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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended June 30, 2000
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission File Number 0-22528
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QUAKER CITY BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4444221
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7021 Greenleaf Avenue 90602
Whittier, California (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (562) 907-2200
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all 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
such filing requirements for the past 90 days.
[X] Yes [_] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the average bid and asked price of its Common Stock,
$.01 par value, on September 21, 2000, on the Nasdaq National Market System
was approximately $75,830,000.
At September 21, 2000, 5,096,077 shares of the Registrant's Common Stock
were outstanding.
Documents Incorporated by Reference
Portions of the Registrant's Proxy Statement to be filed with the Securities
and Exchange Commission in connection with the Annual Meeting of Stockholders
to be held November 15, 2000 are incorporated by reference in Part III hereof.
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TABLE OF CONTENTS
Page
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PART I
ITEM 1. BUSINESS..................................................... 1
General...................................................... 1
Lending Activities........................................... 3
Delinquencies and Classification of Assets................... 11
Nonperforming Assets and Restructured Loans.................. 13
Impaired Loans............................................... 15
Allowances for Loan and Real Estate Losses................... 15
Investment Activities........................................ 19
Sources of Funds............................................. 20
Subsidiary Activities........................................ 22
Competition.................................................. 23
Personnel.................................................... 23
Federal Taxation............................................. 23
State and Local Taxation..................................... 25
Environmental Regulation..................................... 25
Regulation and Supervision................................... 26
General..................................................... 26
Activities Restrictions..................................... 26
Deposit Insurance........................................... 27
Regulatory Capital Requirements............................. 27
Prompt Corrective Action Requirements....................... 29
Enforcement................................................. 29
Savings and Loan Holding Company Regulation................. 30
Classification of Assets.................................... 32
Community Reinvestment Act.................................. 33
Federal Home Loan Bank System............................... 33
Required Liquidity.......................................... 33
Federal Reserve System...................................... 34
Financial Modernization Legislation......................... 34
ITEM 2. PROPERTIES................................................... 36
ITEM 3. LEGAL PROCEEDINGS............................................ 37
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......... 37
ITEM 4A. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........... 37
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.......................................... 38
ITEM 6. SELECTED FINANCIAL DATA...................................... 40
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................... 42
General...................................................... 42
Results of Operations........................................ 42
Financial Condition.......................................... 44
Capital Resources and Liquidity.............................. 45
Asset/Liability Management................................... 47
Average Balance Sheet........................................ 51
Year 2000.................................................... 53
Impact of Inflation and Changing Prices...................... 54
Impact of New Accounting Standards........................... 54
Page
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK... 54
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................. F-1
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE..................................... II-1
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........... II-1
ITEM 11. EXECUTIVE COMPENSATION....................................... II-1
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................... II-1
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............... II-1
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.................................................. II-1
SIGNATURES................................................... II-7
This Annual Report on Form 10-K 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 Quaker City Bancorp, Inc. (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 mortgage-backed securities; (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
(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.
PART I
ITEM 1. BUSINESS
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"). The Company was organized on September 13, 1993, for the
purpose of acquiring all of the capital stock of the Bank issued in the
conversion of the Bank from mutual to stock form effective December 30, 1993.
The Bank was originally founded in 1920 as the Mutual Building and Loan
Association of Whittier, and in 1938 became a federally chartered mutual
savings and loan association. The Company's principal business is serving as
the holding company for the Bank. The executive offices of the Company are
located at 7021 Greenleaf Avenue, Whittier, California 90602, telephone number
(562) 907-2200.
The Bank currently operates fifteen retail full service branches in the
southern California communities of Whittier (2), La Habra (2), Brea,
Fullerton, La Mirada, Hacienda Heights, Anaheim Hills, Rowland Heights,
Lakewood, Los Angeles, Corona, Foothill Ranch and Placentia. Four of these
branches were opened in calendar year 2000 inside Wal-Mart stores. The Bank
also has plans to open at least two additional Wal-Mart "in-store" branches in
southern California during fiscal 2001.
The Company is a savings and loan holding company and as such is subject to
examination and regulation by the Office of Thrift Supervision ("OTS"). The
deposits of the Bank are insured by the Savings Association Insurance Fund
("SAIF") of the Federal Deposit Insurance Corporation (the "FDIC"). The Bank
is regulated by the Director of the OTS and the FDIC. The Bank is a member of
the Federal Home Loan Bank ("FHLB") of San Francisco, which is one of the 12
regional banks comprising the Federal Home Loan Bank System. The Bank is also
subject to certain regulations of the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board") with respect to
1
reserves required to be maintained against deposits and certain other matters.
See "--Regulation and Supervision--General."
The Bank's principal business has been and continues to be attracting retail
deposits from the general public in its primary deposit market area
surrounding its offices and investing those deposits, together with funds
generated from operations and borrowings. Through its wholly owned subsidiary,
Quaker City Financial Corporation ("QCFC"), the Company also engages in the
sale of insurance and investment products on an agency basis. See "--
Subsidiary Activities." The Company originates predominantly multifamily,
commercial real estate and one-to-four family loans and emphasizes multifamily
lending in low and moderate income communities, primarily in southern
California metropolitan areas. To a lesser extent, loans are also originated
and purchased in Central and Northern California. Under certain circumstances,
one-to-four family loans are purchased on loans secured by properties outside
the state of California.
Historically, the Company's principal business was the making of one-to-four
family and multifamily (five or more units) loans. In every year for which
data is presented in this report, i.e., 1996 through 2000, the Company's
multifamily loan portfolio has increased in total dollar amount and has
represented a significant portion of the Company's total loan portfolio. See
"--Lending Activities--Loan and MBS Portfolio Composition." Beginning
principally with the hiring announced in January 1998 of the income property
lending staff of another southern California financial institution, the
Company has increased its focus on commercial real estate lending. The Company
currently intends to continue its emphasis on multifamily and commercial real
estate lending, with their higher risk-adjusted rates of return, rather than
on lower yielding one-to-four family lending. At June 30, 2000, the Company's
gross loan portfolio (including loans held for sale) totaled $1.0 billion,
68.33% of which was secured by multifamily properties (approximately $505.4
million) and commercial real estate (approximately $196.5 million).
Both the multifamily and the commercial real estate loan portfolios have
grown at a significant rate during fiscal 2000. From June 30, 1999 to June 30,
2000 the net increase in the Company's multifamily portfolio was $113.8
million representing a 29.07% increase in the size of the portfolio. From June
30, 1999 to June 30, 2000, the net increase in the Company's commercial real
estate loan portfolio was $56.1 million, representing a 39.92% increase in the
size of the portfolio. At June 30, 2000, however, the $505.4 million
multifamily portfolio represented 49.20% of the Company's gross loans and the
$196.5 million commercial real estate portfolio represented 19.13% of the
Company's gross loans. As a percentage of gross loans, the multifamily
portfolio increased in size by 3.27% and the commercial real estate portfolio
increased in size by 2.65% from June 30, 1999 to June 30, 2000. See "--Lending
Activities--Multifamily Lending--Commercial Real Estate Lending."
In addition to originating loans to hold in portfolio, the Company also
originates loans for sale. The Company sold $48.9 million of loans in fiscal
2000. The Company also purchases loans for investment and for sale. During
fiscal 2000, the Company purchased $85.8 million in loans of which, $45.6
million were one-to-four family. Loans sold come from loans held in the
Company's portfolio designated as being held for sale or originated during the
most recent period and designated as held for sale. Historically, the Company
has generally retained the servicing rights on most loans sold, however, some
loans are sold servicing released. In addition, the Company invests in
securities issued by the U.S. Government and agencies thereof, mortgage-backed
securities ("MBS") and other permitted investments under applicable federal
laws and regulations. The Company's revenues are derived principally from
interest on its mortgage loans, and to a lesser extent, mortgage loan
servicing activities, and interest and dividends on its investment securities
and MBS.
The Company's primary sources of funds are deposits, borrowings from the
FHLB of San Francisco ("FHLB advances"), securities sold under agreements to
repurchase, principal and interest payments on loans and MBS and proceeds from
the sale of loans. At June 30, 2000, the
2
Company had deposits of approximately $808.2 million, including approximately
$183.6 million in certificates of deposit of $100,000 or more. The Company's
borrowings at June 30, 2000 included $290.3 million in FHLB advances. See "--
Sources of Funds."
For the year ended June 30, 2000, the Company reported net earnings of $11.8
million, $2.23 per share diluted. This compares to net earnings of $9.6
million, $1.70 per share diluted, and $6.6 million, $1.14 per share diluted,
for the years ended June 30, 1999 and 1998, respectively. The increase in
fiscal 2000 earnings over fiscal 1999 was primarily due to an increase in net
interest income partially offset by an increase in other expenses. The
increase in fiscal 1999 earnings over fiscal 1998 was also primarily due to an
increase in net interest income partially offset by an increase in other
expenses.
Total assets of the Company were $1.2 billion at June 30, 2000, an increase
of $188.5 million compared to June 30, 1999. The increase in assets was
primarily in loans, with commercial real estate loans increasing $56.1
million, multifamily loans increasing $113.8 million and one-to-four family
loans increasing $3.3 million. The asset growth was funded primarily by an
increase in deposits of $130.4 million and $55.6 million of FHLB advances.
Included in the increase of $130.4 million of deposits during fiscal 2000 is
$45.9 million of retail deposits purchased from another financial institution
and its branch office located in Rowland Heights, California. In addition,
while the vast majority of the Bank's deposits are retail in nature, the Bank
accepted $55 million in time deposits from a political subdivision during
fiscal 2000. 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
source. At June 30, 2000, the Company had total deposits of $808.2 million and
total FHLB advances of $290.3 million.
The southern California economy and real estate market in the Company's
primary lending area have continued to be strong. The Company's level of
nonperforming assets declined from June 30, 1999. The Company includes
nonaccrual loans, troubled debt restructured loans and real estate acquired
through foreclosure ("REO") in determining its level of nonperforming assets.
At June 30, 2000, the Company reported $4.4 million in nonperforming assets
compared to $7.5 million and $9.8 million at June 30, 1999 and 1998,
respectively. The Company recorded provisions for loan losses of $1.6 million
for the year ended June 30, 2000 compared to $1.7 million and $1.5 million for
the years ended June 30, 1999 and 1998, respectively. See "--Allowances for
Loan and Real Estate Losses" and "Management's Discussion and Analysis
("MD&A")--Results of Operations."
Lending Activities
Loan and MBS Portfolio Composition. Historically, the Company's principal
business was the making of one-to-four family and multifamily loans. In every
year for which data is presented in this report, i.e., 1996 through 2000, the
Company's multifamily loan portfolio has increased in total dollar amount and
has represented a significant portion of the Company's total loan portfolio.
Beginning principally with the hiring announced in January 1998 of the income
property lending staff of another southern California financial institution,
the Company has increased its focus on commercial real estate lending. The
Company currently intends to continue its emphasis on multifamily and
commercial real estate lending, with their higher risk-adjusted rates of
return, rather than on lower yielding one-to-four family lending. At June 30,
2000, the Company had $1.0 billion of gross loans outstanding, 68.33% of which
was secured by either multifamily properties or commercial real estate. Gross
loans outstanding at June 30, 2000 included $505.4 million of multifamily
loans, representing 49.20% of gross loans, $196.5 million of commercial real
estate loans, representing 19.13% of gross loans, and $315.7 million of one-
to-four family loans, representing 30.73% of gross loans. The remainder of
gross loans at June 30, 2000 consisted of $1.5 million of land loans, or 0.14%
of gross loans, and other loans of $8.2 million, or 0.80% of gross loans.
Included in these amounts at June 30, 2000 were $21.2 million of loans held
for sale, comprising 2.06% of gross loans.
3
The net increase in the Company's multifamily loans during fiscal 2000 was
$113.8 million, representing an increase of 29.07% in the multifamily loan
portfolio as compared to June 30, 1999. The net increase in the Company's
commercial real estate loans during fiscal 2000 was $56.1 million,
representing an increase of 39.92% in the commercial real estate loan
portfolio as compared to June 30, 1999. The net increase in the Company's one-
to-four family loans during fiscal 2000 was $3.3 million, representing an
increase of 1.05% in the one-to-four family loan portfolio as compared to
June 30, 1999. As a percentage of gross loans, multifamily loans increased by
3.27%, commercial loans increased by 2.65% and one-to-four family loans
decreased by 5.92% from June 30, 1999 to June 30, 2000. These percentage
changes in the composition of the gross mortgage loan portfolio are a result
of the relative growth of the multifamily and commercial real estate loan
portfolios and the Company's sale of approximately 40% of the one-to-four
family loans it originated during the 2000 fiscal year. The Company currently
intends to continue to focus on multifamily and commercial real estate
lending. During fiscal 2000, the Company purchased $85.8 million in loans of
which, $46.0 million were one-to-four family. The Company anticipates that the
purchase of one-to-four family loans will remain a focus of the Company in
fiscal 2001.
The Company invests in MBS, including securities guaranteed by the
Government National Mortgage Association ("GNMA"), Federal National Mortgage
Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC"). To
a limited extent the Company also invests in privately issued MBS which
typically have received a "AA" or "AAA" credit rating from at least one
nationally recognized rating service. The Company invests in both adjustable-
rate and fixed-rate MBS. In an effort to reduce the potential interest rate
risk inherent in fixed-rate assets, the Company purchases fixed-rate MBS with
a variety of coupon rates, maturities, and prices. Furthermore, the assets are
typically purchased with fixed-rate FHLB advances of various terms to maturity
primarily ranging from one month to five years in order to mitigate the
Company's exposure to changes in interest rates. The adjustable-rate MBS in
the Company's portfolio typically have life caps that will prevent the MBS
from further upward adjustments in rate should interest rates rise above the
cap limit. Prior to purchase, management considers the Company's overall
tolerance to interest rate risk and invests accordingly. At June 30, 2000, the
Company's MBS portfolio (including MBS available for sale) totaled
$109.9 million or 9.15% of total assets. The Company's MBS are comprised of
$81.8 million of agency securities, $1.5 million issued by other financial
institutions and $26.5 million in collateralized mortgage obligations
("CMO's"). Of the $26.5 million in CMO's 65.91% or $17.4 million are agency
guaranteed. For all years presented, the CMO's represent non-equity senior
interests in mortgage pass-through certificates and were of investment grade.
At June 30, 2000, $24.4 million in MBS were classified as available for sale.
4
The following table sets forth the composition of the Company's loan and MBS
portfolios in dollar amounts and percentages of the respective portfolio at
the dates indicated.
At June 30,
--------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---------------------- -------------------- ------------------- ------------------- --------------------
Percentage Percentage Percentage Percentage Percentage
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
---------- ---------- -------- ---------- -------- ---------- -------- ---------- -------- ----------
(Dollars in thousands)
Loans:
Residential:
One-to-four
units........... $ 315,689 30.73% $312,407 36.65% $279,862 39.26% $299,979 45.47% $303,273 48.54%
Multifamily..... 505,436 49.20 391,596 45.93 347,285 48.72 301,965 45.77 258,970 41.45
Commercial........ 196,506 19.13 140,439 16.48 77,810 10.92 55,331 8.39 60,822 9.74
Land.............. 1,456 0.14 344 0.04 348 0.05 1,352 0.21 1,038 0.17
Other............. 8,171 0.80 7,730 0.90 7,544 1.05 1,070 0.16 627 0.10
---------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Loans, gross.... 1,027,258 100.00% 852,516 100.00% 712,849 100.00% 659,697 100.00% 624,730 100.00%
====== ====== ====== ====== ======
Less:
Undisbursed loan
funds............. 320 684 579 441 378
Unamortized
discounts......... 752 1,078 2,170 2,404 2,864
Deferred loan
fees, net......... 4,138 3,852 3,612 3,493 3,093
Allowance for
loan losses....... 10,161 8,684 7,955 7,772 7,833
---------- -------- -------- -------- --------
Loans, net...... 1,011,887 838,218 698,533 645,587 610,562
Less:
Loans held for
sale:
One-to-four
units........... -- 353 1,043 623 1,455
Multifamily..... 11,173 7,234 6,464 -- 1,435
Commercial...... 10,031 9,441 -- -- --
Other........... 8 -- -- -- --
---------- -------- -------- -------- --------
Net loans held
for investment.. $ 990,675 $821,190 $691,026 $644,964 $607,672
========== ======== ======== ======== ========
Mortgage-backed
securities:
FNMA.............. $ 12,110 11.01% $ 5,509 5.51% $ 11,309 9.84% $ 13,240 17.87% $ 11,129 26.70%
FHLMC............. 5,171 4.70 399 0.40 8,272 7.20 1,298 1.75 1,697 4.07
GNMA.............. 64,474 58.62 61,858 61.91 52,306 45.52 33,577 45.32 7,885 18.92
Issued by other
financial
institutions...... 1,591 1.45 2,223 2.22 3,628 3.16 4,554 6.15 5,781 13.87
Collateralized
mortgage
obligations....... 26,648 24.22 29,939 29.96 39,391 34.28 21,423 28.91 15,185 36.44
---------- ------ -------- ------ -------- ------ -------- ------ -------- ------
109,994 100.00% 99,928 100.00% 114,906 100.00% 74,092 100.00% 41,677 100.00%
====== ====== ====== ====== ======
Plus (Less):
Unamortized
premium
(discount)........ (133) (67) 945 47 (502)
---------- -------- -------- -------- --------
Mortgage-backed
securities,
net............. 109,861 99,861 115,851 74,139 41,175
Less:
Mortgage-backed
securities
available for
sale.............. 24,404 15,783 8,274 -- --
---------- -------- -------- -------- --------
Net mortgage-
backed
securities held
to maturity..... 85,457 84,078 107,577 74,139 41,175
---------- -------- -------- -------- --------
Total net loans and
mortgage-backed
securities held for
investment or to
maturity........... $1,076,132 $905,268 $798,603 $719,103 $648,847
========== ======== ======== ======== ========
5
Loan Maturity. The following table shows the contractual maturity of the
Company's gross loans and MBS at June 30, 2000. The table includes loans held
for sale of $21.2 million and MBS available for sale of $24.4 million. The
table does not include estimated principal repayments. Actual principal
repayments on loans totaled $127.3 million, $145.6 million and $91.8
million for the years ended June 30, 2000, 1999 and 1998, respectively.
Principal repayments on MBS totaled $13.4 million, $25.0 million, and $29.6
million for the years ended June 30, 2000, 1999, and 1998, respectively.
At June 30, 2000
---------------------------------------------------------------------------
One- Total Mortgage-
to-Four Multi- Loans Backed
Family family Commercial Land Other Receivable Securities Total
-------- -------- ---------- ------ ------ ---------- ---------- ----------
(In thousands)
Amounts due:
One year or less....... $ 2,355 $ 1,819 $ 5,604 $ -- $ 344 $ 10,122 $ -- $ 10,122
-------- -------- -------- ------ ------ ---------- -------- ----------
After one year:
More than one year to
three years........... 1,176 14,305 5,778 -- -- 21,259 -- 21,259
More than three years
to five years......... 2,002 6,617 3,739 -- 15 12,373 -- 12,373
More than five years to
10 years.............. 18,132 86,025 114,425 -- 241 218,823 -- 218,823
More than 10 years to
20 years.............. 109,231 286,082 60,644 1,795 457,752 4,947 462,699
More than 20 years..... 182,793 110,588 6,316 1,456 5,776 306,929 105,047 411,976
-------- -------- -------- ------ ------ ---------- -------- ----------
Total due after one
year................. 313,334 503,617 190,902 1,456 7,827 1,017,136 109,994 1,127,130
-------- -------- -------- ------ ------ ---------- -------- ----------
Total amounts due..... $315,689 $505,436 $196,506 $1,456 $8,171 $1,027,258 $109,994 $1,137,252
======== ======== ======== ====== ====== ========== ======== ==========
The following table sets forth at June 30, 2000, the dollar amount of all
loans due after June 30, 2001, and whether such loans are fixed-rate or
adjustable rate mortgage ("ARM") loans.
At June 30, 2000
---------------------------------
Fixed Adjustable(1) Total
-------- ------------- ----------
(In thousands)
Real estate loans:
One-to-four family.......................... $132,335 $180,999 $ 313,334
Multifamily................................. 22,527 481,090 503,617
Commercial real estate...................... 36,213 154,689 190,902
Land........................................ -- 1,456 1,456
Other loans................................... 3,368 4,459 7,827
-------- -------- ----------
Total loans................................. $194,443 $822,693 $1,017,136
======== ======== ==========
- --------
(1) ARM loans include loans that adjust monthly, semiannually, annually or
once every five years. Five year ARM loans total $2.0 million one-to-four
family, $43.7 million multifamily and $79.3 million commercial real
estate.
