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 September 30, 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.
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(Exact name of registrant as specified in its charter)
DELAWARE 95-4444221
- -------- ----------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
7021 GREENLEAF AVENUE, WHITTIER, CALIFORNIA 90602
- --------------------------------------------- -----
(Address or principal executive offices) (Zip code)
Registrant's telephone number, including area code (562) 907-2200
Indicate by check mark whether the registrant (1) has filed reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days.
YES [X] NO [_]
Number of shares outstanding of the registrant's sole class of common stock at
November 13, 1998: 5,778,226
QUAKER CITY BANCORP, INC.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Statements of Financial Condition (unaudited) as of
September 30, 1998 and June 30, 1998....................................................... 3
Consolidated Statements of Operations (unaudited) for the Three Months
Ended September 30, 1998 and 1997.......................................................... 4
Consolidated Statements of Comprehensive Income (unaudited) for the Three
Months Ended September 30, 1998 and 1997................................................... 5
Consolidated Statements of Cash Flows (unaudited) for the Three Months
Ended September 30, 1998 and 1997.......................................................... 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 6. Exhibits and Reports on Form 8-K........................................................... 22
QUAKER CITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Unaudited
(In thousands, except share data)
SEPTEMBER 30, JUNE 30,
1998 1998
---- ----
ASSETS
Cash and due from banks....................................................... $9,398 $12,687
Interest-bearing deposits..................................................... 355 345
Federal funds sold and other short-term investments........................... 16,320 26,420
Investment securities held to maturity........................................ 14,958 5,058
Investment securities available for sale...................................... 406 1,819
Loans receivable, net......................................................... 700,832 691,026
Loans receivable held for sale................................................ 9,830 7,507
Mortgage-backed securities held to maturity................................... 60,887 107,577
Mortgage-backed securities available for sale................................. 51,667 8,274
Real estate held for sale..................................................... 3,172 3,334
Federal Home Loan Bank stock, at cost......................................... 11,729 11,561
Office premises and equipment, net............................................ 6,444 5,289
Accrued interest receivable and other assets.................................. 7,513 6,583
--------- ---------
Total assets............................................................... $893,511 $887,480
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits...................................................................... $608,376 $580,910
Federal Home Loan Bank advances............................................... 184,850 216,000
Deferred tax liability........................................................ 2,574 2,505
Accounts payable and accrued expenses......................................... 3,175 3,864
Other liabilities............................................................. 15,296 6,942
--------- ---------
Total liabilities.......................................................... 814,271 810,221
Stockholders' equity:
Common stock, $.01 par value. Authorized 10,000,000 shares; issued
and outstanding 5,799,226 shares and 5,826,883 at September 30,
1998 and June 30, 1998, respectively....................................... 58 58
Additional paid-in capital.................................................... 73,303 73,720
Accumulated other comprehensive income........................................ 488 390
Retained earnings, substantially restricted................................... 6,972 4,779
Deferred compensation......................................................... (1,581) (1,688)
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Total stockholders' equity................................................. 79,240 77,259
--------- ---------
Total liabilities and stockholders' equity................................. $893,511 $887,480
======== ========
See accompanying notes to consolidated financial statements.
