San Francisco, at cost 5,338 4,234
Real estate acquired through foreclosure, net 1,592 1,902
Premises and equipment, net 3,247 3,537
Prepaid expenses and other assets, net 3,351 1,221
------------ -----------
Total assets $ 464,500 $ 408,346
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposit accounts $ 323,928 $ 295,281
Federal Home Loan Bank advances 103,946 70,543
Securities sold under agreements to repurchase 6,000
Accrued expenses and other liabilities 4,634 4,289
------------ -----------
Total liabilities 432,508 376,113
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 2,000,000 shares authorized; none issued
Common stock, $.01 par value; 10,000,000 shares authorized;
2,727,656 issued; 2,176,323 shares outstanding at March 31, 1999 and
2,348,068 shares outstanding at June 30, 1998 27 27
Additional paid-in capital 21,259 21,147
Retained earnings, substantially restricted 18,579 16,688
Accumulated other comprehensive income (97) (13)
Deferred stock compensation (1,168) (1,555)
Treasury stock, 551,333 shares at March 31,1999 and
379,588 shares at June 30, 1998 (6,608) (4,061)
------------ -----------
Total stockholders' equity 31,992 32,233
------------ -----------
Total liabilities and stockholders' equity $ 464,500 $ 408,346
============ ===========
</TABLE>
1
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<TABLE>
<CAPTION>
SGV BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)(UNAUDITED)
- ----------------------------------------------------------------------------------------------------
For the Three Months For the Nine Months
Ended March 31, Ended March 31,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest on loans $ 6,707 $ 6,158 $19,363 $17,616
Interest on investment securities 403 241 1,051 817
Interest on mortgage-backed securities 888 904 2,892 3,157
Other 97 131 452 627
-------- -------- -------- --------
Total interest income 8,095 7,434 23,758 22,217
-------- -------- -------- --------
INTEREST EXPENSE:
Interest on deposit accounts 3,367 3,323 10,206 10,356
Interest on borrowings 1,511 1,210 4,379 3,834
-------- -------- -------- --------
Total interest expense 4,878 4,533 14,585 14,190
-------- -------- -------- --------
Net interest income before provision
for estimated loan losses 3,217 2,901 9,173 8,027
PROVISION FOR ESTIMATED LOAN LOSSES 280 115 759 458
-------- -------- -------- --------
Net interest income after provision for
estimated loan losses 2,937 2,786 8,414 7,569
OTHER INCOME (EXPENSE):
Loan servicing and other fees 132 138 428 401
Deposit account fees 143 125 431 389
Secondary marketing activity, net 28 (1) 89 8
Gain on sale or redemption of securities
available for sale, net 28 2 35 39
Other income 139 83 393 164
Net gain (loss) on real estate acquired through
foreclosure 28 (70) 163 (133)
-------- -------- -------- --------
Total other income 498 277 1,539 868
-------- -------- -------- --------
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation and other employee expenses 1,299 1,228 3,777 3,610
Office occupancy 244 260 779 801
Equipment 52 75 161 197
Data processing 234 221 700 628
Advertising 40 42 108 120
FDIC insurance premiums 45 46 132 135
Other operating expenses 349 344 1,101 1,120
-------- -------- -------- --------
Total general and administrative expenses 2,263 2,216 6,758 6,611
-------- -------- -------- --------
EARNINGS BEFORE INCOME TAXES 1,172 847 3,195 1,826
INCOME TAXES 471 356 1,304 770
-------- -------- -------- --------
NET EARNINGS $ 701 $ 491 $ 1,891 $ 1,056
======== ======== ======== ========
EARNINGS PER SHARE - Basic $ 0.32 $ 0.21 $ 0.85 $ 0.45
======== ======== ======== ========
EARNINGS PER SHARE - Diluted $ 0.31 $ 0.20 $ 0.82 $ 0.43
======== ======== ======== ========
</TABLE>
2
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<TABLE>
<CAPTION>
SGV BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------
FOR THE NINE MONTHS
ENDED MARCH 31,
-------------------------------
1999 1998
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 1,891 $ 1,056
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 503 509
Loans originated for sale (16,402) (13,791)
Proceeds from sale of loans 15,619 13,142
Gain on sale of loans, net (113) (33)
Gain on sale of investments available for sale, net (38) (6)
Gain on sale of mortgage-backed securities available for sale, net (2) (33)
Federal Home Loan Bank stock dividend (198) (187)
Increase in prepaid expenses and other assets (2,206) (108)
Amortization of deferred loan costs, net (224) (88)
Deferred loan origination costs (343) (218)
Increase in accrued expenses and other liabilities 406 358
Provision for estimated loan losses 759 458
(Recapture of) provision for estimated real estate losses (52) 111
Premium amortization, net 622 294
(Increase) decrease in accrued interest receivable (201) 124
Other, net 222 19
------------ -------------
Net cash provided by operating activities 243 1,607
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities available for sale (83,273) (25,748)
Proceeds from sale and redemption of investment securities
available for sale 85,892 22,506
Purchase of mortgage-backed securities available for sale (10,153) (5,080)
Proceeds from sale of mortgage-backed securities available for sale 6,931 16,566
Purchase of mortgage-backed securities held to maturity (15,060)
Principal repayments on mortgage-backed securities 18,667 10,240
Loans funded, net (58,291) (23,048)
Loans purchased, net (70,963) (40,623)
Principal repayments on loans 71,714 37,979
Proceeds from sale of real estate 2,687 1,448
Purchase of premises and equipment (137) (220)
Purchase of Federal Home Loan Bank Stock (906)
Other, net (63) (99)
------------ -------------
Net cash used in investing activities (52,955) (6,079)
</TABLE>
3
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<TABLE>
<CAPTION>
SGV BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) (UNAUDITED)(CONTINUED)
- ----------------------------------------------------------------------------------------------------
FOR THE NINE MONTHS
ENDED MARCH 31,
-------------------------------
1999 1998
------------ -------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in certificate accounts $ (15,676) $ (20,068)
Net increase in passbook, money market savings,
NOW and non-interest-bearing accounts 44,323 21,851
Proceeds from Federal Home Loan Bank advances 59,500
Repayment of Federal Home Loan Bank advances (26,097) (8,777)
Proceeds from securities sold under agreements to repurchase 4,300
Repayment of securities sold under agreements to repurchase (10,300)
Purchase of treasury stock (2,547) (3,430)
Other, net 489 593
------------ -------------
Net cash provided by (used in) financing activities 53,992 (9,831)
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,280 (14,303)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 20,008 22,664
------------ -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 21,288 $ 8,361
============ =============
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid during the period for:
Interest $ 14,570 $ 14,218
Income taxes, net 1,510 536
NONCASH INVESTING ACTIVITIES DURING THE PERIOD:
Real estate acquired through foreclosure 2,241 2,135
Change in net unrealized loss on investment securities and
mortgage-backed securities available for sale, net of taxes (85) 82
Loans to facilitate sales of real estate acquired through foreclosure 152
</TABLE>
4
<PAGE> 7
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
1. Basis of Presentation:
---------------------
The accompanying unaudited consolidated financial statements include the
accounts of SGV Bancorp, Inc. (the "Company") and its wholly-owned subsidiary
First Federal Savings and Loan Association of San Gabriel Valley (the
"Association") and its wholly-owned subsidiary, First Covina Service Company.
