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, 2001
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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
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
7021 Greenleaf Avenue, Whittier, California 90602
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(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 8, 2002: 5,243,652.
Quaker City Bancorp, Inc.
Index
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition (unaudited) as of
December 31, 2001 and June 30, 2001......................................................... 3
Consolidated Statements of Operations (unaudited) for the
Three and Six Months Ended December 31, 2001 and 2000....................................... 4
Consolidated Statements of Comprehensive Income (unaudited)
for the Three and Six Months Ended December 31, 2001 and 2000................................ 5
Consolidated Statements of Cash Flows (unaudited) for the
Six Months Ended December 31, 2001 and 2000.................................................. 6
Notes to Consolidated Financial Statements................................................... 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................... 22
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,
2001 2001
---- ----
Assets
Cash and due from banks........................................... $ 13,168 $ 12,952
Interest-bearing deposits......................................... 645 2,898
Federal funds sold and other short-term investments............... 3,400 900
Investment securities held-to-maturity............................ 5,954 13,252
Investment securities available-for-sale.......................... 34,883 25,549
Loans receivable, net............................................. 1,152,953 1,093,168
Loans receivable held-for-sale.................................... 4,593 4,556
Mortgage-backed securities held-to-maturity....................... 129,186 100,395
Mortgage-backed securities available-for-sale..................... 20,569 25,209
Real estate held for sale......................................... -- 6
Federal Home Loan Bank stock, at cost............................. 15,527 16,689
Office premises and equipment, net................................ 6,823 7,143
Accrued interest receivable and other assets...................... 11,962 10,840
---------- ----------
Total assets................................................. $1,399,663 $1,313,557
========== ==========
Liabilities and Stockholders' Equity
Deposits.......................................................... $ 965,869 $ 916,334
Federal Home Loan Bank advances................................... 300,850 276,150
Deferred tax liability............................................ 217 208
Accounts payable and accrued expenses............................. 7,232 6,354
Other liabilities................................................. 9,263 9,703
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Total liabilities............................................ 1,283,431 1,208,749
Stockholders' Equity:
Common stock, $.01 par value. Authorized 20,000,000 shares;
issued and outstanding 5,220,237 shares and 5,133,691 at
December 31, 2001 and June 30, 2001, respectively.............. 52 51
Additional paid-in capital........................................ 74,568 73,121
Accumulated other comprehensive income............................ 287 274
Retained earnings, substantially restricted....................... 41,998 32,156
Deferred compensation............................................. (673) (794)
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Total stockholders' equity................................... 116,232 104,808
---------- ----------
Total liabilities and stockholders' equity................... $1,399,663 $1,313,557
========== ==========
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,
2001 2000 2001 2000
---- ---- ---- ----
Interest income:
Loans receivable.......................................... $22,644 $22,615 $45,779 $44,414
Mortgage-backed securities................................ 2,087 1,845 4,114 3,701
Investment securities..................................... 501 563 1,105 1,125
Other..................................................... 254 415 540 769
------- ------- ------- -------
Total interest income................................ 25,486 25,438 51,538 50,009
------- ------- ------- -------
Interest expense:
Deposits.................................................. 8,478 10,876 18,331 21,306
Federal Home Loan Bank advances........................... 3,902 4,472 7,835 8,948
------- ------- ------- -------
Total interest expense............................... 12,380 15,348 26,166 30,254
------- ------- ------- -------
Net interest income before provision for loan losses...... 13,106 10,090 25,372 19,755
Provision for loan losses...................................... 200 300 200 600
------- ------- ------- -------
Net interest income after provision for loan losses....... 12,906 9,790 25,172 19,155
------- ------- ------- -------
Other income:
Deposit fees.............................................. 861 522 1,675 1,051
Loan service charges and fees............................. 562 458 1,078 962
Gain on sale of loans held-for-sale....................... 113 66 274 129
Commissions............................................... 247 222 482 429
Other..................................................... 12 27 25 88
------- ------- ------- -------
Total other income................................... 1,795 1,295 3,534 2,659
------- ------- ------- -------
Other expense:
Compensation and employee benefits........................ 3,176 2,635 6,390 5,397
Occupancy, net............................................ 721 767 1,446 1,497
Federal deposit insurance premiums........................ 100 91 200 179
Data processing........................................... 301 256 607 514
Advertising and promotional............................... 380 306 693 595
Consulting fees........................................... 213 159 355 326
Other general and administrative expense.................. 892 766 1,788 1,456
------- ------- ------- -------
Total general and administrative expense............. 5,783 4,980 11,479 9,964
Real estate operations, net............................... -- (17) -- (14)
Amortization of core deposit intangible................... 28 28 57 57
------- ------- ------- -------
Total other expense.................................. 5,811 4,991 11,536 10,007
------- ------- ------- -------
Earnings before income taxes............................. 8,890 6,094 17,170 11,807
Income taxes.................................................. 3,790 2,555 7,328 4,992
------- ------- ------- -------
