<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 December 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from________________________to_______________________
Commission File Number 0-25664
SGV BANCORP, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 95-4524789
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(State or other jurisdiction of (I. R. S. Employer Identification No.)
incorporation or organization)
225 NORTH BARRANCA STREET, WEST COVINA, CALIFORNIA 91791
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(Address of principal executive offices)
(626) 859-4200
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
require to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X 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: 2,181,323 shares of common
stock, par value $0.01 per share, were outstanding as of February 9, 1999.
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SGV BANCORP, INC.
FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION PAGE
----
Item 1 Consolidated Statements of Financial Condition:
December 31, 1998 (unaudited) and June 30, 1998.....................1
Consolidated Statements of Operations (unaudited):
For the Six Months Ended December 31, 1998 and 1997 and for the
Three Months Ended December 31, 1998 and 1997 ......................2
Consolidated Statements of Cash Flows (unaudited):
For the Six Months Ended December 31, 1998 and 1997.................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......21
PART II OTHER INFORMATION
Item 1 Legal Proceedings..................................................22
Item 2 Changes in Securities..............................................22
Item 3 Defaults Upon Senior Securities....................................22
Item 4 Submission of Matters to a Vote of Security Holders................22
Item 5 Other Information..................................................22
Item 6 Exhibits and Reports on Form 8-K...................................23
SIGNATURES..................................................................24
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<TABLE>
<CAPTION>
SGV BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
- -------------------------------------------------------------------------------------------------------------------
DECEMBER 31, JUNE 30,
1998 1998
---- ----
ASSETS: (Unaudited)
<S> <C> <C>
Cash and cash equivalents, including short-term bank obligations of
$3,390 at December 31, 1998 and $16,202 at June 30, 1998 $ 11,595 $ 20,008
Investment securities available for sale, amortized cost of $25,325
at December 31, 1998 and $19,241 at June 30, 1998 25,227 19,221
Mortgage-backed securities available for sale, amortized cost of
$26,664 at December 31, 1998 and $29,386 at June 30, 1998 26,623 29,383
Mortgage-backed securities held to maturity, estimated fair value of
$33,880 at December 31, 1998 and $30,089 at June 30, 1998 33,748 29,936
Loans receivable held for sale 1,287 391
Loans receivable held for investment, net of allowance for estimated
loan losses of $1,563 at December 31, 1998 and $1,425 at June 30, 1998 346,873 295,739
Accrued interest receivable 3,071 2,774
Stock of Federal Home Loan Bank of San Francisco, at cost 5,266 4,234
Real estate acquired through foreclosure, net 814 1,902
Premises and equipment, net 3,322 3,537
Prepaid expenses and other assets, net 3,707 1,221
--------------- -----------
Total assets $ 461,533 $ 408,346
=============== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposit accounts $ 317,564 $ 295,281
Federal Home Loan Bank advances 103,991 70,543
Securities sold under agreements to repurchase 4,300 6,000
Accrued expenses and other liabilities 4,583 4,289
--------------- -----------
Total liabilities 430,438 376,113
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; 2,181,323 shares outstanding at December 31, 1998 and
2,348,068 shares outstanding at June 30, 1998 27 27
Additional paid-in capital 21,229 21,147
Retained earnings, substantially restricted 17,879 16,688
Accumulated other comprehensive income (81) (13)
Deferred stock compensation (1,412) (1,555)
Treasury stock, 546,333 shares at December 31,1998 and
379,588 shares at June 30, 1998 (6,547) (4,061)
--------------- ------------
Total stockholders' equity 31,095 32,233
--------------- ------------
Total liabilities and stockholders' equity $ 461,533 $ 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 SIX MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
1998 1997 1998 1997
---------------------------- --------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest on loans $ 6,717 $ 5,980 $ 12,656 $ 11,458
Interest on investment securities 283 263 648 576
Interest on mortgage-backed securities 980 985 2,004 2,253
Other 146 231 355 496
------------- ------------ ------------ --------------
Total interest income 8,126 7,459 15,663 14,783
------------- ------------ ------------ --------------
INTEREST EXPENSE:
Interest on deposit accounts 3,442 3,558 6,839 7,033
Interest on borrowings 1,590 1,282 2,868 2,624
------------- ------------ ------------ --------------
Total interest expense 5,032 4,840 9,707 9,657
------------- ------------ ------------ --------------
Net interest income before provision
for estimated loan losses 3,094 2,619 5,956 5,126
PROVISION FOR ESTIMATED LOAN LOSSES 210 268 479 343
------------- ------------ ------------ --------------
Net interest income after provision for
estimated loan losses 2,884 2,351 5,477 4,783
OTHER INCOME (EXPENSE):
Loan servicing and other fees 151 137 296 263
Deposit account fees 144 136 288 264
Secondary marketing activity, net 40 14 61 9
Gain on sale or redemption of securities
available for sale, net 7 37
Other income 158 40 254 81
Net (loss) gain on real estate acquired through
foreclosure (10) (75) 135 (63)
------------- ------------ ------------ --------------
Total other income 483 252 1,041 591
------------- ------------ ------------ --------------
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation and other employee expenses 1,249 1,194 2,478 2,382
Office occupancy 269 272 535 541
Data Processing and Equipment 298 275 575 529
Advertising 38 26 68 78
FDIC insurance premiums 43 45 87 89
Other operating expenses 409 387 752 776
------------- ------------ ------------ --------------