Origination, Purchase, Sale and Servicing of Loans. The Company's mortgage
lending activities are conducted primarily through its executive and branch
offices. The Company originates both fixed- rate and ARM loans. Its ability to
originate ARM loans as opposed to fixed-rate loans is dependent upon the
relative customer demand, which is affected by the current and expected future
level of interest rates.
Additionally, the Company purchases or participates in loans originated by
other institutions. The determination to purchase loans is based upon the
Company's investment needs and market
6
opportunities. Subject to regulatory restrictions applicable to savings
associations, the Company's current loan policies allow all loan types to be
purchased. The determination to purchase specific loans or pools of loans is
subject to the Company's underwriting policies, which require consideration of
the financial condition of the borrower and the appraised value of the
property and, with respect to multifamily and commercial real estate loans,
the net operating income of the mortgaged property before debt service and
depreciation and the debt service coverage ratio (the ratio of net operating
income to debt service), among other factors. The Company has purchased loans
from independent parties in various transactions. During the year ended
June 30, 2000, of the $352.2 million of loans generated by the Company in
fiscal 2000 through origination or purchase, $85.8 million, or 24.35%, were
purchased. Of the $85.8 million of loans purchased during fiscal 2000, $28.1
million were multifamily loans, $11.7 million were commercial real estate
loans and $46.0 million were one-to-four family loans.
At origination or time of purchase, the Company designates loans as held for
investment or held for sale. Historically, loans held for sale have been sold
in the secondary market to FNMA, FHLMC and other investors. The Company
generally retains the servicing rights on most loans sold, however, certain
loans are sold servicing released. The determination to sell a specific loan
or pool of loans is made based upon the Company's investment needs, growth
objectives and market opportunities.
In an attempt to further minimize interest rate risk associated with fixed-
rate loans designated as held for sale, the Company may enter into commitments
with FNMA and other investors (known as forward commitments) to sell loans at
a future date at a specified price. The Company will then simultaneously
process and close the loans, thereby attempting to protect the price of loans
in process from interest rate fluctuations that may occur from application to
sale. There is risk involved in this forward commitment activity. In a
declining interest rate environment, borrowers may choose not to close loans,
but the Company would remain obligated to fulfill its forward commitments. The
inability of the Company to originate or acquire loans to fulfill these
commitments may result in the Company being required to pay non-delivery fees.
In an increasing interest rate environment, the Company is subject to interest
rate risk in the event its commitments to make loans to borrowers exceeds its
commitments to sell loans. At June 30, 2000, the Company had no forward
commitments with respect to fixed rate loans held for sale. The Company does
not intend to enter into forward commitments on ARM loans.
The Company sells loans and participations in loans with yield rates to the
investors based upon current market rates. Gain or loss is recognized to the
extent that the selling prices differ from the carrying value of the loans
sold based on the estimated relative fair values of the assets sold and any
retained interests, less any liabilities incurred. The assets obtained on sale
are generally loan servicing assets. Liabilities incurred in a sale may
include recourse obligations or servicing liabilities. At June 30, 2000, the
Company had originated mortgage servicing assets with a book value of $72,000.
In addition to retaining the servicing assets for originated loans, the
Company may also purchase mortgage servicing assets related to mortgage loans
originated by other institutions. The Company's current loan policies provide
that the aggregate amount of purchased mortgage servicing shall not exceed 75%
of the total loans in the Company's portfolio that are serviced for others. At
June 30, 2000, the Company had purchased mortgage servicing assets with a book
value of $197,000.
7
The following table sets forth activity in the Company's loan and MBS
portfolios for the periods indicated:
At or for the Year Ended
June 30,
------------------------------
2000 1999 1998
---------- -------- --------
(In thousands)
Gross loans:
Beginning balance............................. $ 852,516 $712,849 $659,697
Loans originated:
One-to-four family.......................... 25,836 63,016 36,227
Multifamily................................. 167,183 119,794 77,703
Commercial.................................. 72,839 87,259 21,208
Other....................................... 608 1,901 1,436
---------- -------- --------
Total loans originated...................... 266,466 271,970 136,574
Loans purchased............................. 85,752 78,075 48,112
Loans to facilitate the sale of REO......... -- 1,205 1,365
---------- -------- --------
Total...................................... 352,218 351,250 186,051
Less:
Transfer to REO............................. 1,362 3,286 6,239
Principal repayments........................ 127,343 145,612 91,846
Sales of loans.............................. 48,910 63,996 34,324
Other, net.................................. (139) (1,311) 490
---------- -------- --------
Ending balance................................ $1,027,258 $852,516 $712,849
========== ======== ========
Gross mortgage-backed securities:
Beginning balance............................. $ 99,928 $114,906 $ 74,092
Mortgage-backed securities purchased........ 23,506 70,624 71,767
Less:
Mortgage-backed securities sold............. -- 61,989 --
Principal repayments........................ 13,427 25,012 29,595
Other, net.................................. 13 (1,399) 1,358
---------- -------- --------
Ending balance................................ $ 109,994 $ 99,928 $114,906
========== ======== ========
Multifamily Lending. During the year ended June 30, 2000, the Company
originated $167.2 million of multifamily loans. The Company originates
multifamily mortgage loans generally secured by apartment buildings located in
southern California metropolitan areas. To a lesser extent multifamily loans
are also originated and purchased in Central and Northern California. In
originating a multifamily loan, the Company considers the qualifications of
the borrower as well as the securing property. Some of the foremost factors to
be considered are the net operating income of the mortgaged property before
debt service and depreciation, the debt service coverage ratio (the ratio of
net operating income to debt service) and the ratio of the loan amount to the
appraised value of the property. Pursuant to the Company's underwriting
policies, a multifamily loan generally may only be made in an amount up to 80%
of the appraised value of the underlying property. The Company also generally
requires a debt service coverage ratio of at least 110%. Properties securing a
loan are appraised by an independent appraiser and title insurance is required
on all loans. The average outstanding loan balance on multifamily loans at
June 30, 2000 was approximately $383,000, with the largest loan being
$4.8 million. The property collateralizing this loan is located in Chula
Vista, California and the loan was not classified at June 30, 2000. Declines
in the real estate values in the Company's primary lending area may result in
increases in the loan-to-value ratio on some multifamily mortgage loans
subsequent to origination.
8
When evaluating the qualifications of the borrower for a multifamily loan,
the Company considers the financial resources and income level of the
borrower, the borrower's experience in owning or managing similar property,
and the Company's lending experience with the borrower. The Company's
underwriting policies require that the borrower be able to demonstrate strong
management skills and the ability to maintain the property with current rental
income. The borrower should also present evidence of the ability to repay the
mortgage and a history of making mortgage payments on a timely basis. In
assessing the creditworthiness of the borrower, the Company generally reviews
the financial statements, employment and credit history of the borrower, as
well as other related documentation.
At June 30, 2000, the Company's multifamily loan portfolio had increased to
$505.4 million, or 49.20% of gross loans, from $391.6 million, or 45.93% of
gross loans, at June 30, 1999, an increase of $113.8 million. The multifamily
loan portfolio increased in total dollar amount during fiscal 2000 by 29.06%,
and as a percentage of gross loans by 3.27%. Of the $505.4 million multifamily
loans outstanding at June 30, 2000, 4.49% were fixed-rate loans and 95.51%
were ARM loans. Of the 95.51% of ARM loans, 9.06% or $43.7 million are tied to
a treasury bill based index that adjusts once every five years.
Multifamily loans 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.
Sometimes multifamily loans are made to groups of related borrowers, which
concentration could increase the Company's exposure should the circumstances
of one borrower negatively affect the ability of other related borrowers to
repay their loans in full on a timely basis. Recessionary economic conditions
tend to result in higher vacancy and reduced rental rates and net operating
incomes from multifamily residential properties. Of the Company's $139,000 of
charge-offs in fiscal 2000, none, were for multifamily loans. See "--
Allowances for Loan and Real Estate Losses."
Commercial Real Estate Lending. During fiscal 2000, the Company originated
$72.8 million of commercial real estate loans. The Company originates
commercial real estate loans that are generally secured by properties used for
business purposes such as small office buildings, multi-tenant industrial
properties or a combination of residential and retail facilities located
primarily in southern California. To a lesser extent, commercial real estate
loans are also originated and purchased in Central and Northern California.
The Company's underwriting procedures provide that commercial real estate
loans generally may be made in amounts up to 75% of the appraised value of the
property. These loans may be made with terms up to 30 years for ARM loans. The
Company's underwriting standards and procedures are similar to those
applicable to its multifamily loans, wherein the Company considers the net
operating income of the property and the borrower's expertise, credit history
and profitability. The Company has generally required that the properties
securing commercial real estate loans have debt service coverage ratios of at
least 110%. The average outstanding loan balance on commercial real estate
loans at June 30, 2000 was approximately $695,000. The largest commercial real
estate loan in the Company's portfolio, located in Huntington Beach,
California had an outstanding principal balance at June 30, 2000 of $3.4
million and the loan was not classified.
At June 30, 2000, the Company's commercial real estate loan portfolio had
increased to $196.5 million, or 19.13% of gross loans, from $140.4 million, or
16.48% of gross loans, at June 30, 1999, an increase of $56.1 million, or
2.65% of gross loans. This $56.1 million increase in the commercial real
estate loan portfolio during fiscal 2000 represents a 39.92% increase in the
total dollar amount of the commercial real estate portfolio. Of the $196.5
million commercial real estate loans outstanding at June 30, 2000, 19.30% were
fixed-rate loans and 80.70% were ARM loans. Of the 80.70% of ARM loans, 50.03%
or $79.3 million are tied to a treasury bill bond index that adjusts once
every five years.
9
Commercial real estate loans 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.
Sometimes commercial real estate loans are made to groups of related
borrowers, which concentration could increase the Company's exposure should
the circumstances of one borrower negatively affect the ability of other
related borrowers to repay their loans in full on a timely basis. Recessionary
economic conditions tend to result in higher vacancy and reduced rental rates
and net operating incomes from commercial properties. In addition, commercial
real estate values tend to be cyclical. Of the Company's $139,000 of charge-
offs in fiscal 2000, none were for commercial real estate loans. The Company
has significantly increased its commercial real estate loan portfolio during
the past two fiscal years. 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 two
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. See "--Allowances for Loan and Real
Estate Losses."
One-to-Four Family Lending. The Company originates both fixed-rate mortgage
loans and ARM loans secured by one-to-four family residences, including, to a
lesser extent, condominium and cooperative units with maturities up to 30
years. Originated loans are predominantly secured by property located in
southern California. Loan originations are generally obtained from existing or
past customers, members of the local communities and loan brokers. One-to-four
family loans are purchased with properties securing the loans located
throughout the state of California and in certain circumstances outside of
California. Included in one-to-four family loans are outstanding balances of
$19.3 million of adjustable rate home equity credit lines tied to the Wall
Street Prime index. These loans are generally secured by a first or second
trust deed, with maturities up to 25 years.
During the year ended June 30, 2000, the Company originated $25.8 million of
one-to-four family loans. The Company's policy is to originate one-to-four
family loans in amounts generally up to 80% of the lower of the appraised
value or the selling price of the property securing the loan and up to 95% of
the appraised value or selling price if private mortgage insurance is
obtained. Declines in the real estate values in the Company's lending areas
may result in increases in the loan-to-value ratio on some one-to-four family
loans subsequent to origination.
At June 30, 2000, the Company's one-to-four family loan portfolio had
increased to $315.7 million, or 30.73% of gross loans, from $312.4 million, or
36.65% of gross loans, at June 30, 1999, an increase of $3.3 million. Although
the one-to-four family loan portfolio increased in total dollar amount during
fiscal 2000 by 1.05%, it decreased as a percentage of gross loans by 5.92%.
During fiscal 2000 one-to-four family loans purchased were $46.0 million. Of
the $315.7 million one-to-four family loans outstanding at June 30, 2000,
42.64% were fixed-rate loans and 57.36% were ARM loans.
Certain Loan Terms. Since 1982, the Company has emphasized the origination
of ARM loans for retention in its portfolio. This practice has enabled the
Company to reduce its interest rate risk exposure by concentrating its loan
portfolio in assets with either shorter terms or more frequent repricing, or
both. At June 30, 2000, approximately 97.67% of the Company's multifamily,
87.76% of its commercial real estate and 57.36% of its one-to-four family
loans were ARM loans. The Company also originates fixed-rate loans in response
to customer demand. The type of loans the Company originates is dependent upon
the relative customer demand for fixed-rate or ARM loans, which in turn is
affected by the current and expected level of interest rates. Historically,
the Company has sold fixed-rate loans in the secondary market to FNMA, FHLMC
and others. During fiscal 2000, the Company retained certain fixed-rate loans
in its portfolio.
10
The interest rates for approximately 43% of the Company's ARM loans in
portfolio are indexed to the 11th District Cost of Funds Index ("COFI"). The
Company currently offers a number of ARM loan programs with interest rates
tied to Treasury bill based and COFI indices that adjust monthly, semi-
annually, annually or once every five years, some of which have payment caps.
Because of payment caps and the different times at which interest rate
adjustments and payment adjustments are made, in periods of rising interest
rates monthly payments may not be sufficient to pay the interest accruing on
some of the Company's ARM loans. The amount of any shortfall ("negative
amortization") is added to the principal balance of the loan to be repaid
through future monthly payments, which could cause increases in the amount of
principal owed to the Company over that which was originally lent. The Company
currently has approximately $531.3 million in mortgage loans that may be
subject to negative amortization. During the years ended June 30, 2000, 1999
and 1998, the negative amortization associated with these loans totaled
$109,000, $223,000 and $478,000, respectively. Significant negative
amortization can increase the associated risk of default on loans,
particularly for loans originated with relatively high loan-to-value ratios.
Based on historical experience, management does not believe that the loss
experience on the loans that are subject to negative amortization is
materially different from the loss experience on the balance of its portfolio.
Mortgage loans originated by the Company, generally include due-on-sale
clauses which provide the Company with the contractual right to deem the loan
immediately due and payable in the event the borrower transfers ownership of
the property without the Company's consent. Due-on-sale clauses are an
important means of adjusting the rates on the Company's fixed rate multifamily
and commercial mortgage loan portfolios and the Company has generally
exercised its rights under these clauses.
Loan Approval Procedures and Authority. The Company's Board of Directors has
a standing Loan Committee. The Loan Committee is primarily responsible for
establishing the lending policies of the Company and reviewing properties
offered as security. The Board of Directors has authorized the following
persons to approve loans up to the amounts indicated: mortgage loans in
amounts of $1.0 million and below may be approved by the respective Loan
Division Manager or his designate; mortgage loans in excess of $1.0 million
and up to $1.5 million require the approval of the President or any member of
the Loan Committee; and mortgage loans in excess of $1.5 million requires the
approval of at least two members of the Loan Committee.
For all loans originated by the Company, upon receipt of a completed loan
application from a prospective borrower, a credit report is ordered and
certain other information is verified by an independent credit agency and, if
necessary, additional financial information is required. Appraisals of the
real estate intended to secure proposed loans over $150,000 are required,
which appraisals currently are performed by independent appraisers designated
and approved by the Company. The Company's Board annually approves the
independent appraisers used by the Company and approves the Company's
appraisal policy. The Company's policy is to obtain title and hazard insurance
on all real estate loans. If the original loan amount exceeds 80% of the
underlying property's value on a sale or refinance of a first trust deed loan,
private mortgage insurance is required and the borrower will be required to
make payments to a mortgage impound account from which the Company makes
disbursements for property taxes and mortgage insurance.
Delinquencies and Classification of Assets
Delinquent Loans. Management performs a monthly review of all delinquent
loans and reports to the Company's Board of Directors regarding the same. The
procedures taken by the Company with respect to delinquencies vary depending
on the nature of the loan and period of delinquency.
The Company's policies generally provide that delinquent mortgage loans be
reviewed and that written notices be mailed after the 11th and 17th day of
delinquency. The Company's policies provide that telephone contact will be
attempted to ascertain the reasons for delinquency and the prospects of
repayment. When contact is made with the borrower at any time prior to
foreclosure, the Company will attempt to obtain full payment or work out a
repayment schedule with the borrower to avoid foreclosure. See also "--
Nonperforming Assets and Restructured Loans."
11
At June 30, 2000, 1999 and 1998, delinquencies in the Company's loan
portfolio were as follows:
2000 1999 1998
--------------------------------- --------------------------------- ---------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More 60-89 Days 90 Days or More
---------------- ---------------- ---------------- ---------------- ---------------- ----------------
Number Principal Number Principal Number Principal Number Principal Number Principal Number Principal
of Balance of Balance of Balance of Balance of Balance of Balance
Loans of Loans Loans of Loans Loans of Loans Loans of Loans Loans of Loans Loans of Loans
------ --------- ------ --------- ------ --------- ------ --------- ------ --------- ------ ---------
(Dollars in thousands)
One-to-four
family.......... 2 $109 28 $1,247 8 $ 456 54 $2,662 5 $ 399 22 $2,514
Multifamily...... 1 526 -- -- -- -- -- -- 5 1,377 4 1,691
Commercial....... -- -- -- -- 2 1,674 1 78 3 1,663 3 249
Other loans...... -- -- -- -- 2 61 2 121 -- -- -- --
--- ---- --- ------ --- ------ --- ------ --- ------ --- ------
Total........... 3 $635 28 $1,247 12 $2,191 57 $2,861 13 $3,439 29 $4,454
=== ==== === ====== === ====== === ====== === ====== === ======
Delinquent loans
to
total gross
loans........... 0.06% 0.12% 0.26% 0.34% 0.48% 0.62%
The loans in the above table have been considered in connection with the
Company's overall assessment of the adequacy of its allowance for loan losses.
However, there can be no assurance that the Company will not have to establish
additional loss provisions for these loans in the future. See "--Allowances
for Loan and Real Estate Losses" and "MD&A--Problem Assets."
Classification of Assets. Federal regulations and the Company's
Classification of Assets Policy require that the Company utilize an internal
asset classification system as a means of reporting problem and potential
problem assets. The Company has incorporated the OTS internal asset
classifications as a part of its credit monitoring system. The Company
currently classifies problem and potential problem assets as "Substandard,"
"Doubtful" or "Loss" assets. An asset is considered "Substandard" if it is
inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. "Substandard" assets include
those characterized by the "distinct possibility" that the insured institution
will sustain "some loss" if the deficiencies are not corrected. Loans can be
considered "Substandard" for other reasons in addition to the paying capacity
and underlying collateral, based on the Company's Classification of Assets
Policy. Assets classified as "Doubtful" have all of the weaknesses inherent in
those classified "Substandard" with the added characteristic that the
weaknesses present make "collection or liquidation in full", on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." See "--Regulation and Supervision--Classification of Assets." The
Company's Internal Asset Review Committee monthly reviews and classifies the
Company's assets and reports the results of its review to the Company's Board
of Directors.
The following table sets forth information with respect to the classified
assets of the Company at June 30, 2000.
At June 30, 2000
----------------------
Substandard
--------------
(In thousands)
Real estate loans:
One-to-four family..................................... $ 5,191
Multifamily............................................ 2,845
Commercial and Land.................................... 2,529
REO...................................................... 639
Securities............................................... 8
-------
Total Classified Assets.................................. $11,212
=======
12
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 114,
"Accounting by Creditors for Impairment of a Loan", the Company recognizes
impairment on troubled collateral dependent loans by creating a specific
valuation allowance. At June 30, 2000 and 1999, the specific valuation
allowances totaled $521,000 and $465,000, respectively. The loans for which a
specific valuation allowance was established are in the process of collection.
At such time that these loans are deemed uncollectible, the specific valuation
allowance will be charged off.
In addition to adversely classified assets, assets which do not currently
expose the Company to sufficient risk to warrant adverse classification but
possess weaknesses are designated "Special Mention." According to OTS
guidelines, Special Mention assets are not adversely classified and do not
expose an institution to sufficient risk to warrant adverse classification. At
June 30, 2000, $6.4 million of assets were graded as Special Mention, compared
to $9.3 million at June 30, 1999.
These assets have been considered in connection with the Company's overall
assessment of the adequacy of its allowance for loan losses; however, there
can be no assurance that the Company will not establish additional loss
provisions for these assets in the future. See "--Allowances for Loan and Real
Estate Losses" and "MD&A--Problem Assets."
Nonperforming Assets and Restructured Loans
After 60 days, the Company ceases the accrual of interest on loans and any
previously accrued interest is reversed. In addition, the Company may
restructure a loan due to the debtor's financial difficulty and grant a
concession which the Company would not have otherwise considered. REO is
recorded at fair value less estimated costs of disposition.
13
The following table sets forth information regarding nonaccrual loans,
troubled debt restructured loans and REO. There were no accruing loans past
due 60 days or more for any of the periods presented below.