The interim consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management all necessary adjustments, consisting only of
normal recurring adjustments necessary for a fair presentation have been
included. The results of operations for the three and nine-month periods ended
March 31, 1999 are not necessarily indicative of the results that may be
expected for the entire fiscal year.
These unaudited consolidated financial statements and the information
under the heading "Management's Discussion and Analysis of Results of Operations
and Financial Condition" should be read in conjunction with the audited
consolidated financial statements and notes thereto of SGV Bancorp, Inc. for the
year ended June 30, 1998 included in the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1998.
5
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<TABLE>
<CAPTION>
2. Earnings Per Share
------------------
Earnings per share reconciliation is as follows:
WEIGHTED
AVERAGE
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
-------------- -------------- -----------
THREE MONTHS ENDED MARCH 31, 1999
---------------------------------------------
<S> <C> <C> <C>
BASIC EPS
Income available to common stockholders $ 701,000 2,179,000 $ 0.32
EFFECT OF DILUTIVE SECURITIES
Incremental shares from assumed exercise
of outstanding options 56,000 (0.01)
-------------- -------------- -----------
DILUTED EPS
Income available to common stockholders $ 701,000 2,235,000 $ 0.31
============== ============== ===========
NINE MONTHS ENDED MARCH 31, 1999
---------------------------------------------
BASIC EPS
Income available to common stockholders $1,891,000 2,231,000 $ 0.85
EFFECT OF DILUTIVE SECURITIES
Incremental shares from assumed exercise
of outstanding options 74,000 (0.03)
-------------- -------------- -----------
DILUTED EPS
Income available to common stockholders $1,891,000 2,305,000 $ 0.82
============== ============== ===========
THREE MONTHS ENDED MARCH 31, 1998
---------------------------------------------
BASIC EPS
Income available to common stockholders 491,000 2,345,000 $ 0.21
EFFECT OF DILUTIVE SECURITIES
Incremental shares from assumed exercise
of outstanding options 121,000 (0.01)
-------------- -------------- -----------
DILUTED EPS
Income available to common stockholders $ 491,000 2,466,000 $ 0.20
============== ============== ===========
NINE MONTHS ENDED MARCH 31, 1998
---------------------------------------------
BASIC EPS
Income available to common stockholders $1,056,000 2,344,000 $ 0.45
EFFECT OF DILUTIVE SECURITIES
Incremental shares from assumed exercise
of outstanding options 122,000 (0.02)
-------------- -------------- -----------
DILUTED EPS
Income available to common stockholders $1,056,000 2,466,000 $ 0.43
============== ============== ===========
</TABLE>
6
<PAGE> 9
3. Comprehensive Income
--------------------
The Company adopted Statement of Financial Accounting Standards No. 130,
REPORTING COMPREHENSIVE INCOME, effective July 1, 1998. The standard requires
that comprehensive income and its components be disclosed in the financial
statements. The Company's comprehensive income includes all items which comprise
net income plus the unrealized holding losses on available-for-sale securities.
For the three months and nine months ended March 1999 and 1998, the Company's
comprehensive income was as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
---------------------------------------------
March 31, 1999 March 31, 1998
------------------- --------------------
(Dollars in thousands)
<S> <C> <C>
Net income $ 701 $ 491
Other comprehensive income (loss) (16) (5)
----------- -----------
Total comprehensive income $ 685 $ 486
=========== ===========
FOR THE NINE MONTHS ENDED
---------------------------------------------
March 31, 1999 March 31, 1998
------------------- --------------------
(Dollars in thousands)
Net income $ 1,891 $ 1,056
Other comprehensive income (loss) (84) 84
----------- -----------
Total comprehensive income $ 1,807 $ 1,140
=========== ===========
</TABLE>
4. Accounting Principles
---------------------
SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES, was issued in June 1998 and establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. SFAS No. 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. Earlier application is encouraged, but it
is permitted only as of the beginning of any fiscal quarter that begins after
June 1998. The adoption of the provisions of SFAS No. 133 is not expected to
have a material impact on the results of operations or the financial position of
the Company.
5. Use of Estimates in the Preparation of Financial Statements
-----------------------------------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
7
<PAGE> 10
Item 2. Management's Discussion and Analysis of Results of Operations and
-----------------------------------------------------------------
Financial Condition
-------------------
GENERAL
- -------
The principal business of the Company is attracting retail deposits from
the general public and investing those deposits, together with funds generated
from operations and borrowings, primarily in one- to four-family residential
mortgage loans. To a lesser extent, the Company engages in secondary marketing
activities and invests in multi-family, commercial real estate, construction,
land and consumer loans. Loan sales come from loans held in the Company's
portfolio designated as being held for sale or originated during the period and
being so designated. The Company retains virtually all the servicing rights of
loans sold. The Company's revenues are derived principally from interest on its
mortgage loans, and to a lesser extent, interest and dividends on its investment
and mortgage-backed securities and income from loan servicing. The Company's
primary sources of funds are deposits, principal and interest payments on loans,
advances from the FHLB, securities sold under agreements to repurchase and, to a
lesser extent, proceeds from the sale of loans.
RESULTS OF OPERATIONS
- ---------------------
The Company posted net earnings of $701,000 for the three months ended
March 31, 1999 compared to net earnings of $491,000 for the three months ended
March 31, 1998. For the nine months ended March 31, 1999, the Company's net
earnings were $1.9 million, as compared to net earnings of $1.1 million for the
nine months ended March 31, 1998. For the three months ended March 31, 1999, the
net earnings were $0.32 per share - basic, compared to $0.21 per share - basic
for the three months ended March 31, 1998. For the nine months ended March 31,
1999, the net earnings were $0.85 per share - basic, compared to net earnings of
$0.45 per share - basic for the nine months ended March 31, 1998. A discussion
of the specific components of net earnings per share is set forth in the Notes
to Consolidated Financial Statements.