Total general and administrative expenses 2,306 2,199 4,495 4,395
------------- ------------ ------------ --------------
EARNINGS BEFORE INCOME TAXES 1,061 404 2,023 979
INCOME TAXES 437 170 833 414
------------- ------------ ------------ --------------
NET EARNINGS $ 624 $ 234 $ 1,190 $ 565
============= ============ ============ ==============
EARNINGS PER SHARE - Basic $ 0.28 $ 0.10 $ 0.53 $ 0.24
============= ============ ============ ==============
EARNINGS PER SHARE - Diluted $ 0.27 $ 0.09 $ 0.51 $ 0.23
============= ============ ============ ==============
</TABLE>
2
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<TABLE>
<CAPTION>
SGV BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS
ENDED DECEMBER 31,
---------------------------------------------
1998 1997
------------------ -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 1,190 $ 565
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 320 328
Loans originated for sale (11,266) (7,258)
Proceeds from sale of loans 10,455 7,055
Gain on sale of loans, net (85) (25)
Gain on sale of investments available for sale, net (10) (7)
Gain on sale of mortgage-backed securities available for sale, net (2) (31)
Federal Home Loan Bank stock dividend (126) (126)
(Increase) decrease in prepaid expenses and other assets (2,538) 20
Amortization of deferred loan fees (159) (36)
Deferred loan origination costs (228) (121)
Increase in accrued expenses and other liabilities 343 435
Provision for estimated loan losses 479 343
(Recapture of) provision for estimated real estate losses (45) 56
Premium amortization, net 386 118
(Increase) decrease in accrued interest receivable (297) 84
Other, net 133 (125)
---------------- ---------------
Net cash provided by operating activities (1,450) 1,275
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities available for sale (65,871) (21,748)
Proceeds from sale and redemption of investment securities
available for sale 59,802 20,507
Purchase of mortgage-backed securities available for sale (10,153)
Proceeds from sale of mortgage-backed securities available for sale 6,931 14,480
Purchase of mortgage-backed securities held to maturity (10,030)
Principal repayments on mortgage-backed securities 11,939 6,328
Loans funded, net (35,521) (13,267)
Loans purchased, net (63,926) (40,623)
Principal repayments on loans 46,993 21,778
Proceeds from sale of real estate 2,127 1,069
Purchase of premises and equipment (71) (113)
Purchase of Federal Home Loan Bank Stock (906)
Other, net (37) (69)
-------------- ---------------
Net cash used in investing activities (58,723) (11,658)
</TABLE>
3
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<TABLE>
<CAPTION>
SGV BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) (UNAUDITED)(CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS
ENDED DECEMBER 31,
---------------------------------------------
1998 1997
------------------ -------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in certificate accounts $ (4,603) $ (5,985)
Net increase in passbook, money market savings,
NOW and non-interest-bearing accounts 26,886 13,197
Proceeds from Federal Home Loan Bank advances 46,500
Repayment of Federal Home Loan Bank advances (13,052) (6,686)
Proceeds from securities sold under agreements to repurchase 4,300
Repayment of securities sold under agreements to repurchase (6,000) (3,430)
Purchase of treasury stock (2,486)
Other, net 215 233
------------------ -------------------
Net cash provided by (used in) financing activities 51,760 (2,671)
NET DECREASE IN CASH AND CASH EQUIVALENTS (8,413) (13,054)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 20,008 22,664
------------------ -------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 11,595 $ 9,610
================== ===================
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid during the period for:
Interest $ 9,629 $ 9,652
Income taxes, net 1,060 536
NONCASH INVESTING ACTIVITIES DURING THE PERIOD:
Real estate acquired through foreclosure 951 1,312
Change in net unrealized loss on investment securities and
mortgage-backed securities available for sale, net of taxes (68) 87
</TABLE>
4
<PAGE> 7
SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(UNAUDITED)
1. Basis of Presentation:
SGV Bancorp, Inc. ("SGV") is a savings and loan holding company
incorporated in the state of Delaware that was organized for the purpose of
acquiring all of the capital stock of First Federal Savings and Loan Association
of San Gabriel Valley ("the Association") upon its conversion from a federally
chartered mutual savings and loan association to a federally chartered stock
savings and loan association. On June 28, 1995, SGV completed its sale of
2,727,656 shares of its common stock through subscription and community
offerings to the Association's depositors, the Employee Stock Ownership Plan and
the public and used approximately 60% of the net proceeds from such sales to
purchase all of the Association's common stock issued in the Association's
conversion to stock form. Such business combination was accounted for at
historical cost in a manner similar to a pooling of interests.
SGV engages only in limited business operations primarily involving
investments in federal agency securities and mortgage-backed securities, and as
a result, substantially all of the net earnings and performance figures herein
reflect the results of the Association.
The Association is primarily engaged in attracting deposits from the
general public in the areas in which its branches are located and investing such
deposits and other available funds primarily in mortgage loans secured by
one-to-four family residences. To a lesser extent, the Association invests in
multi-family residential mortgages, commercial real estate, land and other
loans. The Association's revenues are derived principally from interest on its
mortgage loans, and to a lesser extent, interest and dividends on its investment
and mortgage-backed securities and income from loan servicing. The Association's
primary sources of funds are deposits, principal and interest payments on loans,
advances from the Federal Home Loan Bank of San Francisco (the FHLB) and, to a
lesser extent, proceeds from the sale of loans. As of December 31, 1998, the
Association operated eight branch offices located in the San Gabriel Valley.