Net earnings.................................................. $ 5,100 $ 3,539 $ 9,842 $ 6,815
======= ======= ======= =======
Basic earnings per share...................................... $ 1.01 $ 0.72 $ 1.96 $ 1.39
Diluted earnings per share.................................... $ 0.96 $ 0.68 $ 1.85 $ 1.32
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,
2001 2000 2001 2000
---- ---- ---- ----
Net earnings................................................. $5,100 $3,539 $9,842 $6,815
Other comprehensive income:
Unrealized holding gain (loss) on securities
available-for-sale arising during the period,
net of taxes.......................................... (163) 262 13 192
------ ------ ------ ------
Increase (decrease) in accumulated other comprehensive
income, net of tax.......................................... (163) 262 13 192
------ ------ ------ ------
Total comprehensive income......................... $4,937 $3,801 $9,855 $7,007
====== ====== ====== ======
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,
2001 2000
---- ----
Cash flows from operating activities:
Net earnings............................................................................ $ 9,842 $ 6,815
---------- ----------
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization....................................................... 26 226
Provision for loan losses........................................................... 200 600
Gain on sale of real estate held-for-sale........................................... -- (58)
Gain on sale of loans held-for-sale................................................. (274) (129)
Loans originated for sale........................................................... (27,537) (21,677)
Proceeds from sale of loans held-for-sale........................................... 27,580 27,862
Federal Home Loan Bank (FHLB) stock dividend received............................... (465) (538)
(Increase) decrease in accrued interest receivable and other assets................. (1,179) 907
Decrease in other liabilities....................................................... (440) (993)
Increase (decrease) in accounts payable and accrued expenses........................ 878 (475)
Other............................................................................... 1,060 392
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Total adjustments............................................................... (151) 6,117
---------- ----------
Net cash provided by operating activities....................................... 9,691 12,932
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Cash flows from investing activities:
Loans originated for investment......................................................... (143,272) (92,271)
Loans purchased for investment.......................................................... (71,910) (35,482)
Principal repayments on loans........................................................... 155,736 68,535
Purchases of investment securities available-for-sale................................... (9,419) --
Purchases of investment securities held-to-maturity..................................... (2,000) (3,944)
Maturities and principal repayments of investment securities held-to-maturity........... 9,313 2,225
Purchases of mortgage-backed securities available-for-sale.............................. -- (4,964)
Purchases of mortgage-backed securities held-to-maturity................................ (51,197) (7,926)
Principal repayments on mortgage-backed securities held-to-maturity..................... 22,285 7,845
Principal repayments on mortgage-backed securities available-for-sale................... 4,770 2,696
Proceeds from sale of real estate held-for-sale......................................... 6 200
Redemption of FHLB stock................................................................ 1,627 --
Investment in office premises and equipment............................................. (218) (485)
---------- ----------
Net cash used by investing activities........................................... (84,279) (63,571)
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Cash flows from financing activities:
Increase in deposits.................................................................... 49,535 45,356
Proceeds from funding of FHLB advances.................................................. 118,300 226,100
Repayments of FHLB advances............................................................. (93,600) (218,700)
Stock options exercised................................................................. 816 92
Repurchase of stock..................................................................... -- (356)
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Net cash provided by financing activities....................................... 75,051 52,492
---------- ----------
Increase (decrease) in cash and cash equivalents................................ 463 1,853
Cash and cash equivalents at beginning of period............................................ 16,750 14,067
---------- ----------
Cash and cash equivalents at end of period.................................................. $ 17,213 $ 15,920
========== ==========
6
Quaker City Bancorp, Inc.
Consolidated Statements of Cash Flows
(continued)
Unaudited
(In thousands)
Six Months Ended
December 31,
2001 2000
---- ----
Supplemental disclosures of cash flow information:
Interest paid (including interest credited)........................................... $27,380 $28,200
Cash paid for income taxes............................................................ 6,300 5,312
======= =======
Supplemental schedule of noncash investing and financing activities:
Additions to loans resulting from the sale of real estate acquired through
foreclosure........................................................................... $ -- $ 262
Additions to real estate acquired through foreclosure................................. -- 22
======= =======
See accompanying notes to consolidated financial statements.
7
Quaker City Bancorp, Inc.
Notes to Consolidated Financial Statements
1. The consolidated statements of financial condition as of December 31, 2001
and the related consolidated statements of operations and comprehensive
income for the three and six months ended December 31, 2001 and 2000 and
the related consolidated statements of cash flows for the six months ended
December 31, 2001 and 2000 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, 2001 and its results of operations and comprehensive income
for the three and six months ended December 31, 2001 and 2000 and cash
flows for the six months ended December 31, 2001 and 2000. 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 2002.
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, 2001.
