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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
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 (I. R. S. Employer
or organization) Identification No.)
225 NORTH BARRANCA STREET, WEST COVINA, CALIFORNIA 91791
- --------------------------------------------------------------------------------
(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. /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: 2,221,871 shares of common
stock, par value $0.01 per share, were outstanding as of May 9, 2000.
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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, 2000 (unaudited) and June 30, 1999......................1
Consolidated Statements of Operations (unaudited):
For the Nine Months Ended March 31, 2000 and 1999 and for the
Three Months Ended March 31, 2000 and 1999........................2
Consolidated Statements of Cash Flows (unaudited):
For the Nine Months Ended March 31, 2000 and 1999.................3
Notes to Consolidated Financial Statements........................5
Item 2 Management's Discussion and Analysis of
Results of Operations and Financial Condition.....................7
Item 3 Quantitative and Qualitative Disclosure Regarding Market Risk....16
PART II OTHER INFORMATION
Item 1 Legal Proceedings................................................20
Item 2 Changes in Securities............................................20
Item 3 Defaults Upon Senior Securities..................................20
Item 4 Submission of Matters to a Vote of Security Holders..............20
Item 5 Other Information................................................20
Item 6 Exhibits and Reports on Form 8-K.................................20
SIGNATURES .................................................................21
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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,
2000 1999
(Unaudited)
<S> <C> <C>
ASSETS:
Cash and cash equivalents, including short-term bank obligations of
$4,615 at March 31, 2000 and $4,940 at June 30, 1999 $ 9,919 $ 9,515
Investment securities available for sale, amortized cost of $37,557
at March 31, 2000 and $26,109 at June 30, 1999 36,878 25,816
Mortgage-backed securities available for sale, amortized cost of
$22,129 at March 31, 2000 and $25,326 at June 30, 1999 21,360 24,871
Mortgage-backed securities held to maturity, estimated fair value of
$37,499 at March 31, 2000 and $36,984 at June 30, 1999 38,839 37,717
Loans receivable held for sale 832 100
Loans receivable held for investment, net of allowance for loan losses of
$2,024 at March 31, 2000 and $1,845 at June 30, 1999 371,651 354,989
Accrued interest receivable 3,015 2,979
Stock of Federal Home Loan Bank of San Francisco, at cost 5,629 5,407
Real estate acquired through foreclosure, net 738 827
Premises and equipment, net 3,389 3,166
Prepaid expenses and other assets, net 4,357 3,343
------------- -------------
Total assets $ 496,607 $ 468,730
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Deposit accounts $ 364,462 $ 324,106
Federal Home Loan Bank advances 93,877 108,002
Securities sold under agreements to repurchase
Accrued expenses and other liabilities 3,404 4,251
------------- -------------
Total liabilities 461,743 436,359
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; 2,221,871 shares outstanding at March 31, 2000
and 2,176,323 shares outstanding at June 30, 1999 27 27
Additional paid-in capital 21,628 21,297
Retained earnings, substantially restricted 20,932 19,236
Accumulated other comprehensive income (812) (440)
Deferred stock compensation (849) (1,141)
Treasury stock; 505,785 shares at March 31, 2000
and 551,333 at June 30, 1999 (6,062) (6,608)
-------------- -------------
Total stockholders' equity 34,864 32,371
-------------- -------------
Total liabilities and stockholders' equity $ 496,607 $ 468,730
============== =============
</TABLE>
1
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<TABLE>
<CAPTION>
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,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest on loans $ 7,138 $ 6,707 $ 20,893 $ 19,363
Interest on investment securities 553 403 1,724 1,051
Interest on mortgage-backed securities 1,001 888 2,948 2,892
Other 117 97 371 452
-------- -------- -------- --------
Total interest income 8,809 8,095 25,936 23,758
-------- -------- -------- --------
INTEREST EXPENSE:
Interest on deposit accounts 3,793 3,367 11,207 10,206
Interest on borrowings 1,328 1,511 4,030 4,379
-------- -------- -------- --------
Total interest expense 5,121 4,878 15,237 14,585
-------- --------
Net interest income before provision for loan losses 3,688 3,217 10,699 9,173
PROVISION FOR LOAN LOSSES 150 280 520 759
-------- --------- -------- --------
Net interest income after provision for loan losses 3,538 2,937 10,179 8,414
OTHER INCOME (EXPENSE):
Loan servicing and other fees 102 132 359 428
Deposit account fees 196 143 592 431
Secondary marketing activity, net 3 28 17 89
Gain on sale or redemption of securities
available for sale, net 58 28 94 35
Other income 151 139 462 393
-------- -------- ------- -------
Total other income 510 470 1,524 1,376
-------- -------- ------- -------
OTHER EXPENSES:
Compensation and other employee expenses 1,588 1,299 4,544 3,777
Office occupancy 274 244 824 779
Data Processing and Equipment 312 286 971 861
Advertising 60 40 180 108
FDIC insurance premiums 19 45 113 132
Merger-related expenses 33 420
Other operating expenses 506 349 1,578 1,101
-------- -------- ------- -------
Total general and administrative expenses 2,792 2,263 8,630 6,758
Net loss (gain) on real estate acquired
through foreclosure 5 (28) (43) (163)
-------- -------- ------- -------
Total other expenses 2,797 2,235 8,587 6,595
-------- --------- -------- -------
EARNINGS BEFORE INCOME TAXES 1,251 1,172 3,116 3,195
INCOME TAXES 516 471 1,420 1,304
-------- -------- ------- --------
NET EARNINGS $ 735 $ 701 $ 1,696 $ 1,891
======== ======== ======= ========
EARNINGS PER SHARE - Basic $ 0.33 $ 0.32 $ 0.77 $ 0.85
======== ======== ======= ========
EARNINGS PER SHARE - Diluted $ 0.31 $ 0.31 $ 0.72 $ 0.82
======== ======== ======= ========
</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,
2000 1999
-------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 1,696 $ 1,891
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization 693 503
Loans originated for sale (4,336) (16,402)
Proceeds from sale of loans 5,291 15,619
Gain on sale of loans, net (23) (113)
Gain on sale of investments available for sale, net (94) (38)
Gain on sale of mortgage-backed securities available for sale, net (2)
Federal Home Loan Bank stock dividend (222) (198)
Increase in prepaid expenses and other assets (1,210) (2,206)
Amortization of deferred loan fees (103) (224)
Deferred loan origination costs (182) (343)
(Decrease) increase in accrued expenses and other liabilities (518) 406
Provision for loan losses 520 759
Provision for (recapture of) real estate losses 3 (52)
Premium amortization, net 248 622
Decrease in accrued interest receivable (36) (201)
Other, net 163 222
------------- ------------
Net cash provided by operating activities 1,890 243
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities available for sale (60,000) (83,273)
