SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 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
February 12, 1999: 5,639,726
QUAKER CITY BANCORP, INC.
Index
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Statements of Financial Condition (unaudited) as of
December 31, 1998 and June 30, 1998........................................... 3
Consolidated Statements of Operations (unaudited) for the Three and Six
Months Ended December 31, 1998 and 1997....................................... 4
Consolidated Statements of Comprehensive Income (unaudited) for the Three
and Six Months Ended December 31, 1998 and 1997............................... 5
Consolidated Statements of Cash Flows (unaudited) for the Three and Six
Months Ended December 31, 1998 and 1997....................................... 6
Notes to Consolidated Financial Statements.................................... 8
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................... 11
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Stockholders............................... 24
ITEM 6. Exhibits and Reports on Form 8-K.............................................. 24
QUAKER CITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Unaudited
(In thousands, except share data)
December 31, June 30,
1998 1998
Assets
Cash and due from banks.............................................. $ 5,216 $ 12,687
Interest-bearing deposits............................................ 312 345
Federal funds sold and other short-term investments.................. 24,820 26,420
Investment securities held to maturity............................... 12,837 5,058
Investment securities available for sale............................. -- 1,819
Loans receivable, net................................................ 758,496 691,026
Loans receivable held for sale....................................... 7,554 7,507
Mortgage-backed securities held to maturity.......................... 62,313 107,577
Mortgage-backed securities available for sale........................ 19,871 8,274
Real estate held for sale............................................ 3,167 3,334
Federal Home Loan Bank stock, at cost................................ 11,902 11,561
Office premises and equipment, net................................... 6,330 5,289
Accrued interest receivable and other assets......................... 7,162 6,583
-------- --------
Total assets....................................................... $919,980 $887,480
======== ========
Liabilities and Stockholders' Equity
Deposits............................................................. $635,006 $580,910
Federal Home Loan Bank advances...................................... 190,800 216,000
Deferred tax liability............................................... 2,402 2,505
Accounts payable and accrued expenses................................ 4,650 3,864
Other liabilities.................................................... 9,496 6,942
-------- --------
Total liabilities................................................. 842,354 810,221
Stockholders' equity:
Common stock, $.01 par value. Authorized 20,000,000 shares; issued
and outstanding 5,729,726 shares and 5,826,883 at December 31,
1998 and June 30, 1998, respectively.............................. 57 58
Additional paid-in capital........................................... 73,636 73,720
Accumulated other comprehensive income............................... 238 390
Retained earnings, substantially restricted.......................... 7,700 4,779
Deferred compensation................................................ (4,005) (1,688)
-------- --------
Total stockholders' equity........................................ 77,626 77,259
-------- --------
Total liabilities and stockholders' equity........................ $919,980 $887,480
======== ========
See accompanying notes to consolidated financial statements.
