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, 1998
--------------
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 15, 1998: 4,657,594
QUAKER CITY BANCORP, INC.
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition (unaudited) as of
March 31, 1998 and June 30, 1997.............................................. 3
Consolidated Statements of Operations (unaudited) for the Three Months
and Nine Months Ended March 31, 1998 and 1997................................. 4
Consolidated Statements of Cash Flows (unaudited) for the Nine Months
Ended March 31, 1998 and 1997................................................. 5
Notes to Consolidated Financial Statements.................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations................................................................. 8
PART II. OTHER INFORMATION
Item 5. Other Information............................................................. 20
Item 6. Exhibits and Reports on Form 8-K.............................................. 20
QUAKER CITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Unaudited
(In thousands, except share data)
MARCH 31, JUNE 30,
1998 1997
---- ----
ASSETS
Cash and due from banks............................................. $ 8,355 $ 7,067
Interest-bearing deposits........................................... 343 336
Federal funds sold and other short-term investments................. 18,020 12,950
Investment securities held to maturity.............................. 17,161 36,654
Investment securities available for sale............................ 1,819 1,432
Loans receivable, net............................................... 670,085 644,964
Loans receivable held for sale...................................... 2,087 623
Mortgage-backed securities held to maturity......................... 106,640 74,139
Mortgage-backed securities available for sale....................... 8,324 --
Real estate held for sale........................................... 3,709 2,314
Federal Home Loan Bank stock, at cost............................... 11,323 9,718
Office premises and equipment, net.................................. 4,707 4,217
Accrued interest receivable and other assets........................ 7,420 6,988
-------- --------
Total assets................................................... $859,993 $801,402
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits............................................................ $571,893 $553,186
Federal Home Loan Bank advances..................................... 192,500 157,700
Deferred tax liability.............................................. 1,611 1,413
Accounts payable and accrued expenses............................... 8,268 3,543
Other liabilities................................................... 10,422 15,317
-------- --------
Total liabilities.............................................. 784,694 731,159
Stockholders' equity:
Common stock, $.01 par value. Authorized 10,000,000 shares; issued
and outstanding 4,665,094 shares and 4,703,102 at March 31,
1998 and June 30, 1997, respectively............................. 47 47
Additional paid-in capital.......................................... 44,400 44,051
Unrealized gain on securities available for sale.................... 416 136
Retained earnings, substantially restricted......................... 32,230 28,122
Deferred compensation............................................... (1,794) (2,113)
-------- --------
Total stockholders' equity....................................... 75,299 70,243
-------- --------
Total liabilities and stockholders' equity....................... $859,993 $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 NINE MONTHS ENDED
MARCH 31, MARCH 31,
1998 1997 1998 1997
---- ---- ---- ----
Interest income:
Loans receivable......................................... $13,890 $13,040 $40,712 $38,267
Mortgage-backed securities............................... 1,831 959 5,232 2,513
Investment securities.................................... 345 652 1,370 1,981
Other.................................................... 351 187 1,072 625
------- ------- ------- -------
Total interest income.................................. 16,417 14,838 48,386 43,386
------- ------- ------- -------
Interest expense:
Deposits................................................. 6,953 6,660 21,113 19,457
Federal Home Loan Bank advances and other borrowings..... 2,739 2,184 8,257 6,229
------- ------- ------- -------
Total interest expense................................. 9,692 8,844 29,370 25,686
------- ------- ------- -------
Net interest income before provision for loan losses..... 6,725 5,994 19,016 17,700
Provision for loan losses................................... 400 500 1,050 2,501
------- ------- ------- -------
Net interest income after provision for loan losses...... 6,325 5,494 17,966 15,199
------- ------- ------- -------
Other income:
Loan servicing charges and deposit fees.................. 610 431 1,658 1,291
Gain on sale of loans held for sale...................... 76 78 141 189
Commissions.............................................. 187 113 522 401
Other.................................................... 5 18 10 27
------- ------- ------- -------
Total other income..................................... 878 640 2,331 1,908
------- ------- ------- -------
Other expense:
Compensation and employee benefits....................... 2,139 1,987 6,205 5,815
Occupancy, net........................................... 478 508 1,423 1,467
Federal deposit insurance premiums....................... 132 123 386 732
Data processing.......................................... 192 181 538 518
Other general and administrative expense................. 922 818 2,521 2,315
------- ------- ------- -------
Total general and administrative expense............... 3,863 3,617 11,073 10,847
Savings Association Insurance Fund special assessment.... -- -- -- 3,100
Real estate operations, net.............................. 248 116 527 567
Amortization of core deposit intangible.................. -- 61 35 212
------- ------- ------- -------
Total other expense.................................... 4,111 3,794 11,635 14,726
------- ------- ------- -------
Earnings before income taxes............................. 3,092 2,340 8,662 2,381
Income taxes................................................ 1,374 1,001 3,855 1,050
------- ------- ------- -------
Net earnings............................................. $ 1,718 $ 1,339 $ 4,807 $ 1,331
======= ======= ======= =======
Basic earnings per share................................. $0.39 $0.30 $1.10 $0.30
Diluted earnings per share............................... $0.37 $0.29 $1.04 $0.29
See accompanying notes to consolidated financial statements.