Proceeds from sale and redemption of investment securities available for sale 48,584 85,892
Purchase of mortgage-backed securities available for sale (10,153)
Proceeds from sale of mortgage-backed securities available for sale 6,931
Purchase of mortgage-backed securities held to maturity (5,531) (15,060)
Principal repayments on mortgage-backed securities 7,516 18,667
Loans funded, net (38,037) (58,291)
Loans purchased, net (16,951) (70,963)
Principal repayments on loans 36,266 71,714
Proceeds from sale of real estate 737 2,687
Purchase of premises and equipment (679) (137)
Purchase of Federal Home Loan Bank Stock (906)
Other, net (791) (63)
------------- ------------
Net cash used in investing activities (28,886) (52,955)
</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,
------------------------------------
2000 1999
---------------- ---------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in certificate accounts $ (800) $ (15,676)
Net increase in passbook, money market savings
NOW and non-interest-bearing accounts 4,354 44,323
Purchase of deposit accounts 36,802
Proceeds from Federal Home Loan Bank advances 14,000 59,500
Repayment of Federal Home Loan Bank advances (28,126) (26,097)
Proceeds from securities sold under agreements to repurchase 4,300
Repayment of securities sold under agreements to repurchase (10,300)
Exercise of stock options 479
Purchase of treasury stock (2,547)
Other, net 691 489
---------------- ---------------
Net cash provided by financing activities 27,400 53,992
NET INCREASE IN CASH AND CASH EQUIVALENTS 404 1,280
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 9,515 20,008
---------------- ---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 9,919 $ 21,288
================ ===============
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid during the period for:
Interest $ 15,212 $ 14,570
Income taxes, net 1,475 1,510
NONCASH INVESTING ACTIVITIES DURING THE PERIOD:
Real estate acquired through foreclosure 628 2,241
Change in net unrealized loss on investment securities and
mortgage-backed securities available for sale, net of taxes (372) (84)
</TABLE>
4
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SGV BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(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, 2000 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, 1999 included in the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1999.
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 MARCH 31, 2000
BASIC EPS
<S> <C> <C> <C>
Income available to common stockholders $ 735,000 2,222,000 $ 0.33
Effect of Dilutive Securities
Incremental shares from assumed exercise
of outstanding options - 146,000 (0.02)
Diluted EPS
Income available to common stockholders $ 735,000 2,368,000 $ 0.31
================ ============== ===============
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31, 2000
<S> <C> <C> <C>
BASIC EPS
Income available to common stockholders $ 1,696,000 2,195,000 $ 0.77
Effect of Dilutive Securities
Incremental shares from assumed exercise
of outstanding options - 157,000 (0.05)
Diluted EPS
Income available to common stockholders $ 1,696,000 2,352,000 $ 0.72
================ ============== ================
</TABLE>
5
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<TABLE>
<CAPTION>
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
<S> <C> <C> <C>
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
============== ============= =============
</TABLE>
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
2000 and 1999, the Company's comprehensive income was as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
(Dollars in thousands)
<S> <C> <C>
Net income $ 735 $ 701
Other comprehensive loss (80) (16)
Total comprehensive income $ 655 $ 685
======================= =======================
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
(Dollars in thousands)
<S> <C> <C>
Net income $ 1,696 $ 1,891
Other comprehensive loss (372) (84)
Total comprehensive income $ 1,324 $ 1,807
======================= =======================
</TABLE>
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. In July 1999, the Financial Accounting
Standards Board (FASB) issued SFAS No. 137, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE OF FASB
STATEMENT NO. 133, which delays the effective date of SFAS No. 133 to fiscal
years beginning after June 15, 2000. Earlier application is encouraged, but it
is permitted only as of the beginning
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of any fiscal quarter that begins after June 1998. The adoption of the
provisions of SFAS No. 133 as amended by SFAS No. 137 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.
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, 1999. Accordingly, the ensuing discussion focuses upon the
material matters at and for the three months and nine months ended March 31,
2000.
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 has historically retained the
servicing rights of loans sold, although it has recently sold loans to the
secondary market on a servicing released basis. 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.
RECENT DEVELOPMENTS - ACQUISITION BY INDYMAC MORTGAGE HOLDINGS, INC.
- --------------------------------------------------------------------
On July 12, 1999, the Company and IndyMac Mortgage Holdings, Inc.
("IndyMac") entered into a definitive agreement pursuant to which IndyMac will
acquire the Company for cash. Under the terms of the merger agreement, each
share of the Company's common stock will be exchangeable for $25.00 in cash.
This price may be subject to adjustment as a result of changes in the net
portfolio value of certain assets and liabilities of the Company. In no event
will the purchase price be reduced below $22.50 or increased above $27.50 per
share. Based upon a per share price of $25.00, IndyMac will pay a total of
approximately $62.5 million to acquire all of the Company's shares outstanding
and subject to options. In accordance with the terms of the amended merger
agreement, IndyMac will be the surviving entity of the merger. The merger has
been approved by the shareholders of both companies in separate special meetings
held on December 14, 1999. The merger still requires the approval of certain
regulatory agencies. The merger is expected to be completed in the second
quarter of calendar 2000.
RESULTS OF OPERATIONS
- ---------------------
The Company posted net earnings of $735,000 for the three months ended
March 31, 2000 compared to net earnings of $701,000 for the three months ended
March 31, 1999. In regard to basic earnings per share, for the three months
ended March 31, 2000, net earnings were $0.33 compared to net earnings of $0.32
for the three months ended March 31, 1999. For the nine months ended March 31,
2000, net earnings were $1.7 million as
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compared to $1.9 million for the nine months ended March 31, 1999. In regard to
basic earnings per share, for the nine months ended March 31, 2000, net earnings
were $0.77 compared to net earnings of $0.85 for the nine months ended March 31,
1999. The net earnings for the three and nine months ended March 31, 2000
included approximately $33,000 and $420,000, respectively, in expenses incurred
in connection with the pending merger with IndyMac Mortgage Holdings, Inc.
