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, 1997
-----------------
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, 1998: 4,658,094
QUAKER CITY BANCORP, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition (unaudited)
as of December 31, 1997 and June 30, 1997................. 3
Consolidated Statements of Operations (unaudited) for the
Three Months and Six Months Ended December 31, 1997 and
1996...................................................... 4
Consolidated Statements of Cash Flows (unaudited) for the
Six Months Ended December 31, 1997 and 1996............... 5
Notes to Consolidated Financial Statements............... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 7
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Stockholders.......... 17
Item 6. Exhibits and Reports on Form 8-K......................... 17
2
QUAKER CITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Unaudited
(In thousands, except share data)
DECEMBER 31, JUNE 30,
1997 1997
-------- --------
ASSETS
Cash and due from banks................................................ $ 7,729 $ 7,067
Interest-bearing deposits.............................................. 241 336
Federal funds sold and other short-term investments.................... 20,320 12,950
Investment securities held to maturity................................. 23,270 36,654
Investment securities available for sale............................... 1,819 1,432
Loans receivable, net.................................................. 663,527 644,964
Loans receivable held for sale......................................... 1,450 623
Mortgage-backed securities held to maturity............................ 100,167 74,139
Mortgage-backed securities available for sale.......................... 8,254 --
Real estate held for sale.............................................. 2,481 2,314
Federal Home Loan Bank stock, at cost.................................. 11,161 9,718
Office premises and equipment, net..................................... 4,348 4,217
Accrued interest receivable and other assets........................... 7,387 6,988
-------- --------
Total assets........................................................ $852,154 $801,402
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits............................................................... $559,529 $553,186
Federal Home Loan Bank advances........................................ 207,500 157,700
Deferred tax liability................................................. 1,581 1,413
Accounts payable and accrued expenses.................................. 3,467 3,543
Other liabilities...................................................... 6,575 15,317
-------- --------
Total liabilities................................................... 778,652 731,159
Stockholders' equity:
Common stock, $.01 par value. Authorized 10,000,000 shares; issued
and outstanding 4,673,094 shares and 4,703,102 at December 31,
1997 and June 30, 1997, respectively.................................. 47 47
Additional paid-in capital............................................... 44,257 44,051
Unrealized gain on securities available for sale......................... 374 136
Retained earnings, substantially restricted.............................. 30,724 28,122
Deferred compensation.................................................... (1,900) (2,113)
-------- --------
Total stockholders' equity.......................................... 73,502 70,243
-------- --------
Total liabilities and stockholders' equity.......................... $852,154 $801,402
======== ========
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,
1997 1996 1997 1996
------- ------- ------- -------
Interest income:
Loans receivable.............................................. $13,504 $12,796 $26,822 $25,227
Mortgage-backed securities.................................... 1,893 804 3,401 1,554
Investment securities......................................... 457 659 1,025 1,329
Other......................................................... 388 222 721 438
------- ------- ------- -------
Total interest income...................................... 16,242 14,481 31,969 28,548
------- ------- ------- -------
Interest expense:
Deposits...................................................... 7,036 6,389 14,160 12,797
Federal Home Loan Bank advances and other borrowings.......... 2,974 2,172 5,518 4,045
------- ------- ------- -------
Total interest expense..................................... 10,010 8,561 19,678 16,842
------- ------- ------- -------
Net interest income before provision for loan losses....... 6,232 5,920 12,291 11,706
Provision for loan losses....................................... 400 501 650 2,001
------- ------- ------- -------
Net interest income after provision for loan losses........... 5,832 5,419 11,641 9,705
------- ------- ------- -------
Other income:
Loan servicing charges and deposit fees....................... 563 449 1,048 860
Gain on sale of loans held for sale........................... 35 58 65 111
Commissions................................................... 161 148 335 288
Other......................................................... 3 4 5 10
------- ------- ------- -------
Total other income......................................... 762 659 1,453 1,269
------- ------- ------- -------
Other expense:
Compensation and employee benefits............................ 2,023 1,900 4,066 3,828
Occupancy, net................................................ 462 488 945 960
Federal deposit insurance premiums............................ 128 283 254 609
Data processing............................................... 177 169 346 337
Other general and administrative expense...................... 871 803 1,599 1,497
------- ------- ------- -------
Total general and administrative expense................... 3,661 3,643 7,210 7,231
Savings Association Insurance Fund special assessment......... -- -- -- 3,100
Real estate operations, net................................... 120 169 279 451
Amortization of core deposit intangible....................... -- 75 35 151
------- ------- ------- -------
Total other expense........................................ 3,781 3,887 7,524 10,933
------- ------- ------- -------
Earnings before income taxes................................. 2,813 2,191 5,570 41
Income taxes.................................................... 1,254 932 2,481 49
------- ------- ------- -------
Net earnings (loss)........................................... $ 1,559 $ 1,259 $ 3,089 ($8)
======= ======= ======= =======
Basic earnings per share...................................... $0.36 $0.28 $0.71 $0.00
Diluted earnings per share.................................... $0.34 $0.26 $0.67 $0.00
See accompanying notes to consolidated financial statements.
