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, 1999
------------------
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 12, 1999: 5,329,107.
QUAKER CITY BANCORP, INC.
Index
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition (unaudited) as
of September 30, 1999 and June 30, 1999.......................................... 3
Consolidated Statements of Operations (unaudited) for the
Three Months Ended September 30, 1999 and 1998................................... 4
Consolidated Statements of Comprehensive Income (unaudited)
for the Three Months Ended September 30, 1999 and 1998........................... 5
Consolidated Statements of Cash Flows (unaudited) for the
Three Months Ended September 30, 1999 and 1998................................... 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,
1999 1999
------ ------
Assets
Cash and due from banks............................................. $ 7,236 $ 7,705
Interest-bearing deposits........................................... 447 323
Federal funds sold and other short-term investments................. 10,620 25,120
Investment securities held to maturity.............................. 14,911 11,986
Loans receivable, net............................................... 856,779 821,190
Loans receivable held for sale...................................... 5,571 17,028
Mortgage-backed securities held to maturity......................... 84,004 84,078
Mortgage-backed securities available for sale....................... 16,790 15,783
Real estate held for sale........................................... 1,800 3,138
Federal Home Loan Bank stock, at cost............................... 13,162 12,221
Office premises and equipment, net.................................. 6,425 6,430
Accrued interest receivable and other assets........................ 6,997 8,435
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Total assets................................................... $1,024,742 $1,013,437
========== ==========
Liabilities and Stockholders' Equity
Deposits............................................................ $ 692,772 $ 677,839
Federal Home Loan Bank advances..................................... 231,550 234,700
Deferred tax liability.............................................. 1,669 1,694
Accounts payable and accrued expenses............................... 4,622 4,612
Other liabilities................................................... 11,258 13,288
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Total liabilities.............................................. 941,871 932,133
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Stockholders' equity:
Common stock, $.01 par value. Authorized 20,000,000 shares; issued
and outstanding 5,385,107 shares and 5,457,107 at September 30,
1999 and June 30, 1999, respectively............................. 54 55
Additional paid-in capital.......................................... 72,533 72,681
Accumulated other comprehensive (loss) income....................... (1) 33
Retained earnings, substantially restricted......................... 11,528 9,855
Deferred compensation............................................... (1,243) (1,320)
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Total stockholders' equity..................................... 82,871 81,304
---------- ----------
Total liabilities and stockholders' equity..................... $1,024,742 $1,013,437
========== ==========
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
September 30,
1999 1998
------ ------
Interest income:
Loans receivable...................................................... $17,182 $14,716
Mortgage-backed securities............................................ 1,657 1,823
Investment securities................................................. 215 144
Other................................................................. 281 492
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Total interest income............................................. 19,335 17,175
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Interest expense:
Deposits.............................................................. 7,825 7,227
Federal Home Loan Bank advances and other borrowings.................. 3,151 2,780
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Total interest expense............................................ 10,976 10,007
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Net interest income before provision for loan losses.................. 8,359 7,168
Provision for loan losses.............................................. 400 400
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Net interest income after provision for loan losses................... 7,959 6,768
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Other income:
Loan servicing charges and deposit fees............................... 741 806
Gain on sale of loans held for sale................................... 132 43
Commissions........................................................... 177 175
Gain on sale of securities available for sale......................... - 345
Other................................................................. 10 8
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Total other income................................................ 1,060 1,377
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Other expense:
Compensation and employee benefits.................................... 2,422 2,332
Occupancy, net........................................................ 606 542
Federal deposit insurance premiums.................................... 138 131
Data processing....................................................... 242 199
Advertising and promotional........................................... 183 109
Consulting fees....................................................... 180 122
Other general and administrative expense.............................. 626 596
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Total general and administrative expense.......................... 4,397 4,031
Real estate operations, net........................................... (180) 47
Total other expense............................................... 4,217 4,078
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Earnings before income taxes and
cumulative effect of change in accounting principle............... 4,802 4,067
Income taxes........................................................... 2,112 1,771
Earnings before cumulative
effect of change in accounting principle.......................... 2,690 2,296
Cumulative effect of change in
accounting principle, net of taxes.............................. - 162
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Net earnings........................................................... $ 2,690 $ 2,458