Net Interest Income
- -------------------
Net interest income before the provision for estimated loan losses was
$3.2 million for the three months ended March 31, 1999 compared to $2.9 million
for the three months ended March 31, 1998. For the nine months ended March 31,
1999, net interest income was $9.2 million compared to $8.0 million for the nine
months ended March 31, 1998.
Interest Income
- ---------------
Total interest income for the three months ended March 31, 1999 was $8.1
million, an increase of $700,000 from the comparable period a year ago. The
increase in interest income was primarily due to the $55.5 million increase in
the average balance of interest-earning assets to $447.0 million for the three
months ended March 31, 1999 from $391.5 million for the three months ended March
31, 1998. This increase was partially offset by the 36 basis point decrease in
the average yield on interest-earning assets to 7.24% for the three months ended
March 31, 1999 as compared to 7.60% for the comparable period a year ago. The
decrease in the average yield
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<PAGE> 11
was primarily due to a decrease in the indices which the Company's adjustable
rate mortgage loans are tied to, replacing loans paid off due to the higher
level of prepayments with those of lower rates and faster amortization of
premiums on mortgage-backed securities due to increased prepayment speeds.
Specifically, in the case of the Eleventh District Cost of Funds Index (COFI),
this index has fallen approximately 40 basis points over the last 12 months.
This decline affected approximately 50% of the entire mortgage loan portfolio
which is indexed to COFI. Interest income on loans increased to $6.7 million for
the three months ended March 31, 1999 from $6.2 million for the three months
ended March 31, 1998 primarily due to the increase in the average balance of
loans receivable outstanding to $351.4 million for the three months ended March
31, 1999 from $312.7 million for the three months ended March 31, 1998. The
increase in interest on loans was partially offset by the decrease in the yield
on loans to 7.63% for the three months ended March 31, 1999 from 7.88% for the
three months ended March 31, 1998 due to the reasons described above.
The interest income on mortgage-backed securities decreased slightly to
$888,000 for the three months ended March 31, 1999 compared to $904,000 for the
three months ended March 31, 1998. The slight decrease was the result of a 65
basis point decline in the average yield to 5.97% partially offset by the $4.9
million increase in the average balance of mortgage-backed securities to $59.5
million. This decline in yield on the mortgage-backed securities portfolio was
primarily due to the faster amortization of premiums on purchased securities
resulting from increased prepayments as a result of the lower interest rate
environment. The interest income on investment securities and other investments
increased by $128,000 to $500,000 for the three months ended March 31, 1999 due
primarily to the $11.9 million increase in the average balance of investment
securities and other investments to $36.1 million. The increase in income from
higher average balances was partially offset by the decline in the average yield
to 5.55% for the three months ended March 31, 1999 from 6.17% for the same
period a year ago.
Total interest income for the nine months ended March 31, 1999 was $23.8
million, an increase of $1.5 million from the comparable period a year ago. The
increase in interest income was primarily due to the $35.3 million increase in
the average balance of interest-earning assets to $429.9 million for the nine
months ended March 31, 1999 from $394.6 million for the nine months ended March
31, 1998. The interest income on loans increased to $19.4 million for the nine
months ended March 31, 1999 from $17.6 million for the nine months ended March
31, 1998. The increase in interest on loans receivable was due to the increase
in the average balance of loans receivable outstanding to $334.4 million for the
nine months ended March 31, 1999 from $302.5 million for the nine months ended
March 31, 1998, partially offset by the decrease in the yield on loans to 7.72%
for the nine months ended March 31, 1999 from 7.77% for the nine months ended
March 31, 1998. The interest income on mortgage-backed securities decreased to
$2.9 million for the nine months ended March 31, 1999 compared to $3.2 million
for the nine months ended March 31, 1998 primarily as a result of the decline in
the average yield to 6.21% for the current period versus 6.82% for the same
period a year ago. This decline was primarily due to the lower interest rate
environment resulting in an increase in prepayment speeds and faster
amortization of the related premiums. The interest income on investment
securities and other securities increased slightly to $1.5 million for the nine
months ended March 31, 1999 as compared to $1.4 million for the same period a
year ago. The increase in investment securities and other income was due to the
increase in the average balance to $33.4 million for the nine months ended March
31, 1999 versus $30.4 million for the same period a year ago. Partially offset
9
<PAGE> 12
by the decrease in the average yield to 6.01% for the current period versus
6.34% for the same period a year ago due to the lower interest rate environment.
The total yield on total interest-earning assets decreased to 7.37% for the nine
months ended March 31, 1999 as compared to 7.51% for the nine months ended March
31, 1998.
Interest Expense
- ----------------
Total interest expense for the three months ended March 31, 1999 was $4.9
million, an increase of $345,000 from $4.5 million for the three months ended
March 31, 1998. The increase in interest expense was primarily due to the
increase in the average balance of interest-bearing liabilities to $415.7
million for the three months ended March 31, 1999 from $360.8 million for the
three months ended March 31, 1998. This increase was partially offset by the 34
basis point decline in the average cost of interest-bearing liabilities to 4.69%
for the three months ended March 31, 1999 compared to 5.03% for the three months
ended March 31, 1998. Interest expense on interest-bearing savings accounts
increased slightly to $3.4 million for the three months ended March 31, 1999
from $3.3 million for the same period a year ago. This increase in interest
expense on interest-bearing savings accounts was due to the $24.3 million
increase in average savings accounts to $307.9 million for the current period
versus $283.6 million for the same period a year ago offset by the 32 basis
point decrease in the average cost of funds to 4.37% for the three months ended
March 31, 1999 versus 4.69% for the same period a year ago. The decline in the
average cost of funds on savings accounts was due to the shift in deposit mix to
a higher concentration of core savings accounts (comprised of money market,
checking and savings accounts) and to the lower interest rate environment. The
average balance of core savings accounts increased by $45.6 million to $120.7
million for the three months ended March 31, 1999 from $75.1 million for the
same period a year ago. Conversely, the Company's dependence on certificates of
deposit declined as the average balance of certificates of deposit decreased by
$21.3 million to $187.2 million for the current period versus $208.5 million for
the same period a year ago. The interest expense on borrowings increased to $1.5
million for the three months ended March 31, 1999 from $1.2 million for the
three months ended March 31, 1998. The increase was primarily due to the
increase in the average balance of borrowings to $107.8 million for the current
period versus $77.2 million for the same period a year ago, partially offset by
the decline in the average cost of borrowings to 5.61% for the current period
versus 6.27% for the same period a year ago. The decline in the average cost of
borrowings was due to the addition of new borrowings at substantially lower
rates.