4
QUAKER CITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In thousands)
SIX MONTHS ENDED
DECEMBER 31,
1997 1996
---------- ----------
Cash flows from operating activities:
Net earnings (loss)............................................................ $ 3,089 ($8)
--------- ---------
Adjustments to reconcile net earnings (loss) to net cash used
by operating activities:
Depreciation and amortization.............................................. 162 (91)
Provision for loan losses.................................................. 650 2,001
Write-downs and provision for losses on real estate held for sale.......... 90 210
(Gain) loss on sale of real estate held for sale........................... (94) 88
Gain on sale of loans held for sale........................................ (65) (111)
Loans originated for sale.................................................. (9,291) (14,563)
Proceeds from sale of loans held for sale.................................. 8,438 12,001
Federal Home Loan Bank (FHLB) stock dividend received...................... (307) (236)
Increase in accrued interest receivable and other assets................... (434) (301)
Decrease in other liabilities.............................................. (8,742) (524)
Decrease in accounts payable and accrued expenses.......................... (76) (29)
Other...................................................................... 1,311 386
--------- ---------
Total adjustments...................................................... (8,358) (1,169)
--------- ---------
Net cash used by operating activities.................................. (5,269) (1,177)
--------- ---------
Cash flows from investing activities:
Loans originated for investment................................................ (34,479) (44,851)
Loans purchased for investment................................................. (26,512) (6,542)
Principal repayments on loans.................................................. 38,577 23,306
Purchases of investment securities available for sale.......................... -- (340)
Purchases of investment securities held to maturity............................ -- (2,999)
Maturities and principal repayments of investment securities held to maturity.. 13,390 6,267
Purchases of mortgage-backed securities available for sale..................... (8,237) --
Purchases of mortgage-backed securities held to maturity....................... (34,587) (13,693)
Principal repayments on mortgage-backed securities held to maturity............ 8,450 3,281
Proceeds from sale of real estate held for sale................................ 2,808 2,027
Purchase of FHLB stock......................................................... (1,136) (1,054)
Investment in office premises and equipment.................................... (545) (293)
--------- ---------
Net cash used by investing activities.................................. (42,271) (34,891)
--------- ---------
Cash flows from financing activities:
Increase in deposits........................................................... 6,343 9,075
Repayments of securities sold under agreements to repurchase................... -- (300)
Proceeds from funding of FHLB advances......................................... 220,200 205,700
Repayments of FHLB advances.................................................... (170,400) (174,400)
Stock options exercised........................................................ 21 348
Repurchase of stock............................................................ (687) (953)
--------- ---------
Net cash provided by financing activities.............................. 55,477 39,470
--------- ---------
Increase in cash and cash equivalents.................................. 7,937 3,402
Cash and cash equivalents at beginning of period................................... 20,353 13,568
--------- ---------
Cash and cash equivalents at end of period......................................... $ 28,290 $ 16,970
========= =========
Supplemental disclosures of cash flow information:
Interest paid (including interest credited)....................................... $ 19,168 $ 16,620
Cash paid for income taxes........................................................ 3,625 418
======= =======
Supplemental schedule of noncash investing and financing activities:
Additions to loans resulting from the sale of real estate acquired
through foreclosure.............................................................. $ 557 $ 2,736
Additions to real estate acquired through foreclosure............................. 2,451 4,327
Net change in unrealized gain on securities available for sale, net of taxes...... 238 --
======= =========
See accompanying notes to consolidated financial statements.