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. Calculation of earnings per share can be found in
Exhibit 11.1 to this Quarterly Report on Form 10-Q.
3. The Company accounts for derivative instruments in accordance with
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," ("SFAS No. 133" ). A
derivative is considered either an asset or liability in the statement of
financial position and measured at fair value. If a derivative is
designated as a hedging instrument, the changes in fair value of the
derivative are either (a) recognized in earnings in the period of change
together with the offsetting gain or loss on the hedged item or (b)
reported as a component of other comprehensive income and subsequently
reclassified into earnings when the forecasted transaction affects
earnings. For a derivative not designated as a hedging instrument, changes
in fair value are recognized in earnings in the period of change. As of
December 31, 2001, the Company has approximately $1.6 million of
commitments to originate loans which will be held for sale and
approximately $1.5 million of loan sale commitments that qualify as
derivatives under SFAS No. 133. The fair value of such commitments
approximate zero at December 31, 2001.
8
4 In June 2001, the Financial Accounting Standards Board (FASB or the Board)
issued SFAS No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible
Assets." SFAS No. 142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS No.
142. SFAS No. 142 will also require that intangible assets with estimable
useful lives be amortized over their respective estimated useful lives to
their estimated residual values, and reviewed for impairment in accordance
with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," which supersedes FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of."
The Company is required to adopt the provisions of SFAS No. 142 effective
for the Company beginning July 1, 2002. As of December 31, 2001 the Company
has no assets classified as goodwill under the new pronouncement. However,
the Company does have core deposit premiums. Under the provisions of SFAS
No. 142, the Company expects to continue amortizing these intangible assets
over their estimated useful lives. The impact of the adoption of SFAS No.
142 is expected to be immaterial to the Company.
5. In June 2001 the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs would be capitalized as part of the carrying amount
of the long-lived asset and depreciated over the life of the asset. The
liability is accreted at the end of each period through charges to
operating expense. If the obligation is settled for other than the carrying
amount of the liability, the Company will recognize a gain or loss on
settlement. The provisions of SFAS No. 143 are effective for fiscal years
beginning after June 15, 2002. Management does not expect the
implementation of SFAS No. 143 to have a material impact on the Company's
consolidated financial statements.
6. In August, 2001, the FASB issued FASB Statement No. 144 ("SFAS No. 144"),
"Accounting for the Impairment or Disposal of Long-Lived Assets," which
addresses financial accounting and reporting for the impairment or disposal
of long-lived assets. While SFAS No. 144 supersedes FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," it retains many of the fundamental provisions of
that Statement. The statement is effective for fiscal years beginning after
December 15, 2001 and must be adopted as of the beginning of the fiscal
year. Management does not expect the implementation of SFAS No. 144 to have
a material impact on the Company's consolidated financial statements.
9
Quaker City Bancorp, Inc.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
GENERAL
Quaker City Bancorp, Inc., incorporated in Delaware, is primarily engaged in the
savings and loan business through its wholly owned subsidiary, Quaker City Bank
(the "Bank"). At December 31, 2001, the Bank operated seventeen retail banking
offices in southern California, including six "in-store" Wal-Mart branches.
Three new Wal-Mart in-store retail branches were opened at the end of the month
of January 2002, in the communities of Huntington Beach, Lancaster and Palmdale
bringing the number of Wal-Mart branch offices to nine and our total retail
banking branches to twenty. The Bank is scheduled to open eight additional
in-store Wal-Mart branches within the next two fiscal years, bringing its total
to seventeen in-store Wal-Mart branches. Wal-Mart has entered into an agreement
with another financial institution for the opening of additional in-store
branches throughout the United States. It is not known whether the Bank will
open any additional branches in Wal-Mart stores other than the seventeen
currently under agreement. The Bank 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 real estate mortgages and
mortgage-backed securities ("MBS").
RESULTS OF OPERATIONS
Net Earnings The Company recorded net earnings of $5.1 million, $0.96 per
- ------------
diluted share for the quarter ended December 31, 2001. This compares to net
earnings of $3.5 million, $0.68 per diluted share for the same quarter last
year. The Company recorded net earnings of $9.8 million, $1.85 per diluted share
for the six months ended December 31, 2001. This compares to net earnings of
$6.8 million, $1.32 per diluted share for the same period last year. The
increase in net earnings for the three and six months ended December 31, 2001 as
compared to December 31, 2000 is primarily a result of an increase in net
interest income as discussed below.
Interest Income Interest income amounted to $25.5 million for the quarter ended
- ---------------
December 31, 2001 as compared to $25.4 million for the quarter ended December
31, 2000. Interest income amounted to $51.5 million for the six months ended
December 31, 200l as compared to $50.0 million for the six months ended December
31, 2000. The slight increase in interest income is primarily a result of a
larger earning asset base, which more than offset the decline in the yield on
10
earning assets for both the quarter and six months periods ended December 31,
2001. Average earning assets for the current quarter increased to $1.346 billion
compared to $1.208 billion for the same period last year, a 11.4% increase.