Total interest expense increased to $14.6 million for the nine months
ended March 31, 1999 from $14.2 million for the nine months ended March 31,
1998. The increase was due to the increase in the average balance of
interest-bearing liabilities to $397.1 million for the nine months ended March
31, 1999 as compared to $365.4 million for the nine months ended March 31, 1998,
partially offset by the decrease in the average cost of interest-bearing
liabilities to 4.90% for the nine months ended March 31, 1999 as compared to
5.18% for the same period a year ago. Interest expense on savings accounts
decreased slightly to $10.2 million for the nine months ended March 31, 1999
from $10.4 million for the same period a year ago. The decrease in interest
expense was due to the decline in the average cost of savings accounts to 4.58%
for the current period from 4.85% for the same period a year ago, partially
offset by the increase in the average balance of savings accounts to $297.0
million for the current period from $284.6 million for the same period a year
ago. As stated above, the decline in the average cost of funds was due
10
<PAGE> 13
to the lower interest environment and the change in composition of the savings
portfolio to a higher concentration of core savings accounts. The interest
expense on borrowings increased to $4.4 million for the nine months ended March
31, 1999 from $3.8 million for the nine months ended March 31, 1998. The
increase in interest expense on borrowings was due to the increase in the
average balance of borrowings to $100.1 million for the current period from
$80.8 million for the same period a year ago, partially offset by the decrease
in the average cost of borrowings to 5.83% for the current period versus 6.33%
for the same period a year ago.
Analysis of Net Interest Income
- -------------------------------
The following table sets forth average interest rates on the Company's
interest-earning assets and interest-bearing liabilities for the three month and
nine month periods ended March 31, 1999 and March 31, 1998 (dollars are in
thousands and average balances are primarily based on month-end amounts except
in certain situations where a daily average is necessary to properly reflect
average balances):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
MARCH 31, MARCH 31,
1999 1998 1999 1998
-------------- ---------------- ---------------- ----------------
AVERAGE YIELD AVERAGE YIELD AVERAGE YIELD AVERAGE YIELD
BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Loans receivable $351,441 7.63% $312,720 7.88% $334,428 7.72% $302,483 7.77%
Mortgage-backed securities 59,472 5.97 54,617 6.62 62,103 6.21 61,723 6.82
Investment securities and other 36,067 5.55 24,134 6.17 33,362 6.01 30,385 6.34
-------- -------- -------- --------
Total interest-earnings assets 446,980 7.24% 391,471 7.60% 429,893 7.37% 394,591 7.51%
-------- -------- -------- --------
Noninterest-earning assets 16,634 13,560 14,463 13,511
-------- -------- -------- --------
Total assets $463,614 $405,031 $444,356 $408,102
======== ======== ======== ========
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
Savings accounts $307,882 4.37% $283,598 4.69% $297,000 4.58% $284,626 4.85%
Borrowings 107,785 5.61 77,192 6.27 100,102 5.83 80,768 6.33
-------- -------- -------- --------
Total interest-bearing liabilities 415,667 4.69% 360,790 5.03% 397,102 4.90% 365,394 5.18%
Non-interest-bearing liabilities 16,426 13,010 15,747 12,029
Stockholders' equity 31,521 31,231 31,507 30,679
-------- -------- -------- --------
Total liabilities and equity $463,614 $405,031 $444,356 $408,102
======== ======== ======== ========
Net interest rate spread 2.55% 2.57% 2.47% 2.33%
Net interest margin 2.88% 2.96% 2.85% 2.71%
Ratio of interest-earning assets to
interest-bearing liabilities 107.53% 108.50% 108.26% 107.99%
</TABLE>
The Company's average net interest spread decreased slightly to 2.55% for
the three months ended March 31, 1999 from 2.57% for the three months ended
March 31, 1998. The decrease in the average net interest spread was primarily
due to the decrease in the average yield of interest-earning assets to 7.24% for
the three months ended March 31, 1999 from 7.60% for the three months ended
March 31, 1998 substantially offset by the decrease in the average cost of
interest-bearing liabilities to 4.69% for the current period from 5.03% for the
same period a year ago. In regard to the nine months ended March 31, 1999, the
average net interest spread increased by 14 basis points to 2.47% from 2.33% for
the nine months ended March 31, 1998.
11
<PAGE> 14
The increase in the average net interest spread for current period was due
primarily to the 28 basis point decline in the average cost of funds to 4.90%
for the nine months ended March 31, 1999 versus 5.18% for the same period a year
ago.
The Company's yield on its interest-earning assets declined by 36 basis
points to 7.24% for the three months ended March 31, 1999 from 7.60% for the
three months ended March 31, 1998. The yields in all interest-earning asset
categories declined for the three-month period ended March 31, 1999 as compared
to the same period a year ago. The yield on loans receivable declined by 25
basis points to 7.63% for the three months ended March 31, 1999 due primarily to
the decrease in all adjustable rate loan indices resulting from the lower
interest rate environment. This resulted in lower yields on the Company's
adjustable rate mortgage loans, which comprise approximately 75% of the total
mortgage loan portfolio. The lower interest rate environment also contributed to
the increase in prepayments resulting in higher yielding loans paying off
earlier than expected. The Company was able to originate or purchase loans to
replace those prepaid and to increase the overall portfolio balance, but with
interest rates usually lower than those prepaid.
The decline in the yield in interest-earning assets was also due to the
substantial decline in the yield for mortgage-backed securities which decreased
by 65 basis points to 5.97% for the three months ended March 31, 1999 from 6.62%
for the same period a year ago. As stated above, the decline in yield was
primarily the result of the increase in the prepayment speeds resulting from the
lower interest rate environment. The increase in prepayment speeds required the
Company to increase the amortization of the premiums on purchased securities
producing lower overall yields. Also, the yield on investment income and other
securities declined substantially to 5.55% for the three months ended March 31,
1999 from 6.17% for the same period a year ago due primarily to lower interest
rates. The average yield on interest-earning assets declined to 7.37% for the
nine months ended March 31, 1999 from 7.51% for the nine months ended March 31,
1998. The decline in the average yield was due to the same overall issues
discussed.