The consolidated financial statements include the accounts of SGV Bancorp,
Inc. and its wholly-owned subsidiary, First Federal Savings and Loan Association
of San Gabriel Valley and its wholly-owned subsidiary, First Covina Service
Company (collectively, the Company). All material intercompany balances and
transactions have been eliminated in consolidation.
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted 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 six-month periods ended
December 31, 1998 are not necessarily indicative of the results that may be
expected for the entire fiscal year.
5
<PAGE> 8
These consolidated financial statements and the information under the
heading "Management's Discussion and Analysis of Results of Operations and
Financial Condition" should be read in conjunction with the audited consolidated
financial statements and notes thereto of SGV Bancorp, Inc. for the year ended
June 30, 1998 included in the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1998.
2. Earnings Per Share
Earnings per share reconciliation is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
-------------- -------------- -----------
THREE MONTHS ENDED DECEMBER 31, 1998
---------------------------------------------------
<S> <C> <C> <C>
BASIC EPS
Income available to common stockholders $ 624,000 2,208,000 $ 0.28
EFFECT OF DILUTIVE SECURITIES
Incremental shares from assumed exercise
of outstanding options - 68,000 (0.01)
----------------- ------------------ -------------
DILUTED EPS
Income available to common stockholders $ 624,000 2,276,000 $ 0.27
================= ================== =============
SIX MONTHS ENDED DECEMBER 31, 1998
-----------------------------------------------------
BASIC EPS
Income available to common stockholders $ 1,190,000 2,254,000 $ 0.53
EFFECT OF DILUTIVE SECURITIES
Incremental shares from assumed exercise
of outstanding options - 83,000 (0.02)
----------------- ------------------ -------------
DILUTED EPS
Income available to common stockholders $ 1,190,000 2,337,000 $ 0.51
================= ================== =============
THREE MONTHS ENDED DECEMBER 31, 1997
----------------------------------------------------
BASIC EPS
Income available to common stockholders $ 234,000 2,343,000 $ 0.10
EFFECT OF DILUTIVE SECURITIES
Incremental shares from assumed exercise
of outstanding options - 129,000 (0.01)
----------------- ------------------ -------------
DILUTED EPS
Income available to common stockholders $ 234,000 2,472,000 $ 0.09
================= ================== =============
SIX MONTHS ENDED DECEMBER 31, 1997
----------------------------------------------------------
BASIC EPS
Income available to common stockholders $ 565,000 2,343,000 $ 0.24
EFFECT OF DILUTIVE SECURITIES
Incremental shares from assumed exercise
of outstanding options - 123,000 (0.01)
----------------- ------------------ -------------
DILUTED EPS
Income available to common stockholders $ 565,000 2,466,000 $ 0.23
================= ================== =============
</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 six months ended December 1998 and 1997, the Company's
comprehensive income was as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED:
----------------------------------------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1997
--------------------------- ---------------------------
(Dollars in thousands)
<S> <C> <C>
Net income $ 624 $ 234
Other comprehensive income (loss) (21) (18)
=========================== ===========================
Total comprehensive income $ 603 $ 216
=========================== ===========================
FOR THE SIX MONTHS ENDED:
----------------------------------------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1997
--------------------------- ---------------------------
(Dollars in thousands)
Net income $ 1,190 $ 565
Other comprehensive income (loss) (68) 87
=========================== ===========================
Total comprehensive income $ 1,122 $ 652
=========================== ===========================
</TABLE>
4. Accounting Principles
---------------------
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION. 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. 131 is effective for
fiscal years beginning after December 15, 1997. Since the primary business of
the Company is performed through the Association, there is no material
difference in the information already presented in the financial statements
contained herein and those required under SFAS No. 131 for information about
operating segments. At this time, no additional disclosure is required.
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.
7
<PAGE> 10
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.
Item 2. Management's Discussion and Analysis of Results of Operations and
------------------------------------------------------------------
Financial Condition
-------------------
This Management's Discussion and Analysis should be read in conjunction
with the Management's Discussion and Analysis contained in the Company's Annual
Report on Form 10-K, which focuses upon relevant matters occurring during the
year ended June 30, 1998. Accordingly, the ensuing discussion focuses upon the
material matters at and for the three months and six months ended December 31,
1998.
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 $624,000 for the three months ended
December 31, 1998 compared to net earnings of $234,000 for the three months
ended December 31, 1997. For the six months ended December 31, 1998, the
Company's net earnings were $1.2 million, as compared to net earnings of
$565,000 for the six months ended December 31, 1997. For the three months ended
December 31, 1998, the net earnings were $0.28 per share - basic, compared to
$0.10 per share - basic for the three months ended December 31, 1997. For the
six months ended December 31, 1998, the net earnings were $0.53 per share -
basic, compared to net earnings of $0.24 per share - basic for the six months
ended December 31, 1997. A discussion of the specific components of net earnings
per share is set forth in the Notes to Consolidated Financial Statements.