4
QUAKER CITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In thousands)
NINE MONTHS ENDED
MARCH 31,
1998 1997
---- ----
Cash flows from operating activities:
Net earnings.................................................................... $ 4,807 $ 1,331
--------- ---------
Adjustments to reconcile net earnings to net cash used
by operating activities:
Depreciation and amortization............................................... 201 (168)
Provision for loan losses................................................... 1,050 2,501
Write-downs and provision for losses on real estate held for sale........... 245 357
Gain on sale of real estate held for sale................................... (108) (248)
Gain on sale of loans held for sale......................................... (141) (189)
Loans originated for sale................................................... (22,102) (18,915)
Proceeds from sale of loans held for sale................................... 20,586 20,309
Federal Home Loan Bank (FHLB) stock dividend received....................... (469) (236)
Increase in accrued interest receivable and other assets.................... (467) (953)
Decrease in other liabilities............................................... (4,895) (1,333)
Increase in accounts payable and accrued expenses........................... 4,725 6,531
Other....................................................................... 1,604 1,318
--------- ---------
Total adjustments....................................................... 229 8,974
--------- ---------
Net cash used by operating activities................................... 5,036 10,305
--------- ---------
Cash flows from investing activities:
Loans originated for investment................................................. (62,707) (63,150)
Loans purchased for investment.................................................. (26,511) (8,098)
Principal repayments on loans................................................... 59,676 39,284
Purchases of investment securities available for sale........................... -- (1,008)
Purchases of investment securities held to maturity............................. -- (7,996)
Maturities and principal repayments of investment securities held to maturity... 19,505 6,726
Purchases of mortgage-backed securities available for sale...................... (8,237) --
Purchases of mortgage-backed securities held to maturity........................ (52,339) (26,897)
Principal repayments on mortgage-backed securities held to maturity............. 19,566 5,750
Proceeds from sale of real estate held for sale................................. 2,040 2,371
Purchase of FHLB stock.......................................................... (1,136) (1,054)
Investment in office premises and equipment..................................... (1,109) (716)
--------- ---------
Net cash used by investing activities................................... (51,252) (54,788)
--------- ---------
Cash flows from financing activities:
Increase in deposits............................................................ 18,707 33,370
Repayments of securities sold under agreements to repurchase.................... -- (300)
Proceeds from funding of FHLB advances.......................................... 281,200 291,500
Repayments of FHLB advances..................................................... (246,400) (275,700)
Stock options exercised......................................................... 63 73
Repurchase of stock............................................................. (989) (953)
--------- ---------
Net cash provided by financing activities............................... 52,581 47,990
--------- ---------
Increase in cash and cash equivalents................................... 6,365 3,507
Cash and cash equivalents at beginning of period.................................... 20,353 13,568
--------- ---------
Cash and cash equivalents at end of period.......................................... $ 26,718 $ 17,075
========= =========
5
QUAKER CITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
Unaudited
(In thousands)
NINE MONTHS ENDED
MARCH 31,
1998 1997
---- ----
Supplemental disclosures of cash flow information:
Interest paid (including interest credited)...................................... $28,621 $25,226
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............................................................. $ 1,033 $ 3,850
Additions to real estate acquired through foreclosure............................ 4,724 5,729
Net change in unrealized gain on securities available for sale, net of taxes..... 280 --
======= =======
See accompanying notes to consolidated financial statements.
6
QUAKER CITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated statement of financial condition as of March 31, 1998, the
related consolidated statements of operations for the three and nine months
ended March 31, 1998 and 1997 and the related consolidated statements of
cash flows for the nine months ended March 31, 1998 and 1997 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, 1998 and its results of operations for the
three and nine months ended March 31, 1998 and 1997 and cash flows for the
nine months ended March 31, 1998 and 1997. 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.
2. Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, Earnings Per Share. Under SFAS 128,
the Company is required to report both basic and diluted earnings per
share. Basic earnings per share is determined by dividing net income by
the average number of shares of common stock outstanding, while diluted
earnings per share is determined by dividing net income by the average
number of shares of common stock outstanding adjusted for the dilutive
effect of common stock equivalents. Earnings per share for the quarter
ended March 31, 1997 have been restated to conform with the provisions of
SFAS 128 and to reflect the impact of a stock dividend declared during the
fourth quarter of fiscal 1997.
7
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 March 31, 1998, the Association operated ten 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, multifamily mortgages, commercial and industrial
mortgages and mortgage-backed securities (MBS).
Two new retail banking branches were opened during February 1998 in Orange
County, California, increasing the Company's 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. In the first five months of this program, through March 31, 1998,
checking accounts increased from approximately 9,700 accounts to 11,800
accounts. This represents an increase of over 21% of total checking accounts
during this period.
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Total stockholders' equity for the Company was $75.3 million at March 31, 1998,
compared to $70.2 million at June 30, 1997. Consolidated assets totaled $860.0
million at March 31, 1998, an increase of $58.6 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 a repurchase of 236,000 shares of Company stock, which represented
approximately 5% of then outstanding shares. Since the date of approval and
through March 31, 1998, 167,250 shares of stock have been repurchased as
allowable under this approval.
8
Total loans receivable amounted to $672.2 million at March 31, 1998, compared to
$645.6 million at June 30, 1997. Loan originations and purchases totaled $41.0
million for the quarter ended March 31, 1998, compared to $24.2 million for the
quarter ended March 31, 1997. Loan originations and purchases totaled $111.3
million for the nine months ended March 31, 1998, compared to $90.2 million for
the nine months ended March 31, 1997.
For the quarter ended March 31, 1998 loan originations and purchases were
comprised of $8.5 million of one-to-four family residential loans, $25.0 million
of multifamily loans, $7.2 of commercial and industrial loans and $300,000 in
consumer loans. This compares to $8.1 million of one-to-four family residential
loans and $15.8 million of multifamily loans and $292,000 of commercial and
industrial loans for the quarter ended March 31, 1997. For the nine months
ended March 31, 1998, loan originations and purchases were comprised of $38.4
million of one-to-four family residential loans, $55.3 million of multifamily
loans, $10.9 million of commercial and industrial loans and $6.7 million in
consumer loans. This compares to $25.7 million of one-to-four family
residential loans and $64.2 million of multifamily loans and $292,000 of
commercial and industrial loans for the nine months ended March 31, 1997. One-
to-four family loan and consumer loan originations and purchases increased from
the prior year primarily as a result of an increase in loan purchases.
Multifamily originations and purchases decreased over the comparable nine month
period 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 and
commercial and industrial 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
the increase in commercial and industrial lending for the current quarter is
primarily a result of their production.
Mortgage-backed securities held to maturity amounted to $106.6 million at March
31, 1998, compared to $74.1 million at June 30, 1997. Mortgage-backed
securities available for sale amounted to $8.3 million at March 31, 1998,
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 nine months of the fiscal year
by purchasing MBS consistent with its current business strategy. For the nine
months ended March 31, 1998 the Company purchased $52.3 million in mortgage-
backed securities held to maturity, compared to $26.9 million for the same
period in the previous year. Purchases of mortgage-backed securities available
for sale amounted to $8.2 million for the nine months ended March 31, 1998,
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.
9
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 $12.2 million for the quarter ended March
31, 1998 as compared to $8.3 million for the quarter ended March 31, 1997.
Proceeds from loan sales were $20.6 million for the nine months ended March 31,
1998 as compared to $20.3 million for the nine months ended March 31, 1997. At
present, the Company's policy is to sell most 30 and 15 year fixed-rate loans as
well as certain one-to-four family adjustable, multifamily, and commercial and
industrial loans originated that meet predefined criteria. Loans serviced for
others increased to $275.5 million at March 31, 1998, from $216.4 million at
March 31, 1997, primarily due to a purchase of servicing in the amount of $52.5
million during the quarter ended March 31, 1998.
