SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT UNDER 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: 0-22528
QUAKER CITY BANCORP, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 95-4444221
- -------- ----------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
7021 Greenleaf Avenue, Whittier, California 90602
- --------------------------------------------- -----
(Address or principal executive offices) (Zip code)
Registrant's telephone number, including area code (562) 907-2200
Indicate by check mark whether the registrant (1) has filed reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days.
YES [X] NO [_]
Number of shares outstanding of the registrant's sole class of common stock at
May 11, 2000: 5,118,620.
Quaker City Bancorp, Inc.
Index
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition (unaudited) as of
March 31, 2000 and June 30, 1999................................................. 3
Consolidated Statements of Operations (unaudited) for the Three and Nine
Months Ended March 31, 2000 and 1999............................................. 4
Consolidated Statements of Comprehensive Income (unaudited) for the Three
and Nine Months Ended March 31, 2000 and 1999.................................... 5
Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended
March 31, 2000 and 1999.......................................................... 6
Notes to Consolidated Financial Statements....................................... 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations....................................................................... 10
PART II. OTHER INFORMATION
Item 5. Other Information................................................................ 21
Item 6. Exhibits and Reports on Form 8-K................................................. 21
Consolidated Statements of Financial Condition
Unaudited
(In thousands, except share data)
March 31, June 30,
2000 1999
---- ----
Assets
Cash and due from banks........................................... $ 9,148 $ 7,705
Interest-bearing deposits......................................... 420 323
Federal funds sold and other short-term investments............... -- 25,120
Investment securities held to maturity............................ 18,887 11,986
Investment securities available for sale.......................... 9,250 --
Loans receivable, net............................................. 952,257 821,190
Loans receivable held for sale.................................... 8,375 17,028
Mortgage-backed securities held to maturity....................... 84,618 84,078
Mortgage-backed securities available for sale..................... 21,397 15,783
Real estate held for sale......................................... 290 3,138
Federal Home Loan Bank stock, at cost............................. 14,607 12,221
Office premises and equipment, net................................ 7,110 6,430
Accrued interest receivable and other assets...................... 7,211 8,435
---------- ----------
Total assets................................................. $1,133,570 $1,013,437
========== ==========
Liabilities and Stockholders' Equity
Deposits.......................................................... $ 744,231 $ 677,839
Federal Home Loan Bank advances................................... 288,139 234,700
Deferred tax liability............................................ 1,137 1,694
Accounts payable and accrued expenses............................. 5,624 4,612
Other liabilities................................................. 9,934 13,288
---------- ----------
Total liabilities............................................ 1,049,065 932,133
---------- ----------
Stockholders' equity:
Common stock, $.01 par value. Authorized 20,000,000 shares; issued
and outstanding 5,123,620 shares and 5,457,107 at March 31,
2000 and June 30, 1999, respectively........................... 51 55
Additional paid-in capital........................................ 71,646 72,681
Accumulated other comprehensive (loss) income..................... (174) 33
Retained earnings, substantially restricted....................... 14,068 9,855
Deferred compensation............................................. (1,086) (1,320)
---------- ----------
Total stockholders' equity................................... 84,505 81,304
---------- ----------
Total liabilities and stockholders' equity................... $1,133,570 $1,013,437
========== ==========
See accompanying notes to consolidated financial statements.
3
Quaker City Bancorp, Inc.
Consolidated Statements of Operations
Unaudited
(In thousands, except per share data)
Three Months Ended Nine Months Ended
March 31, March 31,
2000 1999 2000 1999
---- ---- ---- ----
Interest income:
Loans receivable........................................... $19,348 $16,285 $54,459 $46,341
Mortgage-backed securities................................. 1,809 1,431 5,243 4,762
Investment securities...................................... 325 208 815 651
Other...................................................... 258 371 808 1,346
------- ------- ------- -------
Total interest income................................... 21,740 18,295 61,325 53,100
------- ------- ------- -------
Interest expense:
Deposits................................................... 8,534 7,349 24,778 22,098
Federal Home Loan Bank advances and other borrowings....... 3,953 2,559 10,298 7,845
------- ------- ------- -------
Total interest expense.................................. 12,487 9,908 35,076 29,943
------- ------- ------- -------
Net interest income before provision for loan losses....... 9,253 8,387 26,249 23,157
Provision for loan losses....................................... 400 500 1,200 1,300
------- ------- ------- -------
Net interest income after provision for loan losses..... 8,853 7,887 25,049 21,857
------- ------- ------- -------
Other income:
Deposit fees............................................... 415 287 1,076 779
Loan servicing charges and fees............................ 426 431 1,387 1,336
Gain on sale of loans held for sale........................ 39 97 249 261
Commissions................................................ 226 207 638 556
Gain on sale of securities available for sale.............. -- -- -- 616
Other...................................................... 42 (11) 49 17
------- ------- ------- -------
Total other income......................................... 1,148 1,011 3,399 3,565
------- ------- ------- -------
Other expense:
Compensation and employee benefits......................... 2,751 2,264 7,691 7,024
Occupancy, net............................................. 705 564 2,129 1,710
Federal deposit insurance premiums......................... 83 133 373 393
Data processing............................................ 261 205 765 636
Advertising and promotional................................ 300 419 705 743
Consulting fees............................................ 212 231 549 498
Other general and administrative expense................... 704 381 1,923 1,665