At June 30,
----------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------- -------
(Dollars in thousands)
Real estate loans:
One-to-four family................. $1,356 $3,062 $2,779 $ 3,226 $ 1,614
Multifamily........................ 526 -- 2,257 2,387 4,949
Commercial and land................ 1,707 1,752 1,912 2,926 3,781
Other:
Consumer loans..................... -- 170 -- -- 105
------ ------ ------ ------- -------
Total nonaccrual loans(1).......... 3,589 4,984 6,948 8,539 10,449
Troubled debt restructured loans..... 211 218 223 229 234
------ ------ ------ ------- -------
Total nonperforming loans.......... 3,800 5,202 7,171 8,768 10,683
Real estate acquired through
foreclosure......................... 639 2,340 2,678 1,720 2,435
------ ------ ------ ------- -------
Total nonperforming assets......... $4,439 $7,542 $9,849 $10,488 $13,118
====== ====== ====== ======= =======
Ratios:
Net charge-offs to average loans... 0.01% 0.15% 0.18% 0.47% 1.13%
Total allowance for loan losses as
a percentage of gross loans....... 0.99 1.02 1.12 1.18 1.25
Total allowance for loan losses as
a percentage of total
nonperforming loans(2)............ 267.39 166.94 110.93 88.64 73.32
Total allowance as a percentage of
total nonperforming assets(3)..... 228.90 115.14 82.55 75.77 61.05
Total nonaccrual loans as a
percentage of gross loans(1)...... 0.35 0.58 0.98 1.29 1.67
Nonperforming loans as a percentage
of gross loans(2)................. 0.37 0.61 1.01 1.33 1.71
Nonperforming assets as a
percentage of total assets(4)..... 0.37 0.74 1.11 1.31 1.81
- --------
(1) Nonaccrual loans are net of specific allowances of $0, $68,000, $945,000,
$1.0 million and $1.8 million for the years ended June 30, 2000, 1999,
1998, 1997 and 1996, respectively.
(2) Nonperforming loans include nonaccrual and troubled debt restructured
loans. Gross loans include loans held for sale.
(3) Total allowance includes loan and REO valuation allowances.
(4) Nonperforming assets include nonperforming loans and REO.
The gross amount of interest income on nonaccrual loans that would have been
recorded during the years ended June 30, 2000, 1999 and 1998 if the nonaccrual
loans had been current in accordance with their original terms was $312,000,
$424,000 and $640,000, respectively. For the years ended June 30, 2000, 1999
and 1998, $247,000, $295,000 and $399,000, respectively, was actually earned
on nonaccrual loans and is included in interest income on loans in the
consolidated statements of operations for such years included in this report.
Interest income earned on nonaccrual loans is generally recorded utilizing the
cash-basis method of accounting. See "Financial Statements and Supplementary
Data."
14
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
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 all loans with principal balances
of less than $300,000.
Factors considered as part of the periodic loan review process to determine
whether a loan is impaired, as defined under SFAS 114, 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 June 30, 2000 and 1999, the Company had a gross investment in impaired
loans of $1.7 million and $3.5 million, respectively. During the years ended
June 30, 2000 and 1999, the Company's average investment in impaired loans was
$1.7 million and $5.9 million and for the years then ended, interest income on
such loans totaled $126,000 and $531,000, respectively. Interest income on
impaired loans which are performing is generally 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. At June 30, 2000 all
impaired loans were performing in accordance with their contractual terms.
Impaired loans totaling $1.7 million were not performing in accordance with
their contractual terms at June 30, 1999, and have been included in nonaccrual
loans at that date.
The Company recognizes impairment on troubled collateral dependent loans by
creating a specific valuation allowance. The loans for which a specific
valuation allowance was established are in the process of collection. At such
time that these loans are deemed uncollectible, the specific valuation
allowance is charged-off.
Impaired loans at June 30, 2000 include $1.7 million of loans for which
specific valuation allowances of $379,000 had been established. At June 30,
1999, the Company had $1.0 million of impaired loans for which specific
valuation allowances of $155,000 had been established and $2.5 million of such
loans for which no specific valuation allowance was considered necessary. All
such provisions for losses and related recoveries are recorded as part of the
total allowance for loan losses.
Allowances for Loan and Real Estate Losses
The Company's allowance for loan losses is comprised of specific valuation
allowances as well as a general valuation allowance ("GVA"). As discussed
above, specific valuation allowances are generally established to recognize
impairment on troubled collateral dependent loans. The GVA is maintained in an
amount that management believes will be adequate to absorb probable losses
that are anticipated on existing loan-related assets and off-balance sheet
items.
The allowance for loan losses is established through a provision for loan
losses based on management's evaluation of the risks inherent in its loan
portfolio. The allowance for loan losses is
15
maintained at an amount management considers adequate to cover estimated
losses in loans receivable which are deemed probable and estimable. The
allowance is based upon a number of factors, including asset classifications,
economic trends, industry experience and trends, industry and geographic
concentrations, estimated collateral values, management's assessment of the
credit risk inherent in the portfolio, historical loan loss experience, the
Company's underwriting policies and the regulatory environment.
The Company has significantly increased its commercial real estate loan
portfolio during the past fiscal year from $140.4 million at June 30, 1999 to
$196.5 million at June 30, 2000 (an increase of approximately 39.92%). 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 two 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.
Multifamily and commercial real estate loans 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. Sometimes multifamily and commercial real estate loans are
made to groups of related borrowers, which concentration could increase the
Company's exposure should the circumstances of one borrower negatively affect
the ability of other related borrowers to repay their loans in full on a
timely basis. In addition, multifamily and commercial real estate values tend
to be more cyclical and, while the southern California real estate market
remained strong in fiscal 2000, 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. See "Business--Lending
Activities--Multifamily Lending" and "--Commercial Real Estate Lending."
The Company recorded a provision for loan losses of $1.6 million for the
year ended June 30, 2000, compared to $1.7 million, $1.5 million, $3.0 million
and $2.1 million for the years ended June 30, 1999, 1998, 1997 and 1996,
respectively. The slight decrease in the provision for 2000 is primarily the
result of the continued decrease in nonperforming assets during the year. The
slight increase in the provision for fiscal 1999 compared to 1998 was
primarily a result of the overall growth in the loan portfolio as compared to
the prior year, specifically in commercial real estate loans. In addition,
certain one-to-four family loans purchased during fiscal 1999 were considered
by the Company to have higher risk characteristics because they were loans
outside of California, which has historically been considered the Company's
primary market area for one-to-four family loans. The decrease in the
provision for 1998 was primarily a result of decreased charge-offs and
nonaccrual loans during this period. Management believed that the increases in
the provisions for 1997 and 1996 were necessary to replenish the allowance for
loan losses to what management believed was an adequate level due to charge-
offs taken during these years. The increase in charge-offs in 1996 was
primarily a result of acquiring title to or resolving properties damaged in
the January 1994 Northridge earthquake as well as continued declines in the
southern California economy during this year.
Although the Company believes that the allowance for loan losses at June 30,
2000 is adequate, there can be no assurance that the Company will not have to
establish additional loss provisions based upon future events. The Company
will continue to monitor and modify its allowances for loan losses as
conditions dictate. In addition, the OTS and the FDIC, as an integral part of
their examination process, periodically review the Company's valuation
allowance. These agencies may require the Company to establish additional
allowances, based on their judgments of the information available at the time
of the examination. See "Regulation and Supervision--Classification of
Assets."
16
It is the policy of the Company to "charge-off" consumer loans when it is
determined that they are no longer collectible. The policy for loans secured
by real estate, which comprise the bulk of the Company's portfolio, is to
establish an allowance for loan losses in accordance with the Company's asset
classification process, based on generally accepted accounting principles
("GAAP"). It has generally been the practice of the Company to "charge-off"
losses after acquiring title to a property securing the loan. Prior to
acquiring title to REO, losses are recognized through the establishment of
valuation allowances. It is the Company's general policy to obtain appraisals
on the underlying property for loans 90 days or more past due and over
$500,000. If the loan amount is under $500,000, appraisals are obtained at the
time of foreclosure. It is the policy of the Company to obtain an appraisal on
all REO upon acquisition by the Company.
REO is initially recorded at fair value at the date of acquisition, less
estimated costs of disposition. Thereafter, if there is a further
deterioration in value, the Company writes down the REO directly for the
diminution in value. Real estate held for investment is carried at the lower
of cost or net realizable value. All costs of anticipated disposition are
considered in the determination of net realizable value.
The following table sets forth activity in the Company's total allowance for
loan losses and allowance for losses on REO.
At or For the Year Ended June 30,
-------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
(In thousands)
Allowance for loan losses:
Balance at beginning of year.... $ 8,684 $ 7,955 $ 7,772 $ 7,833 $12,108
Provision for loan losses....... 1,600 1,700 1,450 3,001 2,103
Allowance of portfolios
acquired....................... -- 164 -- -- 294
Charge-offs:
One-to-four family............ (125) (189) (428) (714) (994)
Multifamily................... -- (945) (839) (2,182) (4,367)
Commercial and land........... -- -- -- (165) (1,309)
Non-mortgage.................. (14) (1) -- (1) (2)
Recoveries(1)................... 16 -- -- -- --
------- ------- ------- ------- -------
Subtotal charge-offs, net..... (123) (1,135) (1,267) (3,062) (6,672)
------- ------- ------- ------- -------
Balance at end of year.......... $10,161 $ 8,684 $ 7,955 $ 7,772 $ 7,833
======= ======= ======= ======= =======
Allowance for REO losses:
Balance at beginning of year.... $ -- $ 175 $ 175 $ 175 $ 175
Additions charged to operations. -- -- -- -- --
Charge-offs..................... -- (175) -- -- --
------- ------- ------- ------- -------
Balance at end of year.......... $ -- $ -- $ 175 $ 175 $ 175
======= ======= ======= ======= =======
- --------
(1) In 2000 recoveries were on multifamily loans.
17
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
categories listed.
At June 30,
------------------------------------------------------------------------------------------
2000(1) 1999(1) 1998(1)
------------------------------ ----------------------------- -----------------------------
Percentage Percentage Percentage Percentage Percentage Percentage
of of Loans of of Loans of of Loans
Allowance in Each Allowance in Each Allowance in Each
to Total Category to to Total Category to to Total Category to
Amount Allowance Total Loans Amount Allowance Total Loans Amount Allowance Total Loans
------- ---------- ----------- ------ ---------- ----------- ------ ---------- -----------
(Dollars in thousands)
One-to-four
family........... $ 2,392 23.54% 30.73% $2,371 27.30% 36.65% $1,421 17.86% 39.26%
Multifamily...... 4,903 48.25 49.20 4,216 48.55 45.93 3,556 44.70 48.72
Commercial....... 2,620 25.79 19.13 1,888 21.74 16.48 1,337 16.81 10.92
Land............. 1 .01 0.14 4 0.05 0.04 -- -- 0.05
Other............ 103 1.01 0.80 98 1.13 0.90 38 0.48 1.05
Unallocated...... 142 1.40 N/A 107 1.23 N/A 1,603 20.15 N/A
------- ------ ------ ------ ------ ------ ------ ------ ------
Total allowance
for loan losses. $10,161 100.00% 100.00% $8,684 100.00% 100.00% $7,955 100.00% 100.00%
======= ====== ====== ====== ====== ====== ====== ====== ======
At June 30,
-----------------------------------------------------------
1997(1) 1996(1)
----------------------------- -----------------------------
Percentage Percentage Percentage Percentage
of of Loans of of Loans
Allowance in Each Allowance in Each
to Total Category to to Total Category to
Amount Allowance Total Loans Amount Allowance Total Loans
------ ---------- ----------- ------ ---------- -----------
(Dollars in thousands)
One-to-four family...... $1,709 21.99% 45.47% $1,306 16.67% 48.54%
Multifamily............. 3,318 42.69 45.77 4,744 60.56 41.45
Commercial.............. 1,085 13.96 8.39 1,288 16.44 9.74
Land.................... 210 2.70 0.21 199 2.54 0.17
Other................... -- -- 0.16 -- -- 0.10
Unallocated............. 1,450 18.66 N/A 296 3.79 N/A
------ ------ ------ ------ ------ ------
Total allowance
for loan losses........ $7,772 100.00% 100.00% $7,833 100.00% 100.00%
====== ====== ====== ====== ====== ======
- ----------
(1) In 2000, 1999, 1998, 1997 and 1996, total specific allowances amounted to
$521,000, $465,000, $1.7 million, $1.6 million and $2.2 million,
respectively.
18
In fiscal 1999 the Company reevaluated its allowance methodology. This
reevaluation resulted in additional allocations of the allowance to the one-
to-four family and commercial real estate portfolios at June 30, 1999 as
compared to June 30, 1998. The increase in the unallocated allowance at
June 30, 1997 as compared to June 30, 1996, is a result of a decrease in the
allocated allowance on multifamily loans as a result of a decline in
multifamily charge-offs and nonaccrual multifamily loans during the year.
Investment Activities
Federally chartered savings associations such as the Bank have the authority
to invest in various types of liquid assets, including United States Treasury
obligations, securities of various federal agencies, certain certificates of
deposit of insured banks and savings institutions, certain bankers'
acceptances, repurchase agreements and federal funds. Subject to various
restrictions, federally chartered savings institutions may also invest their
assets in commercial paper, investment grade corporate debt securities and
mutual funds whose assets conform to the investments that a federally
chartered savings institution is otherwise authorized to make directly.
Additionally, a federally chartered savings institution such as the Bank must
maintain minimum levels of investments that qualify as liquid assets under OTS
regulations. See "--Regulation and Supervision--Required Liquidity." The Bank
currently manages liquid assets at the minimum level required under OTS
requirements in an effort to maximize overall yield on its investment
portfolio.
The investment policy of the Company attempts to provide and maintain
liquidity, generate a favorable return on investments without incurring undue
interest rate and credit risk, and complement the Company's lending
activities. Specifically, the Company's policy generally limits investments to
government and federal agency-backed securities and other non-government
guaranteed securities, including corporate debt obligations, that are
investment-grade. The Company's policy authorizes investment in marketable
equity securities meeting the Company's guidelines. The policy requires that
all investment purchases be ratified by the Board of Directors of the Company.
At June 30, 2000, the Company had federal funds sold and other short-term
investments and investment securities in the aggregate amount of $35.3 million
with a fair value of $34.2 million.
The following table sets forth certain information regarding the amortized
cost and fair values of the Company's federal funds sold and other short-term
investments and investment securities portfolio at the dates indicated:
At June 30,
-----------------------------------------------------
2000 1999 1998
----------------- ----------------- -----------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- ------- --------- ------- --------- -------
(In thousands)
Federal funds sold and
other short-term
investments............. $ 3,900 $ 3,900 $25,120 $25,120 $26,420 $26,420
======= ======= ======= ======= ======= =======
Investment securities:
Held to maturity:
U.S. Government and
Federal agency
obligations.......... $21,863 20,780 $11,986 $11,320 $ 4,729 $ 4,741
Municipal bonds....... -- -- -- -- 329 329
------- ------- ------- ------- ------- -------
Total held to
maturity........... 21,863 20,780 11,986 11,320 5,058 5,070
Available for sale:
Marketable Equity
Securities........... 9,500 9,498 -- -- 1,200 1,819
------- ------- ------- ------- ------- -------
Total investment
securities......... $31,363 $30,278 $11,986 $11,320 $ 6,258 $ 6,889
======= ======= ======= ======= ======= =======
19
The table below sets forth certain information regarding the amortized cost,
weighted average yields and contractual maturities of the Company's federal
funds sold and other short-term investments and investment securities as of
June 30, 2000.
At June 30, 2000
----------------------------------------------------------------------------------------------
More than One More than Five More than Ten
One Year or Less Year to Five Years Years to Ten Years Years Total
------------------ ------------------ ------------------ ------------------ ------------------
Weighted Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
(Dollars in thousands)
Federal funds
sold and other
short-term investments. $3,900 6.50% $ -- -- % $ -- -- % $ -- -- % $ 3,900 6.50%
====== ==== ====== ==== ======= ==== ======= ==== ======= ====
Investment
securities:
Held to
maturity:
U.S.
Government
and Federal
agency
obligations.. $ -- -- % $4,000 6.91% $11,872 7.59% $ 5,991 6.50% $21,863 7.16%
------ ------ ------- ------- -------
Total held
to
maturity... $ -- -- % $4,000 6.91% $11,872 7.59% $ 5,991 6.50% $21,863 7.16%
------ ------ ------- ------- -------
Available for
sale:
Marketable
Equity
Securities... $ -- -- % $ -- -- % $ -- -- % $ 9,500 6.12% $ 9,500 6.12%
------ ------ ------- ------- -------
Total
investment
securities. $ -- -- % $4,000 6.91% $11,872 7.59% $15,491 6.27% $31,363 6.85%
====== ====== ======= ======= =======
Sources of Funds
General. Deposits, FHLB advances, securities sold under agreements to
repurchase, loan repayments and prepayments, and proceeds from sales of loans
are the primary sources of the Company's funds for use in lending, investing
and for other general purposes.
Deposits. The Company offers a variety of deposit accounts with a range of
interest rates and terms. The Company's deposits consist of passbook savings,
checking accounts, money market accounts and certificates of deposit. The flow
of deposits is influenced significantly by general economic conditions,
changes in money market rates, prevailing interest rates and competition. The
Company's deposits are obtained predominantly from the areas in which its
branch offices are located. The Company relies primarily on customer service
and long-standing relationships with customers to attract and retain these
deposits; however, market interest rates and rates offered by competing
financial institutions significantly affect the Company's ability to attract
and retain deposits. Certificate of deposit accounts in excess of $100,000 are
not actively solicited by the Company nor does the Company currently use
brokers to obtain deposits. During the second quarter of fiscal 2000 the Bank
purchased a retail branch office and its $45.9 million of deposits from
another financial institution. This branch is located in Rowland Heights,
California. In addition, while the vast majority of the Bank's deposits are
retail in nature, the Bank accepted $55 million in time deposits from a
political subdivision during fiscal 2000. 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. Management continually monitors the
Company's certificate accounts and historically the Company has retained a
large portion of such accounts upon maturity. See "MD&A--Capital Resources and
Liquidity--Sources of Funds and Liquidity."
20
The following table presents the deposit activity of the Company for the
periods indicated:
For the Year Ended June 30,
----------------------------------
2000 1999 1998
----------- ---------- ---------
(In thousands)
Deposits.................................... $ 1,275,207 $1,005,505 $ 741,609
Withdrawals................................. (1,178,499) (938,172) (742,092)
----------- ---------- ---------
Net deposits................................ 96,708 67,333 (483)
Interest credited on deposits............... 33,682 29,596 28,207
----------- ---------- ---------
Total increase in deposits................ $ 130,390 $ 96,929 $ 27,724
=========== ========== =========
The following table presents the amount and weighted average rate of time
deposits equal to or greater than $100,000 at June 30, 2000:
For the Year Ended
June 30, 2000
--------------------
Maturity Period Weighted
Amount Average Rate
- --------------- ------- ------------
(Dollars in
thousands)
Three months or less....................................... $69,448 5.74%
Over three through six months.............................. 37,001 5.83
Over six through 12 months................................. 63,732 5.98
Over 12 months............................................. 13,459 5.98
-------
Total...................................................... 183,640 5.86
=======
The following table sets forth the distribution of the Company's average
deposit accounts for the periods indicated and the weighted average interest
rates on each category of deposits presented:
For the Year Ended June 30,
--------------------------------------------------------------------------------------
2000 1999 1998
---------------------------- ---------------------------- ----------------------------
Percentage Percentage Percentage
of Total Weighted of Total Weighted of Total Weighted
Average Average Average Average Average Average Average Average Average
Balance Deposits Rate Balance Deposits Rate Balance Deposits Rate
-------- ---------- -------- -------- ---------- -------- -------- ---------- --------
(Dollars in thousands)
Money market deposits... $163,017 22.25% 4.33% $137,473 21.73% 4.37% $110,990 19.67% 4.52%
Passbook deposits....... 21,324 2.91 1.97 18,298 2.89 1.98 17,425 3.09 2.01
NOW and other demand
deposits............... 44,497 6.07 1.42 35,219 5.57 1.35 26,363 4.67 1.27
Non-interest bearing
deposits............... 14,484 1.98 -- 11,890 1.88 -- 9,253 1.64 --
-------- ------ -------- ------ -------- ------
Total.................. 243,322 33.21 202,880 32.07 164,031 29.07
-------- ------ -------- ------ -------- ------
Certificate accounts:
Three months or less.... 114,463 15.62 5.01 113,440 17.93 5.18 111,121 19.69 5.49
Over three through
six months............. 115,463 15.76 5.24 105,071 16.61 5.14 98,605 17.48 5.51
Over six through
12 months.............. 159,648 21.79 5.43 141,279 22.33 5.23 114,989 20.38 5.56
Over one to three years. 92,458 12.62 5.67 65,252 10.31 5.78 63,974 11.34 6.00
Over three to five
years.................. 7,338 1.00 5.48 4,740 0.75 5.32 11,494 2.04 5.77
Over five to ten years.. -- -- -- -- -- -- 21 -- 5.39
Over ten years.......... 44 -- 5.33 16 0.00 5.31 -- -- --
-------- ------ -------- ------ -------- ------
Total certificates..... 489,414 66.79 5.33 429,798 67.93 5.28 400,204 70.93 5.60
-------- ------ -------- ------ -------- ------
Total deposits......... $732,736 100.00% 4.67 $632,678 100.00% 4.67 $564,235 100.00% 4.99
======== ====== ======== ====== ======== ======
21
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
contractual maturity of the certificate accounts outstanding at June 30, 2000:
Certificate Amounts Maturing in the
At June 30, Year Ending June 30,
-------------------------- --------------------------------------------------
2005 and
1998 1999 2000 2001 2002 2003 2004 thereafter Total
-------- -------- -------- -------- ------- ------ ------ ---------- --------
(In thousands)
Certificate accounts:
0 to 4.00%.............. $ -- $ 5,861 $ 4,841 $ 4,796 $ 45 $ -- $ -- $ -- $ 4,841
4.001 to 5.00%.......... 39,995 165,299 46,406 42,924 2,118 399 965 -- 46,406
5.001 to 6.00%.......... 276,992 250,461 332,621 295,197 30,363 3,264 2,119 1,678 332,621
6.001 to 7.00%.......... 76,599 30,233 191,638 168,237 15,524 1,178 90 6,609 191,638
7.001 to 8.00%.......... 7,527 327 22 22 -- -- -- -- 22
8.001 to 9.00%.......... 27 -- -- -- -- -- -- -- --
-------- -------- -------- -------- ------- ------ ------ ------ --------
Total.................. $401,140 $452,181 $575,528 $511,176 $48,050 $4,841 $3,174 $8,287 $575,528
======== ======== ======== ======== ======= ====== ====== ====== ========
Borrowings. From time to time the Company has obtained advances from the
FHLB and may do so in the future as an alternative to retail deposit funds.