======= =======
Basic earnings per share............................................... $0.52 $0.45
Diluted earnings per share............................................. $0.49 $0.42
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,
1999 1998
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Net earnings............................................................. $2,690 $2,458
Other comprehensive income:
Unrealized holding loss on securities
available for sale arising during the period, net of taxes.......... (34) (267)
Less: realized gain included in net earnings and
previously included in other comprehensive income, net of taxes..... - (365)
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Increase (decrease) in accumulated other
comprehensive income, net of tax........................................ (34) 98
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Total comprehensive income.............................................. $2,656 $2,556
====== ======
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,
1999 1998
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Cash flows from operating activities:
Net earnings.................................................................... $ 2,690 $ 2,458
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Adjustments to reconcile net earnings to net cash provided
by operating activities:
Cumulative effect of change in accounting principle......................... - (162)
Depreciation and amortization............................................... (182) (164)
Provision for loan losses................................................... 400 400
Write-downs on real estate held for sale.................................... - 19
Gain on sale of real estate held for sale................................... (179) (174)
Gain on sale of loans held for sale......................................... (132) (29)
Gain on sale of securities available for sale............................... - (345)
Loans originated for sale................................................... (11,094) (11,463)
Proceeds from sale of loans held for sale................................... 22,556 9,097
Federal Home Loan Bank (FHLB) stock dividend received....................... (159) (168)
(Increase) decrease in accrued interest receivable and other assets......... 1,438 (930)
Increase (decrease) in other liabilities.................................... (2,030) 8,354
Increase (decrease) in accounts payable and accrued expenses................ 10 (689)
Other....................................................................... 52 1,169
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Total adjustments....................................................... 10,680 4,915
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Net cash provided by operating activities............................... 13,370 7,373
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Cash flows from investing activities:
Loans originated for investment................................................. (57,540) (36,432)
Loans purchased for investment.................................................. (10,835) (8,677)
Principal repayments on loans................................................... 32,842 34,362
Purchases of investment securities held to maturity............................. (3,085) (9,995)
Maturities and principal repayments of investment securities held to maturity... - 103
Proceeds from sale of investment securities available for sale.................. - 1,135
Purchases of mortgage-backed securities available for sale...................... (1,750) -
Purchases of mortgage-backed securities held to maturity........................ (3,006) (33,202)
Principal repayments on mortgage-backed securities held to maturity............. 2,991 1,952
Sale of mortgage-backed securities available for sale........................... - 29,636
Principal repayments on mortgage-backed securities available for sale........... 720 5,603
Proceeds from sale of real estate held for sale................................. 1,822 726
Purchase of FHLB stock.......................................................... (782) -
Investment in office premises and equipment..................................... (266) (1,394)
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Net cash used by investing activities................................... (38,889) (16,183)
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Cash flows from financing activities:
Increase in deposits............................................................ 14,933 27,466
Proceeds from funding of FHLB advances.......................................... 103,050 51,500
Repayments of FHLB advances..................................................... (106,200) (82,650)
Stock options exercised......................................................... 86 179
Repurchase of stock............................................................. (1,449) (1,064)
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Net cash (used) provided by financing activities........................ 10,420 (4,569)
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Decrease in cash and cash equivalents................................... (15,099) (13,379)
Cash and cash equivalents at beginning of period.................................... 33,148 39,452
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Cash and cash equivalents at end of period.......................................... $ 18,049 $ 26,073
========= ========
6
QUAKER CITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
Unaudited
(In thousands)
Three Months Ended
September 30,
1999 1998
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Supplemental disclosures of cash flow information:
Interest paid (including interest credited)................................ $11,230 $10,022
Cash paid for income taxes................................................. - 170
======= =======
Supplemental schedule of noncash investing and financing activities:
Additions to loans resulting from the sale of real estate
acquired through foreclosure.............................................. - 838
Additions to real estate acquired through foreclosure...................... 524 1,429
Reclassification of MBS from held to maturity to available for sale........ - 77,961
======= =======
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, 1999
and the related consolidated statements of operations, comprehensive income
and cash flows for the three months ended September 30, 1999 and 1998 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, 1999 and its results of
operations, comprehensive income and cash flows for the three months ended
September 30, 1999 and 1998. 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 2000.