------- ------- ------- -------
Total general and administrative expense................... 5,016 4,197 14,135 12,669
Real estate operations, net................................ (91) 251 (545) 396
Amortization of core deposit intangible......................... 29 -- 48 --
------- ------- ------- -------
Total other expense........................................ 4,954 4,448 13,638 13,065
------- ------- ------- -------
Earnings before income taxes, extraordinary items and
cumulative effect of change in accounting principle... 5,047 4,450 14,810 12,357
Income taxes.................................................... 2,207 1,952 6,499 5,421
------- ------- ------- -------
Earnings before extraordinary items and cumulative
effect of change in accounting principle.............. 2,840 2,498 8,311 6,936
Extraordinary item, net of taxes................................ -- -- -- (61)
Cumulative effect of change in
accounting principle, net of taxes............................ -- -- -- 162
------- ------- ------- -------
Net earnings.................................................... $ 2,840 $ 2,498 $ 8,311 $ 7,037
======= ======= ======= =======
Basic earnings per share........................................ $0.57 $0.47 $1.64 $1.29
Diluted earnings per share...................................... $0.54 $0.45 $1.56 $1.23
See accompanying notes to consolidated financial statements.
4
Quaker City Bancorp, Inc.
Consolidated Statements of Comprehensive Income
Unaudited
(In thousands)
Three Months Ended Nine Months Ended
March 31, March 31,
2000 1999 2000 1999
------ ------ ------ ------
Net earnings..................................................... $2,840 $2,498 $8,311 $7,037
Other comprehensive income:
Unrealized holding loss on securities
available for sale arising during the period, net of
taxes................................................. (119) (136) (207) (810)
Less: realized gain included in net earnings and
previously included in other comprehensive income,
net of taxes.......................................... -- -- -- (522)
------ ------ ------ ------
Decrease in accumulated other
comprehensive income, net of tax............................ (119) (136) (207) (288)
------ ------ ------ ------
Total comprehensive income.................................. $2,721 $2,362 $8,104 $6,749
------ ------ ------ ------
See accompanying notes to consolidated financial statements.
5
Quaker City Bancorp, Inc.
Consolidated Statements of Cash Flows
Unaudited
(In thousands)
Nine Months Ended
March 31,
2000 1999
--------- ---------
Cash flows from operating activities:
Net earnings...................................................................... $ 8,311 $ 7,037
Adjustments to reconcile net earnings to net cash provided........................ --------- ---------
by operating activities:
Cumulative effect of change in accounting principle........................... -- (162)
Depreciation and amortization................................................. (320) (1,116)
Provision for loan losses..................................................... 1,200 1,300
Write-downs on real estate held for sale...................................... -- 241
Gain on sale of real estate held for sale..................................... (679) (275)
Gain on sale of loans held for sale........................................... (249) (261)
Gain on sale of securities available for sale................................. -- (616)
Loans originated for sale..................................................... (32,229) (51,937)
Proceeds from sale of loans held for sale..................................... 40,897 50,449
Federal Home Loan Bank (FHLB) stock dividend received......................... (514) (503)
(Increase) decrease in accrued interest receivable and other assets........... 1,224 (330)
Decrease in other liabilities................................................. (3,354) (2,853)
Increase in accounts payable and accrued expenses............................. 1,012 22
Other......................................................................... 1,718 1,715
--------- ---------
Total adjustments......................................................... 8,706 (4,326)
--------- ---------
Net cash provided by operating activities................................. 17,017 2,711
--------- ---------
Cash flows from investing activities:
Loans originated for investment................................................... (164,811) (147,350)
Loans purchased for investment.................................................... (65,904) (64,393)
Principal repayments on loans..................................................... 98,333 103,178
Purchases of investment securities held to maturity............................... (9,826) (15,985)
Maturities and principal repayments of investment securities held to maturity..... 2,925 8,070
Purchases of investment securities available for sale............................. (9,500) --
Proceeds from sale of investment securities available for sale.................... -- 1,558
Purchases of mortgage-backed securities available for sale........................ (7,550) --
Purchases of mortgage-backed securities held to maturity.......................... (9,028) (48,694)
Principal repayments on mortgage-backed securities held to maturity............... 8,486 12,477
Sale of mortgage-backed securities available for sale............................. -- 61,872
Principal repayments on mortgage-backed securities available for sale............. 1,896 7,317
Proceeds from sale of real estate held for sale................................... 3,827 1,794
Purchase of FHLB stock............................................................ (1,872) --
Investment in office premises and equipment....................................... (1,704) (1,930)
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Net cash used by investing activities..................................... (154,728) (82,086)
--------- ---------
Cash flows from financing activities:
Increase in deposits.............................................................. 66,392 72,025
Proceeds from funding of FHLB advances............................................ 378,589 180,500
Repayments of FHLB advances....................................................... (325,150) (179,000)
Stock options exercised........................................................... 117 217
Repurchase of stock............................................................... (5,817) (4,172)
--------- ---------
Net cash provided by financing activities................................. 114,131 69,570
--------- ---------
Decrease in cash and cash equivalents..................................... (23,580) (9,805)
Cash and cash equivalents at beginning of period...................................... 33,148 39,452
--------- ---------
Cash and cash equivalents at end of period............................................ $ 9,568 $ 29,647
========= =========
6
Quaker City Bancorp, Inc.