(such costs are not considered deductible under current tax laws; therefore, no
tax benefit has been provided).
Net Interest Income
- -------------------
Net interest income before the provision for loan losses was $3.7
million for the three months ended March 31, 2000 compared to $3.2 million for
the three months ended March 31, 1999. For the nine months ended March 31, 2000,
net interest income was $10.7 million as compared to $9.2 million for the nine
months ended March 31, 1999.
Interest Income
- ---------------
Total interest income for the three months ended March 31, 2000 was
$8.8 million, an increase of $714,000 from the comparable period a year ago. The
increase in interest income was primarily due to the $28.9 million increase in
the average balance of interest-earning assets to $475.9 million for the three
months ended March 31, 2000 from $447.0 million for the three months ended March
31, 1999. The majority of the growth in interest-earning assets is attributed to
the savings account acquisition from Citibank, California, a federal savings
bank, in July 1999. The interest income on loans increased to $7.1 million for
the three months ended March 31, 2000 from $6.7 million for the three months
ended March 31, 1999. The increase in interest on loans was due primarily to the
increase in the average balance of loans receivable outstanding to $371.9
million for the three months ended March 31, 2000 from $351.4 million for the
three months ended March 31, 1999. The increase was also due to the increase in
the average yield on loans receivable to 7.68% for the three months ended March
31, 2000 compared to 7.63% for the three months ended March 31, 1999. The
increase in yield on the loan portfolio was partially due to the increase in the
percentage of non-residential mortgage loans (normally have higher overall
yields than single-family residential mortgage loans) which comprised
approximately 23% of the total portfolio at March 31, 2000 versus approximately
15% at March 31, 1999. The interest income on mortgage-backed securities totaled
$1.0 million for the three months ended March 31, 2000, surpassing the $0.9
million posted for the comparable period a year ago. This increase was due
primarily to the increase in the average yield on mortgage-backed securities to
6.66% for the three months ended March 31, 2000 from 5.97% for the comparable
period a year ago. The increase in yield was due partially to the higher
interest rate environment in the three months ended March 31, 2000 resulting in
a substantial decrease in prepayment speeds and therefore, a decrease in the
amortization of premiums on purchased mortgage-backed securities. The interest
income on investment securities and other securities increased to $670,000 for
the three months ended March 31, 2000 from $500,000 for the same period a year
ago primarily as a result of the increase in the average balances of such
securities to $43.9 million for the three months ended March 31, 2000 from $36.1
million for the same period a year ago and due to the increase in average yield
to 6.10% for the three months ended March 31, 2000 from 5.55% for the same
period a year ago due primarily to the increase in short-term interest rates in
the current period.
Total interest income for the nine months ended March 31, 2000
increased to $25.9 million, representing a 9.2% increase from the $23.8 million
in interest income for nine months ended March 31, 1999. The increase in
interest income was due primarily to the $44.6 million increase in the average
balance of interest-earning assets to $474.5 million for the nine months ended
March 31, 2000. Partially offsetting this increase was the reduction in the
overall yield on interest-earning assets to 7.29% for the nine months ended
March 31, 2000 from 7.37% for the same period a year ago. Total interest income
on loans receivable increased to $20.9 million for the nine months ended March
31, 2000, an increase of $1.5 million from the same period a year ago. This
increase was due to the $32.1 million increase in the average balance of loans
receivable to $366.5 million for the nine months ended March 31, 2000, partially
offset by the 12 basis point reduction in the average yield to 7.60% for the
current period. Interest income on the mortgage-backed securities portfolio
reflected a slight increase of $56,000 to $2.9 million for
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the nine months ended March 31, 2000, due primarily to the increase in the
average yield to 6.52% for the nine months ended March 31, 2000 from 6.21% for
the same period a year ago. The increase in yield on mortgage-backed securities
was primarily due to the higher interest rate environment during the last nine
months as compared to the nine months ended March 31, 1999 resulting in a
substantial decrease in the amortization of premiums on mortgage-backed
securities and therefore, a higher overall yield. Interest on investment and
other securities increased to $2.1 million for the nine months ended March 31,
2000 from $1.5 million for the same period a year ago. This increase was due to
the increase in the average balance of investment and other securities to $47.6
million for the nine months ended March 31, 2000 from $33.4 million for the same
period a year ago, partially offset by the 14 basis point decrease in the
average yield to 5.87% for the current period. The decline in the overall yield
on investment and other securities was the result of maintaining higher
short-term investments as a result of the acquisition of deposits from Citibank
and the desire to maintain higher liquidity in anticipation of a higher than
usual need for cash due to Y2K.
Interest Expense
- ----------------
Total interest expense for the three months ended March 31, 2000 was
$5.1 million, an increase from the $4.9 million in interest expense for the
three months ended March 31, 1999. The increase in interest expense was
primarily due to the increase in the average balance of interest-bearing
liabilities to $437.9 million for the three months ended March 31, 2000 as
compared to $415.7 million for the three months ended March 31, 1999. Interest
expense on deposit accounts increased to $3.8 million for the three months ended
March 31, 2000 from $3.4 million for the same period a year ago. This increase
was related to the $35.5 million increase in the average balance of
interest-bearing deposit accounts to $343.4 million for the three months ended
March 31, 2000 due primarily to the acquisition of $35 million in
interest-bearing deposit accounts from Citibank in July 1999. The increase in
interest expense was also due to the slight increase in the average cost of
deposit accounts to 4.42% for the three months ended March 31, 2000 from 4.37%
for the same period a year ago. Interest expense on borrowings decreased by
$183,000 to $1.3 million for the three months ended March 31, 2000 due to the
$13.3 million decrease in the average balance of borrowings to $94.5 million for
the three months ended March 31, 2000. The Company reduced its borrowings in the
current period primarily as a result of the cash received from the deposit
acquisition from Citibank in July 1999.