3
QUAKER CITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
(In thousands, except per share data)
Three Months Ended Six Months Ended
December 31, December 31,
1998 1997 1998 1997
------- ------- ------- -------
Interest income:
Loans receivable.......................................... $15,340 $13,504 $30,056 $26,822
Mortgage-backed securities................................ 1,508 1,893 3,331 3,401
Investment securities..................................... 299 457 443 1,025
Other..................................................... 483 388 975 721
------- ------- ------- -------
Total interest income.................................. 17,630 16,242 34,805 31,969
------- ------- ------- -------
Interest expense:
Deposits.................................................. 7,522 7,036 14,749 14,160
Federal Home Loan Bank advances and other borrowings...... 2,506 2,974 5,286 5,518
------- ------- ------- -------
Total interest expense................................. 10,028 10,010 20,035 19,678
------- ------- ------- -------
Net interest income before provision for loan losses...... 7,602 6,232 14,770 12,291
Provision for loan losses...................................... 400 400 800 650
------- ------- ------- -------
Net interest income after provision for loan losses....... 7,202 5,832 13,970 11,641
------- ------- ------- -------
Other income:
Loan servicing charges and deposit fees................... 591 563 1,397 1,048
Gain on sale of loans held for sale....................... 121 35 164 65
Commissions............................................... 174 161 349 335
Gain on sale of securities available for sale............. 271 -- 616 --
Other..................................................... 20 3 28 5
------- ------- ------- -------
Total other income..................................... 1,177 762 2,554 1,453
------- ------- ------- -------
Other expense:
Compensation and employee benefits........................ 2,428 2,023 4,760 4,066
Occupancy, net............................................ 604 462 1,146 945
Federal deposit insurance premiums........................ 129 128 260 254
Data processing........................................... 232 177 431 346
Other general and administrative expense.................. 1,048 871 1,875 1,599
------- ------- ------- -------
Total general and administrative expense............... 4,441 3,661 8,472 7,210
Real estate operations, net............................... 98 120 145 279
Amortization of core deposit intangible................... -- -- -- 35
------- ------- ------- -------
Total other expense.................................... 4,539 3,781 8,617 7,524
------- ------- ------- -------
Earnings before income taxes, extraordinary items
and cumulative effect of change in accounting principle... 3,840 2,813 7,907 5,570
Income taxes................................................... 1,698 1,254 3,469 2,481
------- ------- ------- -------
Net earnings before extraordinary item and cumulative
effect of change in accounting principle............. 2,142 1,559 4,438 3,089
Extraordinary item, net of taxes............................... (61) -- (61) --
Cumulative effect of change in
accounting principle, net of taxes.......................... -- -- 162 --
------- ------- ------- -------
Net earnings................................................... $ 2,081 $ 1,559 $ 4,539 $ 3,089
======= ======= ======= =======
Basic earnings per share....................................... $0.39 $0.29 $0.85 $0.57
Diluted earnings per share..................................... $0.36 $0.27 $0.79 $0.53
See accompanying notes to consolidated financial statements.
4
QUAKER CITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Unaudited
(In thousands)
Three Months Ended Six Months Ended
December 31, December 31,
1998 1997 1998 1997
------ ------ ------ ------
Net Earnings.................................................. $2,081 $1,559 $4,539 $3,089
Other comprehensive income:
Unrealized holding gain (loss) on securities
available for sale arising during the period........ (407) 4 (674) 238
Less: realized (gain) included in net earnings and
previously included in other comprehensive income... (157) -- (522) --
-------- ------- ------ ------
Increase (decrease) in accumulated other
comprehensive income, net of tax......................... (250) 4 (152) 238
-------- ------- ------ ------
Total comprehensive income............................... $1,831 $1,563 $4,387 $3,327
====== ====== ====== ======
See accompanying notes to consolidated financial statements.
5
QUAKER CITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In thousands)
Six Months Ended
December 31,
1998 1997
------ ------
Cash flows from operating activities:
Net earnings.................................................................... $ 4,539 $ 3,089
--------- ---------
Adjustments to reconcile net earnings to net cash provided (used)
by operating activities:
Cumulative effect of change in accounting principle......................... (162) --
Depreciation and amortization............................................... (585) 162
Provision for loan losses................................................... 800 650
Write-downs on real estate held for sale.................................... 47 90
Gain on sale of real estate held for sale................................... (199) (94)
Gain on sale of loans held for sale......................................... (164) (65)
Gain on sale of securities available for sale............................... (616) --
Loans originated for sale................................................... (30,214) (9,291)
Proceeds from sale of loans held for sale................................... 30,094 8,438
Federal Home Loan Bank (FHLB) stock dividend received....................... (341) (307)
Increase in accrued interest receivable and other assets.................... (579) (434)