Consolidated Statements of Cash Flows
(continued)
Unaudited
(In thousands)
Nine Months Ended
March 31,
2000 1999
------- -------
Supplemental disclosures of cash flow information:
Interest paid (including interest credited)................................. $35,469 $30,369
Cash paid for income taxes.................................................. 6,394 6,570
======= =======
Supplemental schedule of noncash investing and financing activities:
Additions to loans resulting from the sale of real estate acquired through
foreclosure................................................................. -- 1,178
Additions to real estate acquired through foreclosure....................... 979 2,951
Reclassification of MBS from held to maturity to available for sale......... -- 77,961
======= =======
See accompanying notes to consolidated financial statements.
7
Quaker City Bancorp, Inc.
Notes to Consolidated Financial Statements
1. The consolidated statement of financial condition as of March 31, 2000 and
the related consolidated statements of operations and comprehensive income
for the three and nine months ended March 31, 2000 and 1999 and the related
consolidated statements of cash flows for the nine months ended March 31,
2000 and 1999 are unaudited. These statements reflect, in the opinion of
management, all material adjustments, consisting solely of normal recurring
accruals, necessary for a fair presentation of the financial condition of
Quaker City Bancorp, Inc. (the "Company") as of March 31, 2000 and its
results of operations and comprehensive income for the three and nine
months ended March 31, 2000 and 1999 and cash flows for the nine months
ended March 31, 2000 and 1999. The results of operations for the unaudited
periods are not necessarily indicative of the results of operations to be
expected for the entire year of fiscal 2000.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and, therefore,
do not include all information and footnotes normally included in financial
statements prepared in conformity with generally accepted accounting
principles. Accordingly, these consolidated financial statements should be
read in conjunction with the audited consolidated financial statements and
notes thereto included in the Company's Form 10-K for the year ended June
30, 1999.
2. Earnings per share is reported on both a basic and diluted basis. Basic
earnings per share is determined by dividing net earnings by the average
number of shares of common stock outstanding, while diluted earnings per
share is determined by dividing net earnings by the average number of
shares of common stock outstanding adjusted for the dilutive effect of
common stock equivalents. Earnings per share for the three and nine months
ended March 31, 2000 and 1999 are as follows:
Three Months Ended Nine Months Ended
March 31, March 31,
2000 2000
----- -----
Basic Diluted Basic Diluted
----- ------- ----- -------
Earnings before extraordinary item and cumulative
effect of change in accounting principle............... $0.57 $0.54 $1.64 $1.56
Extraordinary item, net of taxes......................... -- -- -- --
Cumulative effect of change
in accounting principle, net of taxes................. -- -- -- --
----- ----- ----- -----
Net earnings.......................................... $0.57 $0.54 $1.64 $1.56
===== ===== ===== =====
8
Quaker City Bancorp, Inc.
Notes to Consolidated Financial Statements (continued)
Three Months Ended Nine Months Ended
March 31, March 31,
1999 1999
Basic Diluted Basic Diluted
----- ------- ------- -------
Earnings before extraordinary item and cumulative
effect of change in accounting principle............... $0.47 $0.45 $ 1.27 $ 1.21
Extraordinary item, net of taxes......................... -- -- (0.01) (0.01)
Cumulative effect of change
-- -- 0.03 0.03
in accounting principle, net of taxes................. ----- ----- ------ ------
Net earnings.......................................... $0.47 $0.45 $ 1.29 $ 1.23
===== ===== ====== ======
3. In June 1998 the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial condition and measure those instruments at fair value. It
specifies necessary conditions to be met to designate a derivative as a
hedge. As amended by SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133." SFAS No. 133 is effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. Early implementation is permitted under this
statement and the Company implemented SFAS No. 133 effective July 1, 1998.
Upon implementation, approximately $78.0 million in mortgage-backed
securities ("MBS") were reclassified from held to maturity to available for
sale. In the first quarter of fiscal 1999, the Company sold $29.6 million of
these reclassified MBS for a gain after tax of $162,000, which is accounted
for as the cumulative effect of a change in accounting principle in the
accompanying consolidated statements of operations.