8
<PAGE> 11
Net Interest Income
- -------------------
Net interest income before the provision for estimated loan losses was
$3.1 million for the three months ended December 31, 1998 compared to $2.6
million for the three months ended December 31, 1997. For the six months ended
December 31, 1998, net interest income was $6.0 million compared to $5.1 million
for the six months ended December 31, 1997.
Interest Income
- ---------------
Total interest income for the three months ended December 31, 1998 was
$8.1 million, an increase of $0.6 million from the comparable period a year ago.
The increase in interest income was primarily due to the $41.4 million increase
in the average balance of interest-earning assets to $438.9 million for the
three months ended December 31, 1998 from $397.5 million for the three months
ended December 31, 1997. This increase was partially offset by the ten basis
point decrease in the average yield on interest-earning assets to 7.41% for the
three months ended December 31, 1998 as compared to 7.51% for the comparable
period a year ago. The interest income on loans increased to $6.7 million for
the three months ended December 31, 1998 from $6.0 million for the three months
ended December 31, 1997. The increase in interest on loans was due primarily to
the increase in the average balance of loans receivable outstanding to $345.1
million for the three months ended December 31, 1998 from $310.0 million for the
three months ended December 31, 1997. The increase in interest on loans was also
due to the increase in the yield on loans to 7.79% for the three months ended
December 31, 1998 from 7.72% for the three months ended December 31, 1997
primarily due to the acquisition of loans with higher yields.
The interest income on mortgage-backed securities was relatively unchanged
as it totaled $980,000 for the three months ended December 31, 1998 compared to
$985,000 for the three months ended December 31, 1997 as the $6.8 million
increase in the average balance of mortgage-backed securities to $63.9 million
was offset by the 78 basis point decline to 6.13% in the average yield on the
securities. This decline in yield on the mortgage-backed securities portfolio
was partially 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 declined by
$65,000 to $429,000 for the three months ended December 31, 1998 primarily as a
result of the declining interest rate environment. This was due primarily to the
decline in the average yield to 5.74% for the current period versus 6.49% for
the same period a year ago and partially to the decrease in the average balance
of investment securities and other to $29.9 million for the three months ended
December 31, 1998 from $30.5 million for the same period a year ago. The total
yield on total interest-earning assets decreased to 7.41% for the three months
ended December 31, 1998 as compared to 7.51% for the three months ended December
31, 1997 primarily as a result of the decline in the interest rate environment
resulting in lower yields and faster amortization of premiums on mortgage-backed
securities.
Total interest income for the six months ended December 31, 1998 was $15.7
million, an increase of $880,000 from the comparable period a year ago. The
increase in interest income was primarily due to the $25.5 million increase in
the average balance of interest-earning assets to $422.0 million for the six
months ended December 31, 1998 from $396.5 million for the six
9
<PAGE> 12
months ended December 31, 1997. The interest income on loans increased to $12.7
million for the six months ended December 31, 1998 from $11.5 million for the
six months ended December 31, 1997. The increase in interest on loans receivable
was due to the increase in the average balance of loans receivable outstanding
to $326.7 million for the six months ended December 31, 1998 from $298.6 million
for the six months ended December 31, 1997. The increase in interest on loans
was also due to the increase in the yield on loans to 7.75% for the six months
ended December 31, 1998 from 7.68% for the six months ended December 31, 1997
resulting from the origination and purchase of loans with higher yields such as
the December 1997 purchase of equity lines of credit with yields in excess of
13%. The interest income on mortgage-backed securities decreased to $2.0 million
for the six months ended December 31, 1998 compared to $2.3 million for the six
months ended December 31, 1997 primarily as a result of the decline in the
average yield to 6.33% for the current period versus 6.94% for the same period a
year ago. The decline is 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 declined slightly to $1.0 million for the six months ended December
31, 1998 as compared to $1.1 million for the same period a year ago. The decline
in investment securities and other income was due to the decline in the average
yield to 6.28% for the current period from 6.49% for the same period a year ago
as well as due to a decrease in the average balance to $31.9 million for the
current period versus $33.1 million for the same period a year ago. The total
yield on total interest-earning assets decreased to 7.42% for the six months
ended December 31, 1998 as compared to 7.46% for the six months ended December
31, 1997.
Interest Expense
- ----------------
Total interest expense for the three months ended December 31, 1998 was
$5.0 million, an increase of $192,000 from $4.8 million for the three months
ended December 31, 1997. The increase in interest expense was primarily due to
the increase in the average balance of interest-bearing liabilities to $406.6
million for the three months ended December 31, 1998 from $368.5 million for the
three months ended December 31, 1997. This increase was substantially offset by
the 30 basis point decline in the average cost of interest-bearing liabilities
to 4.95% for the three months ended December 31, 1998 compared to 5.25% for the
three months ended December 31, 1997. Interest expense on interest-bearing
savings accounts decreased to $3.4 million for the three months ended December
31, 1998 from $3.6 million for the same period a year ago. The decrease in
interest expense on interest-bearing savings accounts was due to the 29 basis
points decline in the average cost of funds to 4.65% for the current period
versus 4.94% for the same period a year ago, partially offset by the $7.8
million increase in average savings accounts to $296.1 million for the current
period versus $288.3 million for the same period a year ago. The decline in the
average cost of funds on savings accounts was due to the lower interest rate
environment and to the shift in deposit mix to a higher concentration of core
savings accounts (comprised of money market, checking and savings accounts). The
average balance of core savings accounts increased by $26.8 million to $93.8
million for the three months ended December 31, 1998 from $67.0 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
$19.0 million to $202.3 million for the current period versus $221.3 million for
the same period a year ago. The interest expense on borrowings increased to $1.6
million for the three months ended December 31, 1998 from $1.3 million for the
three months ended December 31, 1997. The increase was primarily due to the
increase in the average balance of
10
<PAGE> 13
borrowings to $110.6 million for the current period versus $80.2 million for the
same period a year ago, partially offset by the decline in the average cost of
borrowings to 5.75% for the current period versus 6.39% 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 and the maturity during the past
twelve months of approximately $23 million in borrowings with an average rate in
excess of 6.20%.