Average earning assets for the six months ended December 31, 2001 increased to
$1.325 billion compared to $1.200 billion for the same period last year, a 10.4%
increase. The yield on earning assets was 7.57% for the quarter ended December
31, 2001 as compared to 8.43% for the quarter ended December 31, 2000. The yield
on earning assets was 7.78% for the six months ended December 31, 2001 as
compared to 8.34% for the six months ended December 31, 2000. Downward pressure
on interest rates has resulted in the repricing of adjustable rate loans,
increased loan payoffs, and loan originations and refinances funded at record
low interest rates.
Interest Expense Interest expense for the quarter ended December 31, 2001 was
- ----------------
$12.4 million, compared to $15.3 million for the same quarter in the previous
year. Interest expense for the six months ended December 31, 2001 was $26.2
million, compared to $30.3 million for the same period in the previous year. The
decrease in interest expense for the three months ended December 31, 2001 is
primarily a result of a decrease in the cost of interest-bearing liabilities
during the period. The average cost of funds was 4.09% for the quarter ended
December 31, 2001 as compared to 5.56% for the quarter ended December 31, 2000,
a decrease of 147 basis points or 26.4% over the comparable period last year.
The average cost of funds was 4.37% for the six months ended December 31, 2001
as compared to 5.51% for the six months ended December 31, 2000, a decrease of
114 basis points or 20.7% over the comparable period last year.
Net Interest Income Before Provision for Loan Losses Net interest income before
- ----------------------------------------------------
provision for loan losses for the quarter ended December 31, 2001 amounted to
$13.1 million compared to $10.1 million for the same period last year. Net
interest income before provision for loan losses for the six months ended
December 31, 2001 amounted to $25.4 million compared to $19.8 million for the
same period last year. The net interest margin for the three months ended
December 31, 2001 was 3.89% compared to 3.34% for the same period last year. The
net interest margin for the six months ended December 31, 2001 was 3.83%
compared to 3.29% for the same period last year. For comparison purposes, the
net interest margin for the three months ended September 30, 2001 was 3.77%.
Approximately $300.0 million of the Bank's adjustable rate loans hit floor rates
during the first quarter of fiscal 2002. This together with the reduction in the
cost of funds, and the lagging loan pricing indices contributed to the expansion
of the net interest margin in the second quarter of fiscal 2002.
11
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,
2001 2000 2001 2000
---- ---- ---- ----
Yield on interest-earning assets.......... 7.57% 8.43% 7.78% 8.34%
Cost of interest-bearing liabilities...... 4.09% 5.56% 4.37% 5.51%
----- ----- ----- -----
Interest rate spread (1).................. 3.48% 2.87% 3.41% 2.83%
===== ===== ===== =====
Net interest margin (2)................... 3.89% 3.34% 3.83% 3.29%
===== ===== ===== =====
(1) The interest rate spread represents the difference between the
weighted-average yield on interest-earning assets and the weighted average cost
of interest-bearing liabilities.
(2) The net interest margin represents net interest income as a percentage of
average interest-earning assets.
Provision for Loan Losses The Company maintains valuation allowances for losses
- -------------------------
on loans and real estate that the Company's management believes to be inherent
in those portfolios. The Company's management evaluates the adequacy of the
level of the loss allowance quarterly as a function of its internal asset review
process.
The Company's Internal Asset Review Committee meets monthly to review and
determine asset classifications and to recommend any changes to the asset
valuation allowance. This Committee is comprised of the Senior Loan Servicing
Officer (Chairperson), Chief Executive Officer, Chief Financial Officer, Senior
Income Property Lending Officer, Senior Single Family Lending Officer, Assistant
Treasurer, Controller, and Internal Auditors of the Company. The Chairperson of
the Internal Asset Review Committee reports to the Board of Director's Loan
Committee regarding asset quality and the adequacy of valuation allowances.
The Company's management considers various factors when assessing the adequacy
of the allowance for loan losses including risk characteristics inherent in the
collateral types, asset classifications, estimated collateral values, local and
national economic conditions, historical loan loss experience, and the Company's
underwriting policies.
The Company's internal asset review system and loss allowance methodology are
designed to provide for timely identification of problem assets and recognition
of losses. The current asset monitoring process includes the use of asset
classification to segregate the assets, primarily real estate loans, into types
of loans. Currently our type classifications are one-to-four family loans,
multifamily loans, commercial and land loans, and other loans.
The allowance for loan losses consists of three elements: (i) specific valuation
allowances, (ii) general valuations allowances based on historical loan loss
experience and current trends, and (iii) allowance adjustments based on general
economic conditions and other risk factors in the
12
Company's individual markets.
