SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended December 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.
---------------------------------------------------------------
(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
February 13, 2001: 5,117,927.
Quaker City Bancorp, Inc.
Index
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition (unaudited) as of
December 31, 2000 and June 30, 2000 ..................................... 3
Consolidated Statements of Operations (unaudited) for the Three and Six
Months Ended December 31, 2000 and 1999 ................................. 4
Consolidated Statements of Comprehensive Income (unaudited) for the Three
and Six Months Ended December 31, 2000 and 1999 ......................... 5
Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended
December 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 4. Submission of Matters to a Vote of Stockholders ........................ 21
Item 6. Exhibits and Reports on Form 8-K ....................................... 21
Quaker City Bancorp, Inc.
Consolidated Statements of Financial Condition
Unaudited
(In thousands, except share data)
December 31, June 30,
2000 2000
---- ----
Assets
Cash and due from banks....................................... $ 12,313 $ 9,494
Interest-bearing deposits..................................... 507 673
Federal funds sold and other short-term investments........... 3,100 3,900
Investment securities held to maturity........................ 23,592 21,863
Investment securities available for sale...................... 9,521 9,498
Loans receivable, net......................................... 1,050,012 990,675
Loans receivable held for sale................................ 15,035 21,212
Mortgage-backed securities held to maturity................... 85,526 85,457
Mortgage-backed securities available for sale................. 26,994 24,404
Real estate held for sale..................................... 264 639
Federal Home Loan Bank stock, at cost......................... 16,145 15,607
Office premises and equipment, net............................ 7,014 7,130
Accrued interest receivable and other assets.................. 10,380 11,345
---------- ----------
Total assets............................................. $1,260,403 $1,201,897
========== ==========
Liabilities and Stockholders' Equity
Deposits....................................................... $ 853,585 $ 808,229
Federal Home Loan Bank advances................................ 297,650 290,250
Deferred tax liability......................................... 213 73
Accounts payable and accrued expenses.......................... 4,897 5,372
Other liabilities.............................................. 8,946 9,939
---------- ----------
Total liabilities........................................ 1,165,291 1,113,863
Stockholders' Equity:
Common stock, $.01 par value. Authorized 20,000,000 shares; issued
and outstanding 5,096,677 shares and 5,108,077 at December 31,
2000 and June 30, 2000, respectively.......................... 51 51
Additional paid-in capital..................................... 71,980 71,726
Accumulated other comprehensive income......................... 140 (52)
Retained earnings, substantially restricted.................... 23,872 17,318
Deferred compensation.......................................... (931) (1,009)
---------- ----------
Total stockholders' equity............................... 95,112 88,034
---------- ----------
Total liabilities and stockholders' equity............... $1,260,403 $1,201,897
========== ==========
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 Six Months Ended
December 31, December 31,
2000 1999 2000 1999
---- ---- ---- ----
Interest income:
Loans receivable...................................... $22,615 $17,929 $44,414 $35,111
Mortgage-backed securities............................ 1,845 1,777 3,701 3,434
Investment securities................................. 563 275 1,125 490
Other................................................. 415 269 769 550
------- ------- ------- -------
Total interest income.............................. 25,438 20,250 50,009 39,585
------- ------- ------- -------
Interest expense:
Deposits.............................................. 10,876 8,419 21,306 16,244
Federal Home Loan Bank advances....................... 4,472 3,194 8,948 6,345
------- ------- ------- -------
Total interest expense............................. 15,348 11,613 30,254 22,589
------- ------- ------- -------
Net interest income before provision for loan losses.. 10,090 8,637 19,755 16,996
Provision for loan losses.................................. 300 400 600 800
------- ------- ------- -------
Net interest income after provision for loan losses... 9,790 8,237 19,155 16,196
------- ------- ------- -------
Other income:
Deposit fees.......................................... 522 347 1,051 661
Loan service charges and fees......................... 458 534 962 961
Gain on sale of loans held for sale................... 66 78 129 210
Commissions........................................... 222 235 429 412
Other................................................. 27 (3) 88 7
------- ------- ------- -------
Total other income................................. 1,295 1,191 2,659 2,251
------- ------- ------- -------
Other expense:
Compensation and employee benefits.................... 2,635 2,518 5,397 4,940
Occupancy, net........................................ 767 818 1,497 1,424
Federal deposit insurance premiums.................... 91 152 179 290
Data processing....................................... 256 262 514 504
Advertising and promotional........................... 306 222 595 405
Consulting fees....................................... 159 157 326 337