9
Quaker City Bancorp, Inc.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Quaker City Bancorp, Inc., incorporated in Delaware, is primarily engaged in the
savings and loan business through its wholly owned subsidiary, Quaker City Bank
(the "Bank"), formerly Quaker City Federal Savings and Loan Association. At
March 31, 2000, the Bank operated 13 retail banking offices in Southern
California. In November 1999, the Company acquired one retail bank branch in
Rowland Heights, California. This acquisition has provided the Company with an
expanded customer base and approximately $46.0 million of additional retail
deposits. Two additional branches were opened during the quarter ended March
31, 2000 in Wal-Mart Stores located in Southern California in the communities of
Porter Ranch and Lakewood. An additional branch is scheduled to be opened during
the quarter ended June 30, 2000 in a Wal-Mart Store located in the community of
Corona. The Bank is subject to significant competition from other financial
institutions, and is also subject to the regulations of various government
agencies and undergoes periodic examinations by those regulatory authorities.
The Company 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 loans secured by multifamily mortgages, one-
to-four family residential mortgages, commercial and industrial real estate
mortgages and MBS.
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Total stockholders' equity for the Company was $84.5 million at March 31, 2000,
compared to $81.3 million at June 30, 1999. Consolidated assets totaled $1.1
billion at March 31, 2000, an increase of $120.1 million compared to June 30,
1999.
In the first quarter of fiscal 2000, the Company announced its intention to
repurchase up to an additional 173,000 shares of Company common stock. During
the third quarter of fiscal 2000, the Board of Directors authorized the
repurchase of an additional 250,000 shares for an aggregate total of 423,000
shares. As of May 11, 2000, 135,000 shares of Company common stock have been
repurchased under these repurchase programs at an average price of $15.42.
10
Market risk is the risk of loss from adverse changes in market prices and rates.
The Company's market risk arises primarily from interest rate risk inherent in
its lending and deposit taking activities. To that end, management actively
monitors and manages its interest rate risk exposure. The Company does not
currently engage in trading activities. The Company's financial instruments
include interest sensitive loans receivable, federal funds sold, MBS, investment
securities, FHLB stock, deposits and borrowings. At March 31, 2000, the
Company's interest sensitive assets and interest sensitive liabilities totaled
approximately $1.1 billion and $1.0 billion, respectively. The composition of
the Company's financial instruments subject to market risk has not changed
significantly since June 30, 1999.
Total loans receivable (including loans receivable held for sale) amounted to
$960.6 million at March 31, 2000, compared to $838.2 million at June 30, 1999.
The following table presents loans receivable at the dates indicated:
At March 31, At June 30,
2000 1999
---- ----
(In millions)
One-to-four family.......... $307.5 $312.4
Multifamily................. 477.4 391.6
Commercial and land......... 182.5 140.8
Other....................... 8.2 7.7
Unamortized discounts....... (5.2) (5.6)
Allowance for loan losses... (9.8) (8.7)
------ ------
Total...................... $960.6 $838.2
====== ======
Loan originations and purchases totaled $61.9 million for the quarter ended
March 31, 2000, compared to $95.4 million for the quarter ended March 31, 1999.
Loan originations and purchases totaled $262.9 million for the nine months ended
March 31, 2000, compared to $263.7 million for the nine months ended March 31,
1999.
Loan originations and purchases were comprised of the following:
For the Three Month Ended For the Nine Months Ended
March 31, March 31, March 31, March 31,
2000 1999 2000 1999
---- ---- ---- ----
(In millions)
One-to-four family.......... $10.4 $27.6 $ 46.0 $109.4
Multifamily................. 32.7 38.0 151.1 92.5
Commercial and land......... 18.8 29.7 65.4 60.5
Other....................... - 0.1 0.4 1.3
----- ----- ------ ------
Total loans originated and $61.9 $95.4 $262.9 $26.7
purchased.................. ===== ===== ====== ======
11
The decrease in loan production for the three months ended March 31, 2000 is
primarily a result of higher interest rates during the current period as well as
a reduction in loans purchased when compared to the same period in the previous
quarter. The increase in multifamily loan production of the nine months ended
March 31, 2000 as compared to the same period last year is primarily a result of
an increase in loans purchased. At present, the Company expects to continue its
focus on multifamily and commercial and industrial lending during the current
fiscal year.
From time to time the Company obtains advances from the Federal Home Loan Bank
("FHLB") as an alternative to retail deposit funds. The net increase in FHLB
advances were $15.5 million and $53.4 million for the three and nine months
ended March 31, 2000, respectively. Deposits increased by $5.1 million and
$66.4 million for the three and nine months ended March 31, 2000, respectively.
Included in the deposit increase for the nine months ended March 31, 2000 was
the acquisition of a $46.0 million retail banking branch in Rowland Heights,
California that was completed last quarter. This branch acquisition has allowed
the Company to expand its retail branch operating area and provide access to new
customers. The acquisition has also provided funds to purchase loans during the
quarter at a more favorable cost of funds than with wholesale sources.