Specific Valuation Allowances. A specific valuation allowance for losses on a
- -----------------------------
loan is established when management determines the loan to be impaired and the
loss can be reasonably estimated. Generally, the Company's loans are collateral
dependent, therefore, specific reserves would be established based upon the
value of the underlying collateral. To comply with this policy, management has
established a monitoring system that requires an annual review of real estate
loans on commercial properties with balances in excess of $500,000 and for
multifamily loans in excess of $750,000. In addition, all assets considered to
be adversely classified or criticized are reviewed monthly for impairment. The
annual review process requires an analysis of current operating statements, an
evaluation of the property's current and past performance, an evaluation of the
borrower's ability to repay, and an evaluation of the overall condition of the
collateral. Based upon the results of the review, a new appraisal may be
required.
General Valuation Allowances. These allowances relate to assets with no
- ----------------------------
well-defined deficiencies or weaknesses (i.e., assets are not impaired) and take
into consideration losses that are inherent within the portfolio but have not
yet been realized. General valuation allowances are determined by applying
factors that include the mix of loan products within the portfolio, any change
in underwriting standards, past loss experience and general economic conditions
and other risk factors. Past loss experience within homogeneous loan categories
is analyzed annually. The Company may revise general valuation allowance factors
whenever necessary in order to address improving or deteriorating credit quality
trends or specific risks associated with a given loan category.
General Economic Conditions and Other Risk Factors. The Company considers
- --------------------------------------------------
general economic conditions and other risk factors when setting valuation
allowances. These factors are based on local marketplace conditions and/or
events that could affect loan repayment. The assessment of general economic
conditions inherently involves a higher degree of uncertainty as it requires
management to anticipate the impact that economic trends, legislative actions or
other unique market and/or portfolio issues have on estimated credit losses. For
example, in assessing economic risks in the marketplace, management considers
local unemployment trends, real estate absorption rates, expansion and
contraction plans of major employers, and other similar indicators.
Consideration of other risk factors typically includes recent loss experience in
specific portfolio segments, trends in loan quality, concentrations of credit
risk together with any internal administrative risk factors. These risk factors
are carefully reviewed by management and are revised as conditions indicate.
The Company has significantly increased its commercial and industrial real
estate loan portfolio in recent years to a level of 22.16% of total gross loans
at December 31, 2001, compared to 21.55% at June 30, 2001. Both because the size
of the commercial real estate loan portfolio has increased significantly and
most of the loans comprising the portfolio are unseasoned, having been
originated within the last four fiscal years, the Company's past loss experience
with respect to its commercial real estate loan portfolio may not be
representative of the risk of loss in such portfolio in the future.
13
Multifamily and commercial real estate are generally considered to involve a
higher degree of credit risk and to be more vulnerable to adverse conditions in
the real estate market and to deteriorating economic conditions, particularly
changes in interest rates, than one-to-four family residential mortgage loans.
These loans typically involve higher loan principal amounts and the repayment of
such loans generally depend on the income produced by the operation or sale of
the property being sufficient to cover operating expenses and debt service. In
addition, multifamily and commercial real estate values tend to be more cyclical
and, while the southern California real estate market remained strong in 2001,
recessionary economic conditions of the type that prevailed in prior years in
the Company's lending market area tend to result in higher vacancy and reduced
rental rates and net operating incomes from multifamily and commercial real
estate properties.
The following table sets forth the Company's allowance for loan losses to total
loans and the percentage of loans to total loans in each of the loan types
listed:
At December 31, 2001 At June 30, 2001
---------------------------------------------- ----------------------------------------------
(In thousands)
Percentage Percentage Percentage
Percentage of of Loans of of Loans
Allowance to in Each Allowance in Each
Total Category to to Total Category to
Amount Allowance Total Loans Amount Allowance Total Loans
------ --------- ----------- ------ --------- -----------
One-to-four family....... $1,285 11.53% 29.00% $1,443 13.18% 28.01%
Multifamily.............. 6,012 53.95 48.37 5,883 53.76 49.47
Commercial & Land........ 3,720 33.39 22.02 3,475 31.76 21.71
Other.................... 126 1.13 0.61 142 1.30 0.81
------- ------- ------- ------- ------- -------
Total allowance for
loan losses............. $11,143 100.00% 100.00% $10,943 100.00% 100.00%
======= ======= ======= ======= ======= =======
The Company recorded a $200,000 provision for loan losses for the three and six
months ended December 31, 2001 compared to $300,000 and $600,000 for the same
period in the prior year. Management recorded a $200,000 provision in the second
quarter of Fiscal 2002 as a result of loan portfolio growth during the period.
