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 MARCH 31, 2001
--------------
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
May 10, 2001: 5,130,927.
Quaker City Bancorp, Inc.
Index
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition (unaudited) as of
March 31, 2001 and June 30, 2000......................................... 3
Consolidated Statements of Operations (unaudited) for the Three and
Nine Months Ended March 31, 2001 and 2000................................ 4
Consolidated Statements of Comprehensive Income (unaudited) for the
Three and Nine Months Ended March 31, 2001 and 2000...................... 5
Consolidated Statements of Cash Flows (unaudited) for the Nine Months
Ended March 31, 2001 and 2000............................................ 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........................................................ 23
Item 6. Exhibits and Reports on Form 8-K......................................... 23
Quaker City Bancorp, Inc.
Consolidated Statements of Financial Condition
Unaudited
(In thousands, except share data)
March 31, June 30,
2001 2000
---- ----
ASSETS
Cash and due from banks.................................................. $ 13,643 $ 9,494
Interest-bearing deposits................................................ 518 673
Federal funds sold and other short-term investments...................... 5,700 3,900
Investment securities held to maturity................................... 17,410 21,863
Investment securities available for sale................................. 9,641 9,498
Loans receivable, net.................................................... 1,114,319 990,675
Loans receivable held for sale........................................... 6,731 21,212
Mortgage-backed securities held to maturity.............................. 82,057 85,457
Mortgage-backed securities available for sale............................ 28,728 24,404
Real estate held for sale................................................ 88 639
Federal Home Loan Bank stock, at cost.................................... 16,413 15,607
Office premises and equipment, net....................................... 7,241 7,130
Accrued interest receivable and other assets............................. 10,833 11,345
---------- ----------
Total assets........................................................ $1,313,322 $1,201,897
========== ==========
Liabilities and Stockholders' Equity
Deposits................................................................. $ 887,200 $ 808,229
Federal Home Loan Bank advances.......................................... 308,000 290,250
Deferred tax liability................................................... 369 73
Accounts payable and accrued expenses.................................... 5,282 5,372
Other liabilities........................................................ 12,464 9,939
---------- ----------
Total liabilities................................................... 1,213,315 1,113,863
Stockholders' Equity:
Common stock, $.01 par value. Authorized 20,000,000 shares; issued
and outstanding 5,120,927 shares and 5,108,077 at March 31,
2001 and June 30, 2000, respectively.................................. 51 51
Additional paid-in capital............................................... 72,614 71,726
Accumulated other comprehensive income (loss)............................ 355 (52)
Retained earnings, substantially restricted.............................. 27,841 17,318
Deferred compensation.................................................... (854) (1,009)
---------- ----------
Total stockholders' equity.......................................... 100,007 88,034
---------- ----------
Total liabilities and stockholders' equity.......................... $1,313,322 $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 Nine Months Ended
March 31, March 31,
2001 2000 2001 2000
---- ---- ---- ----
Interest income:
Loans receivable............................................... $24,135 $19,348 $68,549 $54,459
Mortgage-backed securities..................................... 1,933 1,809 5,634 5,243
Investment securities.......................................... 517 325 1,642 815
Other.......................................................... 340 258 1,109 808
------- ------- ------- -------
Total interest income....................................... 26,925 21,740 76,934 61,325
------- ------- ------- -------
Interest expense:
Deposits....................................................... 11,182 8,534 32,488 24,778
Federal Home Loan Bank advances................................ 4,564 3,953 13,512 10,298
------- ------- ------- -------
Total interest expense...................................... 15,746 12,487 46,000 35,076
------- ------- ------- -------
Net interest income before provision for loan losses........... 11,179 9,253 30,934 26,249
Provision for loan losses........................................... 200 400 800 1,200
------- ------- ------- -------
Net interest income after provision for loan losses................. 10,979 8,853 30,134 25,049
------- ------- ------- -------
Other income:
Deposit fees................................................... 641 415 1,692 1,076
Loan service charges and fees.................................. 491 426 1,453 1,387
Gain on sale of loans held for sale............................ 109 39 238 249
Commissions.................................................... 164 226 593 638
Other.......................................................... 82 42 170 49
------- ------- ------- -------
Total other income.......................................... 1,487 1,148 4,146 3,399
------- ------- ------- -------
Other expense:
Compensation and employee benefits............................. 3,002 2,751 8,399 7,691
Occupancy, net................................................. 777 705 2,274 2,129