Increase (decrease) in other liabilities.................................... 2,554 (8,742)
Increase (decrease) in accounts payable and accrued expenses................ 786 (76)
Other....................................................................... (592) 1,311
--------- ---------
Total adjustments....................................................... 829 (8,358)
--------- ---------
Net cash provided (used) by operating activities........................ 5,368 (5,269)
--------- ---------
Cash flows from investing activities:
Loans originated for investment................................................. (88,070) (34,479)
Loans purchased for investment.................................................. (50,008) (26,512)
Principal repayments on loans................................................... 69,441 38,577
Purchases of investment securities held to maturity............................. (11,990) --
Maturities and principal repayments of investment securities held to maturity... 4,220 13,390
Proceeds from sale of investment securities available for sale.................. 1,558 --
Purchases of mortgage-backed securities available for sale...................... -- (8,237)
Purchases of mortgage-backed securities held to maturity........................ (40,259) (34,587)
Principal repayments on mortgage-backed securities held to maturity............. 7,594 8,450
Sale of mortgage-backed securities available for sale........................... 61,872 --
Principal repayments on mortgage-backed securities available for sale........... 5,068 --
Proceeds from sale of real estate held for sale................................. 819 2,808
Purchase of FHLB stock.......................................................... -- (1,136)
Investment in office premises and equipment..................................... (1,528) (545)
--------- ---------
Net cash used by investing activities................................... (41,283) (42,271)
--------- ---------
Cash flows from financing activities:
Increase in deposits............................................................ 54,096 6,343
Proceeds from funding of FHLB advances.......................................... 89,500 220,200
Repayments of FHLB advances..................................................... (114,700) (170,400)
Stock options exercised......................................................... 203 21
Repurchase of stock............................................................. (2,288) (687)
--------- ---------
Net cash provided by financing activities............................... 26,811 55,477
--------- ---------
Increase (decrease) in cash and cash equivalents........................ (9,104) 7,937
Cash and cash equivalents at beginning of period.................................... 39,452 20,353
--------- ---------
Cash and cash equivalents at end of period.......................................... $ 30,348 $ 28,290
========= =========
6
QUAKER CITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
Unaudited
(In thousands)
Six Months Ended
December 31,
1998 1997
---- ----
Supplemental disclosures of cash flow information:
Interest paid (including interest credited).......................... $20,957 $19,168
Cash paid for income taxes........................................... 3,795 3,625
======= =======
Supplemental schedule of noncash investing and financing activities:
Additions to loans resulting from the sale of real estate acquired
through foreclosure................................................ $ 1,042 $ 557
Additions to real estate acquired through foreclosure.................. 1,776 2,451
Reclassification of MBS from held to maturity to available for sale.. 77,961 --
Net change in accumulated other comprehensive income, net of taxes... (152) 238
======= =======
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 December 31, 1998
and the related consolidated statements of operations and comprehensive
income for the three and six months ended December 31, 1998 and 1997 and
the related consolidated statement of cash flows for the six months ended
December 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
December 31, 1998 and its results of operations and comprehensive income
for the three and six months ended December 31, 1998 and 1997 and cash
flows for the six months ended December 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 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. Earnings per share is reported on both a basic and diluted basis. Basic
earnings per share is determined by dividing net earnings by the average
number of shares of common stock outstanding, while diluted earnings per
share is determined by dividing net earnings by the average number of
shares of common stock outstanding adjusted for the dilutive effect of
common stock equivalents. Earnings per share for the three and six ended
December 31, 1997 have been restated to conform with the provisions of
Statement of Financial Accounting Standards ("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 three and six months ended
December 31, 1998 is as follows:
Three Months Six Months
Basic Diluted Basic Diluted
------- -------- ------- -----------
Earnings before extraordinary
item and cumulative effect
of change in accounting principle...... $ 0.40 $ 0.37 $ 0.83 $ 0.78
Extraordinary item, net of taxes............. (0.01) (0.01) (0.01) (0.01)
Cumulative effect of change
in accounting principle, net of taxes... -- -- 0.03 0.02
------ ------ ------ ------
Net earnings................................. $ 0.39 $ 0.36 $ 0.85 $ 0.79
====== ====== ====== ======
8
3. In October 1998, the Financial Accounting Standards Board ("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. Implementation of SFAS No. 134 is not
expected to have a material effect on the Company's financial condition or
results of operations.