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, 1999.
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 months ended
September 30, 1999 and 1998 are as follows:
Three Months Ended Three Months Ended
September 30, September 30,
1999 1998
Basic Diluted Basic Diluted
----- ------- ----- -------
Earnings before cumulative effect
of change in accounting principle....... $0.52 $0.49 $0.42 $0.40
Cumulative effect of change
in accounting principle, net of taxes.... - - 0.03 0.02
----- ----- ----- -----
Net earnings............................... $0.52 $0.49 $0.45 $0.42
===== ===== ===== =====
8
3. In June 1998 the FASB issued Statement of Financial Accounting Standards
("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 condition and measure those instruments at fair value. It
specifies necessary conditions to be met to designate a derivative as a
hedge. As amended by SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133." SFAS No. 133 is effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. 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.
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,
1999, the Association operated ten retail banking offices in Southern
California. In October, the Company closed an acquisition of one retail bank
branch in Rowland Heights, California. This acquisition has provided the Company
with an expanded customer base and approximately $46.0 million of additional
retail deposits. 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 multifamily mortgages, one-
to-four family residential mortgages, commercial mortgages and MBS.
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Total stockholders' equity for the Company was $82.9 million at September 30,
1999, compared to $81.3 million at June 30, 1999. Consolidated assets totaled
$1.0 billion at September 30, 1999, an increase of $11.3 million compared to
June 30, 1999.
In the fourth quarter of fiscal 1999, the Company announced its intention to
repurchase up to an additional 275,000 shares (approximately 4.99% of the then
outstanding shares) of Company common stock. As of November 12, 1999, 203,000
shares of Company common stock have been repurchased under this latest
repurchase program.
Market risk is the risk of loss from adverse changes in market prices and rates.
The Company's market risk arises primarily from interest rate risk inherent in
its lending and deposit taking activities. To that end, management actively
monitors and manages its interest rate risk exposure. The Company does not
currently engage in trading activities. The Company's financial instruments
include interest sensitive loans receivable, federal funds sold, MBS, investment
securities, FHLB stock, deposits and borrowings. At September 30, 1999, the
Company's interest sensitive assets and interest sensitive liabilities totaled
approximately $1.0 billion and $898.8 million, respectively. The composition of
the Company's financial instruments subject to market risk has not changed
significantly since June 30, 1999.
10
Total loans receivable (including loans receivable held for sale) amounted to
$862.4 million at September 30, 1999, compared to $838.2 million at June 30,
1999. The following table presents loans receivable at the dates indicated:
At September 30, At June 30,
1999 1999
---- ----
(In millions)
One-to-four family.............................. $307.4 $312.4
Multifamily..................................... 413.4 391.6
Commercial and land............................. 148.6 140.8
Other........................................... 8.1 7.7
Unamortized discounts........................... (6.0) (5.6)
Allowance for loan losses....................... (9.1) (8.7)
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Total...................................... $862.4 $838.2
====== ======
Loan originations and purchases totaled $79.5 million for the quarter ended
September 30, 1999, compared to $56.6 million for the quarter ended September
30, 1998.
Loan originations and purchases were comprised of the following:
For the three months ended
September 30, September 30,
1999 1998
---- ----
(In millions)
One-to-four family.............................. $18.3 $18.4
Multifamily..................................... 44.1 22.7
Commercial and land............................. 16.6 14.5
Other........................................... 0.5 1.0
----- -----
Total loans originated and purchased........ $79.5 $56.6
===== =====
The increase in loan production for the three months ended September 30, 1999 as
compared to the same periods in the previous year is primarily a result of an
increase in multifamily loan originations. At present, the Company expects to
continue its focus on multifamily and commercial and industrial lending during
the current fiscal year.