Federal deposit insurance premiums............................. 96 83 275 373
Data processing................................................ 281 261 795 765
Advertising and promotional.................................... 334 300 929 705
Consulting fees................................................ 230 212 556 549
Other general and administrative expense....................... 747 704 2,203 1,923
------- ------- ------- -------
Total general and administrative expense.................... 5,467 5,016 15,431 14,135
Real estate operations, net.................................... (22) (91) (36) (545)
Amortization of core deposit intangible........................ 29 29 86 48
------- ------- ------- -------
Total other expense......................................... 5,474 4,954 15,481 13,638
------- ------- ------- -------
Earnings before income taxes................................... 6,992 5,047 18,799 14,810
Income taxes........................................................ 3,023 2,207 8,015 6,499
------- ------- ------- -------
Net earnings........................................................ $ 3,969 $ 2,840 $10,784 $ 8,311
======= ======= ======= =======
Basic earnings per share............................................ $ 0.80 $ 0.57 $ 2.20 $ 1.64
Diluted earnings per share.......................................... $ 0.76 $ 0.54 $ 2.08 $ 1.56
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,
2001 2000 2001 2000
---- ---- ---- ----
Net earnings........................................................... $3,969 $2,840 $10,784 $8,311
Other comprehensive income:
Unrealized holding gain (loss) on securities
available for sale arising during the period, net of
taxes....................................................... 215 (119) 407 (207)
------- ------ ------- ------
Increase (decrease) in accumulated other
comprehensive income, net of tax.................................. 215 (119) 407 (207)
------- ------ ------- ------
Total comprehensive income........................................ $4,184 $2,721 $11,191 $8,104
====== ====== ======= ======
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,
2001 2000
---- ----
Cash flows from operating activities:
Net earnings................................................................. $ 10,784 $ 8,311
--------- ---------
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization............................................. 275 (320)
Provision for loan losses................................................. 800 1,200
Gain on sale of real estate held for sale................................. (87) (679)
Gain on sale of loans held for sale....................................... (238) (249)
Loans originated for sale................................................. (26,831) (32,229)
Proceeds from sale of loans held for sale................................. 41,326 40,897
Federal Home Loan Bank (FHLB) stock dividend received..................... (806) (514)
Decrease in accrued interest receivable and other assets.................. 426 1,224
Increase (decrease) in other liabilities.................................. 2,525 (3,354)
Increase (decrease) in accounts payable and accrued expenses............. (90) 1,012
Other..................................................................... 1,282 1,718
--------- ---------
Total adjustments....................................................... 18,582 8,706
--------- ---------
Net cash provided by operating activities............................... 29,366 17,017
--------- ---------
Cash flows from investing activities:
Loans originated for investment.............................................. (134,341) (164,811)
Loans purchased for investment............................................... (105,484) (65,904)
Principal repayments on loans................................................ 115,965 98,333
Purchases of investment securities held to maturity.......................... (3,944) (9,826)
Maturities and principal repayments of investment securities held to maturity 8,413 2,925
Purchases of investment securities available for sale........................ -- (9,500)
Purchases of mortgage-backed securities available for sale................... (8,005) (7,550)
Purchases of mortgage-backed securities held to maturity..................... (16,447) (9,028)
Principal repayments on mortgage-backed securities held to maturity.......... 19,822 8,486
Principal repayments on mortgage-backed securities available for sale........ 4,261 1,896
Proceeds from sale of real estate held for sale.............................. 461 3,827
Purchase of FHLB stock....................................................... -- (1,872)
Investment in office premises and equipment.................................. (1,084) (1,704)
--------- ---------
Net cash used by investing activities................................... (120,383) (154,728)
--------- ---------
Cash flows from financing activities:
Increase in deposits......................................................... 78,971 66,392
Proceeds from funding of FHLB advances....................................... 329,350 378,589
Repayments of FHLB advances.................................................. (311,600) (325,150)
Stock options exercised...................................................... 446 117
Repurchase of stock.......................................................... (356) (5,817)
--------- ---------
Net cash provided by financing activities............................... 96,811 114,131
--------- ---------
Increase (decrease) in cash and cash equivalents........................ 5,794 (23,580)
Cash and cash equivalents at beginning of period............................... 14,067 33,148
--------- ---------
Cash and cash equivalents at end of period..................................... $ 19,861 $ 9,568
========= =========
6
Quaker City Bancorp, Inc.