In addition to FHLB advances and proceeds from increases in customer deposits,
other sources of liquidity for the Company include principal repayments on loans
and MBS, proceeds from sales of loans held for sale and other cash flows
generated from operations. Principal repayments on loans were $26.9 million and
$33.7 million for the three months ended March 31, 2000 and 1999, respectively.
Principal repayments on loans were $98.3 million and $103.2 million for the nine
months ended March 31, 2000 and 1999, respectively.
Proceeds from loan sales amounted to $7.4 million for the quarter ended March
31, 2000 as compared to $20.3 million for the quarter ended March 31, 1999.
Proceeds from loan sales amounted to $40.9 million for the nine months ended
March 31, 2000 as compared to $50.4 million for the same period ended March 31,
1999. The decline in loan sales during the quarter ended March 31, 2000 is
primarily a result of the decrease in loan production, specifically fixed-rate
one-to-four family. At present, the Company's policy is to sell most 30 and 15
year fixed-rate one-to-four family loans as well as certain adjustable-rate one-
to-four family loans, multifamily loans, and commercial and industrial loans
originated that meet predefined criteria. Loans serviced for others increased
to $297.5 million at March 31, 2000, from $284.2 million at June 30, 1999,
primarily due to loan sales of $40.9 million for the nine months ended March 31,
2000, offset by principal paydowns.
The Bank, must, by regulation, maintain minimum levels of liquidity as defined
by Office of Thrift Supervision ("OTS") regulations. This requirement, which
may be varied at the direction of the OTS depending upon economic conditions and
deposit flows, is based upon a percentage of deposits and short-term borrowings.
The required ratio is currently 4%. The Bank's average liquidity ratio for the
quarters ended March 31, 2000 and 1999 was 4.51% and 4.32%, respectively.
Sources of capital and liquidity for the Company on a standalone basis include
distributions from the Bank and borrowings such as securities sold under
agreements to repurchase. Dividends and other capital distributions from the
Bank are subject to regulatory restrictions.
12
RESULTS OF OPERATIONS
Comparison of the Three and Nine Months Ended March 31, 2000 and 1999 The
- ---------------------------------------------------------------------
Company recorded net earnings of $2.8 million, $0.54 per diluted share for the
quarter ended March 31, 2000. This compares to net earnings of $2.5 million,
$0.45 per diluted share for the same quarter last year. The Company recorded net
earnings of $8.3 million, $1.56 per diluted share for the nine months ended
March 31, 2000. This compares to net earnings of $7.0 million, $1.23 per
diluted share for the same period last year. Net earnings for the nine months
ended March 31, 1999 included a gain on sale of securities available for sale of
$360,000, after tax, as well as the cumulative effect of a change in accounting
principle upon the implementation of SFAS No. 133 of $162,000, after tax. In
addition, the Company prepaid approximately $8.0 million of its higher cost
borrowings and replaced the funds with less expensive borrowings and retail
deposits. In association with the debt prepayment, the Company paid a
prepayment fee of $61,000, after tax. The prepayment fee is disclosed as an
extraordinary item on the accompanying statement of operations. The increase in
net earnings for the three and nine months ended March 31, 2000 as compared to
March 31, 1999 is primarily a result of an increase in net interest income and
gains on real estate held for sale partially, offset by an increase in general
and administrative expense as discussed below.
Interest Income Interest income amounted to $21.7 million for the quarter ended
- ---------------
March 31, 2000 as compared to $18.3 million for the quarter ended March 31,
1999. Interest income amounted to $61.3 million for the nine months ended March
31, 2000 as compared to $53.1 million for the nine months ended March 31, 1999.
The increase in interest income is primarily a result of a larger earning asset
base partially offset by a decrease in the yield on interest-earning assets for
the respective periods compared to the same periods in the previous year.
Interest Expense Interest expense for the quarter ended March 31, 2000 was
- ----------------
$12.5 million, compared to $9.9 million for the same quarter in the previous
year. Interest expense for the nine months ended March 31, 2000 was $35.1
million, compared to $29.9 million for the same period in the previous year. The
increase in interest expense for the three months ended March 31, 2000 is
primarily a result of an increase in the average balance of interest-bearing
liabilities in addition to an increase in the cost of interest-bearing
liabilities during the three month period compared to the same period in the
previous year. The increase in interest expense for the nine months ended March
31, 2000 is primarily a result of an increase in the average balance of
interest-bearing liabilities, partially offset by a decrease in the cost of
interest-bearing liabilities for the nine month period compared to the same
period last year.
Net Interest Income Net interest income before provision for loan losses for
- -------------------
the quarter ended March 31, 2000 amounted to $9.3 million compared to $8.4
million for the same period last year. Net interest income before provision for
loan losses for the nine months ended March 31, 2000 amounted to $26.2 million
compared to $23.2 million for the same period last year. The net interest margin
for the three months ended March 31, 2000 was 3.38%, a 28 basis point decrease
from the same period last year. The net interest margin for the nine months
ended March 31, 2000 was 3.35%, a 13 basis point decrease from the same period
last year. The decrease in the net interest margin for the three months ended
March 31, 2000 is primarily a result of the increase in the cost of interest-
13
bearing liabilities. The decrease in the net interest margin for the nine
months ended March 31, 2000 is primarily a result of a decline in the yield on
interest-earning assets.The increase in net interest income is primarily a
result of an increase in the amount of interest-earning assets relative to
interest-bearing liabilities in the respective periods.