Principal repayments on loans were $21.1 million and $16.0 million for the three
months ended March 31, 1998 and 1997, respectively. For the nine months ended
March 31, 1998 and 1997, principal repayments on loans were $59.7 and $39.3
million respectively. The increase in principal repayments during the three and
nine month periods in 1998 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. If interest rates remain low or decrease
further, the speed at which loans and mortgage-backed securities prepay may
remain higher than last year and may increase even further.
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 March 31, 1998 and 1997 was 4.21%
and 5.11%, respectively.
10
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 The Company
- ------------------------------------------------------------
recorded net earnings of $1.7 million, $0.39 per basic share ($0.37 per diluted
share) for the quarter ended March 31, 1998. This compares to net earnings of
$1.3 million, $0.30 per basic share ($0.29 per diluted share) for the same
period in fiscal 1997. Net earnings for the nine month period ending March 31,
1998 were $4.8 million, $1.10 per basic share ($1.04 per diluted share) compared
to net earnings of $1.3 million, $0.30 per basic share ($0.29 per diluted share)
for the same nine month period last year. The change in net earnings for the
comparable nine month period 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
$1.5 million between the nine month period ended March 31, 1998 and March 31,
1997. Without the one-time special assessment, the Company's net earnings for
the nine month period ended March 31, 1997 would have been $3.1 million, $0.72
per basic share ($0.68 per diluted share).
INTEREST INCOME Interest income amounted to $16.4 million for the quarter ended
- ---------------
March 31, 1998 as compared to $14.8 million for the quarter ended March 31,
1997. Interest income amounted to $48.4 million for the nine months ended March
31, 1998 as compared to $43.4 million for the nine months ended March 31, 1997.
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 March 31, 1998 was $9.7
- ----------------
million, compared to $8.8 million for the same quarter in the previous year.
Interest expense for the nine months ended March 31, 1998 was $29.4 million,
compared to $25.7 million for the same nine 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 during the nine month period.
NET INTEREST INCOME The net interest margin for the quarter ended March 31,
- -------------------
1998 was 3.25%, a 4 basis point increase from the same period last year. For
the nine months ended March 31, 1998 the net interest margin was 3.11%, a 13
basis point decrease from the same period last year. The decline in the net
interest margin for the comparable nine month period is primarily a result of
the increase in the cost of interest-bearing liabilities and a decrease in yield
on interest-earning assets. The decrease in yield on interest-earning assets
was due primarily to the Company's increased utilization of agency MBS, which
typically have a lower yield than mortgage loans, for funding liabilities. Net
interest income before provision for loan losses for the quarter ended March 31,
1998 amounted to $6.7 million compared to $6.0 million for the same period last
year. Net interest income before provision for loan losses for the nine months
ended March 31, 1998 amounted to $19.0 million compared to $17.7 million for the
same period last year. These increases are primarily a result of the increase
in the amount of interest-earning assets relative to interest-bearing
liabilities in the respective periods.
11
The following table displays average interest rates on the Company's interest-
earning assets and interest-bearing liabilities:
MARCH 31, 1998 MARCH 31, 1997
-------------- --------------
Three Nine Three Nine
Month Month Month Month
Average Average Average Average
-------- -------- -------- -------
Yield on interest-earning assets........... 7.93% 7.90% 7.94% 7.93%
Cost of interest-bearing liabilities....... 5.21% 5.32% 5.21% 5.18%
---- ---- ---- ----
Interest rate spread (1)................... 2.72% 2.58% 2.73% 2.75%
==== ==== ==== ====
Net interest margin (2).................... 3.25% 3.11% 3.21% 3.24%
==== ==== ==== ====
(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.
PROVISION FOR LOAN LOSSES The provision for loan losses was $400,000 for the
- -------------------------
three months ended March 31, 1998, compared to $500,000 for the same period last
year. The provision for loan losses was $1.1 million for the nine months ended
March 31, 1998, compared to $2.5 million for the same period last year. The
decrease in the provision for the nine months ended March 31, 1998 compared to
the same period last year is a result of a decrease in nonperforming loans and
loan charge offs. 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.