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
14
the Company to increase the allowance for loan losses based on their judgments
of the information available at the time of their examination. Legislation has
been introduced in Congress that proposes to reform the federal deposit
insurance system. Among the changes proposed are: (1) merging the Bank Insurance
Fund (BIF) and the Savings Association Insurance Fund (SAIF); (2) increasing the
current coverage limit for insured deposits to $130,000 and indexing future
coverage limits to inflation; and (3) removing certain existing provisions that
require the FDIC to levy deposit insurance assessments under specified
circumstances. The FDIC recently announced that, because of the existing law and
a decreasing federal reserve to deposit ratio, it may have to levy deposit
assessments of 23 b.p. on BIF member institutions before the end of 2002; no
assessments have been assessed for over six years. The Company is a SAIF member
institution. At this time, it is uncertain what actions the FDIC may take with
respect to assessments for BIF and SAIF member institutions. It is also
uncertain whether deposit insurance legislation will be enacted as proposed, and
if legislation is enacted, what effect, if any, such legislation may have on the
Company.
The following is a summary of the activity in the allowance for loan losses:
At or for the At or for the
Three Months Ended Six Months Ended
December 31, December 31, December 31, December 31,
2001 2000 2001 2000
---- ---- ---- ----
(In thousands)
Balance at beginning of period.... $10,943 $10,461 $10,943 $10,161
Provision for loan losses......... 200 300 200 600
Charge-offs....................... -- -- -- --
Recoveries........................ -- -- -- --
------- ------- ------- -------
Balance at end of period.......... $11,143 $10,761 $11,143 $10,761
======= ======= ======= =======
The specific allowance for loan and real estate losses was $94,000 at December
31, 2001 as compared to $252,000 at December 31, 2000. The specific allowance
declined due to increased real estate values in southern California.
Other Income Other income for the three months ended December 31, 2001 was $1.8
- ------------
million as compared to $1.3 million for the same period last year, an increase
of 38.5%. Other income for the six months ended December 31, 2001 was $3.5
million compared to $2.7 million for the same period last year. This was
primarily the result of increased deposit fee income related to checking
accounts, up 59.4% from the same period last year. The Company has emphasized
checking account growth through marketing during the past several years.
15
Other Expense Other expense for the three months ended December 31, 2001
- -------------
increased to $5.8 million compared to $5.0 million for the same period last
year. Other expense for the six months ended December 31, 2001 was $11.5 million
as compared to $10.0 million for the same period last year. Other expense for
the three and six months ended December 31, 2001 increased from the same period
last year, as a result of compensation expense related to the ESOP and expenses
related to branch network expansion. As shares are released from the ESOP,
compensation expense is recognized to the extent that fair value of the shares
exceeds book value of the shares. The weighted average market price of the stock
for the periods ending December 31, 2001 and 2000 were $29.96 and $18.77,
respectively. The efficiency ratio for the quarter ended December 31, 2001
improved to 38.81% compared to 45.45% 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 42.63% and 41.93% for the
- ------------
quarters ended December 31, 2001 and 2000, respectively. The Company's effective
tax rates were 42.68% and 42.28% for the six months ended December 31, 2001 and
2000, respectively. The effective tax rates were comparable to the applicable
statutory rates in effect.
FINANCIAL CONDITION
Total stockholders' equity for the Company was $116.2 million at December 31,
2001, compared to $104.8 million at June 30, 2001. Consolidated assets totaled
$1.40 billion at December 31, 2001, an increase of $86.1 million compared to
June 30, 2001.
Pursuant to plans to repurchase Company stock, the Company may acquire up to
250,000 additional shares under the current Board authorization. No shares have
been repurchased by the Company, as of February 8, 2002, during Fiscal 2002.
16
Total loans receivable (including loans receivable held-for-sale) amounted to
$1.16 billion at December 31, 2001, compared to $1.10 billion at June 30, 2001.
The following table presents loans receivable at the dates indicated:
At December 31, At June 30,
2001 2001
---- ----
(In millions)
One-to-four family...................................... $340.1 $311.9
Multifamily............................................. 567.4 550.9
Commercial and land..................................... 258.3 241.7
Other................................................... 7.2 9.0
Unamortized discounts................................... (4.3) (4.9)
Allowance for loan losses............................... (11.1) (10.9)
-------- --------
Total.......................................... $1,157.6 $1,097.7
======== ========
Loan originations totaled $86.2 million and loan purchases totaled $46.9 million
for the quarter ended December 31, 2001, compared to loan originations of $49.2
million and loan purchases of $29.5 million for the quarter ended December 31,
2000. Loan originations totaled $170.8 million and loan purchases totaled $71.9
million for the six months ended December 31, 2001, compared to loan
originations of $113.9 million and loan purchases of $35.5 million for the six
months ended December 31, 2000.