Total interest expense was relatively unchanged at $9.7 million for the
six months ended December 31, 1998 and for the six months ended December 31,
1997. Although the interest expense was unchanged from period to period, the
average balance of interest-bearing liabilities increased to $389.0 million for
the six months ended December 31, 1998 as compared to $368.2 million for the six
months ended December 31, 1997. The increase in the average balance of
interest-bearing liabilities was offset by the decrease in the average cost of
interest-bearing liabilities to 4.99% for the six months ended December 31, 1998
as compared to 5.25% for the same period a year ago. Interest expense on savings
accounts decreased to $6.8 million for the six months ended December 31, 1998
from $7.0 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 4.68%
for the current period from 4.92% for the same period a year ago, partially
offset by the increase in the average balance of savings accounts to $292.1
million for the current period from $368.2 million for the same period a year
ago. As stated above, the decline in the average cost of funds was due 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 $2.9 million for the six months ended
December 31, 1998 from $2.6 million for the six months ended December 31, 1997.
The increase in interest expense on borrowings was due to the increase in the
average balance of borrowings to $97.0 million for the current period from $82.4
million for the same period a year ago, partially offset by the decrease in the
average cost of borrowings to 5.91% for the current period versus 6.37% for the
same period a year ago.
11
<PAGE> 14
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
six month periods ended December 31, 1998 and December 31, 1997 (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>
Three Months Ended December 31, Six Months Ended December 31,
------------------------------- -----------------------------------
1998 1997 1998 1997
---- ---- ---- ----
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 $345,125 7.79% $309,957 7.72% $326,667 7.75% $298,555 7.68%
Mortgage-backed securities 63,924 6.13 57,057 6.91 63,360 6.33 64,890 6.94
Investment securities and other 29,886 5.74 30,468 6.49 31,931 6.28 33,052 6.49
-------- -------- -------- --------
Total interest-earning assets 438,935 7.41% 397,482 7.51% 421,958 7.42% 396,497 7.46%
Noninterest-earning assets 14,296 13,269 13,848 13,288
-------- -------- -------- --------
Total assets $453,231 $410,751 $435,806 $409,785
======== ======== ======== ========
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
Savings accounts $296,091 4.65% $288,287 4.94% $292,063 4.68% $285,773 4.92%
Borrowings 110,553 5.75 80,194 6.39 96,967 5.91 82,377 6.37
-------- -------- -------- --------
Total interest-bearing liabilities 406,644 4.95% 368,481 5.25% 389,030 4.99% 368,150 5.25%
Noninterest-bearing liabilities 15,497 11,678 15,335 11,255
Stockholders' equity 31,090 30,592 31,441 30,380
-------- -------- -------- --------
Total liabilities and equity $453,231 $410,751 $435,806 $409,785
======== ======== ======== ========
Net interest rate spread 2.46% 2.26% 2.43% 2.21%
Net interest margin 2.82% 2.64% 2.82% 2.59%
Ratio of interest-earning assets
to interest-bearing liabilities 107.94% 107.87% 108.46% 107.70%
</TABLE>
The Company's average net interest spread increased to 2.46% for the three
months ended December 31, 1998 from 2.26% for the three months ended December
31, 1997. The increase in the average net interest spread was primarily due to
the decrease in the average cost of interest-bearing liabilities to 4.95% for
the three months ended December 31, 1998 from 5.25% for the three months ended
December 31, 1997 partially offset by the decrease in the average yield on
interest-earning assets to 7.41% for the current period from 7.51% for the same
period a year ago. In regards to the six months ended December 31, 1998, the
average net interest spread increased by 22 basis points to 2.43% from 2.21% for
the six months ended December 31, 1997. The increase in the average net interest
spread for current period was due primarily to the 26 basis point decline in the
average cost of funds to 4.99% for the six months ended December 31, 1998 versus
5.25% for the same period a year ago.
The Company's yield on its interest-earning assets declined by 10 basis
points to 7.41% for the three months ended December 31, 1998 from 7.51% for the
three months ended December 31, 1997. The decline was primarily due to the
substantial decline in the yield for mortgage-backed securities which decreased
by 78 basis points to 6.13% for the three months
12
<PAGE> 15
ended December 31, 1998 from 6.91% 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
5.74% for the three months ended December 31, 1998 from 6.49% for the same
period a year ago due primarily to lower interest rates. The average yield for
loans receivable reflects an increase in the average yield to 7.79% for the
three months ended December 31, 1998 as compared to 7.72% for the same period a
year ago due primarily to the purchase of loans with higher yields. The average
yield on interest-earning assets declined to 7.42% for the six months ended
December 31, 1998 from 7.46% for the six months ended December 31, 1997. The
decline in the average yield was due to the same overall issues discussed above
with the primary decrease being the result of the lower yields on the
mortgage-backed securities portfolio and the investment securities and other
securities portfolio, partially offset by the increase in the improved yield on
the loans receivable portfolio.