Other general and administrative expense.............. 766 593 1,456 1,219
------- ------- ------- -------
Total general and administrative expense........... 4,980 4,722 9,964 9,119
Real estate operations, net........................... (17) (274) (14) (454)
Amortization of core deposit intangible............... 28 19 57 19
------- ------- ------- -------
Total other expense................................ 4,991 4,467 10,007 8,684
------- ------- ------- -------
Earnings before income taxes.......................... 6,094 4,961 11,807 9,763
Income taxes............................................... 2,555 2,180 4,992 4,292
------- ------- ------- -------
Net earnings............................................... $ 3,539 $ 2,781 $ 6,815 $ 5,471
======= ======= ======= =======
Basic earnings per share................................... $0.72 $0.55 $1.39 $1.07
Diluted earnings per share................................. $0.68 $0.52 $1.32 $1.01
See accompanying notes to consolidated financial statements.
4
Quaker City Bancorp, Inc.
Consolidated Statements of Comprehensive Income
Unaudited
(In thousands)
Three Months Six Months Ended
December 31, December 31,
2000 1999 2000 1999
------ ------ ----- ------
Net earnings..................................................... $3,539 $2,781 $6,815 $5,471
Other comprehensive income:
Unrealized holding gain (loss) on securities
available for sale arising during the period, net of
taxes.................................................. 262 (54) 192 (88)
Increase (decrease) in accumulated other ------ ------ ----- ------
comprehensive income, net of tax............................ 262 (54) 192 (88)
------ ------ ------ ------
Total comprehensive income.................................. $3,801 $2,727 $7,007 $5,383
====== ====== ====== ======
See accompanying notes to consolidated financial statements.
5
Quaker City Bancorp, Inc.
Consolidated Statements of Cash Flows
Unaudited
(In thousands)
Six Months Ended
December 31,
2000 1999
---- ----
Cash flows from operating activities:
Net earnings................................................................... $ 6,815 $ 5,471
--------- ---------
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization.............................................. 226 (360)
Provision for loan losses.................................................. 600 800
Gain on sale of real estate held for sale.................................. (58) (580)
Gain on sale of loans held for sale........................................ (129) (210)
Loans originated for sale.................................................. (21,677) (25,825)
Proceeds from sale of loans held for sale.................................. 27,862 33,543
Federal Home Loan Bank (FHLB) stock dividend received...................... (538) (328)
Decrease in accrued interest receivable and other assets................... 907 778
Decrease in other liabilities.............................................. (993) (5,705)
Increase (decrease) in accounts payable and accrued expenses............... (475) 1,021
Other...................................................................... 392 535
--------- ---------
Total adjustments...................................................... 6,117 3,669
--------- ---------
Net cash provided by operating activities.............................. 12,932 9,140
--------- ---------
Cash flows from investing activities:
Loans originated for investment................................................ (92,271) (118,183)
Loans purchased for investment................................................. (35,482) (56,942)
Principal repayments on loans.................................................. 68,535 71,454
Purchases of investment securities held to maturity............................ (3,944) (2,925)
Maturities and principal repayments of investment securities held to maturity.. 2,225 2,925
Purchases of investment securities available for sale.......................... -- (5,000)
Purchases of mortgage-backed securities available for sale..................... (4,964) (7,550)
Purchases of mortgage-backed securities held to maturity....................... (7,926) (8,007)
Principal repayments on mortgage-backed securities held to maturity............ 7,845 6,397
Principal repayments on mortgage-backed securities available for sale.......... 2,696 1,285
Proceeds from sale of real estate held for sale................................ 200 3,506
Purchase of FHLB stock......................................................... -- (1,753)
Investment in office premises and equipment.................................... (485) (1,385)
--------- ---------
Net cash used by investing activities.................................. (63,571) (116,178)
--------- ---------
Cash flows from financing activities:
Increase in deposits........................................................... 45,356 61,281
Proceeds from funding of FHLB advances......................................... 226,100 247,489
Repayments of FHLB advances.................................................... (218,700) (209,550)
Stock options exercised........................................................ 92 103
Repurchase of stock............................................................ (356) (3,869)
--------- ---------
Net cash provided by financing activities.............................. 52,492 95,454
--------- ---------
Increase (decrease) in cash and cash equivalents....................... 1,853 (11,584)
Cash and cash equivalents at beginning of period................................... 14,067 33,148
--------- ---------
Cash and cash equivalents at end of period......................................... $ 15,920 $ 21,564
========= =========
6
Quaker City Bancorp, Inc.