FHLB advances may also be used to acquire certain other assets as may be
deemed appropriate for investment purposes. These advances are collateralized
by the capital stock of the FHLB held by the Company and certain of the
Company's mortgage loans. See "--Regulation and Supervision--Federal Home Loan
Bank System." Such advances are made pursuant to several different credit
programs, each of which has its own interest rate and range of maturities. The
maximum amount that the FHLB will advance to member institutions, including
the Company, for purposes other than meeting withdrawals, fluctuates from time
to time in accordance with the policies of the OTS and the FHLB. During fiscal
2000, the Company periodically borrowed advances to provide needed liquidity
and to supplement retail deposit gathering activity. See "MD&A--Capital
Resources and Liquidity--Sources of Funds and Liquidity." At June 30, 2000,
the Company had $290.3 million in outstanding advances from the FHLB. During
fiscal 2000, the maximum amount of FHLB advances that the Company had
outstanding at any month-end was $312.1 million.
The following table sets forth certain information regarding the Company's
borrowed funds at or for the periods ended on the dates indicated:
At or For the Year Ended June 30,
-------------------------------------
2000 1999 1998
----------- ----------- -----------
(Dollars in thousands)
FHLB advances:
Average balance outstanding............ $ 252,284 $ 189,456 $ 185,032
Maximum amount outstanding at any
month-end during the period........... $ 312,139 $ 234,700 $ 216,000
Balance outstanding at end of period... $ 290,250 $ 234,700 $ 216,000
Weighted average interest rate during
the period............................ 5.82% 5.69% 5.93%
Weighted average interest rate at end
of period............................. 6.30% 5.59% 5.86%
For information regarding securities sold under agreements to repurchase,
loan repayments and prepayments and proceeds from loan sales as sources of
funds for the Company, see "MD&A--Capital Resources and Liquidity--Sources of
Funds and Liquidity."
Subsidiary Activities
QCFC, a wholly owned subsidiary of the Bank, is currently engaged, on an
agency basis, in the sale of casualty insurance, mutual funds and annuity
products primarily to the Bank's customers and
22
members of the local community and as a trustee of the Bank's deeds of trust.
In the past, QCFC has been involved in real estate development projects. The
Bank does not currently intend to engage in any future real estate development
projects through QCFC or otherwise. As of June 30, 2000, and for the year then
ended, QCFC had $298,000 in total assets and net income of $227,000.
Competition
Savings associations face strong competition both in attracting deposits and
making real estate loans. The Company's most direct competition for deposits
has historically come from other savings associations and from commercial
banks located in its principal market areas of Los Angeles and Orange Counties
in California, including many large financial institutions which have greater
financial and marketing resources available to them. In addition, particularly
during times of high interest rates, the Company has faced significant
competition for investors' funds from short-term money market securities and
other corporate and government securities and mutual funds which invest in
such securities. Periods of low interest rates have made the attraction and
retention of deposits difficult as savers seek higher rates of return in
alternative investments. The ability of the Company to attract and retain
savings deposits depends on its ability to generally provide a rate of return,
liquidity and risk comparable to that offered by competing investment
opportunities. Furthermore, management considers the Company's reputation for
financial strength and quality service provided through its contiguous
branching network to local customers to be a major competitive advantage in
attracting and retaining savings deposits.
The Company experiences strong competition for real estate loans principally
from other savings associations, commercial banks and mortgage banking
companies. It competes for loans principally through the interest rates and
loan fees it charges and the efficiency and quality of services it provides
borrowers. Management considers the Company's focus in multifamily and low-
to-moderate income lending in the Los Angeles area to be a competitive
advantage also. Competition may increase as a result of the continuing
reduction in restrictions on the interstate operations of financial
institutions.
Under legislation adopted by Congress in 1994, bank holding companies based
in any state generally are allowed to acquire banks in California and banks
based in any state generally are allowed to acquire by merger banks based in
California. Under OTS regulations, federal savings associations have been
generally able to branch nationwide as long as the association's assets
attributable to each state outside of its home state in which it operates
branches are predominantly housing-related assets. The increased authority of
bank holding companies and banks to engage in interstate banking will allow
them to compete more effectively with savings associations.
Personnel
As of June 30, 2000, the Bank had 159 full-time employees and 47 part-time
employees. The employees are not represented by a collective bargaining unit
and the Bank considers its relationship with its employees to be good.
Federal Taxation
General. The Company reports its income for tax purposes using the accrual
method of accounting and will be subject to federal income taxation in the
same manner as other corporations with some exceptions, including particularly
the Bank's reserve for bad debts discussed below. The following discussion of
tax matters is intended only as a summary and does not purport to be a
comprehensive description of the tax rules applicable to the Company.
Tax Bad Debt Reserve. Prior to 1996, savings institutions such as the Bank
which meet certain definitional tests primarily relating to their assets and
the nature of their business ("qualifying thrifts")
23
were permitted to establish a reserve for bad debts and to make annual
additions thereto, which additions, within specified formula limits, were
deducted in arriving at their taxable income. The Bank's deduction with
respect to "qualifying loans," generally loans secured by certain interests in
real property, was computed using the Bank's actual loss experience, or 8% of
the Bank's taxable income. Use of the percentage of taxable income method of
calculating its deductible addition to its loss reserve had the effect of
reducing the maximum marginal rate of federal tax on the Bank's income to
32.20%, exclusive of any minimum or environmental tax, as compared to the
general maximum corporate federal income tax rate of 35%.
Pursuant to certain provisions appended to the Small Business Job Protection
Act signed into law in August 1996 (the "Act"), the above-described bad debt
deduction rules available to thrifts such as the Bank have been repealed.
Under the Act, the Bank has changed its method of accounting for bad debts
from the reserve method formerly permitted under section 593 of the Internal
Revenue Code of 1986, as amended (the "Code") to the "specific charge-off"
method. Under the specific charge-off method, which is governed by section 166
of the Code and the regulations thereunder, tax deductions may be taken for
bad debts only if loans become wholly or partially worthless. Although the Act
generally requires that qualifying thrifts recapture (i.e., include in taxable
income) over a six-year period a portion of their existing bad debt reserves
equal to their "applicable excess reserves," the Bank does not have applicable
excess reserves subject to recapture. However, the Bank's tax bad debt reserve
balance of approximately $10.9 million as of June 30, 2000 will, in future
years, be subject to recapture in whole or in part upon the occurrence of
certain events, such as a distribution to stockholders in excess of the Bank's
current and accumulated earnings and profits, a redemption of shares, or upon
a partial or complete liquidation of the Bank. The Bank does not intend to
make distributions to stockholders that would result in recapture of any
portion of its bad debt reserve. Since management intends to use the reserve
only for the purpose for which it was intended, a deferred tax liability of
approximately $3.8 million has not been recorded.
Distributions. To the extent that the Bank makes "non-dividend
distributions" to stockholders that are considered to result in distributions
from the tax bad debt reserve for losses on qualifying real property, then an
amount based on the amount distributed will be included in the Bank's taxable
income. Non-dividend distributions include distributions in excess of the
Bank's current and accumulated earnings and profits, distributions in
redemption of stock and distributions in partial or complete liquidation.
However, dividends paid out of the Bank's current or accumulated earnings and
profits, as calculated for federal income tax purposes, will not be considered
to result in a distribution from the Bank's tax bad debt reserves. Thus, any
dividends to the Company that would reduce amounts appropriated to the Bank's
tax bad debt reserves and deducted for federal income tax purposes may create
a tax liability for the Bank.
The amount of additional taxable income created from a distribution from the
tax bad debt reserve is an amount that when reduced by the tax attributable to
the income is equal to the amount of the distribution. The result is to tax
distributions from the tax bad debt reserve at approximately 51%. See "--
Regulation and Supervision--Savings and Loan Holding Company Regulation--
Payment of Dividends and Other Capital Distributions by Association" and
"Market for the Registrant's Common Equity and Related Stockholder Matters"
for limits on the payment of dividends of the Bank. The Bank does not intend
to make distributions that would result in a recapture of any portion of its
tax bad debt reserve.
The date of the Company's last complete Internal Revenue Service (IRS) tax
audit was December, 1985. There is a three-year statute of limitations for
federal tax filings. Tax years 1996 through 2000 are considered open tax years
for IRS audit purposes.
Dividends Received Deduction and Other Matters. The Company may exclude from
its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations.
24
The corporate dividends received deduction is generally 70% in the case of
dividends received from unaffiliated corporations with which the Company and
the Bank will not file a consolidated tax return, except that if the Company
and the Bank own more than 20% of the stock of a corporation distributing a
dividend 80% of any dividends received may be deducted.
State and Local Taxation
State of California. The California franchise tax rate applicable to the
Company equals the franchise tax rate applicable to corporations generally
plus an "in lieu" rate approximately equal to personal property taxes and
business license taxes paid by such corporations (but not generally paid by
banks or financial corporations such as the Bank); however, the total tax rate
currently applicable to the Company cannot exceed 10.84% for the 2000 calendar
year. Under California regulations, bad debt deductions are available in
computing California franchise taxes using a three or six year weighted
average loss experience method. The Company and its California subsidiary file
California state franchise tax returns on a combined basis.
The date of the Company's last examination by the California Franchise Tax
Board was December 1997. There is a four-year statute of limitations for state
tax filings. Tax years 1998 through 2000 are considered open for California
Franchise Tax audit purposes.
Delaware Taxation. As a Delaware holding company not earning income in
Delaware, the Company is exempted from Delaware Corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
Environmental Regulation
The Company's business and properties are subject to federal and state laws
and regulations governing environmental matters, including the regulation of
hazardous substances and wastes. For example, under the federal Comprehensive
Environmental Response, Compensation, and Liability Act ("CERCLA") and similar
state laws, owners and operators of contaminated properties may be liable for
the costs of cleaning up hazardous substances without regard to whether such
persons actually caused the contamination. Such laws may affect the Company as
an owner or operator of properties used in its business, and through the Bank,
as a secured lender of property that is found to contain hazardous substances
or wastes.
Although CERCLA and similar state laws generally exempt holders of security
interests, the exemption may not be available if a secured party engages in
the management of its borrower or the securing property in a manner deemed
beyond the protection of the secured party's interest. Recent federal and
state legislation, as well as guidance issued by the United States
Environmental Protection Agency and a number of court decisions, have provided
assurance to lenders regarding the activities they may undertake and remain
within CERCLA's secured party exemption. However, these assurances are not
absolute and generally will not protect a lender or fiduciary that
participates or otherwise involves itself in the management of its borrower,
particularly in foreclosure proceedings. As a result, CERCLA and similar state
statutes may influence the Bank's decision whether to foreclose on property
that is found to be contaminated. The Bank has adopted environmental
underwriting requirements for commercial real estate loans. The Bank's general
policy is to obtain an environmental assessment prior to foreclosure on
commercial real estate. See "Business--General" and "--Lending Activities--
Loan and MBS Portfolio Composition" regarding the recent and rapid expansion
of the Association's commercial real estate loan portfolio. The existence of
hazardous substances or wastes on commercial real estate properties could
cause the Bank to elect not to foreclose on the property, thereby limiting,
and in some instances precluding, the Bank from realizing on the related loan.
Should the Bank foreclose on property containing hazardous substances or
wastes, the Bank would become subject to other environmental statutes,
regulations and common law relating to matters such as, but
25
not limited to, asbestos abatement, lead-based paint abatement, hazardous
substance investigation and remediation, air emissions, wastewater discharges,
hazardous waste management, and third party claims for personal injury and
property damage.
Regulation and Supervision
General
The Bank is a federally chartered savings association, a member of the FHLB
of San Francisco, and is subject to regulation by the OTS and the FDIC. The
Bank's deposits are insured by the FDIC through the SAIF, up to applicable
limits. As a result of its ownership of the Bank, the Company is a savings and
loan holding company subject to regulation by the OTS. As described in more
detail below, statutes and regulations applicable to the Bank govern such
matters as the investments and activities in which the Bank can engage; the
amount of capital the Bank must hold; mergers and changes of control;
establishment and closing of branch offices; and dividends payable by the
Bank. Statutes and regulations applicable to the Company govern such matters
as changes of control of the Company and transactions between the Bank and the
Company.
The Company and the Bank are subject to the examination, supervision and
reporting requirements of the OTS, their primary federal regulator, including
a requirement for the Bank of at least one full scope, on-site examination
every year. The Director of the OTS is authorized to impose assessments on the
Bank to fund OTS operations, including the cost of examinations. The Bank is
also subject to examination, when deemed necessary, and supervision by the
FDIC, and the FDIC has "back-up" authority to take enforcement action against
the Bank if the OTS fails to take such action after a recommendation by the
FDIC. The FDIC may impose assessments on the Bank to cover the cost of FDIC
examinations. The FDIC is no longer able to conduct separate examinations of
the Bank except in exigent circumstances. In addition, the Bank is subject to
regulation by the Board of Governors of the Federal Reserve System ("FRB")
with respect to certain aspects of its business.
The descriptions set forth below and elsewhere in this document of the
statutes and regulations that are applicable to the Company do not purport to
be a complete description of such statutes and regulations and their effects
on the Company, or to identify every statute and regulations that may apply to
the Company. The following description of statutory and regulatory provisions
and proposals is qualified in its entirety by reference to the particular
statutory or regulatory provisions or proposals.
Activities Restrictions
Qualified Thrift Lender Test. The qualified thrift lender ("QTL") test
requires that, in at least nine out of every twelve months, at least 65% of a
savings bank's "portfolio assets" must be invested in a limited list of
"qualified thrift investments," primarily investments related to housing loans
and certain other assets. If the Bank fails to satisfy the QTL test and does
not requalify as a QTL within one year, the Company must register and be
regulated as a bank holding company, and the Bank must either convert to a
commercial bank charter or become subject to restrictions on branching,
business activities and dividends as if it were a national bank. At June 30,
2000, approximately 83.50% of the Bank's portfolio assets constituted
qualified thrift investments and the Bank met the QTL test each month in
fiscal 2000.
Investment and Loan Limits. In general, federal savings institutions such as
the Bank may not invest directly in equity securities, debt securities that
are not rated investment grade, or real estate, other than real estate used
for the institution's offices and related facilities. Indirect equity
investment in real estate through a subsidiary is permissible, but subject to
limitations based on the amount of the institution's assets, and the
institution's investment in such a subsidiary must be deducted from regulatory
capital in full.
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Loans by a savings institution to a single borrower are generally limited to
15% of the institution's "unimpaired capital and unimpaired surplus," which is
similar but not identical to total capital. Aggregate loans by the Bank that
are secured by nonresidential real property are generally limited to 400% of
the institution's total capital. Commercial loans not secured by real property
may not exceed 10% of the Bank's total assets, and consumer loans may not
exceed 35% of the Bank's total assets. At June 30, 2000, the Bank was in
compliance with the above investment limitations.
Activities of Subsidiaries. A savings institution seeking to establish a new
subsidiary, acquire control of an existing company or conduct a new activity
through an existing subsidiary must provide 30 days prior notice to the FDIC
and OTS. A subsidiary of the Bank may be able to engage in activities that are
not permissible for the Bank directly, if the OTS determines that such
activities are reasonably related to the Bank's business, but the Bank may be
required to deduct its investment in such a subsidiary from capital. The OTS
has the power to require a savings institution to divest any subsidiary or
terminate any activity conducted by a subsidiary that the OTS determines to be
a serious threat to the financial safety, soundness or stability of such
savings institution or to be otherwise inconsistent with sound banking
practices.
Safety and Soundness Standards. The Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") required the OTS to prescribe for savings
associations minimum acceptable operational and managerial standards, and
standards for asset quality, earnings, and stock valuation. The standards
cover internal control, loan documentation, credit underwriting, interest rate
exposure, asset growth, and employee compensation. Any institution that fails
to meet the OTS regulations promulgated under the safety and soundness
requirements must submit an acceptable plan for compliance or become subject
to the ability of the OTS, in its discretion, to impose operational
restrictions similar to those that would apply to a failure to meet minimum
capital requirements as discussed below.
Real Estate Lending Standards. The OTS and the other federal banking
agencies have adopted regulations which require institutions to adopt and at
least annually review written real estate lending policies. The lending
policies must include diversification standards, underwriting standards
(including loan-to-value limits), loan administration procedures, and
procedures for monitoring compliance with the policies. The policies must
reflect consideration of guidelines adopted by the banking agencies that
discuss certain loan-to-value and percentage of capital limits.
Deposit Insurance
Deposit Insurance Premium Assessments. The FDIC has established a risk-based
system for setting deposit insurance assessments on deposits. Currently, all
of the Bank's deposits are SAIF-insured. Under the risk-based assessment
system, an institution's insurance assessment will vary depending on the level
of capital the institution holds and the degree to which it is the subject of
supervisory concern to the FDIC. SAIF-assessed deposits are currently subject
to insurance premiums between 0.0% and 0.27%. The Bank's assessment rate was
0.0% as of June 30, 2000.
Also, the FDIC assesses SAIF member and BIF member institutions to fund
interest payments on certain bonds issued by the Financing Corporation ("FICO
debt"). Until December 31, 1999, BIF members were assessed at approximately
one-fifth the rate at which SAIF members were assessed. After December 31,
1999, BIF and SAIF members are being assessed at the same rate of 0.0212% on
deposits. Currently, all of the Bank's deposits are SAIF-insured. See
"Business--Federal Taxation" for a discussion of recent changes concerning bad
debt deductions historically available to qualifying thrift institutions.
Regulatory Capital Requirements
The OTS's capital regulations include three separate minimum capital
requirements for the savings institution industry--a "tangible capital
requirement," a "leverage limit" (also referred to as the
27
"core capital ratio"), and a "risk-based capital requirement." These capital
standards must be no less stringent than the capital standards applicable to
national banks. In addition, institutions whose exposure to interest rate risk
is deemed to be above normal are required to deduct a portion of such exposure
in calculating their risk-based capital requirements. The OTS also has the
authority, after giving the affected institution notice and an opportunity to
respond, to establish individual minimum capital requirements ("IMCR") for a
savings institution which are higher than the industry minimum requirements,
upon a determination that an IMCR is necessary or appropriate in light of the
institution's particular circumstances. Savings institutions that do not meet
their capital requirements are subject to a number of sanctions similar to but
less restrictive than the sanctions under the Prompt Corrective Action system
described below, and to a requirement that the OTS be notified of any changes
in the institution's directors or senior executive officers.