The Company's cost of interest-bearing liabilities has declined sharply
for the current three and nine-month periods ended March 31, 1999 as compared to
the same periods a year ago. These declines were due to the continued emphasis
on building core savings accounts, replacing maturing certificates of deposits
with those of lower rates, and the addition of lower cost borrowings. As stated
above, the Company has increased the percentage of core savings accounts during
the past year with a corresponding reduction in the percentage of certificates
of deposits. The increase in average core savings accounts to approximately 39%
of total savings accounts for the three months ended March 31, 1999 from
approximately 26% for the same period a year ago combined with the renewal of
maturing certificates of deposit at lower interest rates have produced the
substantial decrease in the average cost of savings. The result of this process
was a decline in the average cost of savings accounts to 4.37% for the three
months ended March 31, 1999 from 4.69% for the three months ended March 31,
1998. In regards to the Company's borrowings, the cost of borrowings for the
three-month period ended March 31, 1999 has reflected significant decreases in
comparison to the same period a year ago. For the three months ended March 31,
1999, the average cost of borrowings declined to 5.61% from 6.27% for the three
months ended March 31, 1998. The reduced cost of borrowings was primarily due to
the maturity of approximately $30 million in borrowings with an average interest
rate in excess of
12
<PAGE> 15
6.00% and the approximately $60 million in new or replacement borrowings with an
average interest rate of less than 5.00% during the nine months ended March 31,
1999.
Provision for Estimated Loan Losses
- -----------------------------------
The provision for estimated loan losses for the three months ended March
31, 1999 was $280,000 compared with $115,000 for the three months ended March
31, 1998. The increase was due to the increased write-offs of consumer loans
during the period, a general increase in the reserve for growth related issues
and the establishment of a reserve for a single-family residential loan expected
to be foreclosed on in the next few months. For the nine months ended March 31,
1999, the provision for estimated loan losses totaled $759,000 as compared to
$458,000 for the same period a year ago. The increase was due to the increased
consumer loan write-offs, primarily related to the equity lines of credit
program, as compared to the same period a year ago. See "Financial Condition."
Other Income
- ------------
Other income increased to $498,000 for the three months ended March 31,
1999 from $277,000 for the three months ended March 31, 1998. The increase was
due to the realization of $28,000 in net gains on real estate owned activity in
the current period versus a $70,000 net loss for the same period a year ago and
increases in fee income primarily related to the sale of non-insured products.
The Company's secondary marketing activities also generated $28,000 in net gains
for the three months ended March 31, 1999 as compared to a $1,000 net loss for
the same period a year ago. For the nine months ended March 31, 1999, other
income increased to $1.5 million from $868,000 primarily as a result of a net
gain on real estate owned activities of $163,000 for the period as compared to a
$133,000 net loss for the same period a year ago, an increase to $89,000 for
secondary marketing activities as compared to $8,000 for the same period a year
ago and increases in commissions earned on the sale of non-insured products and
other fee income on deposit account activities. See "Financial Condition."
General and Administrative Expenses
- -----------------------------------
For the three months ended March 31, 1999, general and administrative
expenses increased slightly to $2.3 million from $2.2 million for the three
months ended March 31, 1998. The increase was due primarily to a general
increase in compensation costs partially offset by a decrease in equipment
related expenses as compared to the same period a year ago. For the nine months
ended March 31, 1999, the general and administrative expenses increased to $6.8
million from $6.6 million for the same period a year ago, primarily related to
the overall increase in compensation costs.
Income Taxes
- ------------
The Company recorded $471,000 in income taxes for the three months ended
March 31, 1999 compared to $356,000 for the three months ended March 31, 1998.
The effective tax rates for the three months ended March 31, 1999 and March 31,
1998 were approximately 40.2% and 42.0%, respectively. For the nine months ended
March 31, 1999, the income taxes recorded was $1.3 million as compared to
$770,000 for the same period a year ago. The increase in taxes for
13
<PAGE> 16
the three months and nine months ended March 31, 1999 was due to the improvement
in pre-tax income.
FINANCIAL CONDITION
- -------------------
The Company's total assets were $464.5 million at March 31, 1999, an
increase of $56.2 million from the $408.3 million in total assets at June 30,
1998. The Company's loans receivable held for investment increased by $54.5
million to $350.2 million at March 31, 1999 as compared to $295.7 million at
June 30, 1998. The Company's mortgage-backed securities portfolio remained
approximately the same with a total investment of approximately $58.5 million at
March 31, 1999 compared to $59.3 million at June 30, 1998.
The Company's loan portfolio increase for the nine months ended March 31,
1999 was due primarily to the origination and purchase of approximately $129
million in mortgage loans for the held for investment portfolio during the nine
month period ending March 31, 1999. Of the loans originated and purchased during
this period, approximately $88 million had adjustable rate features. The loans
originated and purchased with adjustable rate features were indexed to COFI, the
one year constant maturity index, LIBOR and the 12 MAT (a lagging index based
upon the rolling average of the one year treasury yield). The Company also
originated $16.4 million of mortgage loans for sale to the secondary market and
sold approximately $15.6 million during the nine months ended March 31, 1999 for
a net gain of $89,000.
The Company's non-performing assets totaled $3.0 million at March 31, 1999
compared to $3.8 million at June 30, 1998. The decrease in non-performing assets
was due to the decrease in the amount of real estate acquired through
foreclosure to $1.6 million at March 31, 1999 compared to $1.9 million at June
30, 1998 and to the decrease in total loans on non-accrual to $1.4 million at
March 31, 1999 compared to $1.9 million at June 30, 1998. The overall result was
a decrease in the Company's ratio of non-performing assets to total assets to
0.65% at March 31, 1999 from 0.93% at June 30, 1998.