QUAKER CITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
(In thousands, except per share data)
THREE MONTHS ENDED
SEPTEMBER 30,
1998 1997
---- ----
Interest income:
Loans receivable................................................................. $14,716 $13,318
Mortgage-backed securities....................................................... 1,823 1,508
Investment securities............................................................ 144 568
Other............................................................................ 492 333
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Total interest income......................................................... 17,175 15,727
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Interest expense:
Deposits......................................................................... 7,227 7,124
Federal Home Loan Bank advances and other borrowings............................. 2,780 2,544
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Total interest expense........................................................ 10,007 9,668
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Net interest income before provision for loan losses............................. 7,168 6,059
Provision for loan losses.......................................................... 400 250
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Net interest income after provision for loan losses.............................. 6,768 5,809
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Other income:
Loan servicing charges and deposit fees.......................................... 806 485
Gain on sale of loans held for sale.............................................. 43 30
Commissions...................................................................... 175 174
Gain on sale of investment securities available for sale......................... 345 --
Other............................................................................ 8 2
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Total other income............................................................ 1,377 691
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Other expense:
Compensation and employee benefits............................................... 2,332 2,043
Occupancy, net................................................................... 542 483
Federal deposit insurance premiums............................................... 131 126
Data processing.................................................................. 199 169
Other general and administrative expense......................................... 827 728
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Total general and administrative expense...................................... 4,031 3,549
Real estate operations, net...................................................... 47 159
Amortization of core deposit intangible.......................................... -- 35
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Total other expense........................................................... 4,078 3,743
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Earnings before income taxes and cumulative
effect of change in accounting principle...................................... 4,067 2,757
Income taxes ...................................................................... 1,771 1,227
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Net earnings before cumulative
effect of change in accounting principle...................................... 2,296 1,530
Cumulative effect of change in accounting principle, net of taxes.................. 162 --
------- --------
Net earnings ...................................................................... $2,458 $1,530
======= ========
Basic earnings per share........................................................... $0.45 $0.28
Diluted earnings per share......................................................... $0.42 $0.27
See accompanying notes to consolidated financial statements.
4
QUAKER CITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Unaudited
(In thousands)
THREE MONTHS ENDED
SEPTEMBER 30,
1998 1997
---- ----
Net Earnings................................................................. $2,458 $1,530
Other comprehensive income:
Unrealized holding gain (loss) arising during the period................... (267) 234
Less: reclassification of the portion of realized
(gain) included in net income previously included
in other comprehensive income............................................. (365) --
-------- -------
Other comprehensive gain, net of tax......................................... 98 234
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Total comprehensive income................................................. $2,556 $1,764
====== ======
See accompanying notes to consolidated financial statements.
5
QUAKER CITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In thousands)
THREE MONTHS ENDED
SEPTEMBER 30,
1998 1997
---- ----
Cash flows from operating activities:
Net earnings............................................................................... $2,458 $1,530
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Adjustments to reconcile net earnings to net cash used by operating
activities:
Cumulative effect of change in accounting principle.................................... (162) --
Depreciation and amortization.......................................................... (164) 75
Provision for loan losses............................................................. 400 250
Write-downs on real estate held for sale............................................... 19 32
Gain on sale of real estate held for sale.............................................. (174) (27)
Gain on sale of loans held for sale.................................................... (29) (30)
Gain on sale of investment securities available for sale............................... (345) --
Loans originated for sale.............................................................. (11,463) (3,570)
Proceeds from sale of loans held for sale.............................................. 9,097 3,460
Federal Home Loan Bank (FHLB) stock dividend received.................................. (168) (148)
(Increase) decrease in accrued interest receivable and other assets.................... (930) 463
Increase in other liabilities.......................................................... 8,354 3,061
Increase (decrease) in accounts payable and accrued expenses........................... (689) 613
Other.................................................................................. 1,169 (453)
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Total adjustments.................................................................. 4,915 3,726
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Net cash used by operating activities.............................................. 7,373 5,256
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Cash flows from investing activities:
Loans originated for investment............................................................ (36,432) (14,057)
Loans purchased for investment............................................................. (8,677) (18,153)
Principal repayments on loans.............................................................. 34,362 16,700
Purchases of investment securities held to maturity........................................ (9,995) --