The three industry minimum capital requirements are as follows:
Tangible capital of at least 1.5% of adjusted total assets. Tangible
capital is composed of (1) an institution's common stock, perpetual non-
cumulative preferred stock, and related earnings
or surplus (excluding unrealized gains and losses on securities classified
as available-for-sale), (2) certain nonwithdrawable accounts and pledged
deposits and (3) the amount, if any, of equity investment by others in the
institution's subsidiaries, after deducting (a) the institution's
investments in and extensions of credit to subsidiaries engaged as
principal in activities not permissible for national banks, net of any
reserves established against such investments and (b) certain non-
qualifying intangible assets. Deferred tax assets whose realization depends
on the institution's future taxable income or on the institution's tax
planning strategies must also be deducted from tangible capital to the
extent that such assets exceed the lesser of (1) 10% of core capital, or
(2) the amount of such assets that can be realized within one year, unless
such assets were reportable as of December 31, 1992, in which case no
deduction is required.
In general, adjusted total assets equal the institution's consolidated total
assets, minus any assets that are deducted in calculating the amount of
capital. At June 30, 2000, the Bank's ratio of tangible capital to adjusted
total assets was 7.20%.
Core capital of at least 4% of adjusted total assets. Core capital
consists of tangible capital plus (1) qualifying intangibles such as
certain mortgage servicing rights and purchased credit card relationships
and (2) any core deposit premium in existence on March 4, 1994 whose
inclusion in core capital is grandfathered by the OTS. At June 30, 2000,
the Bank's core capital ratio was 7.20%.
Total capital of at least 8% of risk-weighted assets. Total capital
includes both core capital and "supplementary" capital items deemed less
permanent than core capital, such as subordinated debt and general loan
loss allowances (subject to certain limits). At least half of total capital
must consist of core capital. Risk-weighted assets are determined by
multiplying each category of an institution's assets, including certain
assets sold with recourse and other off balance sheet assets, by an
assigned risk weight based on the credit risk associated with those assets,
and adding the resulting sums. The amount of risk-based capital, however,
that may be required to be maintained by the institution for recourse
assets cannot be greater than the total of the recourse liability. The four
risk-weight categories include zero percent for cash and government
securities, 20% for certain high-quality investments, 50% for certain
qualifying one-to-four family and multifamily mortgage loans and 100% for
assets (including past-due loans and real estate owned) that do not qualify
for preferential risk-weighting. At June 30, 2000, the Bank's risk-based
capital ratio was 12.03%, and accordingly the Bank exceeded all three of
the industry minimum capital requirements.
FDICIA required the OTS and the federal bank regulatory agencies to revise
their risk-based capital standards to ensure that those standards take
adequate account of interest-rate risk,
28
concentration of credit risk, and risks of nontraditional activities. The
regulations of the OTS and the other federal banking agencies provide that an
institution may be required to hold risk-based capital in excess of regulatory
minimums to the extent that it is determined either that (i) the institution
has a high degree of exposure to interest-rate risk, prepayment risk, credit
risk, certain risks arising from nontraditional activities or similar risks,
or a high proportion of off-balance sheet risk or (ii) the institution is not
adequately managing these risks. For this purpose, however, the agencies have
stated that, in view of the statutory requirements relating to permitted
lending and investment activities of savings institutions, the general
concentration by such institutions in real estate lending activities would
not, by itself, be deemed to constitute an exposure to concentration of credit
risk that would require greater capital levels.
Prompt Corrective Action Requirements
FDICIA required and the OTS has established five capital categories to
implement a "prompt corrective action" system. These categories are:
"well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized."
An institution is treated as well capitalized if its risk-based capital
ratio is at least 10.0%, its ratio of core capital to risk-weighted assets
(the "Tier 1 risk-based capital ratio") is at least 6.0%, its leverage ratio
or core capital is at least 5.0%, and it is not subject to any order or
directive by the OTS to meet a specific capital level. At June 30, 2000, the
Bank had a risk-based capital ratio of 12.03%, a Tier 1 risk-based capital
ratio of 10.83%, and a core capital ratio of 7.20%, which qualified the Bank
for the well-capitalized category. The Bank's capital category under the
prompt corrective action system may not be an accurate representation of the
Bank's overall financial condition or prospects.
An institution will be adequately capitalized if its risk-based capital
ratio is at least 8.0%, its Tier 1 risk-based capital ratio is at least 4.0%,
and its core capital ratio is at least 4.0% (3.0% if the institution receives
the highest rating on the OTS CAMEL financial institutions rating system). An
institution whose capital does not meet the amounts required in order to be
adequately capitalized will be treated as undercapitalized. If an
undercapitalized institution's capital ratios are less than 6.0%, 3.0%, or
3.0% respectively, it will be treated as significantly undercapitalized.
Finally, an institution will be treated as critically undercapitalized if its
ratio of "tangible equity" (core capital plus cumulative preferred stock minus
intangible assets other than supervisory goodwill and purchased mortgage
servicing rights) to adjusted total assets is equal to or less than 2.0%.
An institution that is undercapitalized or lower must submit a capital
restoration plan to the OTS within 45 days after becoming undercapitalized,
and the plan can be accepted only if the institution's performance under the
plan is guaranteed, up to a maximum of 5% of the institution's assets, by
every company that controls the institution. An institution that is
undercapitalized is also subject to mandatory stringent limits on expansion
and on the ability to make capital distributions, and is prohibited from
accepting, renewing or rolling over brokered deposits and certain benefit plan
deposits. In addition, an undercapitalized institution is subject to numerous
other restrictions which the OTS may impose in its discretion, including
restrictions on transactions with affiliates and interest rates, and to the
ability of the OTS to order a sale of the institution, the replacement of
directors and management, and the appointment of a conservator or receiver. A
significantly undercapitalized institution is subject to additional sanctions
and a critically undercapitalized institution generally must be placed into
conservatorship or receivership.
Enforcement
All depository institutions, including savings associations, and
"institution affiliated parties" such as directors, officers, employees,
agents and controlling stockholders of depository institutions, including
holding companies, are subject to regulatory agency enforcement authority. An
institution or institution-affiliated party may be subject to a three-tier
penalty regime that ranges from a maximum
29
penalty of $5,000 per day for a simple violation to a maximum penalty of $1
million per day for certain knowing violations including the failure to
submit, or submission of incomplete, false or misleading, reports. An
institution-affiliated party may also be subject to loss of voting rights with
respect to the stock of depository institutions.
Savings and Loan Holding Company Regulation
Activities of the Company. As a savings and loan holding company, the
Company must file periodic reports with the OTS, and is subject to OTS
examination. As a savings and loan holding company that acquired control of
only one savings association prior to May 4, 1999, the Company generally is
not restricted under existing laws as to the types of business activities in
which it may engage, provided that the Bank continues to be a QTL. See
"Regulation--Activities Restrictions--QTL Test" for a discussion of the QTL
requirements. If the Bank ceases to be a QTL, or if the Company were to
acquire another savings association and hold such association as a subsidiary
separate from the Bank, the Company would be subject to extensive restrictions
on the types of business activities in which it could engage. Such
restrictions would limit the Company to specified finance-, real estate- and
insurance-related activities.
The Home Owners' Loan Act ("HOLA") prohibits a savings and loan holding
company such as the Company, directly or indirectly, or through one or more
subsidiaries, from (a) acquiring control of another savings institution or
savings and loan holding company without prior written approval of the OTS;
(b) acquiring or retaining, with certain exceptions, more than 5% of a non-
subsidiary savings institution or a non-subsidiary savings and loan holding
company; or (c) acquiring or retaining control of a depository institution
that is not insured by the FDIC. In evaluating applications by holding
companies such as the Company to acquire savings institutions, the OTS must
consider the financial and managerial resources and future prospects of the
company and institution involved, the effect of the acquisition on the risk to
the insurance funds, the convenience and needs of the community and
competitive factors.
Affiliate and Insider Transactions. The ability of the Company and its non-
depository subsidiaries to deal with the Bank is limited by the affiliate
transaction rules, including Sections 23A and 23B of the Federal Reserve Act
which also govern BIF-insured banks. With very limited exceptions, these rules
require that all transactions between the Bank and an affiliate must be on
arms' length terms. The term "affiliate" covers any company that controls or
is under common control with the Bank, but does not include individuals and
generally does not include the Bank's subsidiaries.
Under Section 23A and section 11 of HOLA, specific restrictions apply to
transactions in which the Bank provides funding to its affiliates: the Bank
may not purchase the securities of an affiliate, make a loan to any affiliate
that is engaged in activities not permissible for a bank holding company, or
acquire from an affiliate any asset that has been classified, a nonaccrual
loan, a restructured loan, or a loan that is more than 30 days past due. As to
affiliates engaged in bank holding company-permissible activities, the
aggregate of (a) loans, guarantees, and letters of credit provided by the
savings bank for the benefit of any one affiliate, and (b) purchases of assets
by the savings bank from the affiliate, may not exceed 10% of the savings
bank's capital stock and surplus (20% for the aggregate of permissible
transactions with all affiliates). All loans to affiliates must be secured by
collateral equal to at least 100% of the amount of the loan (130% if the
collateral consists of equity securities, leases or real property).
Loans by the Bank to its directors, executive officers, and 10% shareholders
of the Bank, the Company, or the Company's subsidiaries (collectively,
"insiders"), or to a corporation or partnership that is at least 10% owned by
an insider (a "related interest") are subject to limits separate from the
affiliate transaction rules. All loans to insiders and their related interests
must be underwritten and made on non-preferential terms; loans in excess of
$500,000 must be approved in advance by the
30
Bank's Board of Directors; and the Bank's total of such loans may not exceed
100% of the Bank's capital. Loans by the Bank to its executive officers are
subject to additional limits which are even more stringent.
Limits on Change of Control. Subject to certain limited exceptions, control
of the Bank or the Company may only be obtained with the approval (or in the
case of an acquisition of control by an individual, the nondisapproval) of the
OTS, after a public comment and application review process. Under OTS
regulations defining "control," a rebuttable presumption of control arises if
an acquiring party acquires more than 10% of any class of the Bank or the
Company (or more than 25% of any class of stock, whether voting or non-voting)
and is subject to any "control factors" as defined in the regulation. Control
is conclusively deemed to exist if an acquirer holds more than 25% of any
class of voting stock of the Bank or the Company, or has the power to control
in any manner the election of a majority of directors.
Payment of Dividends and Other Capital Distributions by Bank. The payment of
dividends, stock repurchases, and other capital distributions by the Bank to
the Company is subject to regulation by the OTS. The OTS has promulgated a
regulation that addresses a savings institution's ability to make a capital
distribution according to the institution's capital position. Effective April
1, 1999, the OTS amended its capital distributions regulation. The new rule
establishes a "safe-harbor" amounts for capital distributions that
institutions can make without OTS prior approval or notice. It also sets forth
certain conditions that specify whether a notice or an application for prior
approval of the OTS is required if the safe harbor does not apply. The OTS
retains discretion to subject institutions that meet their capital
requirements to the more stringent capital distribution rules applicable to
institutions with less capital if the OTS notifies the institution that it is
in need of more than normal supervision. The OTS retains the authority to
prohibit any capital distribution otherwise authorized under its regulations
if the OTS determines that the distribution would constitute an unsafe or
unsound practice.
Under its regulation, an application for the prior approval of the OTS to
make a capital distribution is required if any of the following conditions are
present: the institution would not be adequately-capitalized after the
distribution, its examination ratings are not at least satisfactory or it is
considered a problem association or in troubled condition, the total amount of
all its capital distributions for the applicable calendar year (including the
proposed distribution) would exceed its net income for that year to date plus
its retained net income for the prior two years, or the distribution would
violate an applicable prohibition or OTS imposed condition on the institution.
A 30-day advance notice is required if, as is the case with the Bank, the
institution is a subsidiary of a holding company, the institution would not be
well-capitalized after the distribution, or the distribution would reduce the
amount of or retire any part of its common or preferred stock or retire any
part of a debt instrument included in total capital (other than through a
regular payment on the instrument). If none of the above conditions are
present, an institution is not required to file an application or notice with
the OTS before making a capital distribution.
In connection with a conversion from mutual to stock form, a savings
institution is required to establish a liquidation account in an amount equal
to the converting institution's net worth as of a practicable date prior to
the conversion. The liquidation account is maintained for the benefit of
certain eligible accountholders maintaining accounts at or prior to the date
of conversion. In the event of a complete liquidation of the converted savings
institution (and only in such event), each such accountholder is entitled to
receive a distribution from the liquidation account equal to the then current
adjusted balance of the holder's savings accounts with the savings
institution. The Bank's ability to pay dividends to the Company is also
subject to restriction arising from the existence of the liquidation account
established upon the conversion of the Bank from mutual to stock form in
December 1993. The Bank is not permitted to pay dividends to the Company if
its regulatory capital would be reduced below the amount required for the
liquidation account.
31
Additionally, as of June 30, 2000, the Bank had a tax bad debt reserve
balance of approximately $10.9 million. Any distribution by the Bank to the
Company that exceeds the Bank's current or accumulated earnings and profits as
calculated for federal income tax purposes would be treated as a distribution
of the bad debt reserve and would be subject to recapture taxes of up to 51%.
See "Business--Federal Taxation" regarding recently enacted changes relating
to bad debt reserve recapture. The Bank does not intend to make distributions
to stockholders that would result in recapture of any portion of its bad debt
reserve. Since management intends to use the reserve only for the purpose for
which it was intended, a deferred tax liability of approximately $3.8 million
has not been recorded.
Enforcement. Whenever the OTS has reasonable cause to believe that the
continuation by a savings and loan holding company of any activity or of
ownership or control of any non FDIC-insured subsidiary constitutes a serious
risk to the financial safety, soundness, or stability of a savings and loan
holding company's subsidiary savings institution and is inconsistent with the
sound operation of the savings institution, the OTS may order the holding
company, after notice and opportunity for a hearing, to terminate such
activities or to divest such noninsured subsidiary. FIRREA also empowers the
OTS, in such a situation, to issue a directive without any notice or
opportunity for a hearing, which directive may (i) limit the payment of
dividends by the savings institution, (ii) limit transactions between the
savings institution and its holding company or its affiliates, and (iii) limit
any activity of the association that creates a serious risk that the
liabilities of the holding company and its affiliates may be imposed on the
savings institution.
In addition, FIRREA includes savings and loan holding companies within the
category of person designated as "institution-affiliated parties." An
institution-affiliated party may be subject to significant penalties and/or
loss of voting rights in the event such party took any action for or toward
causing, bringing about, participating in, counseling, or aiding and abetting
a violation of law or unsafe or unsound practice by a savings institution.
Classification of Assets
Savings institutions are required to classify their assets on a regular
basis, to establish appropriate allowances for losses and report the results
of such classification quarterly to the OTS. A savings institution is also
required to set aside adequate valuation allowances to the extent that an
affiliate possesses assets posing a risk to the institution, and to establish
liabilities for off-balance sheet items, such as letters of credit, when loss
becomes probable and estimable. The OTS has the authority to review the
institution's classification of its assets and to determine whether and to
what extent (a) additional assets must be classified, and (b) the
institution's valuation allowances must be increased.
Troubled assets are classified into one of three categories as follows:
Substandard Assets. An asset is considered "Substandard" if it is
inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. Prudent general valuation
allowances are required to be established for such assets.
Doubtful Assets. Assets classified as "Doubtful" have all of the
weaknesses inherent in those classified "Substandard" with the added
characteristic that the weaknesses present make "collection or liquidation
in full," on the basis of currently existing facts, conditions, and values,
"highly questionable and improbable." Prudent general valuation allowances
are required to be established for such assets.
Loss Assets. Assets classified as "Loss" are those considered
"uncollectible" and of such little value that their continuance as bankable
assets is not warranted.
32
General valuation allowances for loan and lease losses are included within
regulatory capital for certain purposes and up to certain limits, while
specific allowances and other general allowances are not included at all.
The OTS and the other federal banking agencies have adopted a statement of
policy regarding the appropriate levels of general valuation allowances for
loan and lease losses that institutions should maintain. Under the policy
statement, examiners will generally accept management's evaluation of adequacy
of general valuation allowances for loans and lease losses if the institution
has maintained effective systems and controls for identifying and addressing
asset quality problems, analyzed in a reasonable manner all significant
factors that affect the collectibility of the portfolio, and established an
acceptable process for evaluating the adequacy of general valuation
allowances. However, the policy statement also provides that OTS examiners
will review management's analysis more closely if general valuation allowances
for loan and lease losses do not equal at least the sum of (a) 15% of assets
classified as Substandard, (b) 50% of assets classified as Doubtful, and (c)
for the portfolio of unclassified loans and leases, an estimate of credit
losses over the upcoming twelve months based on the institution's average rate
of net charge-offs over the previous two or three years on similar loans,
adjusted for current trends and conditions.
Community Reinvestment Act
The Community Reinvestment Act ("CRA") requires each savings institution, as
well as other lenders, to identify the communities served by the institution's
offices and to identify the types of credit the institution is prepared to
extend within such communities. The CRA also requires the OTS to assess the
performance of the institution in meeting the credit needs of its community
and to take such assessment into consideration in reviewing applications for
mergers, acquisitions, and other transactions. An unsatisfactory CRA rating
may be the basis for denying such an application.
Under the CRA regulations of the OTS and the other federal banking agencies,
an institution's performance in making loans and investments and maintaining
branches and providing services in low-and moderate-income areas within the
communities that it serves is evaluated. In connection with its assessment of
CRA performance, the OTS assigns a rating of "outstanding," "satisfactory,"
"needs to improve," or "substantial noncompliance." Based on the latest
examination conducted by the OTS in 1999, the Bank was rated outstanding.
Federal Home Loan Bank System
The Federal Home Loan Banks provide a credit facility for member
institutions. As a member of the FHLB of San Francisco, the Bank is required
to own capital stock in the FHLB of San Francisco in an amount at least equal
to the greater of 1% of the aggregate principal amount of its unpaid
residential loans, residential purchase contracts and similar obligations at
the end of each calendar year, assuming for such purposes that at least 30% of
its assets were residential mortgage loans, or 5% of its advances from the
FHLB of San Francisco. At June 30, 2000 the Bank was in compliance with this
requirement. Furthermore, FHLB advances must be collateralized with certain
types of assets. Accordingly, the Bank has pledged certain loans to the FHLB
of San Francisco as collateral for its advances. See "--Financial
Modernization Legislation," below regarding legislation proposing changes in
the operation of the Federal Home Loan Bank system.
Required Liquidity
OTS regulations require savings institutions to maintain, for each calendar
quarter, an average daily balance of liquid assets (including cash, certain
time deposits, bankers' acceptances and specified United States government,
state and federal agency obligations) equal to at least 4% of the quarter end
balance of its deposits, excluding those with maturities exceeding one year,
plus short-term borrowings.
33
The OTS may change this liquidity requirement from time to time to an amount
within a range of 4% to 10% of such accounts and borrowings depending upon
economic conditions and the deposit flows of member institutions, and may
exclude from the definition of liquid assets any item other than cash and the
balances maintained in satisfaction of FRB reserve requirements, described
below. The Bank's average liquidity ratio exceeded the applicable requirement
at all times during fiscal 2000.
Federal Reserve System
The Federal Reserve Board requires savings institutions to maintain reserves
against certain of their transaction accounts (primarily deposit accounts that
may be accessed by writing unlimited checks). For the calculation period
including June 30, 2000, the Bank was not required to maintain reserves with
the Federal Reserve Board because it maintains certain levels of cash on hand
at its branches and with the requisite custodian. If balances are maintained
to meet the reserve requirements imposed by the Federal Reserve Board, they do
not earn interest but may be used to satisfy the Bank's liquidity requirements
discussed above.
As a creditor and a financial institution, the Bank is subject to certain
regulations promulgated by the Federal Reserve Board, including, without
limitation, Regulation B (Equal Credit Opportunity Act), Regulation D
(Reserves), Regulation E (Electronic Funds Transfers Act), Regulation F
(limits on exposure to any one correspondent depository institution),
Regulation Z (Truth in Lending Act), Regulation CC (Expedited Funds
Availability Act), and Regulation DD (Truth in Savings Act). As creditors of
loans secured by real property and as owners of real property, financial
institutions, including the Bank, may be subject to potential liability under
various statutes and regulations applicable to property owners, including
statutes and regulations relating to the environmental condition of the
property.
Financial Modernization Legislation
On November 12, 1999, President Clinton signed into law the Gramm-Leach-
Bliley ("G-L-B Act") which significantly reforms various aspects of the
financial services industry. The G-L-B Act authorizes affiliations between
banking, securities, and insurance firms, and authorizes bank holding
companies and national banks to engage in a variety of new financial
activities. Among the new activities that will be permitted to qualifying bank
holding companies are: insurance underwriting and brokerage, securities
underwriting, and merchant banking. Moreover, under the G-L-B Act, the Federal
Reserve Board, in consultation with the Department of Treasury, may approve
additional financial activities for these qualifying bank holding companies.