Loan originations were comprised of the following:
For the Three Months Ended For the Six Months Ended
December 31, December 31, December 31, December 31,
2001 2000 2001 2000
---- ---- ---- ----
(In millions)
One-to-four family.................. $20.8 $6.7 $37.6 $14.4
Multifamily......................... 51.8 29.8 100.7 65.4
Commercial and land................. 13.6 12.5 32.2 33.9
Other............................... -- 0.2 0.3 0.2
----- ----- ------ ------
Total loans originated........... $86.2 $49.2 $170.8 $113.9
===== ===== ====== ======
17
Loan purchases were comprised of the following:
For the Three Months Ended For the Six Months Ended
December 31, December 31, December 31, December 31,
2001 2000 2001 2000
---- ---- ---- ----
(In millions)
One-to-four family..................... $46.6 $13.1 $68.2 $13.1
Multifamily............................ 0.2 1.5 1.9 7.5
Commercial and land.................... 0.1 14.9 1.8 14.9
----- ----- ----- -----
Total loans purchased............. $46.9 $29.5 $71.9 $35.5
===== ===== ===== =====
The increase in loan production for the three and six months ended December 31,
2001 as compared to the same period in the previous year is primarily a result
of an increase in one-to-four family and multifamily loan originations and
increased refinances due to the lower interest rate environment, as well as an
increase in one-to-four family loan purchases. At present, the Company expects
to continue its focus on one-to-four family and multifamily lending during the
current fiscal year.
MBS held to maturity totaled $129.2 million at December 31, 2001, compared to
$100.4 million at June 30, 2001. Approximately $51.2 million of purchases were
off-set by $22.3 million in amortization and pay-offs during the six month
period. MBS available for sale amounted to $20.6 million at December 31, 2001
compared to $25.2 million at June 30, 2001.
CAPITAL RESOURCES AND LIQUIDITY
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 increase in
FHLB advances were $49.3 and $24.7 million for the three and six months ended
December 31, 2001. Deposits increased by $12.8 and $49.5 million for the three
and six months ended December 31, 2001. In addition, while the majority of the
Bank's deposits are retail in nature, the Bank has accepted $65.0 million in
time deposits from a political subdivision. The Bank considers these funds to be
wholesale deposits and an alternative borrowing source rather than a customer
relationship and their levels are determined by management's decision as to the
most economic funding sources.
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 $85.8 million and
$35.2 million for the three months ended December 31, 2001 and 2000,
respectively. Principal repayments on loans were $155.7 million and $68.5
million for the
18
six months ended December 31, 2001 and 2000, respectively. With continued
downward pressure on interest rates, loans are being paid off more rapidly than
in the previous reporting period. This trend is expected to continue into the
next fiscal quarter.
Proceeds from loan sales amounted to $8.0 million for the quarter ended December
31, 2001 as compared to $14.8 million for the quarter ended December 31, 2000.
Proceeds from loan sales amounted to $27.6 million for the six months ended
December 31, 2001 as compared to $27.9 million for the same period ended
December 31, 2000. In October of 2001, the Company began holding most 30 and 15
year fixed-rate one-to-four family loans, as investment alternatives in the
economic environment during the first quarter of Fiscal 2002 were less
advantageous. However, in November 2001, the Company resumed the sale of 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 it has originated that meet predefined criteria. Loans serviced
for others decreased to $293.6 million at December 31, 2001, from $312.0 million
at June 30, 2001, primarily due to increased loan payoffs.
The Financial Regulatory Relief and Economic Efficiency Act of 2000 repealed the
statutory liquidity requirement for savings associations, citing the requirement
as unnecessary. In light of this action, the OTS repealed its liquidity
regulations, with the following exceptions. Savings associations must continue
to maintain sufficient liquidity to ensure safe and sound operation; the
appropriate level of liquidity will vary depending on the activities in which
the savings association engages.
The repeal of the OTS' liquidity regulations was effected as an interim rule
with request for comments. The comment period expired May 14, 2001 and the OTS
adopted the interim rule as a final rule on July 18, 2001. Management does not
believe this rule change will have any adverse impact on the Bank's operations.
Sources of capital and liquidity for the Company on a stand alone basis include
distributions from the Bank. Dividends and other capital distributions from the
Bank are subject to regulatory restrictions.
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,
2001 2001 2000
---- ---- ----
(Dollars in thousands)
Nonaccrual loans (1):
Real estate loans:
One-to-four family.......................................... $2,189 $2,440 $2,698
Multifamily................................................. 585 707 525
Commercial and land......................................... -- -- --
Consumer.................................................... 108 35 45
------ ------ ------
Total nonaccrual loans (1).................................. 2,882 3,182 3,268
Troubled debt restructured loans........................................ -- -- --
------ ------ ------
Total nonperforming loans....................................... 2,882 3,182 3,268
Real estate acquired through foreclosure................................ -- 6 264
------ ------ ------
Total nonperforming assets...................................... $2,882 $3,188 $3,532
====== ====== ======
Nonperforming loans as a percentage of gross loans (2).................. 0.25% 0.29% 0.30%
Nonperforming assets as a percentage of total assets (3)................ 0.21% 0.24% 0.28%
Total allowance for loan losses
as a percentage of gross loans...................................... 0.95% 0.98% 1.00%
Total allowance for loan losses as a percentage of total
nonperforming loans................................................. 386.64% 343.90% 329.28%
Total allowance as a percentage of total
nonperforming assets (4)........................................... 386.64% 343.26% 304.67%
(1) Nonaccrual loans are net of specific allowances of $11,000, $0 and $18,000
at December 31, 2001, June 30, 2001 and December 31, 2000, respectively.