Total interest expense for the nine months ended March 31, 2000 was
$15.2 million, representing a $652,000 increase from the $14.6 million total for
the same period a year ago. The increase in interest expense was due primarily
to the $40.7 million increase in the average balance of interest-bearing
liabilities to $437.8 million for the nine months ended March 31, 2000,
substantially offset by the 26 basis point decrease in the average cost of
interest-bearing liabilities to 4.64% for the current period. Interest expense
on deposit accounts increased to $11.2 million for the nine months ended March
31, 2000 from $10.2 million for the same period a year ago. This increase was
due to the $45.0 million increase in the average balance of deposit accounts to
$342.0 million for the nine months ended March 31, 2000, partially offset by the
21 basis point decrease in the average cost of deposits to 4.37% for the current
period. Interest expense on borrowings declined to $4.0 million for the nine
months ended March 31, 2000 from $4.4 million for the same period a year ago due
to the $4.3 million decline in the average balance of borrowings to $95.8
million for the nine months ended March 31, 2000 and to the 22 basis point
decline in the average cost of borrowings to 5.61% for the nine months ended
March 31, 2000.
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Analysis of Net Interest Income
- -------------------------------
The following table sets forth average interest rates on the Company's
interest-earning assets and interest-bearing liabilities for the three month and
nine month periods ended March 31, 2000 and March 31, 1999 (dollars are in
thousands and average balances are based on month-end amounts):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
MARCH 31, MARCH 31,
2000 1999 2000 1999
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 $371,885 7.68% $351,441 7.63% $366,523 7.60% $334,428 7.72%
Mortgage-backed securities 60,101 6.66 59,472 5.97 60,327 6.52 62,103 6.21
Investment securities and
other 43,935 6.10 36,067 5.55 47,617 5.87 33,362 6.01
Total interest-earning
assets 475,921 7.40% 446,980 7.24% 474,467 7.29% 429,893 7.37%
Noninterest-earning assets 16,284 16,634 16,445 14,463
Total assets $492,205 $463,614 $490,912 $444,356
=========== =========== ============ ============
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
Savings accounts $343,375 4.42% $307,882 4.37% $341,976 4.37% $297,000 4.58%
Borrowings 94,522 5.62 107,785 5.61 95,825 5.61 100,102 5.83
Total interest-bearing
liabilities 437,897 4.68% 415,667 4.69% 437,801 4.64% 397,102 4.90%
Noninterest-bearing liabilities 19,995 16,426 19,740 15,747
Stockholders' equity 34,313 31,521 33,371 31,507
Total liabilities and equity $492,205 $463,614 $490,912 $444,356
=========== =========== ============ ============
Net interest rate spread 2.72% 2.55% 2.65% 2.47%
Net interest margin 3.10% 2.88% 3.01% 2.85%
Ratio of interest-earning assets to
interest-bearing liabilities 108.68% 107.53% 108.38% 108.26%
</TABLE>
The Company's average net interest spread increased to 2.72% for the
three months ended March 31, 2000 as compared 2.55% for the three months ended
March 31, 1999. The increase was due primarily to the increase in the yield on
interest-earning assets to 7.40% for the three months ended March 31, 2000 from
7.24% for the three months ended March 31, 1999. The overall cost of
interest-bearing liabilities was approximately the same, as the average cost for
the three months ended March 31, 2000 was 4.68% as compared to the average cost
of 4.69% for the same period a year ago.
The overall yield on interest-earning assets increased by 16 basis
points to 7.40% for the three months ended March 31, 2000. The increase was the
result of improvements in all categories of interest-earning assets: loans,
mortgage-backed securities and other investments. The average yield on loans
receivable increased by 5 basis points to 7.68% for the three months ended March
31, 2000 due to the rising interest rate environment and to the approximate 50%
increase in non-residential lending average balances over the current period in
comparison to the same period a year ago. The Company increased its
non-residential lending activities during the prior twelve months with this
portion of the loan portfolio now comprising 23% of the total loan portfolio.
Non-residential loans have higher yields than single-family loans, although the
Company's primary portfolio product continues to be single-family lending. The
average yield on mortgage-backed securities improved to 6.66% for the three
months ended March 31, 2000 as compared to 5.97% for the three months ended
March 31, 1999 due primarily to the reduction in the amortization of premiums
related to the reduction in prepayment speeds resulting from rising interest
rates. The average yield on investment securities and other securities increased
to 6.10% for the three months ended March 31, 2000 from 5.55% for three months
ended March 31, 1999. Although the Company
10
<PAGE> 13
increased its average balance of short-term investments received from the
Citibank deposit acquisition throughout the Y2K period, the continued increase
in short-term interest rates improved the overall yield of the investment
portfolio.
For the nine months ended March 31, 2000, the average yield on
interest-earning assets declined to 7.29% from 7.37% for the same period a year
ago. The decline in the overall yield was primarily the result of the 12 basis
point decline in the yield on the loan portfolio which decreased to 7.60% for
the nine months ended March 31, 2000. The decline in the yield on the loan
portfolio was primarily due to the existence of lower rates on the eleventh
district cost of funds index (COFI) adjustable rate mortgage loans throughout
the first six months of this fiscal year as compared to the same period a year
ago. Due to the recent rise in interest rates, COFI has also begun to trend
upward which is expected to improve the yield on such loans which comprise
approximately 44% of the total loan portfolio. The yield on mortgage-backed
securities improved slightly to 6.52% for the nine months ended March 31, 2000
from 6.21% for the same period a year ago due primarily to a decrease in the
amortization of premiums resulting from the reduced prepayment speeds. The yield
on investment and other securities was 5.87% for the nine months ended March 31,
2000, representing a 14 basis points decline from the same period a year ago.
This decline was primarily due to the maintenance of higher balances of
short-term investments during the current period following the funds received
from the deposit acquisition.
The overall cost of interest-bearing liabilities declined slightly to
4.68% for the three months ended March 31, 2000 from 4.69% for the same period a
year ago. This decline occurred even though the average cost of savings accounts
and the average cost of borrowings both increased slightly. This was due
primarily to a shift in the composition of interest-bearing liabilities, as the
average balance of savings accounts as a percent of total interest-bearing
liabilities increased to 78.4% for the three months ended March 31, 2000 as
compared to 74.1% for the same period a year ago. Since the average cost of
savings accounts is substantially lower than the average cost of borrowings, the
overall result was a decline in the average cost of interest-bearing
liabilities. The average cost of savings deposits increased slightly to 4.42%
for the three months ended March 31, 2000 from 4.37% for the same period a year
ago due to an increase in the interest rate environment. The average cost of
borrowings was relatively unchanged at 5.62% for the three months ended March
31, 2000 from 5.61% for the same period a year ago.