The following table displays average interest rates on the Company's interest-
earning assets and interest-bearing liabilities:
Three month average Nine month average
------------------- ------------------
March 31, March 31, March 31, March 31
2000 1999 2000 1999
---- ---- ---- ----
Yield on interest-earning assets ....... 7.94% 7.98% 7.83% 7.98%
Cost of interest-bearing liabilities ... 5.00% 4.84% 4.97% 5.03%
----- ----- ----- -----
Interest rate spread (1) ............... 2.94% 3.14% 2.86% 2.95%
===== ===== ===== =====
Net interest margin (2) ................ 3.38% 3.66% 3.35% 3.48%
===== ===== ===== =====
(1) The interest rate spread represents the difference between the weighted-
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(2) The net interest margin represents net interest income as a percentage of
average interest-earning assets.
Provision for Loan Losses The provision for loan losses for the quarter ended
- -------------------------
March 31, 2000 was $400,000 compared to $500,000 for the same period last year.
The provision for loan losses for the nine months ended March 31, 2000 was $1.2
million compared to $1.3 million for to the same period last year. The
allowance for loan losses is maintained at an amount management considers
adequate to cover losses on loans receivable which are deemed probable and
estimable and is based on management's evaluation of the risks inherent in its
loan portfolio and the general economy. A number of factors are considered,
including asset classifications, estimated collateral values, local economic
conditions, management's assessment of the credit risk inherent in the
portfolio, historical loan loss experience, and the Company's underwriting
policies.
As a result of the potential weakness in certain real estate markets and other
economic factors, increases in the allowance for loan losses may be required in
future periods. In addition, the OTS and the Federal Deposit Insurance
Corporation ("FDIC"), as an integral part of their examination process,
periodically review the Company's allowance for loan losses. These agencies may
require the Company to increase the allowance for loan losses based on their
judgments of the information available at the time of their examination.
14
The following is a summary of the activity in the allowance for loan losses:
At or for the At or for the
Three Months Ended Nine Months Ended
March 31, March 31, March 31, March 31,
2000 1999 2000 1999
----- ---- ---- ----
(In thousands)
Balance at beginning of period....... $9,413 $8,245 $8,684 $8,119
Provision for loan losses............ 400 500 1,200 1,300
Charge-offs.......................... (11) (432) (98) (1,106)
Recoveries........................... -- -- 16 --
------ ------ ------ -------
Balance at end of period............. $9,802 $8,313 $9,802 $ 8,313
====== ====== ====== =======
Other Income Other income for the three months ended March 31, 2000 was $1.1
- ------------
million compared to $1.0 million for the same period last year. Other income
for the nine months ended March 31, 2000 was $3.4 million compared to $3.6
million for the same period last year. Included in other income for the nine
months ended March 31, 1999 were pretax gains of $616,000 related to the sale of
securities available for sale. Excluding gains on the sale of securities, other
income has increased for both the quarter and nine months ended March 31, 2000
due to an increase in deposit fees due primarily to an increase in checking
account activity.
Other Expense Other expense for the three months ended March 31, 2000 was $5.0
- -------------
million compared to $4.4 million for the same period last year. Other expense
for the nine months ended March 31, 2000 was $13.6 million compared to $13.1
million for the same period last year. Other expense for the three month and
nine months ended March 31, 2000 included net pre-tax gains on real estate
operations, net of $91,000 and $545,000, respectively. Excluding these gains,
there was an increase in other expense primarily as a result of an increase in
compensation and employee benefits and occupancy expense as a result of the
acquisition and or opening of three additional branches in the current fiscal
year as well as the relocation of an existing branch to a larger and more
accessible location in December 1999. The efficiency ratio for the quarter
ended March 31, 2000 was 48.41% compared to 45.12% for the same period last
year. The efficiency ratio is the measurement of general and administrative
expense as a percentage of net interest income and other income, excluding
nonrecurring items.
Income Taxes The Company's effective tax rates were 43.73% and 43.87% for the
- ------------
quarters ended March 31, 2000 and 1999, respectively. The Company's effective
tax rates were 43.88% and 43.87% for the nine months ended March 31, 2000 and
1999, respectively. The effective tax rates were comparable to the applicable
statutory rates in effect.
15
YEAR 2000
The concern over the "Year 2000" ("Y2K") issue resulted from computer programs
being written using two digits rather than four digits to identify a year in the
date field. Throughout the world there was concern that this issue could cause
computer systems to fail or create erroneous results at the Year 2000.