5
QUAKER CITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated statement of financial condition as of December 31, 1997,
the related consolidated statements of operations for the three and six
months ended December 31, 1997 and 1996 and the related consolidated
statements of cash flows for the six months ended December 31, 1997 and
1996 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, 1997 and its
results of operations for the three and six months ended December 31, 1997
and 1996 and cash flows for the six months ended December 31, 1997 and
1996. 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 1998.
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, 1997.
6
QUAKER CITY BANCORP, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Quaker City Bancorp, Inc. (the "Company"), incorporated in Delaware, is
primarily engaged in the savings and loan business through its wholly owned
subsidiary, Quaker City Federal Savings and Loan Association (the Association).
At December 31, 1997, the Association operated eight retail banking offices in
Southern California. The Association 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 one-to-four family
residential mortgages and multifamily mortgages.
Two new retail banking branches are scheduled to be opened during February 1998
in Orange County California, increasing the total number of branches to ten.
The Company will utilize these branches to expand its operating area and
increase its retail deposit base in order to fund the Company's plans for
continued asset growth. In addition, in late October 1997, the Company
initiated an aggressive program designed to attract new checking account
relationships through repetitive direct mailings and gifts to new checking
account customers. In the first two months of this program, through December
31, 1997, checking accounts increased from approximately 9,700 accounts to
10,500 accounts. This represents an increase of over 8% of total checking
accounts during this period.
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Total stockholders' equity for the Company was $73.5 million at December 31,
1997, compared to $70.2 million at June 30, 1997. Consolidated assets totaled
$852.2 million at December 31, 1997, an increase of $50.8 million compared to
June 30, 1997. All historical earnings per share data herein reflect a 25%
common stock dividend paid to shareholders on May 30, 1997.
In the first quarter of fiscal 1997, the Office of Thrift Supervision (OTS)
approved an additional stock repurchase of 236,000 shares, which was
approximately 5% of outstanding shares. Through December 31, 1997, 152,250
shares of stock have been repurchased as allowable under this latest approval.
7
Total loans receivable amounted to $665.0 million at December 31, 1997, compared
to $645.6 million at June 30, 1997. Loan originations and purchases totaled
$34.5 million for the quarter ended December 31, 1997, compared to $33.7 million
for the quarter ended December 31, 1996. Loan originations and purchases totaled
$70.3 million for the six months ended December 31, 1997, compared to $66.0
million for the six months ended December 31, 1996.
For the quarter ended December 31, 1997 loan originations and purchases were
comprised of $4.3 million of one-to-four family residential loans, $21.3 million
of multifamily loans, $2.5 of commercial and industrial loans and $6.4 million
in consumer loans. This compares to $8.0 million of one-to-four family
residential loans and $25.7 million of multifamily loans for the quarter ended
December 31, 1996. No commercial and industrial or consumer loans were
originated or purchased for the quarter ended December 31, 1996. For the six
months ended December 31, 1997, loan originations and purchases were comprised
of $29.9 million of one-to-four family residential loans, $30.3 million of
multifamily loans, $3.7 million of commercial and industrial loans and $6.4
million in consumer loans. This compares to $17.6 million of one-to-four family
residential loans and $48.4 million of multifamily loans for the six months
ended December 31, 1996. No commercial and industrial or consumer loans were
originated or purchased for the six months ended December 31, 1996. One-to-four
family loan and consumer loan originations and purchases increased from the
prior year primarily as a result of an increase in loans purchased. Multifamily
originations and purchases decreased over the comparable three and six month
periods last year due to an increase in the number of financial institutions
competing for loans on multifamily properties in the Company's operating area.
At present, the Company expects to continue its focus on multifamily lending
during the current fiscal year. In January 1998, the Company announced the
hiring of the income property lending staff of another institution in Southern
California. This new lending group funds primarily commercial and industrial
loans as well as some multifamily loans and it is expected that this addition to
the loan production division of the Company will complement the existing
multifamily and single family loan departments.