Consolidated Statements of Cash Flows
(continued)
Unaudited
(In thousands)
Six Months Ended
December 31,
2000 1999
---- ----
Supplemental disclosures of cash flow information:
Interest paid (including interest credited)................................ $28,200 $22,954
Cash paid for income taxes................................................. 5,312 4,229
======= =======
Supplemental schedule of noncash investing and financing activities:
Additions to loans resulting from the sale of real estate acquired through
foreclosure................................................................ $ 262 --
Additions to real estate acquired through foreclosure...................... 22 700
======= =======
See accompanying notes to consolidated financial statements.
7
Quaker City Bancorp, Inc.
Notes to Consolidated Financial Statements
1. The consolidated statements of financial condition as of December 31, 2000
and the related consolidated statements of operations and comprehensive
income for the three and six months ended December 31, 2000 and 1999 and
the related consolidated statements of cash flows for the six months ended
December 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
December 31, 2000 and its results of operations and comprehensive income
for the three and six months ended December 31, 2000 and 1999 and cash
flows for the six months ended December 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 2001.
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, 2000.
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. Calculation of earnings per share can be found
in Exhibit 11.1.
3. The Company accounts for derivative instruments in accordance with SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." A
derivative is considered either an asset or liability in the statement of
financial position and measured at fair value. If a derivative is
designated as a hedging instrument, the changes in fair value of the
derivative are either (a) recognized in earnings in the period of change
together with the offsetting gain or loss on the hedged item or (b)
reported as a component of other comprehensive income and subsequently
reclassified into earnings when the forecasted transaction affects
earnings. For a derivative not designated as a hedging instrument, changes
in fair value are recognized in earnings in the period of change. As of
December 31, 2000, the Company has no derivative instruments.
4. In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation." This Interpretation
clarifies issues relating to APB Opinion No. 25, "Accounting for Stock
Issues to Employees." FASB Interpretation No. 44 contains information
relating to (a) the definition of employee for purposes of applying Opinion
25, (b)
8
the criteria for determining whether a plan qualifies as a non-compensatory
plan, (c) the accounting consequences of various modifications to the term
of a previously fixed stock option or award, and (d) the accounting for an
exchange of stock compensation awards in a business combination. FASB
Interpretation No. 44 was effective July 1, 2000. The effects of applying
this Interpretation are recognized on a prospective basis from July 1,
2000. The implementation of Interpretation No. 44 did not have a material
impact on the Company.
5. In September 2000, the FASB issued SFAS No. 140, "Accounting For Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" as a
replacement of SFAS No. 125 effective for disclosures in financial
statements issued subsequent to December 15, 2000, and for transactions
entered after March 31, 2001. The adoption of the statement is not expected
to have a material impact on the financial statements.
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"). At December 31, 2000, the Bank operated fifteen retail banking
offices in southern California, including four "in-store" Wal-Mart branches. Two
additional "in-store" Wal-Mart branches are scheduled to open in the quarter
ending March 2001, in the communities of Murrieta and south Corona. This will
bring the Company's total "in-store" Wal-Mart branches to six. 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 real estate mortgages and
mortgage-backed securities ("MBS").