The improvement in the net interest margins for both the three and six
month periods ended December 31, 1998 as compared to the same periods a year ago
were primarily due to the reduction in the respective average cost of funds. 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 core deposits to approximately 39% of
total savings accounts at December 31, 1998 from approximately 27% at December
31, 1997 combined with the renewal of maturing certificates of deposit at lower
interest rates have produced the substantial decrease in the average cost of
savings accounts for the three and six months ended December 31, 1998 in
comparison to the same periods a year ago. The result of this process was a
decline in the average cost of savings accounts to 4.65% and 4.68% for the three
and six months ended December 31, 1998, respectively from 4.94% and 4.92% for
the three and six months ended December 31, 1997, respectively. In regards to
the Company's borrowings, the cost of borrowings for both the three and six
month periods ended December 31, 1998 have reflected significant decreases in
comparison to the same periods a year ago. For the three months and six months
ended December 31, 1998, the average cost of borrowings declined to 5.75% and
5.91%, respectively, from 6.39% and 6.37% for the three and six months ended
December 31, 1997, respectively. The decline for both periods was primarily due
to the Company borrowing $41.5 million from the Federal Home Loan Bank in
September 1998 with an average rate below 5.0% and an average term of
approximately 39 months. This new borrowing coupled with the maturity of several
individual borrowings with rates in excess of 6% contributed to the decline in
the average cost of borrowings.
Provision for Estimated Loan Losses
- -----------------------------------
The provision for estimated loan losses for the three months ended
December 31, 1998 was $210,000 compared with $268,000 for the three months ended
December 31, 1997. The decrease in the provision for estimated loan losses was
due primarily to the decrease in loan charge-offs during the three months ended
December 31, 1998 to approximately $100,000 from approximately $200,000 for the
three months ended December 31, 1997. For the six months ended December 31,
1998, the provision for estimated loan losses totaled $479,000 as compared to
$343,000 for the same period a year ago. The increase was due to a slight
increase in fair value
13
<PAGE> 16
writedowns and line of credit charge-offs during the six months ended December
31, 1998 as compared to the same period a year ago. See "Financial Condition."
Other Income
- ------------
Other income increased to $483,000 for the three months ended December 31,
1998 from $252,000 for the three months ended December 31, 1997. This was due
primarily to an increase in commissions earned on the sale of non-insured
products such as tax-deferred annuities of approximately $78,000 for the three
months ended December 31, 1998 compared to virtually none for the same period a
year ago. Also, the Company increased its net gain on loan sales to the
secondary market to $40,000 for the three months ended December 31, 1998
compared to $14,000 for the same period a year ago. The Company's net losses on
real estate owned activities declined to $10,000 for the current period compared
to a net loss of $75,000 for the same period a year ago. For the six months
ended December 31, 1998, other income increased to $1.0 million from $591,000
primarily as a result of the $125,000 increase in commissions earned on the sale
of non-insured products, a net gain on real estate owned activities of $135,000
for the period as compared to a $63,000 net loss for the same period a year ago
and a slight increase in fee income on deposit account activities. See
"Financial Condition."
General and Administrative Expenses
- -----------------------------------
For the three months ended December 31, 1998, general and administrative
expenses increased to $2.3 million from $2.2 million for the three months ended
December 31, 1997. The increase was due primarily to an increase in commissions
paid resulting from the increase in sales of non-insured products, the initial
costs of commencing the Company's debit card program and expenses incurred for
Year 2000 matters. For the six months ended December 31, 1998, the general and
administrative expenses increased to $4.5 million from $4.4 million for the same
period a year ago.
Income Taxes
- ------------
The Company recorded $437,000 in income taxes for the three months ended
December 31, 1998 compared to $170,000 for the three months ended December 31,
1997. The effective tax rates for the three months ended December 31, 1998 and
December 31, 1997 were approximately 41.2% and 42.1%, respectively. For the six
months ended December 31, 1998, the income taxes recorded was $833,000 as
compared to income taxes of $414,000 for the same period a year ago. The
increase in taxes for the three months and six months ended December 31, 1998
was due to the improvement in pre-tax income.
FINANCIAL CONDITION
- -------------------
The Company's total assets were $461.5 million at December 31, 1998, an
increase of $53.2 million from the $408.3 million in total assets at June 30,
1998. The Company's loans receivable held for investment increased by $51.2
million to $346.9 million at December 31, 1998 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 $60.4 million at
December 31, 1998 compared to $59.3 million at June 30, 1998.
14
<PAGE> 17
The Company's loan portfolio increase for the six months ended December
31, 1998 was due primarily to the origination and purchase of approximately $100
million in mortgage loans for the held for investment portfolio during the six
month period ending December 31, 1998. Of the loans originated and purchased
during this period, approximately $69 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 $11.3 million of mortgage loans for sale to the
secondary market and sold approximately $10.4 million during the six months
ended December 31, 1998 for a net gain of $61,000.