MBS held to maturity amounted to $84.0 million at September 30, 1999, compared
to $84.1 million at June 30, 1999. MBS available for sale amounted to $16.8
million at September 30, 1999, compared to $15.8 million at June 30, 1999.
11
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 were $3.2 million for the three months ended September 30, 1999.
Deposits increased by $14.9 million for the three months ended September 30,
1999. This increase in deposits enabled the Company to fund asset growth 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. Principal repayments on loans were $32.8 million and
$34.4 million for the three months ended September 30, 1999 and 1998,
respectively.
Proceeds from loan sales amounted to $22.6 million for the quarter ended
September 30, 1999 as compared to $9.1 million for the quarter ended September
30, 1998. 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. Loans serviced for others increased
to $298.3 million at September 30, 1999, from $284.2 million at June 30, 1999,
primarily due to an increase in loans sold.
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 September 30, 1999 and 1998 was
4.89% and 4.72%, respectively.
Sources of capital and liquidity for the Company on a standalone 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 Months Ended September 30, 1999 and 1998 The Company
----------------------------------------------------------------
recorded net earnings of $2.7 million, $0.49 per diluted share for the quarter
ended September 30, 1999. This compares to net earnings of $2.5 million, $0.42
per diluted share for the same quarter last year. Net earnings for the quarter
ended September 30, 1998 included gains totaling $365,000 after tax on the sale
of securities available for sale and a gain from the cumulative effect of change
in accounting principle. Adjusting earnings for these items, net earnings for
the comparative quarter ended September 30, 1998 would have been $2.1 million,
$0.36 per share diluted. The increase in net earnings for the quarter ended
September 30, 1999 as compared to September 30, 1998 is primarily a result of an
increase in net interest income as discussed below.
12
Interest Income Interest income amounted to $19.3 million for the quarter ended
- ---------------
September 30, 1999 as compared to $17.2 million for the quarter ended September
30, 1998. The increase in interest income is primarily a result of a larger
earning asset base partially offset by a decrease 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, 1999 was
----------------
$11.0 million, compared to $10.0 million for the same quarter in the previous
year. The increase in interest expense for the three months ended September 30,
1999 is primarily 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, 1999 amounted to $8.4 million compared to $7.2
million for the same period last year. The net interest margin for the quarter
ended September 30, 1999 was 3.37%, a one basis point increase from the same
period last year. The slight increase in the net interest margin is primarily a
result of the decrease in the cost of interest-bearing liabilities offset by a
decrease in the yield on interest-earning assets. The increase in net interest
income is primarily a result of 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
-------------------
September 30, September 30,
1999 1998
---- ----
Yield on interest-earning assets............... 7.79% 8.03%
Cost of interest-bearing liabilities........... 4.92% 5.17%
---- ----
Interest rate spread (1)....................... 2.87% 2.86%
==== ====
Net interest margin (2)........................ 3.37% 3.36%
==== ====
(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.
13
Provision for Loan Losses The provision for loan losses remained unchanged at
-------------------------
$400,000 for the three months ended September 30, 1999, compared to 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:
At or for the
Three Months Ended
September 30, September 30,
1999 1998
---- ----
(In thousands)
Allowance for loan losses:
Balance at beginning of period...................... $8,684 $7,955
Provision for loan losses........................... 400 400
Charge-offs......................................... (30) (647)
Recoveries.......................................... 16 -
------ ------
Balance at end of period............................ $9,070 $7,708
====== ======
Other Income Other income for the three months ended September 30, 1999 was
- ------------
$1.1 million compared to $1.4 million for the same period last year. The
decrease in other income for the three months ended September 30, 1999 was
primarily a result of pretax gains of $345,000 for the quarter ended September
30, 1998 related to the sale of securities available for sale. The after tax
gain on the sale of these securities for the three months ended September 30,
1998 was $203,000. In addition, during the same quarter of the previous year
there were increases in prepayment fees on loans due to increased loan payoffs
in fiscal 1999.