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Total stockholders' equity for the Company was $95.1 million at December 31,
2000, compared to $88.0 million at June 30, 2000. Consolidated assets totaled
$1.26 billion at December 31, 2000, an increase of $58.5 million compared to
June 30, 2000.
Pursuant to plans to repurchase Company stock announced during the first quarter
of fiscal 2000, the Company has acquired in the open market 20,000 shares as of
February 13, 2001 at an average price of $17.86. Up to 250,000 additional
shares can be repurchased under the current Board authorization.
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 December 31, 2000, the
Company's average interest sensitive assets and interest sensitive liabilities,
for both the quarter and year, totaled approximately $1.2 billion and $1.1
billion, respectively. The composition of the Company's financial instruments
subject to market risk has not changed significantly since June 30, 2000.
Total loans receivable (including loans receivable held for sale) amounted to
$1.07 billion at
10
December 31, 2000, compared to $1.01 billion at June 30, 2000. The following
table presents loans receivable at the dates indicated:
At December 31, At June 30,
2000 2000
---- ----
(In millions)
One-to-four family................ $ 317.5 $ 315.7
Multifamily....................... 533.8 505.4
Commercial and land............... 218.7 198.0
Other............................. 10.6 8.2
Unamortized discounts............. (4.8) (5.2)
Allowance for loan losses......... (10.8) (10.2)
-------- --------
Total............................ $1,065.0 $1,011.9
======== ========
Loan originations totaled $49.2 million and loan purchases totaled $29.5 million
for the quarter ended December 31, 2000, compared to loan originations of $75.4
million and loan purchases of $46.1 for the quarter ended December 31, 1999.
Loan originations totaled $113.9 million and loan purchases totaled $35.5
million for the six months ended December 31, 2000, compared to loan
originations of $144.1 million and loan purchases of $56.9 million for the six
months ended December 31, 1999.
Loan originations were comprised of the following:
For the Three Months Ended For the Six Months Ended
December 31, December 31, December 31, December 31,
2000 1999 2000 1999
---- ---- ---- ----
(In millions)
One-to-four family............. $ 6.7 $ 7.0 $ 14.4 $ 14.5
Multifamily.................... 29.8 47.2 65.4 91.3
Commercial and land............ 12.5 21.0 33.9 37.9
Other.......................... 0.2 0.2 0.2 0.4
----- ----- ------ ------
Total loans originated.... $49.2 $75.4 $113.9 $144.1
===== ===== ====== ======
11
Loan purchases were comprised of the following:
For the Three Months Ended For the Six Months Ended
December 31, December 31, December 31, December 31,
2000 1999 2000 1999
---- ---- ---- ----
(In millions)
One-to-four family............ $13.1 $10.3 $13.1 $21.1
Multifamily................... 1.5 27.1 7.5 27.1
Commercial and land........... 14.9 8.7 14.9 8.7
----- ----- ----- -----
Total loans purchased.... $29.5 $46.1 $35.5 $56.9
===== ===== ===== =====
The decrease in loan production for the three and six months ended December 31,
2000 as compared to the same periods in the previous year is primarily a result
of a decrease in multifamily loan demand.
MBS held to maturity remained relatively unchanged at $85.5 million at December
31, 2000, and at June 30, 2000. Approximately $7.9 million of purchases were
off-set by amortization and pay-offs during the six month period. MBS available
for sale amounted to $27.0 million at December 31, 2000 compared to $24.4
million at June 30, 2000.
From time to time the Company has obtained advances from the Federal Home Loan
Bank ("FHLB") as an alternative to retail deposit funds. The net increase in
FHLB advances were $8.9 and $7.4 million for the three and six months ended
December 31, 2000, respectively. Deposits increased by $22.9 and $45.4 million
for the three and six months ended December 31, 2000, respectively. In
addition, while the majority of the Bank's deposits are retail in nature, the
Bank accepted $55 million in time deposits from a political subdivision in the
fourth quarter of Fiscal 2000. During the three months ended December 31, 2000,
the Bank added an additional $10 million in time deposits from this political
subdivision. The Bank considers these funds to be wholesale deposits and an
alternative borrowing source rather than a customer relationship and their
levels are determined by management's decision as to the most economic funding
sources. The increase in deposits enabled the Company to fund asset growth
during the three months ended December 31, 2000.