Mortgage-backed securities (MBS) held to maturity amounted to $100.2 million at
December 31, 1997, compared to $74.1 million at June 30, 1997. Mortgage-backed
securities available for sale amounted to $8.3 million at December 31, 1997,
compared to none at June 30, 1997. The increase in MBS available for sale is a
result of the Company changing its investment policy to place adjustable rate
MBS purchased during the current fiscal year into available for sale. The
Company increased earning assets during the first six months of the fiscal year
by purchasing mortgage-backed securities consistent with its current business
strategy. For the six months ended December 31, 1997 the Company purchased $34.6
million in mortgage-backed securities held to maturity, compared to $13.7
million for the same period in the previous year. Purchases of mortgage-backed
securities available for sale amounted to $8.2 million for the six months ended
December 31, 1997, compared to none for the same period in the previous year.
The purchase of mortgage-backed securities were funded primarily with Federal
Home Loan Bank advances.
8
In addition to Federal Home Loan Bank advances, other sources of liquidity for
the Company include principal repayments on loans and mortgage-backed
securities, proceeds from sales of loans held for sale, other cash flows
generated from operations and proceeds from increases in customer deposits.
Proceeds from loan sales amounted to $4.9 million for the quarter ended December
31, 1997 as compared to $6.0 million for the quarter ended December 31, 1996.
Proceeds from loan sales were $8.4 million for the six months ended December 31,
1997 as compared to $12.0 million for the six months ended December 31, 1996.
At present, the Company's policy is to sell all 30 and 15 year fixed rate loans
as well as certain one-to-four family adjustable and multifamily loans
originated that meet predefined criteria. Loans serviced for others increased
to $221.8 million at December 31, 1997, from $213.6 million at December 31,
1996.
Principal repayments on loans were $21.9 million and $11.4 million for the three
months ended December 31, 1997 and 1996, respectively. For the six months ended
December 31, 1997 and 1996, principal repayments on loans were $38.6 and $23.3
million respectively. The increase in principal repayments during the three and
six month periods in 1997 is due primarily to an increase in customers
refinancing their loans, generally to a fixed rate loan, as interest rates
declined during the periods in 1997.
Savings and loan associations must, by regulation, maintain minimum levels of
liquidity as a percentage of deposits and short-term borrowings. Effective
November 24, 1997, the OTS reduced this requirement from 5% to 4%. The OTS also
excluded deposits with maturities exceeding one year from the liquidity base,
while expanding the types of investments considered to be liquid assets. The
new rule includes a separate requirement that each thrift must maintain
sufficient liquidity to ensure its safe and sound operation. The Association's
average liquidity ratio for the quarters ended December 31, 1997 and 1996 was
5.00% and 5.12%, respectively.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996 The Company
- ---------------------------------------------------------------
recorded net earnings of $1.6 million, $0.36 per basic share ($0.34 per diluted
share) for the quarter ended December 31, 1997. This compares to net earnings
of $1.3 million, $0.28 per basic share ($0.26 per diluted share) for the same
period in fiscal 1997. Net earnings for the six month period ending December
31, 1997 were $3.1 million, $0.71 per basic share ($0.67 per diluted share)
compared to a net loss of $8,000, $0.00 per basic and diluted share for the same
six month period last year. The change in net earnings is attributable to the
one-time SAIF special assessment of $3.1 million accrued in the first quarter
and paid in the second quarter of fiscal 1997, as well as a decline in the
provision for loan losses of $1.4 million between the six month period ended
December 31, 1997 and December 31, 1996. Without the one-time special
assessment, the Company's net earnings for the same period last year would have
been $1.8 million, $0.40 per basic share ($0.38 per diluted share).
9
INTEREST INCOME Interest income amounted to $16.2 million for the quarter ended
- ---------------
December 31, 1997 as compared to $14.5 million for the quarter ended December
31, 1996. Interest income amounted to $32.0 million for the six months ended
December 31, 1997 as compared to $28.5 million for the six months ended December
31, 1996. The increase in interest income is primarily a result of a larger
earning asset base for the respective period compared to the same period in the
previous year.