14
Other Expense Other expense for the three months ended September 30, 1999 was
- -------------
$4.2 million, compared to $4.1 million the same period last year. The increase
in other expense for the three months ended September 30, 1999 was primarily a
result of the relocation of an existing branch to a larger and more accessible
location in August 1998 and the cost of preparing for the Year 2000 computer
issue. The increase in these costs were partially offset by a gain on the sale
of real estate held for sale of $180,000, net. The efficiency ratio for the
quarter ended September 30, 1999 improved to 47.35% compared to 49.42% 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 44.0% and 43.5% for the
- ------------
quarters ended September 30, 1999 and 1998, respectively. The effective tax
rates 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, heating and air-conditioning 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 decided 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 deemed necessary as a
result of this assessment have been installed.
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.
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:
15
Validation-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 was substantially completed by June 30, 1999.
Testing of all mission-critical systems was also completed by June 30, 1999.
Implementation-This phase began with the replacement of ATM hardware, and
continued with the installation and/or upgrade of both IT and non-IT assets.
Consistent with OTS guidelines, the Company's deadline of mid-1999 for
completion of this phase has been met. As the Company progresses through the
remaining months of 1999, the Company will continue close oversight of vendors
and service providers, and will take any remedial action deemed necessary to
maintain its Year 2000 ready status.
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, 1999, the costs incurred related to Year 2000 have been
approximately $1.3 million, which includes estimates of personnel costs.
Risks Presented by the Year 2000 Issue Because the Company is substantially
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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. Comprehensive testing of this third-
party data processing service bureau took place on September 28 through October
9, 1998. There were no material Year 2000 related problems detected as a result
of the testing.
16
If this third-party service provider or other third party providers with which
the Company has material relationships are not Year 2000 ready, 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.
Contingency Plans Where it has been possible to do so, the Company has
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completed Year 2000 readiness testing with third-party vendors and service
providers. Where this was not possible, the Company has relied upon either
proxy testing or certifications of Year 2000 compliance from vendors and service
providers. The Company's extensive correspondence with and tracking of vendor
progress has resulted in documentation attesting to the Year 2000 readiness of
most of its vendors and service providers. Where the Company has been unable to
secure such documentation, alternate vendors and service providers have been
selected.
The Company has developed a Year 2000 Contingency Plan, consisting of a pre-
event mitigating plan, designed to avoid possible Year 2000 related problems,
and a post-event contingency plan, which includes business resumption procedures
to follow in case of Year 2000 related failures. The most critical areas
included in the Year 2000 Contingency Plan are cash supply, liquidity needs, and
security. The Year 2000 Contingency Plan has been tested and reviewed, and a
plan for its implementation is currently in place. While the Company's Year
2000 Contingency Plan addresses temporary Year 2000 related failures, there can
be no assurance that any such failures would be only temporary or, even if such
failures are temporary, that the Year 2000 Contingency Plan will perform as
anticipated and adequately address any such failures.
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, or the cost of implementing any
aspect of the Year 2000 Contingency Plans, 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,
1999 1999 1998
---- ---- ----
(Dollars in thousands)
...........................................................