The following table sets forth the non-performing assets at March 31, 1999
and June 30, 1998:
<TABLE>
<CAPTION>
MARCH 31, 1999 JUNE 30, 1998
------------------ -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Non-accrual loans $ 1,413 $ 1,911
Real estate acquired through foreclosure 1,592 1,902
----------- -----------
Non-performing assets $ 3,005 $ 3,813
=========== ===========
Non-performing assets as a percent of
total assets 0.65% 0.93%
Non-performing loans as a percent of
gross loans receivable 0.40% 0.64%
</TABLE>
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
14
<PAGE> 17
review process. The Company applies the measurement provisions of SFAS No. 114
to all loans in its portfolio with the exception of one- to four-family
residential mortgage loans and consumer lines of credit which are evaluated on a
collective basis for impairment. Also, loans which have delays in payments of
less than four months are not necessarily considered impaired unless other
factors apply to the loans. The accrual of interest income on impaired loans is
discontinued when, in management's opinion, the borrower may be unable to meet
payments as they become due. When the interest accrual is discontinued, all
unpaid accrued interest is reversed. Interest income is subsequently recognized
only to the extent cash payments are received. Where impairment is considered
temporary, an allowance is established. Impaired loans which are performing
under the contractual terms are reported as performing loans, and cash payments
are allocated to principal and interest in accordance with the terms of the
loan. At March 31, 1999, the Company had classified none of its loans as
impaired with no specific reserves set aside as of March 31, 1999 as determined
in accordance with SFAS No. 114. In comparison, as of June 30, 1998, the Company
had classified $569,000 of its loans as impaired with $100,000 in specific
reserves. In addition, as of March 31, 1999, the Company had $1.4 million in
loans which were collectively evaluated for impairment with $245,000 in specific
reserves established compared to $1.3 million at June 30, 1998 collectively
evaluated for impairment with no specific reserves set aside. The average
recorded investment in impaired loans, inclusive of those evaluated
collectively, during the nine months ended March 31, 1999, was $2.0 million,
whereas, the average for the twelve months ended June 30, 1998 was $2.9 million.
The Company, in consideration of the current local economic environment
and the condition of the loan portfolio, maintained the allowance for estimated
loan losses at March 31, 1999 at $1.7 million. Although loans on non-accrual
status have decreased slightly to $1.4 million at March 31, 1999 from $1.9
million at June 30, 1998, the allowance for estimated loan losses is maintained
at an amount management considers adequate to cover estimated losses in loans
receivable which are deemed probable and estimable. The allowance is based upon
a number of factors, including current economic conditions, actual loss
experience and industry trends. The Company's non-performing loans are primarily
made up of one- to four-family residential mortgage loans. The following table
sets forth the activity in the Company's allowance for estimated loan losses for
the nine months ended March 31, 1999:
<TABLE>
<CAPTION>
ACTIVITY FOR THE NINE MONTHS
ENDED
MARCH 31, 1999
--------------------------------
<S> <C>
Balance at June 30, 1998 $ 1,425,000
Add:
Provision for estimated loan losses 759,000
Recoveries of previous charge-offs
Less:
Charge-offs of consumer loans 180,000
Charge-offs of real estate loans 272,000
-------------
Balance at March 31, 1999 $ 1,732,000
=============
</TABLE>
The Company's total liabilities increased to $432.5 million at March 31,
1999 from $376.1 million at June 30, 1998. Total deposit accounts increased
$28.6 million to $323.9 million at
15
<PAGE> 18
March 31, 1999 from $295.3 million at June 30, 1998 due primarily to the growth
in the Company's core savings accounts. Core savings accounts, comprised of
money market, checking and passbook accounts, increased to approximately $140.2
million at March 31, 1999 from approximately $95.8 million at June 30, 1998. The
growth in core deposits was partially offset by the $15.7 million decrease in
certificates of deposit to $183.8 million at March 31, 1999 from $199.5 million
at June 30, 1998. As a result of the increase in core savings accounts, the
percentage of core savings accounts represents 43.3% of total deposits as of
March 31, 1999. The Company increased its borrowings during the nine months
ended March 31, 1999 to $103.9 million from $70.5 million at June 30, 1998. The
increase in borrowings was part of the funding strategy of the overall growth in
total assets. In September 1998, the Company borrowed approximately $41.5
million from the Federal Home Loan Bank with an average rate slightly below 5.0%
and an average term of approximately 39 months. The Company continues to utilize
FHLB advances and securities sold under agreements to repurchase as part of its
asset and liability management strategy.
The Company's stockholders' equity decreased slightly to $32.0 million at
March 31, 1999 from $32.2 million at June 30, 1998 due primarily to the
repurchase of 171,745 shares of the Company's common stock at a total cost of
$2.5 million. This reduction in stockholders' equity was substantially offset by
the $1.9 million in net earnings from operations.
LIQUIDITY
- ---------
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, increases in deposits and, to a
lesser extent, proceeds from the sale of loans and investments. While maturities
and scheduled amortization of loans are predictable sources of funds, deposit
flows and mortgage prepayments are greatly influenced by general interest rates,
economic conditions and competition.
The Association, by regulation, must maintain its liquidity ratio at no
less than 4.0% of deposits and short-term borrowings. Liquidity represents cash
and certain investments which are not committed or pledged to specific
liabilities. The Association's average liquidity ratio for March 31, 1999 and
March 31, 1998 was 16.42% and 16.79%, respectively.
COMMITMENTS AND CONTINGENT LIABILITIES
- --------------------------------------
At March 31, 1999, there were no material changes to the Company's
commitments or contingent liabilities from the period ended June 30, 1998 as
discussed in the Company's notes to the consolidated financial statements
reflected in the audited consolidated financial statements of SGV Bancorp, Inc.,
for the year ended June 30, 1998 included in the Annual Report on Form 10-K for
the year ended June 30, 1998. At March 31, 1999, the Company had outstanding
commitments to originate or purchase mortgage loans of $11.5 million as compared
to $3.0 million at June 30, 1998.
16
<PAGE> 19
REGULATORY CAPITAL
- ------------------
The Office of Thrift Supervision (OTS) capital regulations require savings
institutions to meet three minimum capital requirements: a 1.5% tangible capital
ratio, a 3% leverage (core capital) ratio and an 8% risk-based capital ratio.
The core capital requirement has been effectively increased to 4% because the
prompt corrective action legislation provides that institutions with less than
4% core capital will be deemed "undercapitalized". In addition, the OTS, under
the prompt corrective action regulation can impose various constraints on
institutions depending on their level of capitalization ranging from
well-capitalized to critically undercapitalized. At March 31, 1999, the
Association was considered "well-capitalized".