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 $35.2 million and
$38.7 million for the three months ended December 31, 2000 and 1999,
respectively. Principal repayments on loans were $68.5 million and $71.5
million for the six months ended December 31, 2000 and 1999, respectively.
Proceeds from loan sales amounted to $14.8 million for the quarter ended
December 31, 2000 as compared to $10.9 million for the quarter ended December
31, 1999. Proceeds from loan sales
12
amounted to $27.9 million for the six months ended December 31, 2000 as compared
to $33.5 million for the same period ended December 31, 1999. The decline in
loan sales during the six months ended December 31, 2000 is primarily a result
of the decrease in loan production, specifically multifamily. 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 slightly to $303.4 million at
December 31, 2000, from $299.1 million at June 30, 2000, primarily due to loan
sales of $27.9 million for the six months ended December 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 December 31, 2000 and 1999 was 4.39% and 5.08%, respectively.
Sources of capital and liquidity for the Company on a standalone basis include
distributions from the Bank. Dividends and other capital distributions from the
Bank are subject to regulatory restrictions.
13
RESULTS OF OPERATIONS
Comparison of the Three and Six Months Ended December 31, 2000 and 1999 The
- -----------------------------------------------------------------------
Company recorded net earnings of $3.5 million, $0.68 per diluted share for the
quarter ended December 31, 2000. This compares to net earnings of $2.8 million,
$0.52 per diluted share for the same quarter last year. The Company recorded
net earnings of $6.8 million, $1.32 per diluted share for the six months ended
December 31, 2000. This compares to net earnings of $5.5 million, $1.01 per
diluted share for the same period last year. The increase in net earnings for
the three and six months ended December 31, 2000 as compared to December 31,
1999 is primarily a result of an increase in net interest income as discussed
below.
Interest Income Interest income amounted to $25.4 million for the quarter ended
- ---------------
December 31, 2000 as compared to $20.3 million for the quarter ended December
31, 1999. Interest income amounted to $50.0 million for the six months ended
December 31, 2000 as compared to $39.6 million for the six months ended December
31, 1999. The increase in interest income is primarily a result of a larger
earning asset base as well as an increase in the yield on earning assets.
Average earning assets for the current quarter increased to $1.208 billion
compared to $1.047 billion for the same period last year, a 15.4% increase.
Average earning assets for the six months ended December 31, 2000 increased to
$1.200 billion compared to $1.020 billion for the same period last year, a 17.6%
increase. The yield on earning assets was 8.43% for the quarter ended December
31, 2000 as compared to 7.74% for the quarter ended December 31, 1999. The
yield on earning assets was 8.34% for the six months ended December 31, 2000 as
compared to 7.77% for the six months ended December 31, 1999. The improvement
in the yield on earning assets over the prior quarter and year is the result
of improvements in the yield on adjustable rate mortgage loans.
Interest Expense Interest expense for the quarter ended December 31, 2000 was
- ----------------
$15.3 million, compared to $11.6 million for the same quarter in the previous
year. Interest expense for the six months ended December 31, 2000 was $30.3
million, compared to $22.6 million for the same period in the previous year.
The increase in interest expense for the three and six months ended December 31,
2000 is primarily a result of an increase in the average balance of interest-
bearing liabilities together with an increase in the cost of interest-bearing
liabilities during the period.
Net Interest Income Net interest income before provision for loan losses for
- -------------------
the quarter ended December 31, 2000 amounted to $10.1 million compared to $8.6
million for the same period last year. Net interest income before provision for
loan losses for the six months ended December 31, 2000 amounted to $19.8 million
compared to $17.0 million for the same period last year. The net interest margin
for the three months ended December 31, 2000 was 3.34%, a 4 basis point increase
from the same period last year. The net interest margin for the six months
ended December 31, 2000 was 3.29%, a four basis point decrease from the same
period last year. The decrease in the net interest margin for the six months
ended December 31, 2000 was primarily a result of an increase in the cost of
interest-bearing liabilities partially offset by an increase 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.