The Company's non-performing assets totaled $2.8 million at December 31,
1998 compared to $3.8 million at June 30, 1998. The decrease in non-performing
assets was due primarily to the decrease in the amount of real estate acquired
through foreclosure to $814,000 at December 31, 1998 compared to $1.9 million at
June 30, 1998. Total loans on non-accrual increased slightly to $2.0 million at
December 31, 1998 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 0.61% at December 31, 1998 from 0.93% at June 30, 1998.
The following table sets forth the non-performing assets at December 31,
1998 and June 30, 1998:
<TABLE>
<CAPTION>
December 31, 1998 June 30, 1998
----------------- --------------
(dollars in thousands)
<S> <C> <C>
Non-accrual loans $2,002 $1,911
Real estate acquired through foreclosure 814 1,902
------ ------
Non-performing assets $2,816 $3,813
====== ======
Non-performing assets as a percent of total
assets 0.61% 0.93%
Non-performing loans as a percent of gross
loans receivable 0.58% 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 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
15
<PAGE> 18
principal and interest in accordance with the terms of the loan. At December 31,
1998, the Company had classified $403,000 of its loans as impaired with no
specific reserves set aside as of December 31, 1998 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 December 31, 1998, the Company had $1.6 million in loans
which were collectively evaluated for impairment with $62,000 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 six months ended December 31, 1998, 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 December 31, 1998 at $1.6 million. Although loans on non-accrual
status have increased slightly to $2.0 million at December 31, 1998 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 six months ended December 31, 1998:
<TABLE>
<CAPTION>
Activity for the six months ended
December 31, 1998
-----------------
<S> <C>
Balance at June 30, 1998 $1,425,000
Add:
Provision for estimated loan losses 479,000
Recoveries of previous charge-offs -
Less:
Charge-offs of consumer loans 172,000
Charge-offs of real estate loans 169,000
----------
Balance at December 31, 1998 $1,563,000
==========
</TABLE>
The Company's total liabilities increased to $430.4 million at December
31, 1998 from $376.1 million at June 30, 1998. Total deposit accounts increased
$22.3 million to $317.6 million at December 31, 1998 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 $122.7 million at December 31, 1998 from
approximately $95.8 million at June 30, 1998. The growth in core deposits was
partially offset by the $4.6 million decrease in certificates of deposit to
$194.9 million at December 31, 1998 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 38.6% of total deposits as of December 31, 1998. The Company
increased its borrowings during the six months ended December 31, 1998 to $104.0
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
16
<PAGE> 19
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 to $31.1 million at December
31, 1998 from $32.2 million at June 30, 1998 due primarily to the repurchase of
166,745 shares of the Company's common stock at a total cost of $2.5 million.
This reduction in stockholders' equity was partially offset by the $1.2 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 December 31, 1998 and
December 31, 1997 was 15.56% and 8.18%, respectively.
COMMITMENTS AND CONTINGENT LIABILITIES
- --------------------------------------
At December 31, 1998, 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 December 31, 1998, the Company had outstanding
commitments to originate or purchase mortgage loans of $5.0 million as compared
to $3.0 million at June 30, 1998.
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 December 31, 1998, the
Association was considered "well-capitalized".
17
<PAGE> 20
<TABLE>
<CAPTION>
The Association was in compliance with the capital requirements in effect
as of December 31, 1998. The following table reflects the required ratios and
the actual capital ratios of the Association at December 31, 1998:
CAPITAL
--------------------------------
ACTUAL REQUIRED EXCESS ACTUAL REQUIRED
CAPITAL CAPITAL AMOUNT PERCENT PERCENT
-------------- -------------- -------------- -------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tangible $ 29,416 $ 6,921 $ 22,495 6.38% 1.50%
Core $ 29,416 $ 13,843 $ 15,573 6.38% 3.00%
Risk-based $ 30,917 $ 18,146 $ 12,771 13.63% 8.00%
</TABLE>
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.
YEAR 2000 READINESS DISCLOSURE
- ------------------------------
The year 2000 issue concerns the potential impact of historic computer
software code that only utilizes two digits to represent the calendar year
(e.g., "98" for "1998"). Software so developed could produce inaccurate or
unpredictable results upon January 1, 2000, when current and future dates
present a lower two digit year number than dates in the prior century. The
Company, similar to most financial services providers, is subject to the
potential impact of the year 2000 issue due to the nature of financial
information. Potential impacts to the Company may arise from software, hardware,
and equipment both within the Company's direct control and outside of the
Company's ownership, yet with which the Company electronically or operationally
interfaces (i.e., vendors providing or receiving service bureau information).
Financial institution regulators have recently increased their focus upon
year 2000 issues, issuing guidance concerning the responsibilities of senior
management and directors. Year 2000
18
<PAGE> 21
testing and certification is being addressed as a key safety and soundness issue
in conjunction with regulatory exams.
The Company has appointed a year 2000 team which includes officers and
staff from all operational areas. The team is responsible for the development,
implementation and monitoring of the 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 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 it has significantly completed the renovation and
validation phases through the completion of testing and review of the Company's
data processor's year 2000 readiness. 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 Company replaced its internal retail branch computer
system and its back office computer systems in 1997 with personal computers
which are year 2000 ready. 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 provide any concerns to the Company. Also, the Company
completed its testing of its primary data processing service bureau for year
2000 readiness. The Company's primary third-party service bureau provides data
processing for all of the Company's savings accounts, lending operations and
general ledger. Upon completion of the review of the tests results, the few
issues detected were forwarded to the data processor for corrective actions.