The G-L-B Act also permits certain national banks to establish subsidiaries
to engage in similar financial activities. National bank subsidiaries,
however, are prohibited from insurance underwriting, real estate development
and, for at least five years, merchant banking. The G-L-B Act generally will
subject banks to the same securities regulation as other providers of
securities products. The G-L-B Act also prohibits future acquisitions of
existing unitary savings and loan holding companies, like the Company, by
firms which are engaged in commercial activities, and limits the permissible
activities of unitary savings and loan holding companies that were not, or had
not submitted an application to become, a unitary savings and loan holding
company by May 4, 1999.
The G-L-B Act imposes new requirements on financial institutions with
respect to customer privacy. The G-L-B Act generally prohibits disclosure of
customer information to non-affiliated third parties unless the customer has
been given the opportunity to object and has not objected to such disclosure.
Financial institutions are further required to disclose their privacy policies
to customers annually. Financial institutions, however, will be required to
comply with state law if it is more protective of customer privacy than the G-
L-B Act. On June 1, 2000, the federal banking agencies, including the OTS,
issued a joint final rule implementing the privacy provisions of the G-L-B
Act. The joint rule
34
becomes effective on November 13, 2000, with compliance optional until July 1,
2001. Management does not believe that complying with the new consumer privacy
provisions or regulations will have a significant impact on our business.
The G-L-B Act contains significant revisions to the Federal Home Loan Bank
System. The G-L-B Act imposes new capital requirements on the Federal Home
Loan Banks and authorizes them to issue two classes of stock with differing
dividend rates and redemption requirements. The G-L-B Act deletes the current
requirement that the Federal Home Loan Banks annually contribute $300 million
to pay interest on certain government obligations in favor of a 20% of net
earnings formula. Accordingly, this change will result in a greater obligation
in years where Federal Home Loan Banks have high-income levels, thereby
reducing the returns on member's investments. In addition, the G-L-B Act
expands the permissible uses of Federal Home Loan Bank advances by community
financial institutions (under $500 million in assets) to include funding loans
to small businesses, small farms and small agribusinesses. If the increase in
the permissible uses for advances leads to an increase in demand, this may
increase the cost of borrowing. The G-L-B Act, however, makes membership in
the Federal Home Loan Bank voluntary for federal savings associations.
The Company is unable to predict the impact of the G-L-B Act on its
operations at this time. Although the G-L-B Act reduces the range of companies
which may acquire control of the Company and with which the Company may
affiliate, it may facilitate affiliations with companies in the financial
services industry. Also, it is expected that while the operations of some of
our competitors may benefit from the G-L-B Act, those of others may be
impaired.
35
ITEM 2. PROPERTIES.
At June 30, 2000, the Company conducted its business through an
administrative office located in Whittier and fourteen retail full service
branch offices. The Company believes that its current facilities are adequate
to meet the present and immediately foreseeable needs of the Company.
Net Book Value of
Original Property or
Date Date of Leasehold
Leased or Leased or Lease Improvements at
Location Owned Acquired Expiration June 30, 2000
-------- ----------- --------- ---------- -----------------
7021 Greenleaf Avenue Owned 7/65 None $ 789,727
Whittier, CA 90602
(Administration)
7355 Greenleaf Avenue Owned 8/18/85 None $1,118,754
Whittier, CA 90602
(Main Office)
15175 Whittier Blvd. Owned 7/29/98 None $1,391,329
Whittier, CA 90603
(Branch)
15335 Whittier Blvd. Owned/Bldg 4/1/70 None $ 89,041
Whittier, CA 90603 Leased/Land 3/31/05
(Training Center)
401 E. Whittier Blvd. Owned 12/72 None $ 317,183
La Habra, CA 90631
(Branch)
220 S. State College Blvd. Leased 1/31/92 12/31/12 $ 187,512
Brea, CA 92821
(Branch)
1701 N. Euclid Avenue Leased 7/6/76 None $ 97,217
Fullerton, CA 92835 11/30/07
(Branch)
12333 S. La Mirada Blvd. Leased 1/31/92 None $ 102,285
La Mirada, CA 90638 7/9/01
(Branch)
3160 Colima Road Leased 1/17/92 12/31/09 $ 79,972
Hacienda Heights, CA 91745
(Branch)
1201 Imperial Hwy. Leased 12/1/94 12/31/02 $ 32,115
La Habra, CA 90631
(Branch)
870 N. Rose Drive Leased 2/10/98 2/28/08 $ 184,465
Placentia, CA 92870
(Branch)
8160 E. Santa Ana Canyon Leased 2/5/98 2/28/03 $ 190,584
Road,
Suite 184
Anaheim Hills, CA 92808
(Branch)
18220 Colima Rd. Owned 10/29/99 None $ 877,172
Rowland Heights, CA 91748
(Branch)
19821 Rinaldi Street Leased 02/01/00 01/31/05 $ 128,478
Los Angeles, CA 91326
(Branch)
2770 Carson Street Leased 04/01/00 03/31/05 $ 9,667*
Lakewood, CA 90712
(Branch)
479 McKinley Street Leased 06/01/00 05/31/05 $ 164,489
Corona, CA 92878
(Branch)
26502 Towne Centre Dr. Leased 08/01/00 07/31/05 $ -- *
Foothill Ranch, CA 92610
(Branch) Opened in August,
2000
Wardman and Comstock Leased/Land 1/2/70 Month --
Whittier, CA 90602 to
(Parking Lot) Month
* Leasehold improvements are in-progress.
36
ITEM 3. LEGAL PROCEEDINGS.
The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings in the aggregate are believed by management to be
immaterial to the Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No items were submitted to a vote of stockholders during the quarter ended
June 30, 2000.
ITEM 4A. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth the names and principal occupations of the
directors and executive officers of the Company as of June 30, 2000.
Name Principal Occupation
---------------------------- -------------------------------------------------
DIRECTORS:
J. L. Thomas Chairman of the Board of the Company and of the
Bank
Frederic R. (Rick) McGill President and Chief Executive Officer of the
Company and of the Bank
David S. Engelman Private Investor
Alfred J. Gobar President and Chairman, AJGA, Inc., an economics
consulting firm
Wayne L. Harvey C.P.A., Retired
David K. Leichtfuss President, Broadview Mortgage, a mortgage banking
company
Edward L. Miller Partner, law firm of Bewley, Lassleben & Miller
D. W. Ferguson Director Emeritus of the Company and of the Bank
EXECUTIVE OFFICERS(1):
J. L. Thomas Chairman of the Board
Frederic R. (Rick) McGill President and Chief Executive Officer
Kathryn M. Hennigan Corporate Secretary and Senior Vice President,
Administrative Services
Hank H. Kadowaki Senior Vice President, Income Property Lending of
the Bank
Jerrold S. Perisho Senior Vice President, In-Store Banking of the
Bank
Harold L. Rams Senior Vice President, Single Family Lending of
the Bank
Karen A. Tannheimer Senior Vice President, Loan Service of the Bank
Robert C. Teeling Senior Vice President, Retail Banking of the Bank
Dwight L. Wilson Senior Vice President, Treasurer and Chief
Financial Officer
- --------
(1) Unless otherwise noted, the indicated principal occupation of the
executive officers is with the Company and the Bank.
37
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's common stock is traded on the National Market System of the
National Association of Securities Dealers, Inc. Automated Quotation System
("NASDAQ-NMS") under the symbol QCBC. At September 21, 2000, the Company had
approximately 307 stockholders of record (not including the number of persons
or entities holding stock in nominee or street name through various brokerage
firms) and 5,096,077 outstanding shares of common stock. The following table
sets forth for the fiscal quarters indicated the range of high and low bid
information per share of the common stock of the Company as reported on the
NASDAQ-NMS.
Fiscal 2000 Fiscal 1999
------------------------------- -------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
High........... 15 7/16 16 7/8 17 3/8 18 17 15 1/2 17 1/4 21 1/4
Low............ 13 12 3/8 16 15 3/4 14 7/8 14 5/8 11 3/4 14 3/4
The Company's ability to pay dividends is limited by certain restrictions
generally imposed on Delaware corporations. In general, dividends may be paid
only out of a Delaware corporation's surplus, as defined in the Delaware
General Corporation Law, or net profits for the fiscal year in which the
dividend is declared and/or the preceding fiscal year. "Surplus" is defined
for this purpose as the amount by which a corporation's net assets (total
assets minus total liabilities) exceed the amount designated by the Board of
Directors of the corporation in accordance with Delaware law as the
corporation's capital. The Company may pay dividends out of funds legally
available therefor at such times as the Board of Directors determines that
dividend payments are appropriate, after considering the Company's net income,
capital requirements, financial condition, alternate investment options,
prevailing economic conditions, industry practices and other factors deemed to
be relevant at the time. The Company has not paid cash dividends in the past
and does not presently intend to pay cash dividends.
The Company's principal source of income in fiscal 2000 was interest from
investments. Dividends from the Bank are a potential source of income for the
Company. On May 19, 2000, the Bank declared a $1.0 million dividend payable to
the Company based on a $5.0 million total authorization by the Board of
Directors of the Bank. The payment of dividends and other capital
distributions by the Bank to the Company is subject to regulation by the OTS.
The OTS has promulgated a regulation that addresses a savings institution's
ability to make a capital distribution according to the institution's capital
position. Effective April 1, 1999, the OTS amended its capital distributions
regulation. The new rule establishes a "safe-harbor" for capital distributions
that institutions can make without OTS prior approval or notice. It also sets
forth certain conditions that specify whether a notice or an application for
prior approval of the OTS is required if the safe harbor does not apply. Under
its regulation, an application for the prior approval of the OTS to make a
capital distribution is required if any of the following conditions are
present: the institution would not be adequately-capitalized after the
distribution, its examination ratings are not at least satisfactory or it is
considered a problem association or in troubled condition, the total amount of
all its capital distributions for the applicable calendar year (including the
proposed distribution) would exceed its net income for that year to date plus
its retained net income for the prior two years, or the distribution would
violate an applicable prohibition or OTS imposed condition on the institution.
A 30-day advance notice is required if, as is the case with the Bank, the
institution is a subsidiary of a holding company, the institution would not be
well-capitalized after the distribution, or the distribution would reduce the
amount of or retire any part of its common or preferred stock or retire any
part of a debt instrument included in total capital (other than through a
regular payment on the instrument). If none of the above conditions are
present, an institution is not required to file an application or notice with
the OTS before making a capital
38
distribution. See "Business--Regulation and Supervision--Savings and Loan
Holding Company Regulation--Payment of Dividends and Other Capital
Distributions by Bank."
The Bank's ability to pay dividends to the Company is also subject to
restriction arising from the existence of the liquidation account established
upon the conversion of the Bank from mutual to stock form in December 1993.
The Bank is not permitted to pay dividends to the Company if its regulatory
capital would be reduced below the amount required for the liquidation
account. See "Business--Regulation and Supervision--Savings and Loan Holding
Company Regulation--Payment of Dividends and Other Capital Distributions by
Bank."
39
ITEM 6. SELECTED FINANCIAL DATA
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
At or for the Year Ended June 30,
--------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- -------- -------- --------
(Dollars in thousands, except per share amounts)
Selected Financial Data:
Total assets............... $1,201,897 $1,013,437 $887,480 $801,402 $725,085
Total liabilities.......... 1,113,863 932,133 810,221 731,159 657,159
Loans receivable, net...... 990,675 821,190 691,026 644,964 607,672
Loans receivable held for
sale...................... 21,212 17,028 7,507 623 2,890
Investment securities(1)... 21,863 11,986 6,877 38,086 37,419
Mortgage-backed
securities(2)............. 109,861 99,861 115,851 74,139 41,175
Deposits................... 808,229 677,839 580,910 553,186 512,517
Federal Home Loan Bank
(FHLB) advances........... 290,250 234,700 216,000 157,700 135,300
Securities sold under
agreements to repurchase.. -- -- -- -- 300
Stockholders' equity....... 88,034 81,304 77,259 70,243 67,926
Selected Operating Data:
Interest income............ $ 84,536 $ 71,919 $ 64,870 $ 58,668 $ 52,646
Interest expense........... 48,914 40,316 39,110 34,901 31,151
---------- ---------- -------- -------- --------
Net interest income
before provision for
loan losses............. 35,622 31,603 25,760 23,767 21,495
Provision for loan losses.. 1,600 1,700 1,450 3,001 2,103
---------- ---------- -------- -------- --------
Net interest income after
provision for loan
losses.................. 34,022 29,903 24,310 20,766 19,392
---------- ---------- -------- -------- --------
Other income:
Loan servicing charges
and deposit fees........ 3,482 2,796 2,402 1,828 1,629
Gain on sale of loans
held for sale........... 316 332 175 356 175
Commissions.............. 882 716 735 555 606
Gain on sale of
securities available for
sale.................... -- 616 -- -- --
Other.................... 62 169 16 30 79
---------- ---------- -------- -------- --------
Total other income..... 4,742 4,629 3,328 2,769 2,489
---------- ---------- -------- -------- --------
Other expense:
Compensation and employee
benefits................ 10,470 9,459 8,375 7,829 7,565
Occupancy, net........... 2,848 2,308 1,945 1,946 1,970
Federal Deposit Insurance
premiums................ 458 527 517 855 1,254
Data Processing.......... 1,049 853 730 707 641
Advertising and
promotional............. 975 1,007 924 573 513
Consulting fees.......... 728 787 471 437 350
Other general and
administrative expense.. 2,600 2,264 2,139 2,026 2,487
---------- ---------- -------- -------- --------
Total general and
administrative expense.. 19,128 17,205 15,101 14,373 14,780
Savings Association
Insurance Fund special
assessment.............. -- -- -- 3,100 --
Real estate operations,
net..................... (519) 320 595 775 656
Amortization of core
deposit intangible...... 76 -- 35 264 303
---------- ---------- -------- -------- --------
Total other expense.... 18,685 17,525 15,731 18,512 15,739
---------- ---------- -------- -------- --------
Earnings before income
taxes, extraordinary item
and cumulative effect of
change in accounting
principle................. 20,079 17,007 11,907 5,023 6,142
Income taxes .............. 8,329 7,464 5,297 2,203 2,573
---------- ---------- -------- -------- --------
Net earnings before
extraordinary item and
cumulative effect of
change in accounting
principle................. 11,750 9,543 6,610 2,820 3,569
Extraordinary item, net of
taxes..................... -- (61) -- -- --
Cumulative effect of
change in accounting
principle, net of taxes... -- 162 -- -- --
---------- ---------- -------- -------- --------
Net earnings............... $ 11,750 $ 9,644 $ 6,610 $ 2,820 $ 3,569
========== ========== ======== ======== ========
Basic earnings per share... $ 2.34 $ 1.79 $ 1.21 $ 0.51 $ 0.62
========== ========== ======== ======== ========
Diluted earnings per
share(3).................. $ 2.23 $ 1.70 $ 1.14 $ 0.49 $ 0.59
========== ========== ======== ======== ========
- --------
(1) Includes $9,498, $1,819, and $1,432, of investment securities available
for sale at June 30, 2000, 1998 and 1997, respectively. No investment
securities were available for sale at June 30, 1999 and 1996.
(2) Includes $24,404, $15,783 and $8,274 of mortgage-backed securities
available for sale at June 30, 2000, 1999 and 1998, respectively. No
mortgage-backed securities were available for sale in 1997 or 1996.
(3) Diluted earnings per share in 2000, 1999, 1998, 1997 and 1996 were
calculated based on weighted average shares outstanding of 5,279,141,
5,660,351, 5,795,480, 5,792,344 and 6,048,751, respectively. The weighted
average shares have been adjusted to reflect the 25% stock dividends paid
on May 30, 1997 and June 30, 1998.
40
At or for the Year Ended June 30,
--------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
Selected Financial Ratios and Other
Data:
Performance Ratios:
Return on average assets(1).......... 1.07% 1.04% 0.78% 0.37% 0.53%
Return on average equity(1).......... 13.95 12.10 8.96 4.11 5.25
Average equity to average assets..... 7.67 8.58 8.67 9.02 10.04
Equity to total assets............... 7.32 8.02 8.71 8.77 9.37
Interest rate spread during the
period(2)........................... 2.84 2.98 2.61 2.74 2.68
Net interest margin(3)............... 3.32 3.50 3.14 3.22 3.24
Average interest-earning assets to
average
interest-bearing liabilities........ 110.50 111.60 110.97 110.17 111.47
General and administrative expense to
average
assets.............................. 1.74 1.85 1.78 1.89 2.18
Other expense to average assets(1)... 1.70 1.89 1.85 2.44 2.32
Efficiency ratio(4).................. 47.39 48.76 52.23 54.90 62.08
Dividend pay-out ratio............... -- -- -- -- --
Regulatory Capital Ratios:
Core capital to adjusted total
assets.............................. 7.20 7.48 7.44 7.34 7.67
Core capital to risk-weighted assets. 10.82 11.05 11.84 11.42 11.53
Total capital to risk-weighted
assets.............................. 12.03 12.26 12.97 12.64 12.74
Asset Quality Ratios:
Nonperforming loans as a percentage
of gross
loans(5)............................ 0.37 0.61 1.01 1.33 1.71
Nonperforming assets as a percentage
of total assets(6).................. 0.37 0.74 1.11 1.31 1.81
Total allowance for loan losses as a
percentage of gross loans........... 0.99 1.02 1.12 1.18 1.25
Total allowance for loan losses as a
percentage of total nonperforming
loans............................... 267.39 166.94 110.93 88.64 73.32
Total allowance as a percentage of
total nonperforming assets(7)....... 228.90 115.14 82.55 75.77 61.05
Number of:
Deposit accounts..................... 56,958 47,259 41,535 37,603 37,628
Mortgage loans in portfolio.......... 7,550 6,757 4,640 4,546 4,485
Mortgage loans serviced for others... 1,860 1,963 2,102 1,717 1,710
Total full-service customer
facilities.......................... 14 10 10 8 8
- --------
(1) Includes one-time special SAIF assessment of $3.1 million in fiscal 1997.
(2) 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.
(3) The net interest margin represents net interest income as a percentage of
average interest-earning assets.
(4) Efficiency ratio represents general and administrative expense as a
percentage of net interest income plus other income (excluding
nonrecurring items).
(5) Nonperforming loans are net of specific allowances and include nonaccrual
and troubled debt restructured loans. Gross loans include loans held for
sale.
(6) Nonperforming assets include nonperforming loans and REO.
(7) Total allowance includes loan and REO valuation allowances.
41
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
At June 30, 2000 the Company had total assets of $1.2 billion, total
deposits of $808.2 million and stockholders' equity of $88.0 million compared
to total assets of $1.0 billion, total deposits of $677.8 million and
stockholders' equity of $81.3 million at June 30, 1999. These changes
represent a 18.60% increase in total assets and a 8.28% increase in
stockholders' equity during fiscal 2000.
The southern California economy and real estate markets in the Company's
lending area have remained strong during the year. The Company's level of
nonperforming assets declined from June 30, 1999, both in total dollar amount
and as a percentage of total assets. The Company currently includes nonaccrual
loans 60 or more days past due (less any specific allowances on these loans),
troubled debt restructured loans and REO in determining its level of
nonperforming assets. At June 30, 2000, the Company reported $4.4 million in
nonperforming assets compared to $7.5 million and $9.8 million at June 30,
1999 and 1998, respectively. The Company recorded a provision for loan losses
of $1.6 million for the year ended June 30, 2000 compared to $1.7 million and
$1.5 million for the years ended June 30, 1999 and 1998, respectively. See
"Business--Allowances for Loan and Real Estate Losses."
Results of Operations
General. The Company reported net earnings of $11.8 million, $2.23 per share
diluted, for the year ended June 30, 2000, compared to net earnings of $9.6
million, $1.70 per share diluted, and $6.6 million, $1.14 per share diluted,
for the years ended June 30, 1999 and 1998, respectively. This increase in
earnings for fiscal 2000 compared to fiscal 1999 was primarily attributable to
an increase in net interest income partially offset by an increase in other
expenses. Net earnings for fiscal 2000 also includes $400,000 of recaptured
accrued taxes as a result of a favorable tax audit ruling. Without this tax
recapture, net earnings for the fiscal year ended June 30, 2000 would have
been $11.4 million, $2.15 per share diluted, representing a 26% increase in
earnings per share over the previous year. The increase in earnings in fiscal
1999 over 1998 was primarily attributable to an increase in net interest
income and an increase in noninterest income due primarily to the one-time
gain on sale of securities, partially offset by an increase in total other
expense.