14
The following table displays average interest rates on the Company's interest-
earning assets and interest-bearing liabilities:
Three month average Six month average
------------------- -----------------
December 31, December 31, December 31, December 31,
2000 1999 2000 1999
---- ---- ---- ----
Yield on interest-earning assets............. 8.43% 7.74% 8.34% 7.77%
Cost of interest-bearing liabilities......... 5.56% 4.97% 5.51% 4.95%
---- ---- ---- ----
Interest rate spread (1)..................... 2.87% 2.77% 2.83% 2.82%
==== ==== ==== ====
Net interest margin (2)...................... 3.34% 3.30% 3.29% 3.33%
==== ==== ==== ====
(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 Company maintains a valuation allowance for
- -------------------------
losses on loans and real estate to provide for losses that the Company's
management believes to be inherent in those portfolios. The Company's
management evaluates the adequacy of the levels of the loss allowance quarterly
as a function of our internal asset review process.
The Company's Internal Asset Review Committee meets monthly to review and
determine asset classifications and to recommend any changes to the asset
valuation allowance. This Committee is comprised of the Senior Loan Servicing
Officer (Chairperson), Chief Executive Officer, Chief Financial Officer, Senior
Income Property Lending Officer, Senior Single Family Lending Officer,
Assistant Treasurer, Controller, and Internal Auditors of the Company. The
Chairperson of the Internal Asset Review Committee reports monthly to the Board
of Director's Loan Committee regarding asset quality and the adequacy of
valuation allowances.
The Company's management considers various factors when assessing the adequacy
of the allowance for loan losses including risk characteristics inherent in the
collateral types, asset classifications, estimated collateral values, local
economic conditions, historical loan loss experience, and the Company's
underwriting policies.
The Company's management currently determines the desired level of the valuation
allowance by assigning loans to risk categories based upon the risk inherent to
that particular loan product. In order to determine appropriate reserve levels,
management has established a valuation matrix similar to that utilized for risk-
weighting assets for the calculation of risk-based capital. Loans in higher
risk categories are assigned larger amounts of valuation allowance as compared
to those in lower risk categories.
Commercial and industrial loans are deemed to have a higher risk characteristic
than one-to-four family loans as these loans are considered to involve a high
degree of credit risk and to be more vulnerable to adverse conditions in the
real estate market and to deteriorating economic conditions. These loans
typically involve higher loan principal amounts and the repayment of such loans
generally depends on the income produced by the operation or sale of the
property being sufficient to cover operating expenses and debt service.
Multifamily loans with certain risk characteristics are placed in either a
moderate or higher risk category. The risk characteristics include the timely
payment of principal and interest for a twelve month period, performance status,
loan-to-value ratio, debt service ratio, and occupancy ratios. Similar to
commercial and industrial loans, multifamily loans are also considered to
involve a high degree of credit risk and to be more vulnerable than one-to-four
family loans to adverse conditions in the real estate market and to
deteriorating economic conditions.
One-to-four family loans are placed in either a moderate or higher risk category
depending on their performance status, loan-to-value and whether or not the
Company holds the first lien or a junior lien.
In addition to the above, the Company also recognizes impairment on troubled
collateral dependent loans by creating specific valuation allowances.