The Association was in compliance with the capital requirements in effect
as of March 31, 1999. The following table reflects the required ratios and the
actual capital ratios of the Association at March 31, 1999:
<TABLE>
<CAPTION>
CAPITAL
-----------------------
ACTUAL REQUIRED EXCESS ACTUAL REQUIRED
CAPITAL CAPITAL AMOUNT PERCENT PERCENT
--------- --------- ---------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tangible $ 30,214 $ 6,963 $ 23,251 6.51% 1.50%
Core $ 30,214 $ 13,925 $ 16,289 6.51% 3.00%
Risk-based $ 31,701 $ 18,614 $ 13,087 13.62% 8.00%
</TABLE>
YEAR 2000 READINESS DISCLOSURE
- ------------------------------
In recent years the Company has been executing a formal plan to address
year 2000 issues ("Y2K"). The Y2K issues relate to the way software was
programmed through much of this Century. Specifically, years were coded with two
digits. The Company's Y2K plan has been designed to address potential problems
that could arise from software, hardware and equipment both within the Company's
direct control and outside of the Company's control, yet which the Company
relies upon, in that it electronically or operationally interfaces with such
software, hardware and equipment.
The Company principally utilizes third-party data processors and
third-party software for its information technology (IT) needs. As a result, the
year 2000 compliance of the company's information technology assets, such as
computer hardware, software and systems, is primarily dependent upon the year
2000 compliance efforts and results of its third-party vendors. The year 2000
compliance of the Company's non-IT assets, such as automated teller machines,
copiers, fax machines, elevators, and HVAC systems, is also primarily dependent
upon the year 2000 compliance efforts and results of third parties.
Financial institution regulators have focused their attention on year 2000
issues and have published guidance concerning the responsibilities of senior
management and directors. Year 2000 testing and certification, liquidity risk,
customer awareness, and contingency planning are being addressed as key safety
and soundness issues in conjunction with regulatory Y2K examinations.
The Company has appointed a year 2000 team that includes officers and
staff from all operational areas. The team is responsible for the development,
implementation and monitoring of the
17
<PAGE> 20
Company's Year 2000 Plan. Also, the Company has enlisted the services of outside
contractors to assist in the attainment of year 2000 readiness. In order to
address the year 2000 issue, the Company has developed and implemented a
five-phase plan, which is divided into the following major components:
awareness
assessment
renovation
validation
implementation
The Company has completed the first two phases of the plan and is
currently working internally and with external vendors on the final three
phases. The Company believes that third-party service providers have
significantly completed the renovation phase. Also, the validation or test phase
has been completed for the Company's data processor, ATM processor, primary ATM
interchange provider, Federal Reserve Bank of San Francisco, and Fannie Mae.
Because the Company outsources its data processing and item processing
operations, a significant component of the Year 2000 Plan is to work with
external vendors to test and certify their systems as year 2000 compliant. The
majority of software used in these systems, both purchased and related to our
external data processing vendors, has been tested for year 2000 readiness with
minimal issues detected. Any issues detected have been reported to the
respective vendor or service provider for corrective action. None of the issues
noted during the testing, if not corrected by year 2000, are expected to have
any material effect on the Company. The Company's primary third-party service
bureau provides data processing for all of the Company's savings accounts,
lending operations and its general ledger. Upon review of the test results, the
few issues detected were forwarded to the data processor for corrective action.
Although the Company is confident these issues will be resolved, none of the
issues detected are expected to have any material impact to the Company's
successful transition to year 2000 even if they have not been corrected by year
2000. The Company also completed testing with the Federal Reserve Bank of San
Francisco, its primary ATM processor, primary ATM interchange provider, and
Fannie Mae and detected no date-related issues which would be expected to
present any material Y2K problems to the Company.
The Company surveyed its primary vendors and others with whom it relies on
to assure their systems will be year 2000 ready. Of the vendors the Company
considers critical to its operations, all have responded that they are year 2000
ready or are in process of becoming ready. Vendors the Company considers mission
critical include its primary data processor, item processor, ATM provider, the
Federal Reserve Bank and the Federal Home Loan Bank, as well as all utility
providers. Of the critical vendors the Company tested, no material year 2000
date related issues were identified. In addition, the majority of critical
vendors not tested (primarily utility providers) have indicated they are Y2K
ready. As of March 31, 1999, three utility providers have not responded of their
Y2K readiness. If any mission critical vendor were to fall out of Y2K
compliance, the Company will seek to switch to a new vendor. However, due to the
timing required to change to another vendor, if mission critical vendors are not
year 2000 ready (all have stated that they are or expect to be year 2000 ready),
the Company may be adversely affected. Further, the Company will be unable to
seek alternative service providers with respect to some critical vendors such as
utility providers. The Company has endeavored to determine such vendors will be
year 2000 compliant and at this time, based upon information supplied by such
vendors, has no information suggesting utility services will be interrupted.
However, any disruption in utility service would directly affect the Company's
ability to operate.
18
<PAGE> 21
In regard to vendors or service providers the Company deems are important
for the normal operations of the Company, but not considered critical,
approximately 87% have responded that they are year 2000 ready or are working
towards readiness. The Company is performing follow-up work on those vendors or
service providers (primarily title companies and appraisal firms) who have not
responded. If the Company believes that one of these vendors will not be year
2000 ready by June 30, 1999, the Company will review other solutions, including
changing vendors. However, there can be no assurance that these systems or other
vendors will be year 2000 ready or that any such failure in readiness by such
vendors would not have an adverse effect on the Company's operations. The
Company is participating, through proxy testing, with its data processor in
third-party interfaces for year 2000 readiness and remains on target to complete
testing by June 30, 1999.
Another important segment of the Year 2000 Plan is to identify those loan
customers or deposit customers whose possible lack of year 2000 preparedness
might expose the Company to financial loss. The Company completes a risk
analysis of their large dollar fund users and fund providers quarterly and has
determined that such customers are not expected to expose the Company to any
material impact by a lack of year 2000 preparedness. Also, the analysis of fund
users indicates that the Company does not expect to have any material financial
exposure in regard to its loan portfolio as the portfolio is comprised primarily
of loans to individuals and, to a lessor extent, to businesses secured by real
estate. Management believes that loans secured by real estate are less likely to
be impacted by any year 2000 issues.
The Company has completed its Year 2000 Contingency Plan for handling
issues which may present concern to the Company if certain processes or vendors
are unable to provide services. The contingency plan has been reviewed by an
independent outside consultant for feasibility with management's stated business
resumption goals and other plans adopted by the Company. Recommendations made by
the consultant were reviewed by management and incorporated into the contingency
plan. This plan will be updated continuously throughout 1999, as new information
becomes available on the Company's vendors and service providers.