Maturities and principal repayments of investment securities held to maturity.............. 103 3,128
Proceeds from sale of investment securities available for sale............................. 1,135 --
Purchases of mortgage-backed securities available for sale................................. -- (8,237)
Purchases of mortgage-backed securities held to maturity................................... (33,202) (28,478)
Principal repayments on mortgage-backed securities held to maturity........................ 1,952 3,188
Sale of mortgage-backed securities available for sale...................................... 29,636 --
Principal repayments on mortgage-backed securities available for sale...................... 5,603 --
Proceeds from sale of real estate held for sale............................................ 726 192
Purchase of FHLB stock..................................................................... -- (425)
Investment in office premises and equipment................................................ (1,394) (163)
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Net cash used by investing activities.............................................. (16,183) (46,305)
Cash flows from financing activities:
Increase in deposits....................................................................... 27,466 9,491
Proceeds from funding of FHLB advances..................................................... 51,500 115,800
Repayments of FHLB advances................................................................ (82,650) (84,900)
Stock options exercised.................................................................... 179 21
Repurchase of stock........................................................................ (1,064) (687)
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Net cash provided (used) by financing activities................................... (4,569) 39,725
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Decrease in cash and cash equivalents.............................................. (13,379) (1,324)
Cash and cash equivalents at beginning of period............................................... 39,452 20,353
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Cash and cash equivalents at end of period .................................................... $26,073 $19,029
========== ========
6
QUAKER CITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
Unaudited
(In thousands)
THREE MONTHS ENDED
SEPTEMBER 30,
1998 1997
---- ----
Supplemental disclosures of cash flow information:
Interest paid (including interest credited)............................................... $10,022 $9,336
Cash paid for income taxes ............................................................... 170 2,025
======= =======
Supplemental schedule of noncash investing and financing activities:
Additions to loans resulting from the sale of real estate acquired
through foreclosure ................................................................... $838 $43
Additions to real estate acquired through foreclosure..................................... 1,429 1,394
Net change in unrealized gain on securities available for sale, net of taxes 98 234
======= =======
See accompanying notes to consolidated financial statements.
7
QUAKER CITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated statement of financial condition as of September 30, 1998
and the related consolidated statements of operations, comprehensive income
and cash flows for the three months ended September 30, 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 September 30, 1998 and its results of
operations, comprehensive income and cash flows for the three months ended
September 30, 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 1999.
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, 1998.
2. Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share." Under SFAS No.
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 September 30, 1997 have been restated to conform with the provisions
of SFAS No. 128 and to reflect the impact of a stock dividend declared and
paid during the fourth quarter of fiscal 1998. Earnings per share for the
quarter ended September 30, 1998 is as follows:
Basic Diluted
----- -------
Earnings before cumulative effect
of change in accounting principle....... $0.42 $0.40
Cumulative effect of change
in accounting principle................. 0.03 0.02
----- -----
Net earnings................................... $0.45 $0.42
===== =====
3. In June 1998 the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. It
specifies necessary conditions to be met to designate a derivative as a
hedge. SFAS No. 133 is effective for all fiscal quarters of all fiscal
years beginning after June 15, 1999. Early
8
implementation is permitted under this statement and the Company
implemented SFAS No. 133 effective July 1, 1998. Upon implementation,
approximately $78.0 million in mortgage-backed securities ("MBS") were
reclassified from held to maturity to available for sale. The Company
subsequently sold $29.6 million of these reclassified MBS for a
nonrecurring gain after tax of $162,000, which is accounted for as the
cumulative effect of a change in accounting principle in the accompanying
consolidated statements of operations.
4. Effective with the quarter ended September 30, 1998, the Company adopted
SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 requires all
items that are required to be recognized under accounting standards as
components of comprehensive income to be reported in a financial statement
that is displayed in equal prominence with the other financial statements
and to disclose as a part of shareholders' equity accumulated comprehensive
income. Comprehensive income is defined as the change in equity during a
period from transactions and other events and circumstances from non-owner
sources. Comprehensive income generally includes net income, foreign
currency items, minimum pension liability adjustments, and unrealized gains
and losses on investments in certain debt and equity securities.
5. In October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-
Backed Securities Retained after the Securitization of Mortgage Loans Held
for Sale by a Mortgage Banking Enterprise." SFAS No. 65, "Accounting for
Certain Mortgage Banking Activities," as amended by SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," and
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities," requires that after the securitization
of a mortgage loan held for sale, an entity engaged in mortgage banking
activities classify the resulting MBS as a trading security. SFAS No. 134
further amends SFAS No. 65 to require that after the securitization of
mortgage loans held for sale, an entity engaged in mortgage banking
activities classify the resulting MBS or other retained interests based on
its ability and intent to sell or hold those investments. SFAS No. 134
conforms the subsequent accounting for securities retained after the
securitization of mortgage loans with the subsequent accounting for
securities retained after the securitization of other types of assets by a
nonmortgage banking enterprise. SFAS No. 134 is effective for the first
interim period beginning after December 15, 1998. Early application is
permitted as of the issuance date. Implementation of SFAS No. 134 will not
have a material effect on the Company's financial condition or results of
operations.