The following table sets forth the Company's allowance for loan losses to total
loans and the percentage of loans to total loans in each of the loan types
listed:
At December 31, 2000 At June 30, 2000
------------------------------------------------------------------ -----------------------------
(In thousands)
Percentage Percentage Percentage Percentage
of of Loans of Of Loans
Allowance in Each Allowance in Each
to Total Category to to Total Category to
Amount Allowances Total Loans Amount Allowance Total Loans
--------- ----------- ----------- -------- --------- -----------
One-to-four family...... $ 2,389 22.20% 29.38% $ 2,392 23.54% 30.73%
Multifamily............. 5,139 47.76% 49.40% 4,903 48.25% 49.20%
Commercial.............. 2,734 25.41% 20.09% 2,620 25.79% 19.13%
Land.................... 21 0.19% 0.15% 1 0.01% 0.14%
Other................... 157 1.46% 0.98% 103 1.01% 0.80%
Unallocated............. 321 2.98% -- 142 1.40% --
--- ----- ------- ------- ------- -------
Total allowance for
loan losses........... $10,761 100.00% 100.00% $10,161 100.00% 100.00%
======= ======= ======= ======= ======= =======
The provision for loan losses was reduced to $300,000 and $600,000 for the three
and six months ended December 31, 2000, from $400,000 and $800,000 for the same
period in the prior year. These loan loss provisions reflect the overall
increase in the real estate loan portfolio coupled with a recognition of
improvement in nonperforming loans.
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. There 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.
15
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 Six Months Ended
December 31, December 31, December 31, December 31,
2000 1999 2000 1999
------- ------ ------- ------
(In thousands)
Balance at beginning of period...... $10,461 $9,070 $10,161 $8,684
Provision for loan losses........... 300 400 600 800
Charge-offs......................... -- (57) -- (87)
Recoveries.......................... -- -- -- 16
------- ------ ------- ------
Balance at end of period............ $10,761 $9,413 $10,761 $9,413
======= ====== ======= ======
The general allowance for loan and real estate losses for the six months ended
December 31, 2000 was $10.5 million as compared to $8.9 million for the six
months ended December 31, 1999. The general allowance is comprised of allowance
factors applied to outstanding loans with no well-defined deficiency. These
allowance factors provide for management's best estimate of the inherent risk of
loss. The increase in the general allowance is a result of the portfolio
growth. The specific allowance for loan and real estate losses for the six
months ended December 31, 2000 was $252,000 as compared to $530,000 for the six
months ended December 31, 1999. The specific allowance declined mainly due to
less non-performing loans. The unallocated portion of the allowance is $321,000
at December 31, 2000 compared to $142,000 at June 30, 2000. Though this
unallocated amount increased, it is not a significant component of the overall
allowance.
Other Income Other income for the three months ended December 31, 2000 was $1.3
- ------------
million as compared to $1.2 million for the same period last year. Other income
for the six months ended December 31, 2000 was $2.7 million compared to $2.3
million for the same period last year. Other income has increased for both the
quarter and six months ended December 31, 2000 due to an increase in deposit
fees due primarily to an increase in fees related to checking accounts. The
Company has emphasized checking account growth through marketing during the past
several years.
Other Expense Other expense for the three months ended December 31, 2000
- -------------
increased to $5.0 million compared to $4.5 million for the same period last
year. Other expense for the six months ended December 31, 2000 was $10.0
million compared to $8.7 million for the same period last year. Other expense
for the three month and six months ended December 31, 1999 included net gains on
the sale of real estate held for sale of $274,000 and $454,000, respectively.
Excluding these gains, there was an increase in other expense primarily as a
result of the costs associated with the expansion of the branch network. A
retail banking branch was purchased from another financial institution in
November of 1999 and four "in-store" Wal-Mart branches were opened, during the
period of February to December 2000. Marketing expense was also up from the
same period last year, as the Bank continues to pursue deposit growth through
advertising and checking account promotions. The efficiency ratio for the
quarter ended December 31, 2000 improved to 45.45% compared to 48.43% 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.
16
Income Taxes The Company's effective tax rates were 41.93% and 43.94% for the
- ------------
quarters ended December 31, 2000 and 1999, respectively. The Company's
effective tax rates were 42.28% and 43.96% for the six months ended December 31,
2000 and 1999, respectively. The effective tax rates were comparable to the
applicable statutory rates in effect.