INTEREST EXPENSE Interest expense for the quarter ended December 31, 1997 was
- ----------------
$10.0 million, compared to $8.6 million for the same quarter in the previous
year. Interest expense for the six months ended December 31, 1997 was $19.7
million, compared to $16.8 million for the same six months in the previous year.
The increase in interest expense is a result of an increase in the average
balance of interest-bearing liabilities as well as an increase in the cost of
interest-bearing liabilities.
NET INTEREST INCOME The net interest margin for the quarter ended December 31,
- -------------------
1997 was 3.01%, a 23 basis point decrease from the same period last year. For
the six months ended December 31, 1997 the net interest margin was 3.03%, a 22
basis point decrease from the same period last year. The decline in the net
interest margin is primarily a result of the increase in the cost of interest-
bearing liabilities. Net interest income before provision for loan losses for
the quarter ended December 31, 1997 amounted to $6.2 million compared to $5.9
million for the same period last year. Net interest income before provision for
loan losses for the six months ended December 31, 1997 amounted to $12.3 million
compared to $11.7 million for the same period last year. This increase is
primarily a result of the increase in the amount of interest-earning assets
relative to interest-bearing liabilities.
The following table displays average interest rates on the Company's interest-
earning assets and interest-bearing liabilities:
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------- ------------------
Three Six Three Six
Month Month Month Month
Average Average Average Average
-------- -------- -------- -------
Yield on interest-earning assets 7.85% 7.89% 7.93% 7.93%
Cost of interest-bearing liabilities 5.36% 5.37% 5.16% 5.16%
---- ---- ---- ----
Interest rate spread (1) 2.49% 2.52% 2.77% 2.77%
==== ==== ==== ====
Net interest margin (2) 3.01% 3.03% 3.24% 3.25%
==== ==== ==== ====
(1) The interest rate spread represents the difference between the weighted-
average rate on interest-earning assets and the weighted average rate on
interest-bearing liabilities.
(2) The net interest margin represents net interest income as a percentage of
average interest-earning assets.
10
PROVISION FOR LOAN LOSSES The provision for loan losses was $400,000 for the
- -------------------------
three months ended December 31, 1997, compared to $501,000 for the same period
last year. The provision for loan losses was $650,000 for the six months ended
December 31, 1997, compared to $2.0 million for the same period last year. The
increase in the provision for the six months ended December 31, 1996 was a
result of an increase in performing loans which demonstrated some weakness
during that period. The allowance for loan losses is maintained at an amount
management considers adequate to cover losses on loans receivable which are
deemed probable and estimable and is based on management's evaluation of the
risks inherent in its loan portfolio and the general economy. A number of
factors are considered, including asset classifications, estimated collateral
values, local economic conditions, management's assessment of the credit risk
inherent in the portfolio, historical loan loss experience, and the
Association's underwriting policies.
As a result of the 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, 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
establish additional allowance for loan losses based on their judgments of the
information available at the time of the examination.
11
The following is a summary of the activity in the allowance for loan losses and
the allowance for losses on real estate acquired through foreclosure (REO):
AT OR FOR THE AT OR FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
------------- ------------- ------------- -----------------
(IN THOUSANDS) (IN THOUSANDS)
Accumulated through a charge to earnings:
Balance at beginning of period................. $6,414 $6,924 $6,496 $ 6,542
Provision for loan losses...................... 400 501 650 2,001
Charge-offs, net............................... (150) (761) (482) (1,879)
------ ------ ------ -------
Balance at end of period....................... 6,664 6,664 6,664 6,664
Valuation allowance for portfolios acquired:
Balance at beginning of period................. 1,271 1,288 1,276 1,291
Reductions credited............................ (2) (4) (7) (7)
------ ------ ------ -------
Balance at end of period....................... 1,269 1,284 1,269 1,284
------ ------ ------ -------
Total allowance for loan losses............. $7,933 $7,948 $7,933 $ 7,948
====== ====== ====== =======
Allowance for REO losses:
Balance at beginning of period................. $ 175 $ 175 $ 175 $ 175
Additions charged to operations................ -- -- -- --
------ ------ ------ -------
Balance at end of period....................... $ 175 $ 175 $ 175 $ 175
====== ====== ====== =======
OTHER INCOME Other income for the three months ended December 31, 1997 was
- ------------
$762,000 compared to $659,000 for the same period last year. For the six months
ended December 31, 1997 other income was $1.5 million as compared to $1.3
million for the same period a year earlier. The increase in other income for
the three and six months ended December 31, 1997 was a result of an increase in
loan servicing charges and other deposit fees.