For the nine months ended March 31, 2000, the cost of interest-bearing
liabilities decreased to 4.64%, a decline of 26 basis points from 4.90% for the
same period a year ago. The overall decrease was due to the decline in both the
average cost of savings accounts and of borrowings. The average cost of savings
accounts declined by 21 basis points to 4.37% for the nine months ended March
31, 2000 from 4.58% for the same period a year ago. The decline was due to the
$28.8 million increase in average core deposits, which generally have lower
interest rates, to $130.0 million for the nine months ended March 31, 2000. The
average cost of borrowings for the nine months ended March 31, 2000 declined by
22 basis points to 5.61% for the nine months ended March 31, 2000, primarily due
to the replacement of matured borrowings with those of lower rates.
Provision for Loan Losses
- -------------------------
The provision for loan losses totaled $150,000 for the three months
ended March 31, 2000 as compared to $280,000 for the three months ended March
31, 1999. The decline in the Company's provision for loan loss charge for the
three months ended March 31, 2000 as compared to the three months ended March
31, 1999 was partially due to the establishment of a $200,000 reserve for a
single-family mortgage loan during the three months ended March 31, 1999 not
recurring in the current period. For the nine months ended March 31, 2000 the
provision for loan losses totaled $520,000, as compared to $759,000 for the same
period a year ago. The decline from a year ago is primarily due to the decline
in net charge-offs to $350,000 for the nine months ended March 31, 2000 as
compared to $452,000 for the same period a year ago and to the establishment of
the $200,000 specific reserve not recurring in the current period. See
"Financial Condition."
11
<PAGE> 14
Other Income
- ------------
Other income increased slightly to $510,000 for the three months ended
March 31, 2000 from $470,000 for the three months ended March 31, 1999. The
Company's fee income on savings accounts increased by $53,000 to $196,000 for
the three months ended March 31, 2000 as compared to the same period a year ago
due to the increase in core deposits and the deposit acquisition. The Company
also posted $58,000 in net gains on sales of investments available for sale and
for mark-to-market adjustments in the investments underlying the Company's
deferred compensation plans in the three months ended March 31, 2000 as compared
to $28,000 for the comparable period a year ago. Income from secondary marketing
activities was only $3,000 for the three months ended March 31, 2000 as compared
to $28,000 for the same period a year ago due primarily to the rise in interest
rates resulting in a decline of fixed-rate mortgage applications. For the nine
months ended March 31, 2000, other income increased approximately $148,000 to
$1.5 million. The majority of the increase was due to increased fee income on
savings accounts which increased by $161,000 to $592,000 for the nine months
ended March 31, 2000 from $431,000 for the same period a year ago. See
"Financial Condition."
Other Expenses
- --------------
The Company's other expenses increased to $2.8 million for the three
months ended March 31, 2000 as compared to $2.2 million for the three months
ended March 31, 1999. The Company incurred approximately $33,000 in costs for
its pending merger with IndyMac Mortgage Holdings, Inc. during the three months
ended March 31, 2000. Compensation and other employee costs increased
approximately $289,000 to $1.6 million for the three months ended March 31, 2000
due to additional employees (in part related to the branch office purchased from
Citibank) and to the increase in stock-related compensation plans as a result of
the increase in the value of the Company's common stock. All of the other
categories of other expenses reflected increases due to the operation of an
additional branch in the three months ended March 31, 2000 as compared to the
same period a year ago. Included in other expenses was approximately $92,000 in
amortization of the goodwill associated with the premiums paid on the deposits
acquired from Citibank and from a prior acquisition.
For the nine months ended March 31, 2000, the Company's other expenses
increased to $8.6 million from $6.6 million for the same period a year ago. The
Company's costs for the pending merger with IndyMac totaled $420,000 for the
nine months ended March 31, 2000. Compensation and other employee costs
increased to $4.5 million for the nine months ended March 31, 2000 compared to
$3.8 million for the same period a year ago due primarily to increased costs for
stock-related compensation plans and additional personnel. Data processing and
equipment charges increased by approximately $110,000 in the three months ended
March 31, 2000 to $971,000 due primarily to the Citibank acquisition. Other
operating expenses increased to $1.6 million, an increase of $477,000 due to
increased amortization of goodwill related to the deposit acquisition, the
initial costs to convert and acquire the deposits from Citibank, and to a lessor
extent on Y2K-related issues.
Income Taxes
- ------------
The Company's income taxes increased to $516,000 for the three months
ended March 31, 2000 compared to $471,000 in income taxes for the three months
ended March 31, 1999. The increase in taxes was primarily due to the improvement
in pre-tax earnings and to the expected non-deductibility of the $33,000 in
costs incurred regarding the pending merger with IndyMac Mortgage Holdings, Inc.
As a result of these non-deductible expenses, the effective tax rate for the
three months ended March 31, 2000 increased to 41.2% from 40.2% for the three
months ended March 31, 1999. For the nine months ended March 31, 2000, total
taxes were $1,420,000, as compared to $1,304,000 in total taxes accrued for the
same period a year ago. In regards to the nine months ended March 31, 2000, the
increase in taxes was primarily due to the expected non-deductibility of
$420,000 in costs incurred regarding the pending merger with IndyMac. As a
result, the effective tax rate for the nine months ended March 31, 2000
increased to 45.6% from 40.8% for the same period a year ago.
12
<PAGE> 15
FINANCIAL CONDITION
- -------------------
The Company's total assets increased to $496.6 million at March 31,
2000 from $468.7 million in total assets at June 30, 1999. The Company's loans
receivable held for investment increased by $16.7 million to $371.7 million at
March 31, 2000 compared to $355.0 million at June 30, 1999. The growth in the
loan portfolio was aided by the purchase of $17.0 million in mortgage loans
during the nine months ended March 31, 2000. The Company was able to increase
its loan portfolio even though its total volume of originations and purchases
declined by more than 55% in the nine months ended March 31, 2000 as compared to
the same period a year ago as the rise in interest rates also resulted in a
similar decline in the level of prepayments. Total principal repayments on loans
received during the nine months ended March 31, 2000 were only $36.3 million as
compared to $71.7 million for the same period a year ago.