Interest Income. Interest income was $84.5 million, $71.9 million and $64.9
million for the years ended June 30, 2000, 1999, and 1998, respectively. The
$12.6 million increase in interest income in 2000 compared to 1999 resulted
from an increase in the average balance of interest-earning assets of $168.1
million while the average yield on interest-earnings assets decreased 0.08% to
7.87%. The $7.0 million increase in interest income in 1999 compared to 1998
resulted from an increase in the average balance of interest-earning assets of
$83.1 million while the average yield on interest earning assets increased
0.05 to 7.95%.
Interest Expense. Interest expense was $48.9 million, $40.3 million, and
$39.1 million for the years ended June 30, 2000, 1999, and 1998, respectively.
The $8.6 million increase in 2000 compared to 1999 resulted from an increase
in the average balance of interest-bearing liabilities of $160.3 million and
an increase in the average cost on interest-bearing liabilities of 0.07% to
5.04%. The $1.2 million increase in 1999 compared to 1998 resulted from an
increase in the average balance of interest-bearing liabilities of
$70.2 million and partially offset by a decrease in the average cost on
interest-bearing liabilities of 0.32% to 4.97%.
Net Interest Income Before Provision for Loan Losses. Net interest income
before provision for loan losses was $35.6 million, $31.6 million, and $25.8
million for the years ended June 30, 2000,
42
1999, and 1998, respectively. The increase in 2000 compared to 1999 was
primarily a result of the increase in interest-earning assets relative to
interest-bearing liabilities during the year partially offset by the decrease
in the yield on interest-earning assets and an increase in the cost of
interest-bearing liabilities. The increase in 1999 compared to 1998 was
primarily a result of the increase in interest-earning assets relative to
interest-bearing liabilities, as well as a decrease in the cost of interest-
bearing liabilities.
Provision for Loan Losses. During fiscal 2000, 1999, and 1998 the Company
established $1.6 million, $1.7 million and $1.5 million, respectively, of
provisions for losses on loans. The slight decrease in the provision for 2000
is primarily a result of the continued decrease in nonperforming assets during
the year. The slight increase in the provision for fiscal 1999 compared to
1998 was primarily a result of the overall growth in the loan portfolio as
compared to the prior year, specifically in commercial real estate. In
addition, certain one-to-four family loans purchased during fiscal 1999 were
considered by the Company to have higher risk characteristics because they are
loans outside of California, which has historically been considered the
Company's primary market area for one-to-four family loans. Management
considers the level of nonperforming assets, the regional economic conditions
and relevant real estate values and other factors when assessing the adequacy
of the allowance for loan losses. The southern California economy and real
estate markets in the Company's primary lending area continued to be strong
during fiscal 2000, and management considers the level of allowance for loan
losses at June 30, 2000 to be adequate. However, even though the local economy
and real estate markets were strong during fiscal 2000, there can be no
assurance that nonperforming assets will not increase and that the Company
will not have to establish additional loss provisions based upon future
events.
Other Income. Other income increased slightly in 2000 to $4.7 million
compared to $4.6 million in 1999. Deposit fees increased to $1.6 million for
2000 compared to $1.1 million for 1999, a 47.84% increase as a result of a
continued program, that began in the second quarter of fiscal 1998, with
efforts to attract checking accounts as well as a larger deposit base. In
addition, other income for fiscal 1999 reflected gains on sale of securities
of $616,000 compared to none in fiscal 2000. Other income increased by $1.3
million in fiscal 1999 as compared to fiscal 1998. This increase was due to
the $616,000 gain on sale of securities as well as transactional fee income
for deposits and loans increasing due to a larger deposit and loan base and
prepayment fees on loans increased due to a higher level of loans paying off
in order to refinance in the lower rate environment during that time period.
Other Expense. Other expense increased $1.2 million, or 6.62%, from $17.5
million in fiscal 1999 to $18.7 million in fiscal 2000. This increase in other
expense is primarily due to an increase in compensation and employee benefits
and occupancy expense. These increases during fiscal 2000 are primarily a
result of three retail banking branches opened during the year and the
purchase of a branch facility and its deposits from another financial
institution. Included in compensation and employee benefits are expenses
related to the Employee Stock Ownership Plan ("ESOP"). Companies that
established an ESOP after 1992 are required to account for the expense of the
ESOP at the fair value of the related shares released. The expense related to
the ESOP was $1.0 million, $1.0 million, and $1.1 million for the fiscal years
ended June 30, 2000, 1999, and 1998, respectively.
Other expense increased $1.8 million, or 11.40%, from $15.7 million in
fiscal 1998 to $17.5 million in fiscal 1999. The increase was primarily due to
the opening of additional retail banking branches during February 1998, the
relocation of an existing branch to a larger more accessible location in
August 1998 and additional staffing in the income property lending department
of the Company.
43
The following is a summary of other general and administrative expenses for
the fiscal years ended:
June 30,
--------------------
2000 1999 1998
------ ------ ------
(In thousands)
Professional fees...................................... $ 290 $ 246 $ 260
Bank service charges................................... 324 305 234
Miscellaneous loan expenses............................ 175 316 486
Other.................................................. 1,811 1,397 1,159
------ ------ ------
$2,600 $2,264 $2,139
====== ====== ======
Income Taxes. Income taxes increased by $865,000 from $7.5 million in fiscal
1999 to $8.3 million in fiscal 2000. Income taxes increased by $2.2 million
from $5.3 million in fiscal 1998 to $7.5 million in fiscal 1999. The effective
tax rate was 41.48%, 43.89% and 44.49% for the years ended June 30, 2000, 1999
and 1998, respectively. The decrease in the effective tax rate for 2000 as
compared to 1999 is primarily a result of a $400,000 recapture of accrued
taxes due to a favorable tax audit ruling. The decrease in the effective tax
rate for 1999 as compared to 1998 is primarily a result of ESOP expense as a
percentage of net earnings before income taxes being lower in fiscal 1999 due
to the increase in net earnings before income taxes.
Extraordinary Item and Cumulative Effect of Change in Accounting
Principle. During the fiscal year ended June 30, 1999, the Company prepaid
approximately $8.0 million of its higher cost borrowings and replaced the
funds with less expensive borrowings and retail deposits. In association with
the debt prepayment, the Company paid a prepayment fee of $61,000, after tax.
The prepayment fee is disclosed as an extraordinary item on the statement of
earnings. The Company implemented SFAS No. 133 effective July 1, 1998. Upon
implementation, approximately $78.0 million in MBS were reclassified from held
to maturity to available for sale. The Company has accounted for the gains or
losses on the sale of any such reclassified MBS sold within 90 days of the
reclassification date as the cumulative effect of a change in accounting
principle. Any gains or losses recorded on such reclassified securities sold
90 days or more after the reclassification date have been recorded as gain or
losses on sale of securities available for sale. In the first quarter of 1999,
the Company sold $29.6 million of these reclassified MBS for a gain after tax
of $162,000.
Financial Condition
The Company's consolidated assets totaled $1.2 billion at June 30, 2000,
compared to $1.0 billion at June 30, 1999. Stockholders' equity totaled $88.0
million at June 30, 2000 compared to $81.3 million at June 30, 1999. The
increase in assets is primarily attributable to the implementation of the
Company's growth strategies and was primarily funded by deposit growth and
FHLB advances.
Loans and MBS (including assets held or available for sale) increased to
$1.1 billion at June 30, 2000, from $938.1 million at June 30, 1999. Loans
originated and purchased for investment were $299.2 million for the year ended
June 30, 2000, compared to $276.4 million for the same period the previous
year. MBS purchased for investment decreased to $12.0 million at June 30,
2000, from $70.6 million for the same period the previous year.
At June 30, 2000, the Company's multifamily loan portfolio totaled $505.4
million, or 49.20% of total loans, an increase of 29.07% as compared to $391.6
million at June 30, 1999, and its commercial loan portfolio totaled $196.5
million, or 19.13% of total loans, an increase of 39.92% as compared to $140.4
million at June 30, 1999. Of the Company's $139,000 of charge-offs in fiscal
2000, $125,000 or 81.93% were for one-to-four family loans and none were
multifamily or for commercial real estate loans. The Company's commercial loan
portfolio increased significantly during the past fiscal year,
44
increasing by approximately 39.92%. 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 three fiscal years, the Company's past loss experience with respect to
its commercial loan portfolio may not be representative of the risk of loss in
such portfolio in the future. See "Business--Allowances for Loan and Real
Estate Losses." Multifamily and commercial real estate loans are generally
considered to involve a higher degree of credit risk and to be more vulnerable
to deteriorating economic conditions 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. Even though the southern California real estate market was
healthy in fiscal 2000, recessionary economic conditions of the type that have
prevailed in recent 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. See "Business--Lending
Activities--Multifamily Lending" and "--Commercial Real Estate Lending."
Loan sales decreased to $48.9 million for the year ended June 30, 2000,
compared to $64.0 million for the same period ended June 30, 1999. The
decrease in loan sales is primarily a result of a decrease in funding of
fixed-rate loans during a period of higher interest rates during fiscal 2000
compared to 1999. These fixed rate loans were generally held for sale during
this period. Loans serviced for others increased to $299.1 million at June 30,
2000 from $284.2 million at June 30, 1999 primarily due to a lower rate of
loan prepayments in fiscal 2000 compared to fiscal 1999.
Capital Resources and Liquidity
Regulatory Capital Requirements
FIRREA and implementing OTS capital regulations require the Bank to maintain
certain minimum tangible, core and risk-based regulatory capital levels. The
minimum core capital requirement is 4% for all but the highest rated savings
associations. See "Business--Regulation and Supervision--Regulatory Capital
Requirements."
The following table summarizes the regulatory capital requirements for the
Bank at June 30, 2000. As indicated in the table, the Bank's capital levels
exceed all three of the currently applicable minimum capital requirements.
June 30, 2000
-----------------------------------------
Tangible Risk-Based
Capital Core Capital Capital
------------ ------------ -------------
Amount % Amount % Amount %
------- ---- ------- ---- ------- -----
(Dollars in thousands)
Regulatory capital................ $86,358 7.20% $86,358 7.20% $95,999 12.03%
Required minimum.................. 17,979 1.50 47,944 4.00 63,836 8.00
------- ---- ------- ---- ------- -----
Excess capital.................... $68,379 5.70% $38,414 3.20% $32,163 4.03%
======= ==== ======= ==== ======= =====
In addition, FDICIA required the OTS to implement a system of regulatory
sanctions against institutions that are not adequately capitalized, with the
sanctions growing more severe the lower the institution's capital. Under
FDICIA, the OTS issued regulations establishing five separate
capital categories: "well capitalized." "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized," differentiated by core capital ratio, level of core capital
to risk-weighted assets and risk-based capital ratio. See "Business--
Regulation and Supervision--Prompt Corrective Action Requirements."
An institution is treated as "well capitalized" if its core capital ratio to
adjusted total assets is at least 5%, its ratio of core capital to risk-
weighted assets is at least 6% and its total capital to risk-
45
weighted assets ratio is at least 10%. The following table summarizes the
capital ratios of the "well capitalized" category and the Bank's regulatory
capital at June 30, 2000 as compared to such ratios. As indicated in the
table, the Bank's capital levels exceeded the three minimum capital ratios of
the "well capitalized" category.
June 30, 2000
--------------------------------------------
Total Capital
Core Capital Core Capital to Risk-
to Adjusted to Risk- Weighted
Total Assets Weighted Assets Assets
------------ --------------- -------------
Amount % Amount % Amount %
------- ---- --------------- ------- -----
(Dollars in thousands)
Regulatory capital............. $86,358 7.20% $ 86,358 10.82% $95,999 12.03%
Well capitalized requirement... 59,930 5.00 47,877 6.00 79,795 10.00
------- ---- -------- ------ ------- -----
Excess capital................. $26,428 2.20% $ 38,481 4.82% $16,204 2.03%
======= ==== ======== ====== ======= =====
For the year ended June 30, 2000 a total of 380,500 shares had been
repurchased under previously announced plans to repurchase Company stock. Up
to 270,000 additional shares could be repurchased in the future under current
board authorization.
Sources of Funds and Liquidity
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. See "Business--
Regulation and Supervision--Savings and Loan Holding Company Regulation--
Payment of Dividends and Other Capital Distributions by Bank" and "Market for
the Registrant's Common Equity and Related Stockholder Matters."
The Bank's primary sources of funds in fiscal 2000 were deposits, FHLB
advances, principal and interest payments on loans and proceeds from the sale
of loans. While maturities and scheduled amortization of loans are predictable
sources of funds, deposit flows and mortgage prepayments are greatly
influenced by interest rates, economic conditions, and competition. The Bank
also has other potential sources of liquidity, such as securities sold under
agreements to repurchase and liquidating existing short-term assets.
The Bank has continued to maintain the required minimum levels of liquid
assets as defined by 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 Bank's average liquidity ratios were 4.33%, 4.49%,
and 4.12%, at June 30, 2000, 1999, and 1998, respectively. Management
currently attempts to maintain a liquidity ratio as close to the minimum as
possible. Liquidity levels reflect management's strategy to invest excess
liquidity in higher yielding interest-earning assets such as loans or MBS.
The Company's cash flows are comprised of three primary classifications:
cash flows from operating activities, cash flows used by investing activities
and financing activities. Cash flows from operating activities consisted
primarily of cash flows from the sale of loans held for sale which totaled
$48.9 million, $64.0 million, and $34.3 million for fiscal 2000, 1999, and
1998, respectively. The Company originated loans for sale of $53.0 million,
$73.7 million, and $41.3 million during fiscal years 2000, 1999, and 1998,
respectively. Net cash used by investing activities consisted primarily of
loan originations, loan purchases and investment purchases, offset by
principal collections on loans and proceeds from principal reductions on MBS
and maturities of other investment securities. Loans originated and purchased
for investment were $299.2 million, $276.4 million, and $143.4 million for
fiscal 2000, 1999, and 1998, respectively. Proceeds from principal repayments
on loans were
46
$127.3 million, $145.6 million and $91.8 million for fiscal years ended 2000,
1999, and 1998. Proceeds from maturities and principal payments of investment
securities were $2.9 million, $9.1 million, and $31.6 million for fiscal years
ended 2000, 1999, and 1998, respectively. Net cash used by financing
activities consisting primarily of net activity in deposit accounts and
proceeds from funding and repayments of FHLB advances. The net change in
deposits was an increase of $130.4 million, $96.9 million, and $27.7 million
for fiscal 2000, 1999 and 1998, respectively. During the second quarter of
fiscal 2000 the Bank purchased a retail branch office and its $45.9 million of
deposits from another financial institution. This branch is located in Rowland
Heights, California. The Bank also opened three "in-store" branches in Wal-
Mart stores, the nation's largest retailer, during the second half of fiscal
2000. A fourth Wal-Mart in-store branch was opened in August 2000 with plans
to open, at least, two additional Wal-Mart "in-store" branches later in fiscal
2001. All of the Bank's existing and planned Wal-Mart "in-store" branches are
located in the southern California area. In addition, while the vast majority
of the Bank's deposits are retail in nature, the Bank accepted $55 million in
time deposits from a political subdivision during fiscal 2000. 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. The net
proceeds from FHLB advances were $55.6 million, $18.7 million, and $53.3
million for fiscal 2000, 1999, and 1998, respectively.
Due to the Company's growth strategies and increased competition for retail
deposits in fiscal 2000, 1999, and 1998, the Company's use of FHLB advances
increased. At June 30, 2000, the Company had $290.3 million (26.06% of total
liabilities) in advances outstanding from the FHLB compared to $234.7 million
(25.18% of total liabilities) at June 30, 1999. The maximum amount of advances
that the Company had outstanding at any month-end was $312.1 million.
Management anticipates increased borrowing from the FHLB again in fiscal 2001.
See "Business--Sources and Funds--Borrowings."
The Company's most liquid assets are cash and short-term investments. The
levels of these assets are dependent on the Company's operating, financing,
lending and investing activities during any given period. At June 30, 2000,
cash and short-term investments totaled $14.1 million, a decrease of 57.40%
from $33.1 million at June 30, 1999.
At June 30, 2000, the Company had outstanding commitments to originate loans
of $15.0 million and no commitments to purchase loans. At June 30, 2000, the
Company had $25.5 million of approved undisbursed lines of credit. The Company
anticipates that it will have sufficient funds available to meet its current
loan origination and purchase commitments. Certificates of deposits which have
contractual maturities in one year or less from June 30, 2000, totaled
$511.2 million. If a significant portion of the maturing certificates are not
renewed at maturity, the Company's other sources of liquidity include FHLB
advances, principal and interest payments on loans, proceeds from loan sales
and other borrowings, such as repurchase transactions. The Company could also
choose to pay higher rates to maintain maturing deposits, which could result
in increased cost of funds. Historically, the Company has maintained a
significant portion of maturing deposits. While management anticipates that
there may be some outflow of these deposits upon maturity due to the current
competitive rate environment, these are not expected to have a material impact
on the long-term liquidity position of the Company.
Asset/Liability Management
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and
by monitoring an institution's interest-rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period
if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of interest-
earning assets maturing or repricing within a specific time
47
period and the amount of interest-bearing liabilities maturing or repricing
within that time period. A gap is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A gap is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate sensitive assets.
During a period of falling interest rates therefore, the net earnings of an
institution with a positive gap theoretically may be adversely affected due to
its interest-earning assets repricing to a greater extent than its interest-
bearing liabilities. Conversely, during a period of rising interest rates,
theoretically, the net earnings of an institution with a positive gap position
may increase as it is able to invest in higher yielding interest-earning
assets at a more rapid rate than its interest-bearing liabilities reprice. In
addition, a positive gap may not protect an institution with a large portfolio
of ARM loans from increases in interest rates for extended time periods as
such instruments generally have periodic and lifetime interest rate caps.
Additionally, the Company's ARM loans are predominantly tied to COFI, a
lagging market index, and rapid increases in interest rates could have a
negative impact on the Company's earnings. Accordingly, interest rates and the
resulting cost of funds increases in a rapidly increasing rate environment
could exceed the cap levels on these instruments and negatively impact net
interest income. Declining interest rates have, in general, benefited the
Company primarily due to the effect of the lagging market index which has
resulted in interest income declining at a slower rate than interest expense.
At June 30, 2000, the Company's total interest-earning assets maturing or
repricing within one year exceeded its total interest-bearing liabilities
maturing or repricing in the same time by $60.6 million, representing a one
year cumulative positive gap ratio of 5.04%. This compares to $4.3 million at
June 30, 1999, which represented a positive GAP ratio of 0.42%.
This increase in the one year cumulative GAP ratio is primarily a result of
the following:
. a significant amount of financing activity during the fiscal year in
adjustable rate loans.
. The extension of the assumed repricing period of the Company's money
market deposit accounts. This is consistent with the Company's actual
experience with these accounts over the past fiscal year.
The Company manages the resulting interest rate risk by extending the
maturities of various liabilities such as FHLB advances and retail
certificates of deposit.
The Company closely monitors its interest rate risk as such risk relates to
its operational strategies. The Bank's Board of Directors has established an
Asset/Liability Committee, responsible for reviewing its asset/liability
policies and interest rate risk position, which generally meets weekly and
reports to the Board of Directors on interest rate risk and trends on a
quarterly basis. The Company's cumulative gap position is at a level
satisfactory to management. There can be no assurances that the Company will
be able to maintain its positive gap position or that its strategies will not
result in a negative gap position in the future. The level of the movement of
interest rates, up or down, is an uncertainty and could have a negative impact
on the earnings of the Company.
The Company does not currently engage in the use of trading activities, high
risk derivatives and synthetic instruments or hedging activities in
controlling its interest rate risk. Such uses are permitted at the
recommendation of the Asset/Liability Committee with the approval of the Board
of Directors, however, the Company does not anticipate engaging in such
practices in the immediate future.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at June 30, 2000, which are
anticipated by the Company, based upon certain assumptions, to reprice or
mature in each of the future time periods shown. Except as stated below, the
amount of assets and liabilities shown which reprice or mature during a
particular period were determined in accordance with the earlier of term to
repricing or the contractual terms of the asset or liability. Specifically,
the Company assumed a prepayment rate ranging from 6% to 18% on ARM
48
loans, and 6% to 15% on fixed rate loans. Additionally, the Company utilized
deposit decay rate assumptions of 50% for passbook accounts, 15.8% for
checking accounts and 10% to 50% for money market deposit accounts in the one
year or less category. The range of decay rates for money market deposit
accounts is due to the market rate sensitivity of various money market
checking accounts. These decay rates are based upon the Company's historical
experience, but there is no assurance that the assumed rates will correspond
to future rates. For information regarding the contractual maturities of the
Company's loans, investments and deposits, see "Business--Lending Activities,"
"--Investment Activities" and "--Sources of Funds."