4. In June 1998 the 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 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. In the first
quarter of fiscal 1999, the Company sold $29.6 million of these
reclassified MBS for a 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. In the second quarter
of fiscal 1999, the Company sold an additional $32.3 million of MBS for
pretax gain of $245,000 and an after tax gain of $142,000. The pretax gain
of $245,000 is included as a gain on sale of securities available for sale
in the accompanying consolidated statements of operations.
9
5. 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 accumulated other comprehensive income as part of
stockholders' equity. 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
earnings, foreign currency items, minimum pension liability adjustments,
and unrealized gains and losses on investments in certain debt and equity
securities.
10
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 December 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 MBS.
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Total stockholders' equity for the Company was $77.6 million at December 31,
1998, compared to $77.3 million at June 30, 1998. Consolidated assets totaled
$920.0 million at December 31, 1998, an increase of $32.5 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 153,500 shares of Company
common stock have been repurchased under this latest repurchase program.
Total loans receivable amounted to $766.1 million at December 31, 1998, compared
to $698.5 million at June 30, 1998. Loan originations and purchases totaled
$111.7 million for the quarter ended December 31, 1998, compared to $34.5
million for the quarter ended December 31, 1997. Loan originations and purchases
totaled $168.3 million for the six months ended December 31, 1998, compared to
$70.3 million for the six months ended December 31, 1997.
11
Loan originations and purchases were comprised of the following:
For the three months ended For the six months ended
December 31, December 31, December 31, December 31,
1998 1997 1998 1997
(In millions)
One-to-four family $ 63.4 $ 4.3 $ 81.8 $29.9
Multifamily 31.8 21.3 54.5 30.3
Commercial and industrial 16.3 2.5 30.8 3.7
Consumer 0.2 6.4 1.2 6.4
------ ----- ------ -----
$111.7 $34.5 $168.3 $70.3
====== ===== ====== =====
The increase in loan production for the three and six months ended December 31,
1998 as compared to the same periods in the previous year is primarily a result
of lower interest rates during the current fiscal year as well as an increase in
loan purchase transactions. The decline in consumer loan originations and
purchases for the same periods is a result of no consumer loan purchase
transactions being made in the current period. At present, the Company expects
to continue its focus on multifamily and commercial and industrial lending
during the current fiscal year. In second half of 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 three and six month periods of fiscal
1999 as compared to the same periods last year are primarily a result of their
production.
MBS held to maturity amounted to $62.3 million at December 31, 1998, compared to
$107.6 million at June 30, 1998. MBS available for sale amounted to $19.9
million at December 31, 1998, compared to $8.3 million at June 30, 1998. In the
first quarter of fiscal 1999, the Company adopted 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 has subsequently sold a total of $61.9 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. The net repayments of
FHLB advances was $114.7 million as compared to proceeds of $89.5 million for
the six months ended December 31, 1998. Deposits increased by $54.1 million for
the six months ended December 31, 1998. This increase in deposits enabled the
Company to repay certain advances during the period.
In addition to FHLB advances and proceeds from increases in customer deposits,
other sources of liquidity for the Company include principal repayments on loans
and MBS, proceeds from sales of loans held for sale and other cash flows
generated from operations.
12
Principal repayments on loans were $35.0 million and $21.9 million for the three
months ended December 31, 1998 and 1997, respectively. Principal repayments on
loans were $69.4 million and $38.6 million for the six months ended December 31,
1998 and 1997, respectively. The increase in principal repayments during the
three and six month periods of 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 prepay may increase even further.