During the nine months ended March 31, 2000, the Company originated and
purchased for investment a total of $55.0 million in mortgage loans as compared
to the $129.3 million purchased and originated in the nine month period ended
March 31, 1999. The significant reduction in overall lending activity was due to
the increase in interest rates resulting in a substantial fall-off in loan
prepayments and therefore less of a need to purchase or originate loans as
replacements. Also, in regards to the loans funded for portfolio during the nine
months ended March 31, 2000, approximately 95% were adjustable rate mortgage
loans as fixed-rate loan rates rose significantly during the nine months ended
March 31, 2000 which curtailed interest in this type of loan. As a result of the
increase in interest rates, the Company only originated $5.3 million in loans
held for sale and sold approximately $4.3 million in mortgage loans to the
secondary market or to other financial institutions during the nine months ended
March 31, 2000. The total mortgage-backed securities portfolio declined to $60.2
million at March 31, 2000 from $62.6 million at June 30, 1999, primarily as a
result of the $7.5 million in principal reduction partially offset by the
purchase of approximately $5.5 million in adjustable-rate mortgage-backed
securities during the nine months ended March 31, 2000. The Company's balance of
investment securities available for sale increased by $11.1 million to $36.9
million at March 31, 2000 as the Company maintained higher short-term
investments throughout the Y2K process and in consideration of higher current
interest rates. The Company's other assets increased during the nine months
ended March 31, 2000 primarily due to the $1.3 million in deposit premiums
related to the Citibank acquisition.
The Company's non-performing assets totaled $2.2 million at March 31,
2000 compared to $2.4 million at June 30, 1999. The slight decrease in
non-performing assets was related to decreases in both the balance of real
estate acquired in settlement of loans which totaled $738,000 at March 31, 2000
as compared to $827,000 at June 30, 1999 and the balance of non-performing loans
which totaled $1.4 million versus $1.5 million at June 30, 1999. This change
reduced the Company's ratio of non-performing assets to total assets to 0.44% at
March 31, 2000 from 0.50% at June 30, 1999.
The following table sets forth the non-performing assets at March 31,
2000 and June 30, 1999:
<TABLE>
<CAPTION>
March 31, 2000 June 30, 1999
(Dollars in thousands)
<S> <C> <C>
Non-accrual loans $1,448 $1,524
Real estate acquired through foreclosure 738 827
Non-performing assets $2,186 $2,351
============= =============
Non-performing assets as a percent
of total assets 0.44% 0.50%
Non-performing loans as a percent
of gross loans receivable 0.39% 0.43%
</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
13
<PAGE> 16
impairment as part of the Company's normal internal asset review process. The
Company applies the measurement provisions of SFAS No. 114, as amended by SFAS
No. 118, 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. For those loans which are reviewed individually for impairment, at March
31, 2000, the Company had classified two loans totaling $346,000 as impaired
with no specific reserves and had no such loans classified as impaired at June
30, 1999 with no specific reserves as determined in accordance with SFAS No.
114, as amended by SFAS No. 118. In addition, the Company had $1.1 million and
$1.5 million at March 31, 2000 and June 30, 1999, respectively, in impaired
loans, which were collectively evaluated for impairment with $38,000 and
$238,000 in reserves set aside as of March 31, 2000 and June 30, 1999,
respectively. The average recorded investment in impaired loans, inclusive of
those evaluated collectively, during the nine months ended March 31, 2000, was
$1.6 million, whereas, the average for the twelve months ended June 30, 1999 was
$1.9 million.
The Company, in consideration of the current economic environment and
the condition of the loan portfolio, maintained the allowance for loan losses at
March 31, 2000 at $2.0 million. The loans on non-accrual status have decreased
slightly to $1.4 million at March 31, 2000 from $1.5 million at June 30, 1999.
The allowance for loan losses is maintained at an amount management considers
adequate to cover estimated losses in loans receivable which are deemed probable
and estimable. The allowance is based upon a number of factors, including
current economic conditions, actual loss experience and industry trends. 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 loan losses for the nine months ended March 31, 2000:
<TABLE>
<CAPTION>
Activity for the Nine Months Ended
March 31, 2000
(Dollars in thousands)
<S> <C>
Balance at June 30, 1999 $1,845
Add:
Provision for loan losses 520
Recoveries of previous charge-offs 9
Less:
Charge-off of consumer loans 144
Charge-off of real estate loans 206
Balance at March 31, 2000 $2,024
====================
</TABLE>
The Company's total liabilities increased to $461.7 million at March
31, 2000 from $436.4 million at June 30, 1999. Total deposit accounts increased
$40.4 million to $364.5 million at March 31, 2000 from $324.1 million at June
30, 1999, primarily as a result of the acquisition of deposit accounts from
Citibank in July 1999. The Company decreased its borrowings from the FHLB by
$14.1 million during the three months ended March 31, 2000 as the Company used a
portion of the cash received from the acquisition of the Citibank deposits to
allow maturing short-term FHLB borrowings to roll off. Also, an additional $14.0
million in FHLB borrowings which matured during the nine months ending March 31,
2000 were renewed into five-year terms to assist in the lengthening of the
average life of the Company's liabilities and lessen its interest-rate
sensitivity. The Company continues to utilize
14
<PAGE> 17
FHLB advances and securities sold under agreements to repurchase as part of its
asset and liability management strategy.
The Company's stockholders' equity increased to $34.9 million at March
31, 2000 from $32.4 million at June 30, 1999 primarily as a result of the net
earnings for the nine months ending March 31, 2000 and to the exercise of
approximately 45,000 in vested options in December 1999. The common stock issued
on behalf of the exercised options was from the Company's treasury stock.
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 the majority of the Company's investments which are not committed or pledged
to specific liabilities. The Association's average liquidity ratio for March 31,
2000 and March 31, 1999 was 19.12% and 16.42%, respectively.