9
QUAKER CITY BANCORP, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
Quaker City Bancorp, Inc., incorporated in Delaware, is primarily engaged in the
savings and loan business through its wholly owned subsidiary, Quaker City
Federal Savings and Loan Association (the "Association"). At September 30, 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 MBS.
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Total stockholders' equity for the Company was $79.2 million at September 30,
1998, compared to $77.3 million at June 30, 1998. Consolidated assets totaled
$893.5 million at September 30, 1998, an increase of $6.0 million compared to
June 30, 1998. All historical earnings per share data herein reflect a 25%
common stock dividend paid to shareholders on June 30, 1998.
In the first quarter of fiscal 1999, the Company announced its intention to
repurchase up to an additional 300,000 shares (approximately 5.17% of the then
outstanding shares) of Company common stock. To date 10,000 shares of Company
common stock have been repurchased under this latest repurchase program.
Total loans receivable amounted to $710.7 million at September 30, 1998,
compared to $698.5 million at June 30, 1998. Loan originations and purchases
totaled $56.6 million for the quarter ended September 30, 1998, compared to
$35.8 million for the quarter ended September 30, 1997.
For the quarter ended September 30, 1998 loan originations and purchases were
comprised of $18.4 million of one-to-four family residential loans, $22.7
million of multifamily loans, $14.5 million of commercial and industrial loans
and $1.0 million in consumer loans. This compares to $25.6 million of
one-to-four family residential loans, $9.0 million of multifamily loans and $1.2
million of commercial and industrial loans for the quarter ended September 30,
1997. At present, the Company expects to continue its focus on multifamily and
commercial and industrial
10
lending during the current fiscal year. In fiscal 1998, the Company hired the
income property lending staff of another institution in Southern California.
This new lending group originates primarily commercial and industrial loans as
well as some multifamily loans and the increase in commercial and industrial
lending for the quarter as compared to the same quarter last year is primarily a
result of their production.
MBS held to maturity amounted to $60.9 million at September 30, 1998, compared
to $107.6 million at June 30, 1998. MBS available for sale amounted to $51.7
million at September 30, 1998, compared to $8.3 million at June 30, 1998. The
increase in MBS available for sale is a result of the Company adopting SFAS No.
133, "Accounting for Derivatives and Hedging Activities," which resulted in the
reclassification of approximately $78.0 million in MBS from held to maturity to
available for sale. The Company subsequently sold $29.6 million of these
reclassified MBS.
From time to time the Company has obtained advances from the Federal Home Loan
Bank ("FHLB") as an alternative to retail deposit funds. FHLB advances may also
be used to acquire certain other assets as may be deemed appropriate for
investment purposes. The net repayments of FHLB advances was $31.2 million for
the quarter ended September 30, 1998 as compared to proceeds of $30.9 million
for the quarter ended September 30, 1997. The increase in deposit activity of
$27.5 million for the quarter ended September 30, 1998 enabled the Company to
repay certain advances during the quarter.
In addition to Federal Home Loan Bank ("FHLB") advances, other sources of
liquidity for the Company include principal repayments on loans and MBS,
proceeds from sales of loans held for sale, other cash flows generated from
operations and proceeds from increases in customer deposits.
Principal repayments on loans were $34.4 million and $16.7 million for the three
months ended September 30, 1998 and 1997, respectively. The increase in
principal repayments during the three month period in 1998 is due primarily to
an increase in customers refinancing their loans, generally to fixed-rate loans,
as interest rates declined during the period. If interest rates remain low or
decrease further, the speed at which loans and MBS prepay may remain higher than
last year and may increase even further.