Proceeds from loan sales amounted to $21.0 million for the quarter ended
December 31, 1998 as compared to $4.9 million for the quarter ended December 31,
1997. Proceeds from loan sales amounted to $30.1 million for the six months
ended December 31, 1998 as compared to $8.4 million for the quarter ended
December 31, 1997. At present, the Company's policy is to sell most 30 and 15
year fixed-rate one-to-four family loans as well as certain adjustable-rate one-
to-four family loans, multifamily loans, and commercial and industrial loans
originated that meet predefined criteria. The increase in loan sales is
primarily a result of the increase in fixed-rate loans originated for sale due
to the low interest rate environment in the current fiscal year. Loans serviced
for others increased to $280.1 million at December 31, 1998, from $221.8 million
at December 31, 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 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 December 31, 1998 and 1997 was
7.51% and 5.00%, respectively.
Sources of capital and liquidity for the Company on a stand-alone basis include
distributions from the Association and borrowings such as securities sold under
agreements to repurchase. Dividends and other capital distributions from the
Association are subject to regulatory restrictions.
RESULTS OF OPERATIONS
Comparison of the Three and Six Months Ended December 31, 1998 and 1997 The
- -----------------------------------------------------------------------
Company recorded net earnings of $2.1 million, $0.36 per diluted share for the
quarter ended December 31, 1998. This compares to net earnings of $1.6 million,
$0.27 per diluted share for the same quarter last year. Net earnings were $4.5
million, $0.79 per diluted share for the six months ended December 31, 1998.
This compares to net earnings of $3.1 million, $0.53 per diluted share for the
same period last year. Net earnings for the six months ended December 31, 1998
includes a gain on sale of securities available for sale of $360,000, after tax,
as well as the cumulative effect of a change in accounting principle upon the
implementation of SFAS No. 133 of $162,000, after tax. In addition, the Company
prepaid approximately $8.0 million of its higher cost borrowings and replaced
the funds with less expensive borrowings and retail deposits. In association
with the debt prepayment, the Company paid a prepayment fee of $61,000, after
tax. The prepayment fee is disclosed as an extraordinary item on the
accompanying statements of operations.
13
Interest Income Interest income amounted to $17.6 million for the quarter ended
- ---------------
December 31, 1998 as compared to $16.2 million for the quarter ended December
31, 1997. Interest income amounted to $34.8 million for the six months ended
December 31, 1998 as compared to $32.0 million for the six months ended December
31, 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 December 31, 1998
- ----------------
remained unchanged at $10.0 million, compared to the same quarter in the
previous year. Interest expense for the six months ended December 31, 1998 was
$20.0 million, compared to $19.7 million for the same period in the previous
year. The increase in interest expense for the six months ended December 31,
1998 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 December 31, 1998 amounted to $7.6 million compared to $6.2
million for the same period last year. Net interest income before provision for
loan losses for the six months ended December 31, 1998 amounted to $14.8 million
compared to $12.3 million for the same period last year. The net interest
margin for the quarter ended December 31, 1998 was 3.41%, a 40 basis point
increase from the same period last year. For the six months ended December 31,
1998, the net interest margin was 3.39%, a 36 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.
The following table displays average interest rates on the Company's interest-
earning assets and interest-bearing liabilities:
Three month average Six month average
----------------------------- ------------------
December 31, December 31, December 31, December 31,
1998 1997 1998 1997
Yield on interest-earning assets....... 7.92% 7.85% 7.98% 7.89%
Cost of interest-bearing liabilities... 5.09% 5.36% 5.13% 5.37%
---- ---- ---- ----
Interest rate spread (1)............... 2.83% 2.49% 2.85% 2.52%
==== ==== ==== ====
Net interest margin (2)................ 3.41% 3.01% 3.39% 3.03%
==== ==== ==== ====
(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.
14
Provision for Loan Losses The provision for loan losses remained unchanged at
- -------------------------
$400,000 for the three months ended December 31, 1998, compared to the same
period last year. The provision for loan losses was $800,000 for the six months
ended December 31, 1998, compared to $650,000 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 increase the allowance for loan losses based on their
judgments of the information available at the time of their examination.