Consolidated Statements Of Cash Flows
(continued)
Unaudited
(In thousands)
Nine Months Ended
March 31,
2001 2000
---- ----
Supplemental disclosures of cash flow information:
Interest paid (including interest credited) ............................... $44,743 $35,469
Cash paid for income taxes ................................................ 8,262 6,394
======= =======
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 ..................... 78 979
======= =======
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 March 31, 2001 and
the related consolidated statements of operations and comprehensive income
for the three and nine months ended March 31, 2001 and 2000 and the related
consolidated statements of cash flows for the nine months ended March 31,
2001 and 2000 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, 2001 and its
results of operations and comprehensive income for the three and nine
months ended March 31, 2001 and 2000 and cash flows for the nine months
ended March 31, 2001 and 2000. 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 to this Quarterly Report on Form 10-Q.
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
March 31, 2001, 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
8
information relating to (a) the definition of employee for purposes of
applying Opinion No. 25, (b) 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 became 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 into after March 31, 2001. The adoption of the statement did not
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 March 31, 2001, the Bank operated seventeen retail banking
offices in southern California, including six "in-store" Wal-Mart branches. Two
"in-store" Wal-Mart branches were opened in the quarter ended March 2001, in the
communities of Murrieta and South 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 real estate mortgages and
mortgage-backed securities ("MBS").
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Total stockholders' equity for the Company was $100.0 million at March 31, 2001,
compared to $88.0 million at June 30, 2000. Consolidated assets totaled $1.3
billion at March 31, 2001, an increase of $111.4 million compared to June 30,
2000.
Pursuant to plans to repurchase Company stock, the Company has acquired in the
open market 20,000 shares as of May 11, 2001 at an average price of $17.86,
during Fiscal 2001. 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. The Company's average interest
sensitive assets totaled approximately $1.3 billion and $1.2 billion,
respectively, for both the three and nine months ended March 31, 2001. Interest
sensitive liabilities 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 materially since June 30, 2000.
Total loans receivable (including loans receivable held for sale) amounted to
$1.12 billion at March
10
31, 2001, compared to $1.01 billion at June 30, 2000. The following table
presents loans receivable at the dates indicated:
At March 31, At June 30,
2001 2000
---- ----
(In millions)
One-to-four family................... $ 341.0 $ 315.7
Multifamily.......................... 542.5 505.4
Commercial and land.................. 244.1 198.0
Other................................ 8.9 8.2
Unamortized discounts................ (4.6) (5.2)
Allowance for loan losses............ (10.9) (10.2)
-------- --------
Total............................... $1,121.0 $1,011.9
======== ========
Loan originations totaled $47.3 million and loan purchases totaled $70.0 million
for the quarter ended March 31, 2001, compared to loan originations of $52.9
million and loan purchases of $9.0 million for the quarter ended March 31, 2000.
Loan originations, including loans originated for sale, totaled $161.2 million
and loan purchases totaled $105.5 million for the nine months ended March 31,
2001, compared to loan originations of $197.0 million and loan purchases of
$65.9 million for the nine months ended March 31, 2000.
Loan originations were comprised of the following:
For the Three Months Ended For the Nine Months Ended
March 31, March 31, March 31, March 31,
2001 2000 2001 2000
---- ---- ---- ----
(In millions)
One-to-four family................ $ 7.5 $ 5.5 $ 21.9 $ 20.0
Multifamily....................... 31.1 31.6 96.5 122.9
Commercial and land............... 8.5 15.8 42.4 53.7
Other............................. 0.2 0.0 0.4 0.4
----- ----- ------ ------
Total loans originated......... $47.3 $52.9 $161.2 $197.0
===== ===== ====== ======
11
Loan purchases were comprised of the following:
For the Three Months Ended For the Nine Months Ended
March 31, March 31, March 31 March 31,
2001 2000 2001 2000
---- ---- ---- ----
(In millions)
One-to-four family ....................... $35.2 $5.0 $ 48.3 $26.1
Multifamily .............................. 5.4 1.0 12.9 28.1
Commercial and land ...................... 29.4 3.0 44.3 11.7
----- ---- ------ -----
Total loans purchased ................. $70.0 $9.0 $105.5 $65.9
===== ==== ====== =====
The decrease in loan originations for the three and nine months ended March 31,
2001 as compared to the same periods in the previous year is primarily a result
of increased competition and a decrease in multifamily loan demand.