Proceeds from loan sales amounted to $9.1 million for the quarter ended
September 30, 1998 as compared to $3.5 million for the quarter ended September
30, 1997. At present, the Company's policy is to sell most 30 and 15 year
fixed-rate one-to-four loans as well as certain adjustable-rate one-to-four
family loans, multifamily loans, and commercial and industrial loans originated
that meet predefined criteria. Loans serviced for others increased to $273.0
million at September 30, 1998, from $223.8 million at September 30, 1997,
primarily due to the purchase of servicing in the amount of $52.5 million during
the quarter ended March 31, 1998.
Savings and loan associations must, by regulation, maintain minimum levels of
liquidity as defined by Office of Thrift Supervision ("OTS") regulations. This
requirement, which may be
11
varied at the direction of the OTS depending upon economic conditions and
deposit flows is based upon a percentage of deposits and short-term borrowings.
The required ratio is currently 4%. The Association's average liquidity ratio
for the quarters ended September 30, 1998 and 1997 was 4.72% and 5.16%,
respectively.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 The Company
- ----------------------------------------------------------------
recorded net earnings of $2.5 million, $0.42 per diluted share for the quarter
ended September 30, 1998. This compares to net earnings of $1.5 million, $0.27
per diluted share for the same quarter last year. Net earnings for the quarter
ended September 30,1998 includes a nonrecurring gain on sale of investment
securities available for sale of $203,000 (after tax) as well as the cumulative
gain resulting from a change in accounting principle upon the implementation of
SFAS No. 133 of $162,000 after tax. Without these two nonrecurring gains, net
earnings for the quarter ended September 30, 1998 would have been $2.1 million,
$0.36 per diluted share. Excluding the nonrecurring gains, the increase in net
earnings for the quarter ended September 30, 1998 as compared to September 30,
1997 is primarily a result of an increase in net interest income as discussed
below.
INTEREST INCOME Interest income amounted to $17.2 million for the quarter ended
- ---------------
September 30, 1998 as compared to $15.7 million for the quarter ended September
30, 1997. The increase in interest income is primarily a result of a larger
earning asset base as well as an increase in the yield on interest-earning
assets for the respective period compared to the same period in the previous
year.
INTEREST EXPENSE Interest expense for the quarter ended September 30, 1998 was
- ----------------
$10.0 million, compared to $9.7 million for the same quarter in the previous
year. The increase in interest expense is a result of an increase in the average
balance of interest-bearing liabilities partially offset by a decrease in the
cost of interest-bearing liabilities during the period.
NET INTEREST INCOME Net interest income before provision for loan losses for the
- -------------------
quarter ended September 30, 1998 amounted to $7.2 million compared to $6.1
million for the same period last year. The net interest margin for the quarter
ended September 30, 1998 was 3.36%, a 30 basis point increase from the same
period last year. The increase in the net interest margin is primarily a result
of the decrease in the cost of interest-bearing liabilities combined with an
increase in the yield on interest-earning assets as well as an increase in the
amount of interest-earning assets relative to interest-bearing liabilities in
the respective periods.
12
The following table displays average interest rates on the Company's
interest-earning assets and interest-bearing liabilities:
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
---- ----
Three Three
Month Month
AVERAGE AVERAGE
------- -------
Yield on interest-earning assets.............................. 8.05% 7.93%
Cost of interest-bearing liabilities.......................... 5.17% 5.38%
----- -----
Interest rate spread (1)...................................... 2.88% 2.55%
===== =====
Net interest margin (2)....................................... 3.36% 3.06%
===== =====
(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 September 30, 1998, compared to $250,000 for the same period
last year. The allowance for loan losses is maintained at an amount management
considers adequate to cover losses on loans receivable which are deemed probable
and estimable and is based on management's evaluation of the risks inherent in
its loan portfolio and the general economy. A number of factors are considered,
including asset classifications, estimated collateral values, local economic
conditions, management's assessment of the credit risk inherent in the
portfolio, historical loan loss experience, and the Company's underwriting
policies.
As a result of the potential weakness in certain real estate markets and other
economic factors, increases in the allowance for loan losses may be required in
future periods. In addition the OTS and the Federal Deposit Insurance
Corporation ("FDIC"), as an integral part of their examination process,
periodically review the Company's allowance for loan losses. These agencies may
require the Company to establish additional allowance for loan losses based on
their judgments of the information available at the time of the examination.