OTHER EXPENSE Other expense for the three months ended December 31, 1997 was
- -------------
$3.8 million, compared to $3.9 million the same period last year. For the six
months ended December 31, 1997 other expense was $7.5 million, compared to $10.9
million for the same period last year. The decline in other expense for the
three months ended December 31, 1997 was primarily a result of a reduction in
deposit insurance from 23 basis points to 6.45 basis points effective November
1996 offset by an increase in compensation and employee benefits expense. The
decline in other expense for the six months ended December 31, 1997 was
primarily a result of other expense including for the six months ended December
31, 1996, the accrual in September 1996 for the $3.1 million one-time special
SAIF assessment.
12
Compensation and employee benefits expense increased $123,000 or 6.47% for the
quarter ended December 31, 1997 as compared to the same quarter last year. For
the six months ended December 31, 1997 compensation and employee benefits
expense increased $238,000 or 6.22% as compared to the same period last year.
This increase in compensation and employee benefits expense is due to an
increase in expense related to the Company's Employee Stock Ownership Plan
(ESOP) established in 1993. When shares of stock are released from an ESOP, the
sponsoring company recognizes employee benefit expense. Companies that
established an ESOP after 1992, like the Company, are required to account for
such expense at the fair value of the shares at the time of release of the
Company stock to employee participants, as opposed to the original cost of the
shares released. Accordingly, as the fair value of the Company's stock has
increased during the past few quarters, ESOP expense has correspondingly
increased. The expense related to the ESOP was $277,000 and $173,000 for the
quarters ended December 31, 1997 and 1996, respectively. The expense related to
the ESOP was $542,000 and $319,000 for the six months ended December 31, 1997
and 1996, respectively, with virtually all of the increase resulting from the
required fair value treatment of ESOP expense described above.
INCOME TAXES The Company's effective tax rates were 44.6% and 42.5% for the
- ------------
quarter ended December 31, 1997 and 1996, respectively, and were comparable to
the applicable statutory rates in effect.
13
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,
1997 1997 1996
------- ------- -------
(DOLLARS IN THOUSANDS)
Nonaccrual loans (1):
Real estate loans:
One-to-four family....................................... $ 2,769 $ 3,226 $ 3,490
Multifamily.............................................. 3,091 2,387 3,044
Commercial and land...................................... 3,373 2,926 2,974
Other........................................................ 50 -- 28
------- ------- -------
Total nonaccrual loans (1)............................... 9,283 8,539 9,536
Troubled debt restructured loans................................. 226 229 232
------- ------- -------
Total nonperforming loans................................ 9,509 8,768 9,768
Real estate acquired through foreclosure......................... 1,811 1,720 1,789
------- ------- -------
Total nonperforming assets.............................. $11,320 $10,488 $11,557
======= ======= =======
Nonperforming loans as a percentage of gross loans (2)........... 1.40% 1.33% 1.50%
Nonperforming assets as a percentage of total assets (3)......... 1.33% 1.31% 1.51%
General Valuation Allowance (GVA) on loans
as a percentage of gross loans............................... 0.90% 0.94% 0.95%
GVA on loans as a percentage of total nonperforming loans (2).... 64.52% 70.91% 63.25%
Total GVA as a percentage of total nonperforming assets (4)...... 55.74% 60.95% 54.97%
(1) Nonaccrual loans are net of specific allowances of $1.3 million, $1.0
million and $1.2 million at December 31, 1997, June 30, 1997 and December
31, 1996, respectively.
(2) Nonperforming loans include nonaccrual and troubled debt restructured loans.
Gross loans include loans held for sale.
(3) Nonperforming assets include nonperforming loans and REO.
(4) Total GVA includes loan and REO general 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 (at December 31, 1997, all troubled debt restructured loans
were performing according to their restructured terms). Nonperforming loans are
reported net of specific allowances. Nonperforming assets are defined as
nonperforming loans and real estate acquired through foreclosure.