The following is a summary of the activity in the allowance for loan losses and
the allowance for losses on real estate acquired through foreclosure (REO):
At or for the At or for the
Three Months Ended Six Months Ended
December 31, December 31, December 31, December 31,
1998 1997 1998 1997
----- ----- ----- -----
(In thousands) (In thousands)
Allowance for loan losses:
Balance at beginning of period........ $7,708 $7,685 $7,955 $7,772
Provision for loan losses............. 400 400 800 650
Reductions credited................... (3) (2) (7) (7)
Charge-offs, net...................... (24) (150) (667) (482)
------ ------ ------ ------
Balance at end of period............ $8,081 $7,933 $8,081 $7,933
====== ====== ====== ======
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
====== ====== ====== ======
15
Other Income Other income for the three months ended December 31, 1998 was
- ------------
$1.2 million compared to $762,000 for the same period last year. For the six
months ended December 31, 1998 other income was $2.6 million as compared to $1.5
million for the same period a year earlier. The increase in other income for the
three and six months ended December 31, 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 and pretax gains
of $271,000 and $616,000 for the three and six months ended December 31,1998,
respectively, related to the sale of securities available for sale. The after
tax gain on the sale of these securities for the three and six months ended
December 31, 1998 was $157,000 and $360,000, respectively. In the current
quarter other income was reduced by $100,000 due to a writedown of a premium
paid on purchased mortgage servicing rights. The premium was initially recorded
at cost and was subsequently reported at the lower of amortized cost or fair
value. Primarily due to higher than expected prepayment speeds on the serviced
loans, the premium was written down by $100,000 to $340,000 at December 31,
1998.
Other Expense Other expense for the three months ended December 31, 1998 was
- -------------
$4.5 million, compared to $3.8 million the same period last year. For the six
months ended December 31, 1998 other expense was $8.6 million, compared to $7.5
million for the same period last year. The increase in other expense for the
three and six months ended December 31, 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, the relocation of an
existing branch to a larger and more accessible location in August 1998,
additional staffing in the income property lending department of the Company,
and the cost of preparing for the Year 2000 computer issue. In addition, as a
result of a recent change in the accounting treatment for stock of the Company
that is held in trust for a deferred compensation plan, which change requires
accounting for this stock at fair value, there was an increase in compensation
expense of $125,000 during the quarter. The efficiency ratio for the quarter
ended December 31, 1998 was 52.95% compared to 52.61% for the same period last
year. The efficiency ratio is the measurement of general and administrative
expense as a percentage of net interest income and other income, excluding
nonrecurring items.
Income Taxes The Company's effective tax rates were 44.2% and 44.6% for the
- ------------
quarters ended December 31, 1998 and 1997, respectively and 43.9% and 44.5% for
the six months ended December 31, 1998 and 1997, respectively. The effective
tax rates were comparable to the applicable statutory rates in effect.
16
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.
The new personal computers and monitors have been delivered and 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.
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
17
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 December 31, 1998,
the costs incurred related to Year 2000 are approximately $719,000, 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 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.
18
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 targeted
December, 1998 as their expected compliance completion date. Currently,
divisions are in the process of reviewing vendor Y2K compliance status. Until
this final review is completed, the Company is unable to fully assess its risks
from potential Year 2000 non-compliance. In addition, the Year 2000 Committee
has started the contingency planning phase. The contingency planning phase
includes provisions for vendors whose compliance has not yet been finalized.
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.