12
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 NINE MONTHS ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1998 1997 1998 1997
---- ---- ---- ----
(IN THOUSANDS) (IN THOUSANDS)
Accumulated through a charge to earnings:
Balance at beginning of period............... $6,664 $6,664 $6,496 $ 6,542
Provision for loan losses.................... 400 500 1,050 2,501
Charge-offs, net............................. (361) (375) (843) (2,254)
------ ------ ------ -------
Balance at end of period..................... 6,703 6,789 6,703 6,789
Valuation allowance for portfolios acquired:
Balance at beginning of period............... 1,269 1,284 1,276 1,291
Reductions credited.......................... (3) (6) (10) (13)
------ ------ ------ -------
Balance at end of period..................... 1,266 1,278 1,266 1,278
------ ------ ------ -------
Total allowance for loan losses........... $7,969 $8,067 $7,969 $ 8,067
====== ====== ====== =======
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 March 31, 1998 was
- ------------
$878,000 compared to $640,000 for the same period last year. For the nine
months ended March 31, 1998 other income was $2.3 million as compared to $1.9
million for the same period a year earlier. The increase in other income for
the three and nine months ended March 31, 1998 was a result of an increase in
loan servicing charges due to increased loan payoffs as well as an increase in
deposit fees due primarily to an increase in checking account activity.
OTHER EXPENSE Other expense for the three months ended March 31, 1998 was $4.1
- -------------
million, compared to $3.8 million the same period last year. For the nine
months ended March 31, 1998 other expense was $11.6 million, compared to $14.7
million for the same period last year. The increase in other expense for the
three months ended March 31, 1998 was primarily a result of an increase in
compensation and employee benefits expense, an increase in expense related to
real estate owned, in addition to an increase in marketing expense related to
the checking account program. The decline in other expense for the nine months
ended March 31, 1998 was primarily a result of other expense including for the
nine months ended March 31, 1997 the accrual in September 1996 for the $3.1
million one-time special SAIF assessment.
13
Compensation and employee benefits expense increased $152,000 or 7.65% for the
quarter ended March 31, 1998 as compared to the same quarter last year. For the
nine months ended March 31, 1998 compensation and employee benefits expense
increased $390,000 or 6.71% 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 $268,000 and $194,000 for the
quarters ended March 31, 1998 and 1997, respectively. The expense related to
the ESOP was $810,000 and $513,000 for the nine months ended March 31, 1998 and
1997, 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 44.4% and 42.8% for the
- ------------
quarter ended March 31, 1998 and 1997, respectively, and were comparable to the
applicable statutory rates in effect.
14
YEAR 2000 COMPLIANCE
Quaker City Bancorp recognizes that the arrival of the Year 2000 presents a
challenge to the ability of computer systems worldwide. Many existing computer
programs use only two digits to identify a year in the date field with the
assumption that the first two digits are always 19. Systems that calculate,
compare or sort using the incorrect date will cause erroneous results, ranging
from system malfunctions to incorrect or incomplete processing. If not
remedied, potential risks include business disruption or shutdown and financial
loss.
In April 1997, the Company developed a plan to address Year 2000 issues and
appointed a Year 2000 task force with representatives from all divisions of the
Company. Since the Company primarily utilizes computer software provided by
outside firms, it is currently in the process of contacting vendors and
evaluating vendor responses to Year 2000 issues. Those vendors contacted have
indicated that their hardware/software is or will be Year 2000 compliant in time
frames that meet regulatory requirements. The Company's plan provides for its
Year 2000 readiness to be completed by mid-1999 consistent with OTS guidance.
The total cost of the project to the Company is currently estimated to be $1
million and is comprised primarily of equipment and software that will be
acquired and depreciated over its useful life in accordance with Company policy.
Any personnel and consulting costs will be expensed as incurred. These
currently contemplated Year 2000 compliance costs are expected to be funded
primarily through operating cash flow and are not expected to have a material
adverse effect on the Company's business, financial condition or results of
operations. To date, the costs incurred related to Year 2000 are immaterial.
However, although the Company is working diligently on Year 2000 compliance
issues, no assurance can be given that all of the Company's and its vendors,
systems will be compliant on a timely basis or the ultimate total costs to the
Company to address the Year 2000 issue or the impact of the Company's failure to
achieve Year 2000 compliance will not have a material adverse effect on the
Company's business, financial condition or results of operations.