15
<PAGE> 18
COMMITMENTS AND CONTINGENT LIABILITIES
- --------------------------------------
At March 31, 2000, there were no material changes to the Company's
commitments or contingent liabilities from the period ended June 30, 1999 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, 1999 included in the Annual Report on Form 10-K for
the year ended June 30, 1999. At March 31, 2000, the Company had outstanding
commitments to originate or purchase mortgage loans of $1.8 million, as compared
to $4.8 million at June 30, 1999.
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, 2000, the
Association was considered "well-capitalized".
The Association was in compliance with the capital requirements in
effect as of March 31, 2000. The following table reflects the required ratios
and the actual capital ratios of the Association at March 31, 2000:
<TABLE>
<CAPTION>
CAPITAL
ACTUAL REQUIRED EXCESS ACTUAL REQUIRED
CAPITAL CAPITAL AMOUNT PERCENT PERCENT
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tangible $ 32,648 $ 7,444 $ 25,204 6.58% 1.50%
Core $ 32,648 $ 19,852 $ 12,796 6.58% 4.00%
Risk-based $ 34,634 $ 21,250 $ 13,384 13.04% 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 management's 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,
1999.
YEAR 2000
- ---------
As of April 28, 2000, the Company has experienced no disruptions or
problems regarding the year 2000 changeover. As part of the Company's Y2K plan,
on January 1, 2000, the Company tested and sampled internal
16
<PAGE> 19
systems including its primary third-party data processor, telecommunication
systems, automated teller machines and related third-party vendors supporting
these machines, various third-party software applications and the Company's
ability to interface with its correspondent banks such as the Federal Reserve
Bank of San Francisco. All sampling and testing completed on January 1, 2000
indicated all systems were operating as normal. Through April 28, 2000, all of
the Company's internal hardware and software continue to operate as normal and
to-date, and to the Company's knowledge, all vendors utilized by the Company in
its daily operations are operating normally and have not indicated any Y2K
anomalies.
As of April 28, 2000, there has been no indication of any misstatement
or misrepresentation of any deposit or loan customer financial position based
upon the records of the Company. Also, from the deposit or loan customers
perspective, no customers have advised the Company that they are having any
Y2K-related issues which would present any financial exposure to the Company.
The Company continued to monitor and oversee all internal operations
and was in contact with its vendors regarding the additional Y2K dates (such as
February 29, 2000 and March 1, 2000) which were identified as presenting
potential Y2K issues. The Company did not experience any problems throughout
these additional dates. The Company will continue to monitor its internal
operations and vendors into the future, but based upon the continued successful
operations to date, does not anticipate any problems to arise.
The Company's expenditures for the Y2K effort totaled approximately
$222,000, which is below the expected total of $260,000 (these costs exclude
approximately $700,000 in hardware and software purchased in 1997). A
significant portion of the estimated costs incurred for the Y2K effort was the
use of internal staff resources which totaled approximately $168,000. The
Company did not incur any material costs during the preceding three months in
regards to Y2K.
RECENT LEGISLATION
- ------------------
Recent legislation designed to modernize the regulation of the
financial services industry expands the ability of bank holding companies to
affiliate with other types of financial services companies such as insurance
companies and investment banking companies. However, the legislation provides
that companies that acquire control of a single savings association after May 4,
1999 (or that filed an application for that purpose after that date) are not
entitled to the unrestricted activities formerly allowed for a unitary savings
and loan holding company. Rather, these companies will have authority to engage
in the activities permitted "a financial holding company" under the new
legislation, including insurance and securities-related activities, and the
activities currently permitted for multiple savings and loan holding companies,
but generally not in commercial activities. The authority for unrestricted
activities is grandfathered for unitary savings and loan holding companies, such
as the Company, that existed prior to May 4, 1999. However, the authority for
unrestricted activities would not apply to any company that acquired the
Company. Accordingly, it is likely that after the consummation of the Company's
acquisition by IndyMac Mortgage Holdings, Inc., IndyMac will not be entitled to
engage in the unrestricted activities in which the Company is currently
authorized to engage.
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
the majority of the fixed-rate mortgage loans originated; and (iii) 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.
17
<PAGE> 20
The Association's interest rate sensitivity is monitored by management
through the use of an internally generated model which estimates the change in
net portfolio value ("NPV") over a range of interest rate scenarios. NPV is the
present value of expected cash flows from assets, liabilities and off-balance
sheet contracts. An NPV Ratio, in any interest rate scenario, is defined as the
NPV in that scenario divided by the market value of assets in the same scenario.
The Sensitivity Measure is the decline in the NPV Ratio, in basis points, caused
by a 2% increase or decrease in rates, whichever produces a larger decline. The
higher an institution's Sensitivity Measure is, the greater its exposure to
interest rate risk is considered to be. The OTS also produces a similar analysis
using its own model, based upon data submitted on the Association's quarterly
Thrift Financial Reports.
As of March 31, 2000, the Association's Sensitivity Measure, as
measured by the Association, was 1.41%. The Sensitivity Measure as measured by
the OTS, will not be available until near the end of the second quarter of
calendar 2000. Historically, the differences between the two measurements are
partially attributed to differences in assigning various prepayment rates, decay
rates and discount rates. The Association compares the results from the OTS with
its internally generated results and provides the Board of Directors a
comparison to determine if there is any additional risk.
In addition to monitoring selected measures of NPV, management also
monitors effects on net interest income resulting from changes in interest
rates. These measures are used in conjunction with NPV measures to identify
potential interest rate risk. The Association projects net interest income for
the next 12-month period, based upon certain specific assumptions. For the years
ended June 30, 1999, 1998 and 1997, the forecasted net interest income in the
existing rate environment (held constant for the period) for interest rate risk
management purposes was $11.5 million, $10.2 million, and $8.1 million,
respectively, compared to the actual net interest income recorded of $12.4
million, $10.9 million, and $9.6 million, respectively.
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in NPV requires the making of
certain assumptions which may tend to oversimplify the manner in which actual
yields and costs respond to changes in market interest rates. First, the models
assume that the composition of the Association's interest sensitive assets and
liabilities existing at the beginning of a period remains constant over the
period being measured. Second, the models assume that a particular change in
interest rates is reflected uniformly across the yield curve regardless of
duration to maturity or repricing of specific assets and liabilities. Third, the
model does not take into account the Association's business or strategic plans.