MBS held to maturity totaled $82.1 million at March 31, 2001, compared to $85.5
million at June 30, 2000. Approximately $16.4 million of purchases were off-set
by $19.8 million in amortization and pay-offs during the nine month period. MBS
available for sale amounted to $28.7 million at March 31, 2001 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 $10.4 and $17.8 million for the three and nine months ended
March 31, 2001, respectively. Deposits increased by $33.6 and $79.0 million for
the three and nine months ended March 31, 2001, respectively. In addition,
while the majority of the Bank's deposits are retail in nature, the Bank
accepted $55.0 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 $10.0 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.
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 $47.5 million and
$26.9 million for the three months ended March 31, 2001 and 2000, respectively.
Principal repayments on loans were $116.0 million and $98.3 million for the nine
months ended March 31, 2001 and 2000, respectively. With recent downward
pressure on interest rates, loans are being paid off more rapidly than in the
previous reporting periods. This trend is expected to continue into the next
fiscal quarter.
Proceeds from loan sales amounted to $13.4 million for the quarter ended March
31, 2001 as
12
compared to $7.4 million for the quarter ended March 31, 2000. Proceeds from
loan sales amounted to $41.3 million for the nine months ended March 31, 2001 as
compared to $40.9 million for the same period ended March 31, 2000. The increase
in loan sales during the three and nine months ended March 31, 2001 is primarily
a result of the sale of participation interests in certain loan purchases during
the quarter ended March 31, 2001. The decline in loan originations during the
three and nine months ended March 31, 2001 has resulted in an increased focus on
loan purchases. Loan pools purchased in the quarter ended March 31, 2001
included larger balance loans in the commercial and industrial loan category. 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 it has originated that
meet predefined criteria. Loans serviced for others increased to $318.7 million
at March 31, 2001, from $299.1 million at June 30, 2000, primarily due to loan
sales of $41.3 million for the nine months ended March 31, 2001, offset by
principal paydowns.
On December 27, 2000, the Financial Regulatory Relief and Economic Efficiency
Act of 2000 was adopted. Section 1201 of the Act repealed the statutory
liquidity requirement for savings associations under Section 6 of the Home
Owners' Loan Act. As a result, effective March 15, 2001, the Office of Thrift
Supervision ("OTS") repealed its regulation which had required the Bank to
maintain a minimum level of liquidity based upon a percentage of deposits and
short-term borrowings. The previously required ratio was 4%. In its place, the
OTS has issued an interim regulation which provides that, as a general matter,
savings associations must maintain sufficient liquidity to ensure safe and sound
operation. The Bank's ratio calculated under the repealed regulation for the
quarters ended March 31, 2001 and 2000 was 4.25% and 4.51%, respectively.
Sources of capital and liquidity for the Company on a stand alone 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 Nine Months Ended March 31, 2001 and 2000 The
- ---------------------------------------------------------------------
Company recorded net earnings of $4.0 million, $0.76 per diluted share for the
quarter ended March 31, 2001. This compares to net earnings of $2.8 million,
$0.54 per diluted share for the same quarter last year. The Company recorded net
earnings of $10.8 million, $2.08 per diluted share for the nine months ended
March 31, 2001. This compares to net earnings of $8.3 million, $1.56 per
diluted share for the same period last year. The increase in net earnings for
the three and nine months ended March 31, 2001 as compared to March 31, 2000 is
primarily a result of an increase in net interest income as discussed below.
Interest Income Interest income amounted to $26.9 million for the quarter ended
- ---------------
March 31, 2001 as compared to $21.7 million for the quarter ended March 31,
2000. Interest income amounted to $76.9 million for the nine months ended March
31, 2001 as compared to $61.3 million for the nine months ended March 31, 2000.
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 $1.273 billion compared to $1.094
billion for the same period last year, a 16.4% increase. Average earning assets
for the nine months ended March 31, 2001 increased to $1.224 billion compared to
$1.045 billion for the same period last year, a 17.1% increase. The yield on
earning assets was 8.46% for the quarter ended March 31, 2001 as compared to
7.94% for the quarter ended March 31, 2000. The yield on earning assets was
8.38% for the nine months ended March 31, 2001 as compared to 7.83% for the nine
months ended March 31, 2000. The improvement in the yield on earning assets for
the three and nine months ended March 31, 2001 is the result of improvements in
the yield on adjustable rate mortgage loans which are tied to lagging indices.