13
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
THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
---- ----
(IN THOUSANDS)
Accumulated through a charge to earnings:
Balance at beginning of period.................................... $6,691 $6,496
Provision for loan losses......................................... 400 250
Charge-offs, net ................................................. (643) (332)
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Balance at end of period.......................................... 6,448 6,414
Valuation allowance for portfolios acquired:
Balance at beginning of period.................................... 1,264 1,276
Reductions credited............................................... (4) (4)
--------- -------
Balance at end of period.......................................... 1,260 1,272
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Total allowance for loan losses................................ $7,708 $7,686
======= =======
Allowance for REO losses:
Balance at beginning of period.................................... $175 $175
Additions charged to operations................................... -- --
------- -------
Balance at end of period.......................................... $175 $175
======= =======
OTHER INCOME Other income for the three months ended September 30, 1998 was $1.4
- ------------
million compared to $691,000 for the same period last year. The increase in
other income for the three months ended September 30, 1998 was a result of an
increase in prepayment fees on loans due to increased loan payoffs, an increase
in deposit fees due primarily to an increase in checking account activity as
well as a nonrecurring gain of $345,000 (before tax) related to the sale of
investment securities available for sale.
OTHER EXPENSE Other expense for the three months ended September 30, 1998 was
- -------------
$4.0 million, compared to $3.5 million the same period last year. The increase
in other expense for the three months ended September 30, 1998 was primarily a
result of an increase in compensation and employee benefits expense as a result
of two new retail banking branches opened during February 1998 and additional
staffing in the income property lending department of the Company. The
efficiency ratio, however, was reduced to 49.42% for the quarter ended September
30,1998 from 52.81% 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 non-interest income, excluding nonrecurring items.
14
INCOME TAXES The Company's effective tax rates were 43.6% and 44.5% for the
- ------------
quarter ended September 30, 1998 and 1997, respectively, and were comparable to
the applicable statutory rates in effect.
YEAR 2000
Pursuant to its information technology strategy, the Company principally
utilizes third-party computer service providers and third-party software for its
information technology needs. As a result, the Year 2000 compliance of the
Company's information technology assets ("IT assets"), such as computer
hardware, software and systems, is primarily dependent upon the Year 2000
compliance efforts and results of its third-party vendors. The Year 2000
compliance of the Company's non-IT assets, which include automated teller
machines ("ATMs"), copiers, fax machines, coin/currency counters, elevators,
microfilmers, HVAC systems and emergency communications radios, is also
primarily dependent upon the Year 2000 compliance efforts and results of third
parties.
STATE OF READINESS As a result of the Year 2000 compliance review and test of
- ------------------
the computer hardware and software used by the Company conducted in the Spring
of 1998 by the Company's Year 2000 Committee, the Company determined to replace
approximately one-third of its existing personal computers and monitors and to
purchase network and application software upgrades and related licensing rights.
All personal computers, monitors and software upgrades have been ordered; the
new personal computers and monitors have been delivered, the software upgrades
are being received as vendors complete Year 2000 testing and upgrading.
The Company's non-IT assets have also been assessed for Year 2000 compliance and
of the Company's non-IT assets, only ATM hardware was determined to be in need
of replacement. The ATM hardware replacement has been completed. Year 2000
compliant ATM software has been installed by the Company's ATM processing
provider.
The Year 2000 Committee's initiative to make the Company's IT assets and non-IT
assets Year 2000 compliant is comprised of five phases, the first three of
which- awareness, assessment and renovation- have been completed and the fourth
and fifth of which- validation and implementation- are discussed below:
VALIDATION-The Year 2000 Committee's readiness initiative is currently in this
phase. This phase consists of testing of IT assets and non-IT assets as well as
testing of third-party vendors and service providers for Year 2000 issues. The
testing of IT assets and non-IT assets is substantially complete. The testing of
third-party vendors and service providers has begun and will continue through
June 30, 1999. The Company tested its primary third-party service bureau's data
processing systems over a two-week period from September 28 through October 9,
1998. No material Year 2000-related issues were identified as a result of the
test. Testing of all mission-critical systems is scheduled to be completed by
June 30, 1999.