Again, none of the issues detected are expected to have any material impact to
the Company's successful transition to year 2000 if they have not been
corrected. The Company also completed testing with the Federal Reserve Bank of
San Francisco and detected no issues which woums to the Company at year 2000.
The Company has contacted 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 being 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. As stated above, completed year 2000 testing with its
primary data processor and the Federal Reserve Bank and detected no material
issues which would be expected to materially affect the Company. The ATM
provider and ATM network will undergo testing by March 31, 1999. If the critical
vendors the Company is able to test are not
19
<PAGE> 22
compliant by March 31, 1999, 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 unable to obtain an
alternative and therefore 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
disrupted. However, any disruption in utility service would directly affect the
Company's ability to operate.
In regards to vendors or service providers the Company deems are important
for the normal operations of the Company, but not considered critical,
approximately 53% 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 who have not responded. If the Company believes that one of
these important 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. 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 completed a risk analysis of their large dollar fund users and fund
providers and 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 regards 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. In management's estimation, loans secured by
real estate are less likely to be impacted by any year 2000 issues. The Company
is participating, through proxy testing, with its data processor in third party
interfaces for year 2000 readiness. In March 1999, the Company will participate
with its data processor in proxy testing of FHLMC and FNMA, agencies for whom
the Company services loans.
The Company has substantially completed its initial draft of its
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 is currently undergoing a review by an outside consultant to determine
areas in which the plan may need modification. It is expected this review and
any subsequent revisions to the contingency plan will be completed by February
28, 1999. This plan is expected to be amended throughout 1999 as new information
on the Company's vendors year 2000 readiness becomes available.
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. As stated earlier, 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
20
<PAGE> 23
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 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. If such infrastructure suppliers would have year 2000
disruptions, this could adversely and materially affect the Company's ability to
provide services to its customers.
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
substantially all 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 December 31, 1998. 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.
21
<PAGE> 24
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
---------------------------------------------------
The Company held its Annual Meeting of Shareholders on November 19, 1998.
At the Annual Meeting, the shareholders elected Irven G. Reynolds and Benjamin
S. Wong to three-year terms. Directors Royce A. Stutzman, Barrett G. Andersen,
Thomas A. Patronite and John D. Randall have terms of office that continued
after the Annual Meeting. The shareholders also ratified the SGV Bancorp, Inc.
1995 Amended and Restated Stock-Based Incentive Plan and ratified the
appointment of Deloitte & Touche LLP as independent auditors of the Company for
the year ending June 30, 1999.
The vote on each matter was as follows:
<TABLE>
<CAPTION>
1. For Directors: BROKER
FOR WITHHELD ABSTAIN NON-VOTES
<S> <C> <C> <C> <C>
Irven G. Reynolds 2,157,947 41,951 -- --
Benjamin S. Wong 2,157,497 42,401 -- --
2. Other Matters:
Ratification of SGV Bancorp, Inc.
1995 Amended and Restated
Stock-Based Incentive Plan 1,401,823 210,346 9,575 578,154
Ratification of the appointment
of Deloitte & Touche LLP as
independent auditors for the
Company 2,178,343 16,780 4,775 --
</TABLE>
Item 5. Other Information
-----------------
None.
22
<PAGE> 25
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
None.
- -------------------
* 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.
23
<PAGE> 26
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.
February 11, 1999 /s/ Barrett G. Andersen
- ---------------------------------- -------------------------------------
Date Barrett G. Andersen
President and Chief Executive Officer
February 11, 1999 /s/ Ronald A. Ott
- ---------------------------------- -------------------------------------
Date Ronald A. Ott
Executive Vice President
Chief Financial Officer and Treasurer
24
<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> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 8,205,000
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 3,390,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 51,850,000
<INVESTMENTS-CARRYING> 33,748,000
<INVESTMENTS-MARKET> 33,880,000
<LOANS> 349,723,000
<ALLOWANCE> 1,563,000
<TOTAL-ASSETS> 461,533,000
<DEPOSITS> 317,564,000
<SHORT-TERM> 0
<LIABILITIES-OTHER> 4,583,000
<LONG-TERM> 108,291,000
0
0
<COMMON> 27,000
<OTHER-SE> 31,068,000
<TOTAL-LIABILITIES-AND-EQUITY> 461,533,000
<INTEREST-LOAN> 12,656,000
<INTEREST-INVEST> 2,652,000
<INTEREST-OTHER> 355,000
<INTEREST-TOTAL> 15,663,000
<INTEREST-DEPOSIT> 6,839,000
<INTEREST-EXPENSE> 9,707,000
<INTEREST-INCOME-NET> 5,956,000
<LOAN-LOSSES> 479,000
<SECURITIES-GAINS> 7,000
<EXPENSE-OTHER> 3,461,000
<INCOME-PRETAX> 2,023,000
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,190,000
<EPS-PRIMARY> 0.53
<EPS-DILUTED> 0.51
<YIELD-ACTUAL> 7.42
<LOANS-NON> 2,002,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 852,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,425,000
<CHARGE-OFFS> 341,000
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,563,000
<ALLOWANCE-DOMESTIC> 1,563,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