Nonaccrual loans (1):
Real estate loans:
One-to-four family........................................ $ 3,048 $ 3,062 $ 2,426
Multifamily............................................... - - 592
Commercial and land....................................... 1,797 1,752 1,686
Consumer.................................................. 110 170 -
------- ------- -------
Total nonaccrual loans (1)................................ 4,955 4,984 4,704
Troubled debt restructured loans.............................. 216 218 222
------- ------- -------
Total nonperforming loans............................. 5,171 5,202 4,926
Real estate acquired through foreclosure...................... 1,800 2,340 2,524
------- ------- -------
Total nonperforming assets........................... $ 6,971 $ 7,542 $ 7,450
======= ======= =======
Nonperforming loans as a percentage of gross loans (2)........ 0.59% 0.61% 0.68%
Nonperforming assets as a percentage of total assets (3)...... 0.68% 0.74% 0.83%
General Valuation Allowance (GVA) on loans
as a percentage of gross loans............................ 0.97% 0.96% 0.90%
GVA on loans as a percentage of total nonperforming loans..... 164.55% 158.02% 132.81%
Total GVA as a percentage of total nonperforming assets (4)... 122.06% 108.99% 90.16%
(1) Nonaccrual loans are net of specific allowances of $51,000, $68,000 and
$317,000 at September 30, 1999, June 30, 1999 and September 30, 1998,
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 valutation 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, 1999, 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.
18
Nonperforming assets decreased to $7.0 million, 0.68% of total assets at
September 30, 1999, compared to $7.5 million, 0.74% of total assets at June 30,
1999. The decrease in nonperforming assets for the three month period is
primarily a result of a reduction in real estate acquired through foreclosure.
Impaired Loans A loan is considered impaired when based on current
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circumstances and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. Creditors are required to measure impairment of a loan based on any
one of the following: (i) the present value of expected future cash flows from
the loan discounted at the loan's effective interest rate, (ii) an observable
market price or (iii) the fair value of the loan's underlying collateral. The
Company measures loan impairment based upon the fair value of the loan's
underlying collateral property. Impaired loans exclude large groups of smaller
balance homogeneous loans that are collectively evaluated for impairment. For
the Company, loans collectively reviewed for impairment include all loans with
principal balances of less than $300,000. At September 30, 1999, the Company
had a gross investment in impaired loans of $1.7 million, including $1.4 million
for which specific valuation allowances of $279,000 had been established and
$300,000 for which no specific valuation allowance was considered necessary.
During the three months ended September 30, 1999, the Company's average
investment in impaired loans was $1.8 million. For the three months ended
September 30, 1999, income recorded on impaired loans totaled $32,000,
substantially all of which was recorded utilizing the cash-basis method of
accounting. Payments received on impaired loans which are performing under
their contractual terms are allocated to principal and interest in accordance
with the terms of the loans. All impaired loans were performing in accordance
with their contractual terms at September 30, 1999.
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
4.00% of adjusted total assets as defined in the capital regulations. Third,
the risk-based capital requirement presently mandates that core capital plus
supplemental capital as defined by the OTS be at least 8.00% of risk-weighted
assets as prescribed in the capital regulations. The capital regulations assign
specific risk weightings to all assets and off-balance sheet items.
19
The Association was in compliance with all capital requirements in effect at
September 30, 1999, 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:
FDICIA
FIRREA "Well-capitalized" Actual Actual
Regulatory Capital Ratios for Quaker City Minimum Minimum at September 30, at June 30,
Federal Savings and Loan Association Requirement Requirement 1999 1999
- ------------------------------------ ----------- ----------- ---- ----
Tangible capital........................... 1.50% N/A 7.68% 7.48%
Core capital to adjusted total assets...... 4.00% 5.00% 7.68% 7.48%
Core capital to risk-weighted assets....... N/A 6.00% 11.05% 11.05%
Total capital to risk-weighted assets...... 8.00% 10.00% 12.25% 12.26%
20
* * * * *
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 from those contemplated by these forward-looking statements.
Consequently, all of the forward-looking statements made in this report are
qualified by these cautionary statements and there can be no assurance that the
actual results or developments anticipated by the Company will be realized or,
even if substantially realized, that they will have the expected consequences to
or effects on the Company and its business or operations. Forward-looking
statements made in this report speak as of the date hereof. The Company
undertakes no obligation to update or revise any forward-looking statement made
in this report.
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
(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 12, 1999 By: /s/ Dwight L. Wilson
----------------- ------------------------------
Dwight L. Wilson
Senior Vice President,
Treasurer and Chief Financial Officer
23