15
IMPLEMENTATION-This phase has begun with the replacement of ATM hardware, and
will continue as replacements of other IT assets are received. The Company's
Year 2000 initiative provides for its Year 2000 readiness to be completed by
mid-1999 consistent with OTS guidelines. As the Company progresses through the
validation phase, the Company expects to determine necessary remedial actions
and subsequently provide for their implementation, with respect to any
third-party vendors or service providers who are ultimately determined to not be
Year 2000 compliant.
COSTS TO ADDRESS THE YEAR 2000 ISSUE The total cost of the Company's plan to
- ------------------------------------
address the Year 2000 issue is currently estimated to be $1.5 million, including
estimates of personnel costs, and is comprised primarily of costs for equipment
and software that will be acquired and depreciated over its useful life in
accordance with Company policy. Any personnel and consulting costs have been and
will continue to 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. As of September 30,
1998, the costs incurred related to Year 2000 are approximately $537,000, which
includes estimates of personnel costs.
RISKS PRESENTED BY THE YEAR 2000 ISSUE Because the Company is substantially
- --------------------------------------
dependent upon the proper functioning of its computer systems and the computer
systems and services of third parties, a failure of those computer systems and
services to be Year 2000 compliant could have a material adverse effect on the
Company's business, financial condition or results of operations. The Company
relies heavily on third-party vendors and service providers for its information
technology needs. The Company's primary third-party computer service provider is
a computer service bureau that provides data processing for virtually all of the
Company's savings and checking accounts, real estate lending and real estate
loan servicing, general ledger, fixed assets and accounts payable. This
third-party's data processing services are mission-critical services for the
Company and a failure of this provider's services to be Year 2000 compliant
could cause substantial disruption of the Company's business and could have a
material adverse financial impact on the Company. The Company tested its primary
third-party service bureau's data processing systems over a two-week period from
September 28 through October 9, 1998. No material Year 2000-related issues were
identified as a result of the test.
Although the Company now believes this third-party service provider is Year 2000
compliant, if this third-party service provider or other third party providers
with which the Company has material relationships are not Year 2000 compliant,
the following problems could result: (i) in the case of vendors, important
services upon which the Company depends, such as telecommunications and
electrical power, could be interrupted, (ii) in the case of third-party service
providers, the Company could receive inaccurate or outdated information, which
could impair the Company's ability to perform critical data functions, such as
the processing of deposit accounts, loan servicing and internal accounting, and
(iii) in the case of governmental agencies, such as the FHLB, and correspondent
banks, such agencies and financial institutions could fail to provide funds to
the Company, which could materially impair the Company's liquidity and affect
the Company's ability to fund loans and deposit withdrawals. In addition,
whether or not
16
the Company is Year 2000 compliant, the Company may experience an outflow of
deposits if customers are concerned about the integrity of financial
institutions' records regarding customers' accounts.
CONTINGENCY PLANS Where it is possible to do so, the Company has scheduled
- -----------------
testing with third-party vendors and service providers. Where this is not
possible, the Company will rely upon certifications of Year 2000 compliance from
vendors and service providers. Most vendors and service providers have targeted
December, 1998 as their expected compliance completion date. Until that time,
the Company is unable to fully assess its risks from potential Year 2000
non-compliance and to complete its development of Year 2000 contingency plans.
There can be no assurance that the Company's Year 2000 initiative will
effectively address the Year 2000 issue, that the Company's estimates of the
timing and costs of completing the initiative will ultimately be accurate or
that the impact of any failure of the Company or its third-party vendors and
service providers to be Year 2000 compliant will not have a material adverse
effect on the Company's business, financial condition or results of operations.