Beginning in 1997, the Company took various steps to mitigate the potential
impact of a Y2K problem. In general, these actions were designed to identify,
assess, and design an action plan to mitigate the risks that the Company might
have encountered relative to the Y2K problem, including risks faced by the
Company's third-party vendors.
The total cost of the Company's plan to address Y2K issues as of March 31, 2000
was $1.5 million, including estimates of personnel costs. Hardware and software
upgrades will be depreciated over their useful lives in accordance with the
Company's policy. All other costs were expensed as incurred. The total amount
expensed during fiscal 2000 and fiscal 1999 related to the Y2K issue was
$260,000 and $464,000, respectively.
Following the end of 2000 and subsequently to date, the Company experienced no
problems with its or its third-party vendors' computer systems or services
relative to the Y2K issue that had a material adverse impact on the Company's
financial condition, results of operations or liquidity. The Company has and
will continue to monitor its significant vendors with respect to Y2K problems
they may encounter as those issues may adversely affect the Company. The
Company does not believe at this time that any potential problems relative to
the Y2K issue will materially impact the Company in the future; however, no
assurance can be given that this will be the case.
16
ASSET QUALITY
The following table sets forth information regarding nonaccrual loans, troubled
debt restructured loans and real estate acquired through foreclosure at the
dates indicated:
At At At
March 31, June 30, March 31,
2000 1999 1999
---- ---- ----
(Dollars in thousands)
Nonaccrual loans (1):
Real estate loans:
One-to-four family....................................... $ 1,561 $ 3,062 $ 2,035
Multifamily.............................................. 527 -- 662
Commercial and land...................................... 1,714 1,752 1,603
Consumer................................................. -- 170 --
------- ------- -------
Total nonaccrual loans (1)............................... 3,802 4,984 4,300
Troubled debt restructured loans............................... 213 218 219
------- ------- -------
Total nonperforming loans.............................. 4,015 5,202 4,519
Real estate acquired through foreclosure....................... 290 2,340 2,681
------- ------- -------
Total nonperforming assets............................ $ 4,305 $ 7,542 $ 7,200
======= ======= =======
Nonperforming loans as a percentage of gross loans (2)......... 0.41% 0.61% 0.55%
Nonperforming assets as a percentage of total assets(3)........ 0.38% 0.74% 0.75%
General Valuation Allowance (GVA) on loans
as a percentage of gross loans............................. 0.95% 0.96% 0.95%
GVA on loans as a percentage of total nonperforming loans...... 229.94% 158.02% 172.34%
Total GVA as a percentage of total nonperforming assets........ 214.45% 108.99% 108.17%
(1) Nonaccrual loans are net of specific allowances of $40,000, $68,000 and
$101,000 at March 31, 2000, June 30, 1999 and March 31, 1999, respectively.
(2) Nonperforming loans include nonaccrual and troubled debt restructured loans.
Gross loans include loans held for sale.
The Company's nonaccrual policy provides that interest accruals generally are to
be discontinued once a loan is past due for a period of 60 days or more. Loans
may also be placed on nonaccrual status even though they are less than 60 days
past due if management concludes that it is probable that the borrower will not
be able to comply with the repayment terms of the loan.
The Company defines nonperforming loans as nonaccrual loans and troubled debt
restructured loans (at March 31, 2000, all troubled debt restructured loans were
performing according to their restructured terms). Nonperforming loans are
reported net of specific allowances. Nonperforming assets are defined as
nonperforming loans and real estate acquired through foreclosure.
17
Nonperforming assets decreased to $4.3 million, 0.38% of total assets at March
31, 2000, compared to $7.5 million, 0.74% of total assets at June 30, 1999.
The decrease in nonperforming assets for the three month period is primarily a
result of a reduction in delinquent one-to-four family loans and an overall
decline in real estate acquired through foreclosure.
Impaired Loans A loan is considered impaired when based on current
- --------------
circumstances and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. Creditors are required to measure impairment of a loan based on any
one of the following: (i) the present value of expected future cash flows from
the loan discounted at the loan's effective interest rate, (ii) an observable
market price or (iii) the fair value of the loan's underlying collateral. The
Company measures loan impairment based upon the fair value of the loan's
underlying collateral property. Impaired loans exclude large groups of smaller
balance homogeneous loans that are collectively evaluated for impairment. For
the Company, loans collectively reviewed for impairment include all loans with
principal balances of less than $300,000. At March 31, 2000, the Company had a
gross investment in impaired loans of $1.7 million for which specific valuation
allowances of $379,000 had been established.
During both the three and nine months ended March 31, 2000, the Company's
average investment in impaired loans was $1.7 million. For the three and nine
months ended March 31, 1999, the Company's average investment in impaired loans
was $5.7 million and $6.4 million, respectively. For the three and nine months
ended March 31, 2000, income recorded on impaired loans totaled $31,000 and
$95,000, substantially all of which was recorded utilizing the cash-basis method
of accounting. For the three and nine months ended March 31, 1999, income
recorded on impaired loans totaled $149,000 and $464,000, substantially all of
which was recorded utilizing the cash-basis method of accounting. Payments
received on impaired loans which are performing under their contractual terms
are allocated to principal and interest in accordance with the terms of the
loans. All impaired loans were performing in accordance with their contractual
terms at March 31, 2000.