During the execution of this project, the Company will incur internal
staff costs as well as consulting and other expenses related to enhancements
necessary to prepare the systems for the year 2000. Since the Company replaced
many of the internal systems with year 2000 compliant personal computers in
1997, the expenses incurred to bring the Company to year 2000 compliance will be
expensed as incurred, with the majority of such costs being the reallocation of
current staff to bring about this readiness. The Company replaced the majority
of its internal computer hardware and software in early 1997. The capitalized
costs of this replacement were in excess of $700,000 and are being amortized
over several years in compliance with the Company's normal depreciation of such
hardware or software. The future expenses of the year 2000 project as well as
the related potential effect on the Company's earnings is not expected to have a
material effect on its financial position or results of operations. Management
does not expect the future costs of the year 2000 project to exceed $200,000,
which is primarily related to the reallocation of internal staff resources.
The Company believes it has developed an effective and prudent plan to
review, renovate and resolve any potential year 2000 issues. In respect to
operations under the Company's direct control and due to management's year 2000
readiness efforts and those of its strategic business partners, management does
not expect that Year 2000 failures will have a material effect on the financial
condition or results of operations of the Company. However, the impact of
disruptions in the
19
<PAGE> 22
local or national economy as a result of year 2000 issues is not quantifiable at
this time and could adversely and materially affect the Company. In addition,
the Company is heavily dependent on the year 2000 readiness of infrastructure
suppliers such as utilities, communication and other such Services. As discussed
above, such infrastructure suppliers would have year 2000 disruptions, this
could adversely and materially affect the Company's ability to provide services
to its customers.
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
- --------------------------------------------------------------
In addition to historical information, this Form 10-Q may include forward
looking statements based on current management expectations. The Company's
actual results could differ materially from those management expectations.
Factors that could cause future results to vary from current management
expectations include, but are not limited to, general economic conditions,
legislative and regulatory changes, monetary and fiscal policies of the federal
government, changes in tax policies, rates and regulations of federal, state and
local tax authorities, changes in interest rates, deposit flows, the cost of
funds, demand for loan products, demand for financial services, competition,
changes in the quality or composition of the Company's loan and investment
portfolios, changes in accounting principles, policies or guidelines, and other
economic, competitive, governmental and technological factors affecting the
Company's operations, markets, products, services and prices. Further
description of the risks and uncertainties to the business of the Company are
included in detail in the Company's Form 10-K for the fiscal year ended June 30,
1998.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
---------------------------------------------------------
MANAGEMENT OF INTEREST RATE RISK
- --------------------------------
The Company's profitability is dependent to a large extent upon its net
interest income, which is the difference between its interest income on
interest-earning assets, such as loans and investments, and its interest expense
on interest-bearing liabilities, such as deposits and borrowings. To manage its
interest rate risk, the Company has utilized the following strategies: (i)
emphasizing the origination and/or purchase of adjustable-rate one- to
four-family mortgage loans for portfolio; (ii) selling to the secondary market
all conforming fixed-rate mortgage loans originated; (iii) holding primarily
short-term mortgage-backed and investment securities; and (iv) attempting to
reduce the overall interest rate sensitivity of liabilities by emphasizing core
and longer-term deposits, utilizing FHLB advances and securities sold under
agreements to repurchase.
The Company's interest rate sensitivity is monitored by management through
the use of an interest rate risk (IRR) model. Based on internal IRR modeling,
management does not believe that there has been a material change in the
Company's interest rate sensitivity from June 30, 1998 to March 31, 1999. All
methods used to measure interest rate sensitivity involve the use of
assumptions, which may tend to oversimplify the manner in which actual yields
and costs respond to changes in market interest rates. The Company's interest
rate sensitivity should be reviewed in conjunction with the financial statements
and notes thereto contained in the Company's Annual Report for the fiscal year
ended June 30, 1998.
20
<PAGE> 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The Company is involved as plaintiff or defendant in various legal actions
incident to its business, none of which is believed by management to be material
to the financial condition of the Company.
Item 2. Changes in Securities
---------------------
None.
Item 3. Defaults in Securities
----------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
Item 5. Other Information
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) The following exhibits are filed as part of this report:
3.1 Certificate of Incorporation of SGV Bancorp, Inc. *
3.2 Bylaws of SGV Bancorp, Inc. *
11.0 Computation of per share earnings (filed herewith).
27.0 Financial data schedule (filed herewith).
(b) Reports on Form 8-K
Announcement of intent to purchase two branches from Citibank
filed with the Securities and Exchange Commission on
April 5, 1999.
- -------------------
* Incorporated herein by reference from the Exhibits to the Registration
Statement on Form S-1, as amended, filed on March 6, 1995 and declared
effective on May 9, 1995, Registration No. 33-90018.
21
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SGV BANCORP, INC.
May 11, 1999 /s/ Barrett G. Andersen
- ------------------------- --------------------------------------------
Date Barrett G. Andersen
President and Chief Executive Officer
May 11, 1999 /s/ Ronald A. Ott
- ------------------------- --------------------------------------------
Date Ronald A. Ott
Executive Vice President
Chief Financial Officer and Treasurer
22
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary information extracted from the Form 10-Q and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000940511
<NAME> SGV Bancorp, Inc.
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 4,813,000
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 16,475,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 39,385,000
<INVESTMENTS-CARRYING> 35,711,000
<INVESTMENTS-MARKET> 35,661,000
<LOANS> 353,345,000
<ALLOWANCE> 1,732,000
<TOTAL-ASSETS> 464,500,000
<DEPOSITS> 323,928,000
<SHORT-TERM> 0
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<LONG-TERM> 103,946,000
0
0
<COMMON> 27,000
<OTHER-SE> 31,965,000
<TOTAL-LIABILITIES-AND-EQUITY> 464,500,000
<INTEREST-LOAN> 19,363,000
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<INTEREST-OTHER> 452,000
<INTEREST-TOTAL> 23,758,000
<INTEREST-DEPOSIT> 10,206,000
<INTEREST-EXPENSE> 14,585,000
<INTEREST-INCOME-NET> 9,173,000
<LOAN-LOSSES> 759,000
<SECURITIES-GAINS> 35,000
<EXPENSE-OTHER> 5,254,000
<INCOME-PRETAX> 3,195,000
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 1,891,000
<EPS-PRIMARY> 0.85
<EPS-DILUTED> 0.82
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<ALLOWANCE-CLOSE> 1,732,000
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</TABLE>