With recent downward pressure on interest rates, the yield on earning assets
may decline in future fiscal quarters.
Interest Expense Interest expense for the quarter ended March 31, 2001 was
- ----------------
$15.7 million, compared to $12.5 million for the same quarter in the previous
year. Interest expense for the nine months ended March 31, 2001 was $46.0
million, compared to $35.1 million for the same period in the previous year.
The increase in interest expense for the three and nine months ended March 31,
2001 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 March 31, 2001 amounted to $11.2 million compared to $9.3
million for the same period last year. Net interest income before provision for
loan losses for the nine months ended March 31, 2001 amounted to $30.9 million
compared to $26.2 million for the same period last year. The net interest margin
for the three months ended March 31, 2001 was 3.51%, a 13 basis point increase
from the same period last year. The net interest margin for the nine months
ended March 31, 2001 was 3.37%, a two basis point increase from the same period
last year. The increase in the net interest margin for the nine months ended
March 31, 2001 was primarily a result of an increase in the yield on interest-
earning assets partially offset by an increase in the cost of interest-bearing
liabilities. The increase in net interest income is primarily a result of an
increase in the amount of interest-earning assets
14
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,
2001 2000 2001 2000
---- ---- ---- ----
Yield on interest-earning assets ...... 8.46% 7.94% 8.38% 7.83%
Cost of interest-bearing liabilities .. 5.43% 5.00% 5.48% 4.97%
---- ---- ---- ----
Interest rate spread (1) .............. 3.03% 2.94% 2.90% 2.86%
==== ==== ==== ====
Net interest margin (2) ............... 3.51% 3.38% 3.37% 3.35%
==== ==== ==== ====
(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 its 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
15
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 March 31, 2001 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 Allowance Total Loans Amount Allowance Total Loans
------ --------- ----------- ------ --------- -----------
One-to-four family ......... $ 2,732 24.97% 30.00% $ 2,392 23.54% 30.73%
Multifamily ................ 4,911 44.88% 47.73% 4,903 48.25% 49.20%
Commercial ................. 3,053 27.90% 21.48% 2,620 25.79% 19.13%
Land ....................... 22 0.20% 0.16% 1 0.01% 0.14%
Other ...................... 134 1.22% 0.63% 103 1.01% 0.80%
Unallocated ................ 91 0.83% -- 142 1.40% --
------- ------ ------ ------- ------ ------
Total allowance for
loan losses ................ $10,943 100.00% 100.00% $10,161 100.00% 100.00%
======= ====== ====== ======= ====== ======
16
The provision for loan losses was reduced to $200,000 and $800,000 for the three
and nine months ended March 31, 2001, from $400,000 and $1,200,000 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 the credit risk inherent in the portfolio.
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.
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,
2001 2000 2000 2000
---- ---- ---- ----
(In Thousands)
Balance at beginning of period .............. $10,761 $9,413 $10,161 $8,684
Provision for loan losses ................... 200 400 800 1,200
Charge-offs ................................. (18) (11) (18) (98)
Recoveries .................................. -- -- -- 16
------- ------ ------- ------
Balance at end of period .................... $10,943 $9,802 $10,943 $9,802
======= ====== ======= ======
The general allowance for loan and real estate losses for the nine months ended
March 31, 2001 was $10.9 million as compared to $9.8 million for the nine months
ended March 31, 2000. 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 was $234,000 at March 31,
2001 as compared to $570,000 at March 31, 2000. The specific allowance
declined mainly due to fewer non-performing loans. The unallocated portion of
the allowance was $91,000 at March 31, 2001 compared to $142,000 at June 30,
2000.
Other Income Other income for the three months ended March 31, 2001 was $1.5
- ------------
million as compared to $1.1 million for the same period last year. Other income
for the nine months ended March 31, 2001 was $4.1 million compared to $3.4
million for the same period last year. Other income has increased for both the
quarter and nine months ended March 31, 2001 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.