15
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,
1998 1997 1997
---- ---- ----
(DOLLARS IN THOUSANDS)
Nonaccrual loans (1):
Real estate loans:
One-to-four family.................................... $ 2,890 $ 3,226 $ 4,389
Multifamily........................................... 2,223 2,387 2,520
Commercial and land................................... 2,335 2,926 2,971
------- ------- -------
Total nonaccrual loans (1)............................ 7,448 8,539 9,880
Troubled debt restructured loans.............................. 225 229 232
------- ------- -------
Total nonperforming loans............................. 7,673 8,768 10,112
Real estate acquired through foreclosure...................... 3,047 1,720 1,551
------- ------- -------
Total nonperforming assets........................... $10,720 $10,488 $11,663
======= ======= =======
Nonperforming loans as a percentage of gross loans (2)........ 1.12% 1.33% 1.55%
Nonperforming assets as a percentage of total assets (3)...... 1.25% 1.31% 1.49%
General Valuation Allowance (GVA) on loans
as a percentage of gross loans............................ 0.90% 0.94% 0.96%
GVA on loans as a percentage of total nonperforming loans (2). 80.15% 70.91% 61.87%
Total GVA as a percentage of total nonperforming assets (4)... 59.00% 60.95% 55.14%
(1) Nonaccrual loans are net of specific allowances of $1.1 million, $1.0
million and $1.2 million at March 31, 1998, June 30, 1997 and March 31,
1997, 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 March 31, 1998, 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.
16
Nonaccrual loans at March 31, 1998 consisted of $2.9 million in one-to-four
family loans, $2.2 million in multifamily loans and $2.3 million in commercial
and industrial 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 $10.7 million, 1.25% of total assets at March
31, 1998, compared to $10.5 million, 1.31% of total assets at June 30, 1997.
The increase in nonperforming assets for the nine month period is primarily a
result of an increase in REO. 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
- --------------
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, 1998, the Company had a
gross investment in impaired loans of $7.8 million, including $6.3 million for
which specific valuation allowances of $1.3 million had been established and
$1.5 million for which no specific valuation allowance was considered necessary.
During the three and nine months ended March 31, 1998, the Company's average
investment in impaired loans was $8.1 million. For the three and nine months
ended March 31, 1998, income recorded on impaired loans totaled $214,000 and
$558,000 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 $3.4
million were not performing in accordance with their contractual terms at March
31, 1998, and have been included in nonaccrual loans at that date.
17
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
March 31, 1998, 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 MARCH 31, AT JUNE 30,
FEDERAL SAVINGS AND LOAN ASSOCIATION REQUIREMENT REQUIREMENT 1998 1997
- ------------------------------------ ----------- ----------- ---- ----
Tangible capital........................... 1.50% N/A 7.45% 7.34%
Core capital............................... 3.00% 5.00% 7.45% 7.34%
Risk-based capital......................... 8.00% 10.00% 13.21% 12.64%
Tier 1 Risk-based capital.................. N/A 6.00% 12.03% 11.42%
18
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This 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 1955. 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 business strategy; economic trends, including
the direction of interest rates and prepayment speeds of mortgage loans and MBS;
goals; expansion and growth of the Company's business and operations; plans,
including its plan regarding Year 2000 compliance; and other matters are
forward- looking statements. These statements are based upon certain
assumptions and analyses made by the Company in light of its experience and its
perception of historical trends, current conditions and expected future
developments as well as other factors it believes are appropriate in the
circumstances. These statements are subject to a number of risks and
uncertainties, many of which are beyond the control of the Company, including
general economic, market or business conditions; real estate market conditions,
particularly in California; the opportunities (or lack thereof) that may be
presented to and pursued by the Company; competitive actions by other companies;
changes in law of regulations; and other factors. Actual results could differ
materially form 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 is 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.
19
PART II. OTHER INFORMATION
Item 5. Other Information: Date of Annual Meeting
-----------------------------------------
The date of the 1998 annual meeting of stockholders of Quaker City
Bancorp, Inc. ("the Company") has been set for Wednesday, November 18,
1998. 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 1998 Annual
Meeting must provide timely written notice of the matter to the
Corporate Secretary of the Company. To be timely, a stockholder's
notice must be delivered or mailed to and received at the principal
executive offices of the Corporation no less than ninety (90) days
prior to the date of the Annual Meeting. Any notice to the Corporate
Secretary must comply with the notice procedures and informational
requirements of Section 6 of Article I of the Company's Bylaws (a copy
of which is available upon request to the Corporate Secretary of the
Company). No person shall be eligible for election as a Director of
the Corporation unless nominated in accordance with the provisions of
Section 6(c) of Article I of the Company's Bylaws.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits -
11.1 Computation of Earnings per Share
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule for period ended
December 31, 1996
27.3 Restated Financial Data Schedule for period ended
March 31, 1997
(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.
20
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, 1998 By: /s/ Dwight L. Wilson
------------ ---------------------------------------
Dwight L. Wilson
Senior Vice President,
Treasurer and Chief Financial Officer
21