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
December 31, June 30, December 31,
2000 2000 1999
---- ---- ----
(Dollars in thousands)
Nonaccrual loans (1):
Real estate loans:
One-to-four family......................................... $ 2,698 $ 1,356 $ 2,787
Multifamily................................................ 525 526 --
Commercial and land........................................ -- 1,707 1,721
Consumer................................................... 45 -- 140
------- ------- -------
Total nonaccrual loans (1)................................. 3,268 3,589 4,648
Troubled debt restructured loans.............................. -- 211 215
------- ------- -------
Total nonperforming loans................................. 3,268 3,800 4,863
Real estate acquired through foreclosure...................... 264 639 292
------- ------- -------
Total nonperforming assets................................ $ 3,532 $ 4,439 $ 5,155
======= ======= =======
Nonperforming loans as a percentage of gross loans (2)........ 0.30% 0.37% 0.51%
Nonperforming assets as a percentage of total assets (3)...... 0.28% 0.37% 0.46%
Total allowance for loan losses
as a percentage of gross loans............................ 1.00% 0.99% 0.99%
Total allowance for loan losses as a percentage of total
nonperforming loans....................................... 329.28% 267.39% 193.56%
Total allowance as a percentage of total
nonperforming assets (4)................................. 304.67% 228.90% 182.60%
(1) Nonaccrual loans are net of specific allowances of $18,000, $0 and $33,000
at December 31, 2000, June 30, 2000 and December 31, 1999, respectively.
(2) Nonperforming loans are net of specific allowances and include nonaccrual
and troubled debt restructured loans. Gross loans include loans held for sale.
(3) Nonperforming assets include nonperforming loans and REO.
(4) Total allowance includes loan and REO valuation allowances.
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.
17
The Company defines nonperforming loans as nonaccrual loans and troubled debt
restructured loans. Nonperforming loans are reported net of specific allowances.
Nonperforming assets are defined as nonperforming loans and real estate acquired
through foreclosure.
Nonperforming assets decreased to $3.5 million, 0.28% of total assets at
December 31, 2000, compared to $4.4 million, 0.37% of total assets at June 30,
2000. The decrease in nonperforming assets for the six month period is
primarily a result of the pay-off of one $1.7 million commercial loan.
Classified loans decreased to $9.6 million at December 31, 2000, compared to
$11.2 million at June 30, 2000. This is primarily the result of improvement in
real estate values in southern California.
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 December 31, 2000, the Company had
a gross investment in impaired loans of $676,000 for which specific valuation
allowances of $149,000 had been established.
The Company's average investment in impaired loans for the three and six months
ended December 31, 2000 was $1.3 million and $1.5 million, respectively. For
both the three and six months ended December 31, 1999, the Company's average
investment in impaired loans was $1.7 million. For the three and six months
ended December 31,2000, income recorded on impaired loans totaled $27,000 and
$60,000, substantially all of which was recorded utilizing the cash-basis method
of accounting. For the three and six months ended December 31, 1999, income
recorded on impaired loans totaled $32,000 and $63,000, 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 December 31, 2000.
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
18
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 December
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 December 31, at June 30,
Bank Requirement Requirement 2000 2000
- ---- ----------- ------------------ ----- -----
Tangible capital............................. 1.50% N/A 7.43% 7.20%
Core capital to adjusted total assets........ 4.00% 5.00% 7.43% 7.20%
Core capital to risk-weighted assets......... N/A 6.00% 11.18% 10.82%
Total capital to risk-weighted assets........ 8.00% 10.00% 12.43% 12.03%
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 4. Submission of Matters to a Vote of Stockholders
-----------------------------------------------
At the Annual Meeting of Stockholders of the Company held on November
15, 2000, the following were approved:
Election of the following nominees as directors of the Company:
(1) Wayne L. Harvey was elected by a vote of 4,135,712 for, none
against, with 32,899 abstentions.
(2) Edward L. Miller was elected by a vote of 4,109,706 for, none
against, with 58,905 abstentions.
(3) J.L. Thomas was elected by a vote of 3,800,141 for, none
against, with 368,470 abstentions.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits -
11.1 Computation of Earnings per Share
(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: February 14, 2001 By: /s/ Dwight L. Wilson
----------------- --------------------
Dwight L. Wilson
Senior Vice President,
Treasurer and Chief Financial Officer
22