17
Other Expense Other expense for the three months ended March 31, 2001
- -------------
increased to $5.5 million compared to $5.0 million for the same period last
year. Other expense for the nine months ended March 31, 2001 was $15.5 million
compared to $13.6 million for the same period last year. Other expense for the
three months and nine months ended March 31, 2000 included net gains on the sale
of real estate held for sale of $91,000 and $545,000, respectively. Excluding
these gains, there was an increase in other expense, both compensation and
occupancy costs, primarily as a result of the expansion of the branch network
including the addition of six "in-store" Wal-Mart branches that were opened
during the period of February 2000 to March 2001. Marketing expense was also up
from the same period last year, as the Bank continued to pursue deposit growth
through advertising and checking account promotions. The efficiency ratio for
the quarter ended March 31, 2001 improved to 42.83% compared to 48.41% 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 43.24% and 43.73% for the
- ------------
quarters ended March 31, 2001 and 2000, respectively. The Company's effective
tax rates were 42.64% and 43.88% for the nine months ended March 31, 2001 and
2000, respectively. The effective tax rates were comparable to the applicable
statutory rates in effect.
18
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,
2001 2000 2000
---- ---- ----
(Dollars In thousands)
Nonaccrual loans (1):
Real estate loans:
One-to-four family........................................ $ 1,664 $ 1,356 $ 1,561
Multifamily............................................... 557 526 527
Commercial and land....................................... -- 1,707 1,714
Consumer.................................................. 35 -- --
------- ------- -------
Total nonaccrual loans (1)................................ 2,256 3,589 3,802
Troubled debt restructured loans............................ -- 211 213
------- ------- -------
Total non-performing loans............................... 2,256 3,800 4,015
Real estate acquired through foreclosure.................... 88 639 290
------- ------- -------
Total non-performing assets.............................. $ 2,344 $ 4,439 $ 4,305
======= ======= =======
Non-performing loans as a percentage of gross loans (2)..... 0.20% 0.37% 0.41%
Non-performing assets as a percentage of total assets (3)... 0.18% 0.37% 0.38%
Total allowance for loan losses
as a percentage of gross loans............................ 0.96% 0.99% 1.00%
Total allowance for loan losses as a percentage of total
non-performing loans...................................... 485.06% 267.39% 244.13%
Total allowance as a percentage of total
non-performing assets (4)................................. 466.85% 228.90% 227.69%
(1) Nonaccrual loans are net of specific allowances of $0, $0 and $40,000 at
March 31, 2001, June 30, 2000 and March 31, 2000, respectively.
(2) Non-performing loans are net of specific allowances and include nonaccrual
and troubled debt restructured loans.
Gross loans include loans held for sale.
(3) Non-performing assets include non-performing 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.
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.
19
Nonperforming assets decreased to $2.3 million, 0.18% of total assets at March
31, 2001, compared to $4.4 million, 0.37% of total assets at June 30, 2000.
The decrease in nonperforming assets for the nine month period is primarily a
result of the pay-off of one $1.7 million commercial loan.
Classified loans decreased to $7.8 million at March 31, 2001, compared to $11.2
million at June 30, 2000. This is primarily the result of an 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 March 31, 2001, the Company had a
gross investment in impaired loans of $674,000 for which specific valuation
allowances of $149,000 had been established.
The Company's average investment in impaired loans for the three and nine months
ended March 31, 2001 was $674,000 and $1.2 million, respectively. For 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,
2001, income recorded on impaired loans totaled $14,000 and $74,000,
substantially all of which was recorded utilizing the cash-basis method of
accounting. 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. 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, 2001.
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 stockholders' 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.
20
The Bank was in compliance with all capital requirements in effect at March 31,
2001, 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 2001 2000
- ---- ----------- ----------- ---- ----
Tangible capital......................... 1.50% N/A 7.46% 7.20%
Core capital to adjusted total assets.... 4.00% 5.00% 7.46% 7.20%
Core capital to risk-weighted assets..... 4.00% 6.00% 10.92% 10.82%
Total capital to risk-weighted assets.... 8.00% 10.00% 12.12% 12.03%
21
* * * * *
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 or 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.
22
Part II. Other Information
Item 5. Other Information: Date of Annual Meeting
-----------------------------------------
The date of the Company's 2001 annual meeting of stockholders has been
set for Tuesday, November 20, 2001. 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 2001 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
(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.
23
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 15, 2001 By: /s/ Dwight L. Wilson
------------ --------------------
Dwight L. Wilson
Senior Vice President,
Treasurer and Chief Financial Officer
24