(2) Nonperforming loans are net of specific allowances and include nonaccrual
and troubled debt restructured loans. Gross loans include loans held for
sale.
(3) Nonperforming assets include nonperforming loans and REO.
(4) Total allowance includes loan and REO 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. Nonperforming loans are reported net of specific allowances.
Nonperforming assets are defined as nonperforming loans and real estate acquired
through foreclosure.
Nonperforming assets decreased to $2.9 million, 0.21% of total assets at
December 31, 2001,
20
compared to $3.2 million, 0.24% of total assets at June 30, 2001. Classified
loans increased to $9.6 million at December 31, 2001, compared to $7.6 million
at June 30, 2001. Included in classified loans at December 31, 2001 are two
bankruptcies, totaling $1.1 million that are performing in compliance with the
original loan terms and two loans that defaulted in the second quarter of fiscal
2002, totaling $2.3 million which were also included in nonperforming assets at
December 31, 2001.
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 on 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 one-to-four family loans with principal balances
of less than $300,000, commercial properties with balances of less than $500,000
and multifamily loans with balances of less than $750,000.
Factors considered as part of the periodic loan review process to determine
whether a loan is impaired, as defined under SFAS 114, "Accounting by Creditors
for Impairment of a Loan," and as amended by SFAS 118, "Accounting by Creditors
for Impairment of a Loan-Income Recognition and Disclosures," address both the
amount the Company believes is probable that it will collect and the timing of
such collection. As part of the Company's loan review process the Company
considers such factors as the ability of the borrower to continue to meet the
debt service requirements, assessments of other sources of repayment, the fair
value of any collateral and the Company's prior history in dealing with the
particular type of loan involved. In evaluating whether a loan is considered
impaired, insignificant delays (less than twelve months) in the absence of other
facts and circumstances would not alone lead to the conclusion that a loan was
impaired. At December 31, 2001, the Company had a gross investment in impaired
loans of $364,000 for which specific valuation allowances of $94,000 had been
established.
During the three and six months ended December 31, 2001, the Company's average
investment in impaired loans was $482,000 and $676,000, respectively. For the
three and six months ended December 31, 2000, the Company's average investment
in impaired loans was $1.3 million and $1.5 million, respectively. For the three
and six months ended December 31, 2001, income recorded on impaired loans
totaled $10,000 and $28,000, substantially all of which was recorded in
accordance with the policy for non-accrual loans. 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. One impaired
loan, with a balance of $28,000, was not performing in accordance with it's
contractual terms at December 31, 2001, and has been included in nonaccrual
loans, net of specific reserves of $11,000, at that date.
21
REGULATORY CAPITAL
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA"), and implementing OTS capital regulations include three separate
minimum capital requirements for financial institutions subject to OTS
supervision. First, the tangible capital requirement mandates that the Bank's
stockholders' 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.
The Bank was in compliance with all capital requirements in effect at December
31, 2001, 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 Bank at the dates indicated:
FDICIA
FIRREA "Well-Capitalized" Actual Actual
Regulatory Capital Ratios for Quaker City Minimum Minimum at December 31, at June 30,
Bank Requirement Requirement 2001 2001
- ---- ----------- ----------- ---- ----
Tangible capital.............................. 1.50% N/A 8.09% 7.81%
Core capital to adjusted total assets......... 4.00% 5.00% 8.09% 7.81%
Core capital to risk-weighted assets.......... 4.00% 6.00% 12.07% 11.72%
Total capital to risk-weighted assets......... 8.00% 10.00% 13.25% 12.96%
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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. The Company's average interest
sensitive assets totaled approximately $1.32 billion for the six months ended
December 31, 2001. Average interest sensitive liabilities totaled approximately
$1.20 billion at December 31, 2001. The composition of the Company's financial
instruments subject to market risk has not changed materially since June 30,
2001.
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;
and (vi) 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 or 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.
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
20, 2001, the following were approved:
Election of the following nominees as directors of the Company:
(1) Alfred J. Gobar was elected by a vote of 4,767,861 for,
none against, with 32,466 abstentions.
(2) Frederic R. McGill was elected by a vote of 4,586,257 for,
none against, with 214,070 abstentions.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits -
11.1 Computation of Earnings per Share
(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 14, 2002 By: /s/ Dwight L. Wilson
----------------- --------------------
Dwight L. Wilson
Senior Vice President,
Treasurer and Chief Financial Officer
25