19
ASSET QUALITY
The following table sets forth information regarding nonaccrual loans, troubled
debt restructured loans and real estate acquired through foreclosure at the
dates indicated:
At At At
December 31, June 30, December 31,
1998 1998 1997
(Dollars in thousands)
Nonaccrual loans (1):
Real estate loans:
One-to-four family......................................... $ 2,216 $2,779 $ 2,769
Multifamily................................................ 1,288 2,257 3,091
Commercial and land........................................ 1,617 1,912 3,423
------- ------ -------
Total nonaccrual loans (1)................................. 5,121 6,948 9,283
Troubled debt restructured loans................................... 221 223 226
------- ------ -------
Total nonperforming loans.................................. 5,342 7,171 9,509
Real estate acquired through foreclosure........................... 2,528 2,678 1,811
------- ------ -------
Total nonperforming assets................................ $ 7,870 $9,849 $11,320
======= ====== =======
Nonperforming loans as a percentage of gross loans (2)............. 0.69% 1.01% 1.40%
Nonperforming assets as a percentage of total assets (3)........... 0.86% 1.11% 1.33%
General Valuation Allowance (GVA) on loans
as a percentage of gross loans................................. 0.90% 0.87% 0.90%
GVA on loans as a percentage of total nonperforming loans (2)...... 131.13% 86.61% 64.52%
Total GVA as a percentage of total nonperforming assets (4)........ 91.23% 64.84% 55.74%
(1) Nonaccrual loans are net of specific allowances of $439,000, $945,000 and
$1.3 million at December 31, 1998, June 30, 1998 and December 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 December 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.
20
Nonaccrual loans at December 31, 1998 consisted of $2.2 million in one-to-four
family loans, $1.3 million in multifamily loans and $1.6 million in commercial
and industrial loans. At June 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 $7.9 million, 0.86% of total assets at
December 31, 1998, compared to $9.8 million, 1.11% of total assets at June 30,
1998. The decrease in nonperforming assets for the six month period is
primarily a result of a reduction in multifamily nonperforming loans primarily
as a result of several multifamily loans being reinstated as performing loans
during the period. 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 December 31, 1998, the Company had
a gross investment in impaired loans of $6.4 million, including $3.9 million for
which specific valuation allowances of $481,000 had been established and $2.5
million for which no specific valuation allowance was considered necessary.
During the three and six months ended December 31, 1998, the Company's average
investment in impaired loans was $6.4 million and $6.7 million, respectively.
For the three and six months ended December 31, 1997, the Company's average
investment in impaired loans was $8.4 million and $8.1 million, respectively.
For the three and six months ended December 31, 1998, income recorded on
impaired loans totaled $152,000 and $315,000, 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 $2.7 million were not performing in accordance with their
contractual terms at December 31, 1998, and have been included in nonaccrual
loans at that date.
21
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 8.00% of risk-weighted
assets as prescribed in the capital regulations. The capital regulations assign
specific risk weightings to all assets and off-balance sheet items.
The Association was in compliance with all capital requirements in effect at
December 31, 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 December 31, at June 30,
Federal Savings and Loan Association Requirement Requirement 1998 1998
- ------------------------------------- ------------ ------------------- ---------------- ------------
Tangible capital........................... 1.50% N/A 7.69% 7.44%
Core capital............................... 3.00% 5.00% 7.69% 7.44%
Risk-based capital......................... 8.00% 10.00% 13.41% 12.97%
Tier 1 Risk-based capital.................. N/A 6.00% 12.18% 11.84%
22
* * * * *
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.
23
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Stockholders
-----------------------------------------------
At the Annual Meeting of Stockholders of the Company held on November
18, 1998, the following were approved:
(1) Frederick R. McGill was elected by a vote of 5,355,183, none
against, with 52,567 abstentions.
(2) Alfred J. Gobar was elected by a vote of 5,355,245, none against,
with 52,505 abstentions.
The proposal to approve the amendment of the Quaker City Bancorp, Inc.
Certificate of Incorporation to increase the number of authorized
shares of Common Stock of the Company was approved by a vote of
5,055,793 in favor, 288,907 against, with 63,050 abstentions.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits -
11.1 Computation of Earnings per Share
27.1 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.
24
SIGNATURES
----------
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Quaker City Bancorp, Inc.
Date: February 12, 1999 By: /s/ Dwight L. Wilson
----------------- ---------------------------------------
Dwight L. Wilson
Senior Vice President,
Treasurer and Chief Financial Officer
25