18
REGULATORY CAPITAL
The OTS' capital regulations include three separate minimum capital requirements
for financial institutions subject to OTS supervision. First, the tangible
capital requirement mandates that the Bank's stockholder's equity less
intangible assets be at least 1.50% of adjusted total assets as defined in the
capital regulations. Second, the core capital requirement currently mandates
core capital (tangible capital plus qualifying supervisory goodwill) be at least
4.00% of adjusted total assets as defined in the capital regulations. Third,
the risk-based capital requirement presently mandates that core capital plus
supplemental capital as defined by the OTS be at least 8.00% of risk-weighted
assets as prescribed in the capital regulations. The capital regulations assign
specific risk weightings to all assets and off-balance sheet items.
The Bank was in compliance with all capital requirements in effect at March 31,
2000, and meets all standards necessary to be considered "well-capitalized"
under the prompt corrective action regulations adopted by the OTS pursuant to
the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). The
following table reflects the required and actual regulatory capital ratios of
the Bank at the dates indicated:
FDICIA
FIRREA "Well-capitalized" Actual Actual
Regulatory Capital Ratios for Quaker City Minimum Minimum at March 31, at June 30,
Bank Requirement Requirement 2000 1999
- ---- ----------- ----------- ----- -----
Tangible capital............................. 1.50% N/A 7.36% 7.48%
Core capital to adjusted total assets........ 4.00% 5.00% 7.36% 7.48%
Core capital to risk-weighted assets......... N/A 6.00% 11.09% 11.05%
Total capital to risk-weighted assets........ 8.00% 10.00% 12.31% 12.26%
19
* * * * *
This Quarterly Report on Form 10-Q includes "forward-looking statements" within
the meaning of the Securities Exchange Act of 1934, as amended by the Private
Securities Litigation Reform Act of 1995. All statements, other than statements
of historical facts, included in this report that address results or
developments that the Company expects or anticipates will or may occur in the
future, including such things as (i) business strategy; (ii) economic trends,
including the condition of the real estate market in Southern California, and
the direction of interest rates and prepayment speeds of mortgage loans and MBS;
(iii) the adequacy of the Company's allowances for loan and real estate losses:
(iv) goals; (v) expansion and growth of the Company's business and operations;
and (vi) other matters are forward-looking statements. These statements are
based upon certain assumptions and analyses made by the Company in light of its
experience and its perception of historical trends, current conditions and
expected future developments as well as other factors it believes are
appropriate in the circumstances. These statements are subject to a number of
risks and uncertainties, many of which are beyond the control of the Company,
including general economic, market or business conditions; real estate market
conditions, particularly in California; the opportunities (or lack thereof) that
may be presented to and pursued by the Company; competitive actions by other
companies; changes in law of regulations; and other factors. Actual results
could differ materially from those contemplated by these forward-looking
statements. Consequently, all of the forward-looking statements made in this
report are qualified by these cautionary statements and there can be no
assurance that the actual results or developments anticipated by the Company
will be realized or, even if substantially realized, that they will have the
expected consequences to or effects on the Company and its business or
operations. Forward-looking statements made in this report speak as of the date
hereof. The Company undertakes no obligation to update or revise any forward-
looking statement made in this report.
20
Part II. Other Information
Item 5. Other Information: Date of Annual Meeting
-----------------------------------------
The date of the 2000 annual meeting of stockholders of Quaker City
Bancorp, Inc. ("the Company") has been set for Wednesday, November 15,
2000. Pursuant to Section 6 of Article I of the Company's Bylaws,
stockholders who intend to submit a proposal or to make a nomination of
a person for election to the Board of Directors at the 2000 Annual
Meeting must provide timely written notice of the matter to the
Corporate Secretary of the Company. To be timely, a stockholder's
notice must be delivered or mailed to and received at the principal
executive offices of the Corporation no less than ninety (90) days
prior to the date of the Annual Meeting. Any notice to the Corporate
Secretary must comply with the notice procedures and informational
requirements of Section 6 of Article I of the Company's Bylaws (a copy
of which is available upon request to the Corporate Secretary of the
Company). No person shall be eligible for election as a Director of the
Corporation unless nominated in accordance with the provisions of
Section 6(c) of Article I of the Company's Bylaws.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits -
11.1 Computation of Earnings per Share
27.1 Financial Data Schedule
(b) Reports on Form 8-K -
No reports on Form 8-K were filed by the registrant during the
quarter for which this report is filed.
21
Signatures
----------
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Quaker City Bancorp, Inc.
Date: May 11, 2000 By: /s/ Dwight L. Wilson
------------ ----------------------------------
Dwight L. Wilson
Senior Vice President,
Treasurer and Chief Financial Officer
22