Accordingly, although the NPV measurements and interest income models do provide
an indication of the Association's interest rate risk exposure at a particular
point in time, such measurements are not intended to and do not provide a
precise forecast of the effect of changes in market interest rates on the
Association's net interest income and will differ from actual results.
18
<PAGE> 21
The following table sets forth, at March 31, 2000 and June 30, 1999, an
analysis of the Association's internal report of its interest rate risk measured
by the estimated changes in the NPV resulting from instantaneous and sustained
parallel shifts in the yield curve (+/-300 basis points, measured in 100 basis
point increments).
<TABLE>
<CAPTION>
CHANGE IN NET PORTFOLIO VALUE - MARCH 31, 2000
----------------------------------------------------------
INTEREST RATES NPV AS A % OF
In Basis Points Change Present Value
(Rate Shock) Amount $ Assets
---------------------- ---------------- ---------------- -----------------
(Dollars in thousands)
<S> <C> <C> <C>
300 $28,841 $(13,247) 5.99%
200 34,068 (8,020) 6.96%
100 38,794 (3,294) 7.81%
-- 42,088 - 8.37%
(100) 44,530 2,442 8.76%
(200) 43,252 1,164 8.49%
(300) 41,685 (403) 8.16%
</TABLE>
<TABLE>
<CAPTION>
CHANGE IN NET PORTFOLIO VALUE - JUNE 30, 1999
----------------------------------------------------------
INTEREST RATES NPV AS A % OF
In Basis Points Change Present Value
(Rate Shock) Amount $ Assets
---------------------- ---------------- ---------------- -----------------
(Dollars in thousands)
<S> <C> <C> <C>
300 $26,429 $(14,378) 5.68%
200 32,065 (8,742) 6.79%
100 36,939 (3,868) 7.71%
-- 40,807 - 8.41%
(100) 39,691 (1,115) 8.28%
(200) 39,976 (831) 8.29%
(300) 41,642 836 8.55%
</TABLE>
At March 31, 2000, the Association was slightly less sensitive to
rising interest rates than was evident at June 30, 1999. Although there has been
an increase in the overall interest rate environment from June 30, 1999, the
increased sensitivity resulting from these higher interest rates have been
offset by the increase in core deposits, primarily due to the deposit
acquisition, the replacement of $14 million in short-term borrowings with those
of longer terms and the increase in adjustable rate mortgages during the past
nine months. In comparing the Association's NPV as a percent of present value
assets in the current interest rate environment for March 31, 2000 and June 30,
1999, the ratios reflect a very slight decline to 8.37% from 8.41%. The declines
in the Association's NPVs in rising rates is primarily due to the interest rate
sensitivity of fixed-rate mortgage loans and mortgage-backed securities which
comprise approximately 27% of the total assets of the Association as of March
31, 2000, although this represents a decline from the 30% ratio existing at June
30, 1999.
In regards to the application of the above analysis on the pending
merger with IndyMac, the figures presented above are only intended to provide an
indication of relative interest rate sensitivity of the Association at March 31,
2000 and June 30, 1999. As defined in the original merger agreement dated July
12, 1999 and the amended and restated merger agreement, dated October 25, 1999,
there are several adjustments which must be considered before arriving at an
overall NPV which can be used as outlined in the merger agreement. Such
adjustments include, but are not limited to, the additional equity of the
holding company (adjusted for intercompany eliminations), exercise of stock
options, expenses incurred in connection with the pending merger and a review of
the assumptions used in developing the NPV analysis.
19
<PAGE> 22
Although the Company does provide IndyMac with an analysis of the
Association's NPV on a periodic basis (including the NPV analysis as of March
31, 2000) and provides a summary of the adjustments for items as outlined in the
merger agreement, IndyMac has twenty business days to review this adjusted NPV
and question or comment on the analysis. For further information on NPV in
context with the pending merger, please refer to the merger agreements as noted
above.
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:
2.1 Agreement and Plan of Merger By and Between SGV Bancorp, Inc.
and IndyMac Mortgage Holdings, Inc., Dated as of July 12, 1999**
2.2 Amended and Restated Plan of Merger By and Between SGV
Bancorp, Inc. and IndyMac Mortgage Holdings, Inc., Dated as of
July 12, 1999 and Amended and Restated as of October 25, 1999***
3.1 Certificate of Incorporation of SGV Bancorp, Inc. *
3.2 Bylaws of SGV Bancorp, Inc. *
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.
** Incorporated by reference from the Form 8-K (File No. 000-25664) filed
with the SEC on July 14, 1999.
*** Incorporated herein by reference from the appendices to the definitive
merger proxy statement filed on November 5, 1999.
21
<PAGE> 23
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 9, 2000 /s/ Barrett G. Andersen
- ---------------------------- ----------------------------------------
Date Barrett G. Andersen
President and Chief Executive Officer
May 9, 2000 /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-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 5,304,000
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,615,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 58,238,000
<INVESTMENTS-CARRYING> 38,839,000
<INVESTMENTS-MARKET> 37,499,000
<LOANS> 374,507,000
<ALLOWANCE> 2,024,000
<TOTAL-ASSETS> 496,607,000
<DEPOSITS> 364,462,000
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,404,000
<LONG-TERM> 93,877,000
0
0
<COMMON> 27,000
<OTHER-SE> 34,837,000
<TOTAL-LIABILITIES-AND-EQUITY> 496,607,000
<INTEREST-LOAN> 20,893,000
<INTEREST-INVEST> 4,672,000
<INTEREST-OTHER> 371,000
<INTEREST-TOTAL> 25,936,000
<INTEREST-DEPOSIT> 11,207,000
<INTEREST-EXPENSE> 15,237,000
<INTEREST-INCOME-NET> 10,699,000
<LOAN-LOSSES> 520,000
<SECURITIES-GAINS> 94,000
<EXPENSE-OTHER> 7,157,000
<INCOME-PRETAX> 3,116,000
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,696,000
<EPS-BASIC> 0.77
<EPS-DILUTED> 0.72
<YIELD-ACTUAL> 7.29
<LOANS-NON> 1,448,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 453,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,845,000
<CHARGE-OFFS> 350,000
<RECOVERIES> 9,000
<ALLOWANCE-CLOSE> 2,024,000
<ALLOWANCE-DOMESTIC> 2,024,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