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Nonaccrual loans at December 31, 1997 consisted of $2.8 million in one-to-four
family loans, $3.1 million in multifamily loans and $3.4 million in commercial
and industrial loans, which includes $1.0 million in land loans and $50,000 in
other loans. At June 30, 1997, nonaccrual loans consisted of $3.2 million in
one-to-four family loans, $2.4 million in multifamily loans and $2.9 million in
commercial and industrial loans, which includes $1.0 million in land loans.
Nonperforming assets increased to $11.3 million, 1.33% of total assets at
December 31, 1997, compared to $10.5 million, 1.31% of total assets at June 30,
1997. The increase in nonperforming assets this quarter is primarily a result
of an increase in nonperforming multifamily properties. Controlling and
reducing nonperforming assets continues to be a primary focus of the Company
even in an improving Southern California economy.
IMPAIRED LOANS A loan is considered impaired when based on current
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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, 1997, the Company had
a gross investment in impaired loans of $8.1 million, including $6.4 million for
which specific valuation allowances of $1.1 million had been established and
$1.7 million for which no specific valuation allowance was considered necessary.
During the three and six months ended December 31, 1997, the Company's average
investment in impaired loans was $8.4 million and $8.1 million, respectively.
For the three and six months ended December 31, 1997, income recorded on
impaired loans totaled $176,000 and $344,000 respectively, 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. Impaired loans totalling $4.4 million were not performing in accordance
with their contractual terms at December 31, 1997, and have been included in
nonaccrual loans at that date.
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REGULATORY CAPITAL
FIRREA and the regulations promulgated thereunder established certain minimum
levels of regulatory capital for savings institutions subject to OTS
supervision. The Association must meet three capital tests. First, the
tangible capital requirement mandates that the Association'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 3.00% of adjusted total assets as defined in the capital
regulations. Third, the risk-based capital requirement presently mandates that
core capital plus supplemental capital as defined by the OTS be at least 8.00%
of risk-weighted assets as prescribed in the capital regulations. The capital
regulations assign specific risk weightings to all assets and off-balance sheet
items.
The Association was in compliance with all capital requirements in effect at
December 31, 1997, 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 Improvement Act of 1991 (FDICIA). The following
table reflects the required and actual regulatory capital ratios of the
Association at the dates indicated:
FIRREA FDICIA ACTUAL ACTUAL
REGULATORY CAPITAL RATIOS FOR QUAKER CITY MINIMUM "WELL-CAPITALIZED" AT DECEMBER 31, AT JUNE 30,
FEDERAL SAVINGS AND LOAN ASSOCIATION REQUIREMENT REQUIREMENT 1997 1997
- -------------------------------------------- ------------ ------------------- ---------------- ------------
Tangible capital 1.50% N/A 7.30% 7.34%
Core capital 3.00% 5.00% 7.30% 7.34%
Risk-based capital 8.00% 10.00% 13.19% 12.64%
Tier 1 Risk-based capital N/A 6.00% 11.99% 11.42%
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PART II. OTHER INFORMATION
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Item 4. Submission of Matters to a Vote of Stockholders
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At the Annual Meeting of Stockholders of the Company held on November
19, 1997, the following were approved:
(1) Wayne L. Harvey was elected by a vote of 4,024,948 in favor,
48,162 against, with no abstentions.
(2) Edward L. Miller was elected by a vote of 4,024,948 in favor,
48,162 against, with no abstentions.
(3) J. L. Thomas was elected by a vote of 4,024,948 in favor,
48,162 against, with no abstentions.
The proposal to approve the Quaker City Bancorp, Inc. 1997 stock
incentive plan was approved by a vote of 3,456,364 in favor, 529,186
against, with 87,560 abstentions.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits -
11.1 Computation of Earnings per Share
27 Financial Data Schedule
(b) Reports on Form 8-K -
No reports on Form 8-K were filed by the registrant during the
quarter for which this report is filed.
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SIGNATURES
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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 13, 1998 By: /s/ Dwight L. Wilson
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Dwight L. Wilson
Senior Vice President,
Treasurer and Chief Financial Officer
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