17
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
September 30, JUNE 30, September 30,
1998 1998 1997
---- ---- ----
(DOLLARS IN THOUSANDS)
Nonaccrual loans (1):
Real Estate Loans:
One-to-Four Family.......................................... $ 2,426 $ 2,779 $ 2,827
Multifamily................................................. 592 2,257 2,363
Commercial and Land......................................... 1,686 1,912 3,127
------- ------- -------
Total Nonaccrual Loans (1).................................. 4,704 6,948 8,317
Troubled Debt Restructured Loans.................................... 222 223 227
------- ------- -------
Total Nonperforming Loans................................... 4,926 7,171 8,544
Real Estate Acquired Through Foreclosure............................ 2,524 2,678 2,863
------- ------- -------
Total Nonperforming Assets................................. $ 7,450 $ 9,849 $11,407
======= ======= =======
Nonperforming Loans as a percentage of Gross Loans (2).............. 0.68% 1.01% 1.27%
Nonperforming Assets as a percentage of Total Assets (3)............ 0.83% 1.11% 1.35%
General Valuation Allowance (GVA) on loans
as a percentage of Gross Loans.................................. 0.90% 0.87% 0.97%
GVA on loans as a percentage of total Nonperforming Loans (2)....... 132.81% 86.61% 76.18%
Total GVA as a percentage of total Nonperforming Assets (4)......... 90.16% 64.84% 58.60%
(1) Nonaccrual Loans are net of specific allowances of $317,000, $945,000 and
$647,000 at September 30, 1998, June 30, 1998 and September 30, 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 September 30, 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.
Nonaccrual loans at September 30, 1998 consisted of $2.4 million in one-to-four
family loans, $592,000 in multifamily loans and $1.7 million in commercial and
industrial loans. At June
18
30, 1998, nonaccrual loans consisted of $2.8 million in one-to-four family
loans, $2.3 million in multifamily loans and $1.9 million in commercial and
industrial loans.
Nonperforming assets decreased to $7.5 million, 0.83% of total assets at
September 30, 1998, compared to $9.8 million, 1.11% of total assets at June 30,
1998. The decrease in nonperforming assets for the three month period is
primarily a result of a reduction in multifamily nonperforming loans primarily
as a result of several multifamily loans reinstating during the quarter.
Controlling and reducing nonperforming assets continues to be a primary focus of
the Company.
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 September 30, 1998, the Company had a gross investment
in impaired loans of $6.3 million, including $4.0 million for which specific
valuation allowances of $784,000 had been established and $2.3 million for which
no specific valuation allowance was considered necessary.
During the three months ended September 30, 1998, the Company's average
investment in impaired loans was $7.0 million. For the three months ended
September 30, 1997, the Company's average investment in impaired loans was $7.7
million. For the three ended September 30, 1998, income recorded on impaired
loans totaled $162,000, 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. Impaired loans totalling $4.3 million
were not performing in accordance with their contractual terms at September 30,
1998, and have been included in nonaccrual loans at that date.
REGULATORY CAPITAL
The OTS' capital regulations include three separate minimum capital requirements
for savings institutions subject to OTS supervision. 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
19
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
September 30, 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 Insurance Corporation 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 SEPTEMBER 30, AT JUNE 30,
FEDERAL SAVINGS AND LOAN ASSOCIATION REQUIREMENT REQUIREMENT 1998 1998
- ------------------------------------ ----------- ----------- ---- ----
TANGIBLE CAPITAL............................... 1.50% N/A 7.67% 7.44%
CORE CAPITAL................................... 3.00% 5.00% 7.67% 7.44%
RISK-BASED CAPITAL............................. 8.00% 10.00% 13.84% 12.97%
TIER 1 RISK-BASED CAPITAL...................... N/A 6.00% 12.62% 11.84%
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* * * * *
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;
(vi) plans, including the ultimate costs, results and effects of its plan
regarding Year 2000 compliance; (vii) risks resulting from failure of
third-party vendors and service providers to be Year 2000 compliant; and (viii)
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 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.
21
PART II. OTHER INFORMATION
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
(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.
22
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: NOVEMBER 13, 1998 BY: /S/ DWIGHT L. WILSON
----------------- ---------------------------
Dwight L. Wilson
Senior Vice President,
Treasurer and Chief Financial Officer
23