49
At June 30, 2000
---------------------------------------------------------------------------------------------------
More
More than More than More than than 3 More than
3 Months 3 Months to 6 Months 1 Year to Years to 5 Years to More than Non-interest
or Less 6 Months to 1 Year 3 Years 5 Years 10 Years 10 Years Bearing Total
-------- ----------- --------- --------- -------- ---------- --------- ------------ ----------
(Dollars in thousands)
Interest-earning
assets:
Interest-earning
deposits............. $ 673 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 673
Federal funds sold
and other short-term
investments.......... 3,900 -- -- -- -- -- -- -- 3,900
Investment
securities, net(3)... -- -- -- 4,500 17,363 -- 9,498 -- 31,361
Loans
receivable(1)(3)..... 613,549 84,554 43,394 73,614 136,138 52,021 20,188 1,023,458
Mortgage-backed
securities(3)........ 14,591 3,041 5,761 19,458 14,250 22,260 30,500 -- 109,861
FHLB stock........... 15,607 -- -- -- -- -- -- -- 15,607
-------- --------- --------- --------- -------- ------- ------- -------- ----------
Total interest-
earning assets..... 648,320 87,595 49,155 97,572 167,751 74,281 60,186 -- 1,184,860
-------- --------- --------- --------- -------- ------- ------- -------- ----------
Less:
Unearned discount
and deferred
fees(2).............. 2,687 363 204 404 695 308 229 -- 4,890
Allowance for loan
losses............... -- -- -- -- -- -- -- 10,161 10,161
-------- --------- --------- --------- -------- ------- ------- -------- ----------
Net interest-
earning assets...... 645,633 87,232 48,951 97,168 167,056 73,973 59,957 (10,161) 1,169,809
Non-interest-earning
assets............... -- -- -- -- -- -- -- 32,088 32,088
-------- --------- --------- --------- -------- ------- ------- -------- ----------
Total assets....... $645,633 $ 87,232 $ 48,951 $ 97,168 $167,056 $73,973 $59,957 $ 21,927 $1,201,897
======== ========= ========= ========= ======== ======= ======= ======== ==========
Interest-bearing
liabilities:
Money market
deposits............. $ 3,675 $ 3,675 $ 6,125 $ 57,891 $ 32,564 $40,559 $ 4,887 $ -- $ 149,376
Passbook deposits.... 2,829 2,829 5,658 5,663 5,664 -- -- -- 22,643
NOW and other demand
deposits............. 1,785 1,785 3,570 17,710 9,962 10,428 -- -- 45,240
Certificate
accounts(4).......... 135,810 197,183 178,183 52,891 11,461 -- -- -- 575,528
FHLB advances(5)..... 118,900 24,800 34,400 92,650 19,500 -- -- -- 290,250
-------- --------- --------- --------- -------- ------- ------- -------- ----------
Total interest-
bearing
liabilities........ 262,999 230,272 227,936 226,805 79,151 50,987 4,887 -- 1,083,037
Non-interest bearing
liabilities.......... -- -- -- -- -- -- -- 30,826 30,826
Stockholders'
equity............... -- -- -- -- -- -- -- 88,034 88,034
-------- --------- --------- --------- -------- ------- ------- -------- ----------
Total liabilities
and stockholders'
equity............. $262,999 $ 230,272 $ 227,936 $ 226,805 $ 79,151 $50,987 $ 4,887 $118,860 $1,201,897
======== ========= ========= ========= ======== ======= ======= ======== ==========
Interest sensitivity
gap(6)................ $382,634 $(143,040) $(178,985) $(129,637) $ 87,905 $22,986 $55,070 $(96,933) $ --
======== ========= ========= ========= ======== ======= ======= ======== ==========
Cumulaltive interest
sensitivity gap....... $382,634 $ 239,594 $ 60,609 $ (69,028) $ 18,877 $41,863 $96,933 $ -- $ --
======== ========= ========= ========= ======== ======= ======= ======== ==========
Cumulative interest
sensitivity gap as a
percentage of total
assets................ 31.84% 19.94% 5.04% (5.74)% 1.57% 3.48% 8.07%
Cumulative net
interest-earning
assets as a percentage
of cumulative
interest-bearing
liabilities........... 245.49% 143.70% 99.40% 77.42 % 81.63% 85.26% 102.66%
- ----
(1) For purposes of the gap analysis, mortgage and other loans are reduced for
nonperforming loans but are not reduced for the allowance for loan losses.
(2) For purposes of the gap analysis, unearned discount and deferred fees are
pro rated for loans receivable.
(3) Includes assets held or available for sale.
(4) Certain certificate accounts have potential repricing dates which are
prior to the contractual maturity dates. The repricing dates were used for
purposes of the gap analysis.
(5) Certain FHLB Advances have call features which are prior to the
contractual maturity dates. The call dates were used for purposes of the
gap analysis.
(6) Interest sensitivity gap represents the difference between net interest-
earning assets and interest-bearing liabilities.
50
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on
certain types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while interest rates on other types may lag behind
changes in market rates. Additionally, certain assets, such as ARM loans, have
features which restrict changes in interest rates on a short-term basis and
over the life of the asset. Further, in the event of a change in interest
rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed in calculating the table. Finally, the
ability of many borrowers to service their ARM loans may decrease in the event
of an interest rate increase.
Average Balance Sheet
The following table sets forth certain information relating to the Company
for the years ended June 30, 2000, 1999, and 1998. The yields and costs are
derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods shown except where noted otherwise.
Average balances are derived from average month-end balances. Management does
not believe that the use of average monthly balances instead of average daily
balances has caused any material differences in the information presented. The
average balance of loans receivable includes loans on which the Company has
discontinued accruing interest. The yields and costs include fees which are
considered adjustments to yields.
51
Year Ended June 30,
---------------------------------------------------------------------------------
At June 30,
2000 2000 1999 1998
----------- --------------------------- ------------------------- -------------------------
Yield/ Yield/ Yield/
Rate End of Average Average Average Average Average Average
Period Balance Interest Cost Balance Interest Cost Balance Interest Cost
----------- ---------- -------- ------- -------- -------- ------- -------- -------- -------
(Dollars in thousands)
Assets:
Interest-earning
assets:
Interest-earning
deposits............. 2.88% $ 533 $ 13 2.44% $ 363 $ 12 3.31% $ 239 $ 9 3.77%
Federal funds sold and
other short-term
investments.......... 6.50 6,134 339 5.53 22,949 1,018 4.44 17,691 802 4.53
Investment securities,
net(1)............... 6.85 19,667 1,309 6.66 12,399 858 6.92 24,186 1,608 6.65
Loans receivable(2)... 8.22 925,624 74,977 8.10 764,401 63,207 8.27 665,328 54,793 8.24
Mortgage-backed
securities, net(1)... 6.87 106,237 7,066 6.65 92,162 6,149 6.67 102,749 6,995 6.81
FHLB stock............ 5.50 14,202 832 5.86 11,978 675 5.64 11,001 663 6.03
---------- ------- -------- ------- -------- -------
Total interest-
earning assets...... 8.01 1,072,397 84,536 7.87 904,252 71,919 7.95 821,194 64,870 7.90
Non-interest-earning
assets............... 25,650 24,961 29,584
---------- -------- --------
Total assets......... $1,098,047 $929,213 $850,778
========== ======== ========
Liabilities and
Stockholders' equity:
Interest-bearing
liabilities:
Money market deposits. 4.33 $ 163,017 7,062 4.33 $137,473 6,008 4.37 $110,990 5,022 4.52
Passbook deposits..... 1.99 21,324 421 1.97 18,298 363 1.98 17,425 351 2.01
NOW and other demand
deposits............. 1.37 44,497 633 1.42 35,219 476 1.35 26,363 336 1.27
Certificate accounts.. 5.76 489,414 26,108 5.33 429,798 22,685 5.28 400,204 22,429 5.60
---------- ------- -------- ------- -------- -------
Total savings
accounts............. 5.04 718,252 34,224 620,788 29,532 554,982 28,138
FHLB advances......... 6.30 252,284 14,690 5.82 189,456 10,784 5.69 185,032 10,972 5.93
---------- ------- -------- ------- -------- -------
Total interest-
bearing liabilities. 5.37 970,536 48,914 5.04 810,244 40,316 4.97 740,014 39,110 5.29
Non-interest-bearing
liabilities.......... 43,253 39,283 36,984
Stockholders' equity.. 84,258 79,686 73,780
---------- -------- --------
Total liabilities and
stockholders' equity. $1,098,047 $929,213 $850,778
========== ------- ======== ======= ======== -------
Net interest
income/interest rate
spread(3)............ $35,622 2.83% $31,603 2.98% $25,760 2.61%
======= ====== ======= ====== ======= ======
Net interest
margin(4)............ 3.32% 3.50% 3.14%
====== ====== ======
Ratio of interest-
earning assets to
interest-bearing
liabilities.......... 110.50% 111.60% 110.97%
====== ====== ======
- ------
(1) Amount includes assets available for sale.
(2) Amount is net of deferred loan fees, loan discounts, loans in process and
loan loss allowances, and includes nonaccrual loans and loans held for
sale.
(3) Net interest rate spread represents the difference between the yield on
average interest-earning assets and the cost of average interest-bearing
liabilities.
(4) Net interest margin represents net interest income divided by average
interest-earning assets.
52
Rate/Volume Analysis. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected the Company's interest income
and interest expense during the periods indicated. Information is provided in
each category with respect to (i) changes attributable to changes in volume
(changes in volume multiplied by prior rate), (ii) changes attributable to
changes in rate (changes in rate multiplied by prior volume), and (iii) the
net change. The changes attributable to the combined impact of volume and rate
have been allocated proportionately to the changes due to volume and the
changes due to rate.
Year Ended June 30, 2000 Year Ended June 30, 1999
Compared to Compared to
Year Ended June 30, 1999 Year Ended June 30, 1998
--------------------------- ---------------------------
Increase (Decrease) In Increase (Decrease) In
Interest Income/Interest Interest Income/Interest
Expense Expense
--------------------------- ---------------------------
Due to
Net ----------------- Net
Volume Rate Change Volume Rate Change
------ ---- ------ -------- -------- --------
(In thousands)
Interest-earning assets:
Interest-earning
deposits.............. $ 32 $ (43) $ (11) $ 6 $ 9 $ 15
Federal funds sold and
other short-term
investments........... (1,035) 368 (667) 230 (26) 204
Investment securities,
net(2)................ 482 (31) 451 (819) 69 (750)
Loans receivable,
net(1), (2)........... 13,030 (1,260) 11,770 8,191 223 8,414
Mortgage-backed
securities, net(2).... 936 (19) 917 (709) (137) (846)
FHLB stock............. 129 28 157 45 (33) 12
------- -------- ------- ------- -------- -------
Total interest-
earning assets...... 13,574 (957) 12,617 6,944 105 7,049
------- -------- ------- ------- -------- -------
Interest-bearing
liabilities:
Money market deposits.. 1,106 (52) 1,054 1,151 (165) 986
Passbook deposits...... 60 (2) 58 17 (5) 12
NOW and other demand
deposits.............. 131 26 157 119 21 140
Certificate accounts... 3,178 245 3,423 1,204 (948) 256
FHLB advances.......... 3,653 253 3,906 278 (466) (188)
------- -------- ------- ------- -------- -------
Total interest-
bearing liabilities. 8,128 470 8,598 2,769 (1,563) 1,206
------- -------- ------- ------- -------- -------
Change in net interest
income................. $ 5,446 $ (1,427) $ 4,019 $ 4,175 $ 1,668 $ 5,843
======= ======== ======= ======= ======== =======
- --------
(1) Includes nonaccrual loans.
(2) Includes assets held or available for sale.
Year 2000
Beginning in 1997, the Company developed and implemented a program to make
its systems and processes Year 2000 compliant. The Company's Year 2000 program
included the preparation of a plan and a contingency plan as required by the
Federal Financial Institutions Examination Council as well as the testing and
replacement of information technology assets ("IT assets"), such as computer
hardware, software and systems, and non-IT assets.
As of the date of this report, the Company has experienced no material
disruption in the operation of its business as a result of the transition from
1999 to 2000. However, it is possible that the full impact of Year 2000 issues
has not been fully recognized, and no assurances can be given that Year 2000
problems will not emerge.
The total cost of the Company's Year 2000 program was approximately $1.5
million, including approximately $330,000 incurred in the year ended June 30,
2000. Program costs consisted primarily of costs for acquiring equipment and
software, which are being depreciated over their useful lives, and personnel
and consulting costs, which were expensed as incurred. The Company has funded
these Year 2000 expenditures primarily through operating cash flow.
53
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with GAAP, which require the measurement of
financial position and operating results in terms of historical dollars
without considering the changes in the relative purchasing power of money over
time due to inflation. The impact of inflation is reflected in the increased
cost of the Company's operations. Unlike industrial companies, nearly all of
the assets and liabilities of the Company are monetary in nature. As a result,
interest rates have a greater impact on the Company's performance than do the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or to the same extent as the price of goods and
services. See "Market Risk" and "--Asset/Liability Management."
Impact of New Accounting Standards
In March 2000, the FASB Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation. This Interpretation clarifies
certain issues relating to APB Opinion No. 25, Accounting for Stock Issued to
Employees. FASB Interpretation No. 44 contains information relating to (a) the
definition of employee for purposes of applying Opinion 25, (b) the criteria
for determining whether a plan qualifies as a non-compensatory plan, (c) the
accounting consequence of various modifications to the term of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FASB Interpretation No. 44 is
effective July 1, 2000. The effects of applying this Interpretation are
recognized on a prospective basis from July 1, 2000.
ITEM 7A. 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.
54
The Company's profitability is affected by fluctuations in interest rates. A
sudden and substantial increase in interest rates may adversely impact the
Company's earnings to the extent that the interest rates borne by assets and
liabilities do not change at the same speed, to the same extent, or on the
same basis. The Company monitors the impact of changes in interest rates on
its net interest income using several tools. One measure of the Company's
exposure to differential changes in interest rates between assets and
liabilities is shown in the Company's Maturity and Rate Sensitivity Analysis
under the caption "MD&A--Asset/Liability Management." Another measure,
required to be performed by OTS-regulated institutions, is the test specified
by OTS Thrift Bulletin No. 13a, "Interest Rate Risk Management." This test
measures the impact on net interest income and on net portfolio value of an
immediate change in interest rates in 100 basis point increments. Net
portfolio value is defined as the net present value of assets, liabilities,
and off-balance sheet contracts. Following are the estimated impacts of
immediate changes in interest rates at the specified levels at June 30, 2000,
calculated in compliance with Thrift Bulletin No. 13a:
Percentage Change In:
---------------------------------------------
Change in Interest Rates
(In Basis Points) Net Interest Income(1) Net Portfolio Value(2)
------------------------ ---------------------- ----------------------
+300...................... -4% -44%
+200...................... -2 -27
+100...................... 0 -11
-100...................... 2 4
-200...................... 1 12
-300...................... 0 11
- --------
(1) The percentage change in this column represents net interest income for 12
months in a stable interest rate environment versus the net interest
income in the various rate scenarios.
(2) The percentage change in this column represents net portfolio value of the
Bank in a stable interest rate environment versus the net portfolio value
in the various rate scenarios.
The Company's primary objective in managing interest rate risk is to
minimize the adverse impact of changes in interest rates on the Company's net
interest income and capital, while structuring the Company's asset-liability
structure to obtain the maximum yield-cost spread on that structure. The
Company relies primarily on its asset-liability structure to control interest
rate risk.
The Company continually evaluates interest rate risk management
opportunities, including the use of derivative financial instruments.
Management has focused its efforts on increasing the Company's yield-cost
spread through wholesale and retail growth opportunities.
55
The following table shows the Company's financial instruments that are
sensitive to changes in interest rates, categorized by expected maturity, and
the total balance of expected maturities and principal repayments and the
instruments' fair values at June 30, 2000. Market risk sensitive instruments
are generally defined as on- and off-balance sheet derivatives and other
financial instruments.
June 30, 2000
------------------------------------------------------------------------
Weighted
Average Expected Maturity/Principal Repayment
Rate End ------------------------------------------------------------------------
of Total Fair
Period 2001 2002 2003 2004 2005 Thereafter Balance(1) Value(1)
-------- -------- ------- ------- ------- -------- ---------- ---------- --------
(dollars in thousands)
Interest-Sensitive
Assets:
Interest-earning
deposits.............. 2.88% $ 673 $ -- $ -- $ -- $ -- $ -- $ 673 $ 673
Fed funds sold and
other short-term
investments........... 6.50 3,900 -- -- -- -- -- 3,900 3,900
Loans Receivable:
One-to-four family... 7.93 44,784 38,426 33,466 28,708 24,253 144,696 314,333 316,720
Multifamily and Non-
Residential......... 8.27 67,471 77,073 87,668 98,025 107,226 263,491 700,954 710,876
Other................ 8.46 3,207 919 739 593 471 2,242 8,171 8,956
Mortgage-Backed
Securities............ 6.87 14,396 12,039 10,409 8,871 7,386 56,760 109,861 105,782
Investment Securities.. 6.85 -- -- -- 11,000 20,361 -- 31,361 30,278
FHLB stock............. 5.50 15,607 -- -- -- -- -- 15,607 15,607
Interest-Sensitive
Liabilities:
Deposits
Money Market
Deposits............ 4.33 13,475 28,945 28,945 16,262 16,262 45,487 149,376 149,376
Passbook Deposits.... 1.99 11,316 2,831 2,831 2,831 2,831 3 22,643 22,643
NOW and other demand
deposits............ 1.37 7,140 8,855 8,855 4,981 4,981 10,428 45,240 45,240
Certificate Accounts. 5.76 511,176 48,050 4,841 3,174 8,287 -- 575,528 574,906
FHLB Advances.......... 6.30 163,100 47,050 45,600 3,250 31,250 -- 290,250 288,567
Interest-Sensitive Off-
balance sheet items:(2)
Commitments to extend
credit................ 8.22 14,969 165
Loans sold with
recourse (including
bond loans)........... 6.50 10,341 (960)
Unused lines of
credit................ 9.25 25,500 1,631
- --------
(1) Loans are reduced for nonperforming loans but are not reduced for the
allowance for loan losses.
(2) Total balance equals the notional amount of off-balance sheet items and
interest rates are the weighted average interest rates of the underlying
loans.
Expected maturities are contractual maturities adjusted for prepayments of
principal. The Company uses certain assumptions to estimate fair values and
expected maturities. For assets, expected maturities are based upon
contractual maturity, projected repayments and prepayments of principal. The
prepayment experience reflected herein is based on the Company's historical
experience. The Company's average Constant Prepayment Rate ("CPR") on its
total fixed-rate portfolio ranges from 6% to 15% and on its adjustable rate
portfolio from 6% to 18% for interest-earning assets (excluding investment
securities, which do not have prepayment features). For deposit liabilities,
in accordance with standard industry practice and the Company's own historical
experience, "decay factors," were used to estimate deposit runoff of 50%,
15.8%, and between 10% to 50% for passbook, checking and money market deposit
accounts, respectively. The actual maturities of these instruments could vary
substantially if future prepayments differ from the Company's historical
experience.
56
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report............................................... F-2
Consolidated Statements of Financial Condition as of June 30, 2000 and
1999...................................................................... F-3
Consolidated Statements of Earnings for Each of the Years in the Three-Year
Period Ended June 30, 2000................................................ F-4
Consolidated Statements of Comprehensive Income for Each of the Years in
the Three-Year Period Ended June 30, 2000................................. F-5
Consolidated Statements of Stockholders' Equity for Each of the Years in
the Three-Year Period Ended June 30, 2000................................. F-6
Consolidated Statements of Cash Flows for Each of the Years in the Three-
Year Period Ended June 30, 2000........................................... F-7
Notes to Consolidated Financial Statements................................. F-8
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Quaker City Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial
condition of Quaker City Bancorp, Inc. and subsidiaries (the Company) as of
June 30, 2000 and 1999 and the related consolidated statements of earnings,
comprehensive income, stockholders' equity and cash flows for each of the
years in the three-year period ended June 30, 2000. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Quaker
City Bancorp, Inc. and subsidiaries as of June 30, 2000 and 1999 and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 2000 in conformity with accounting principles
generally accepted in the United States of America.
KPMG llp
July 21, 2000
Los Angeles, California
F-2
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 2000 and 1999
(In thousands, except share data)
2000 1999
ASSETS ---------- ---------
Cash and due from banks................................. $ 9,494 7,705
Interest-bearing deposits............................... 673 323
Federal funds sold and other short-term investments..... 3,900 25,120
Investment securities held to maturity (fair value of
$20,780 at June 30, 2000 and $11,320 at June 30, 1999)
(note 2)............................................... 21,863 11,986
Investment securities available for sale, at fair value
(note 2)............................................... 9,498 --
Loans receivable, net (notes 3 and 9)................... 990,675 821,190
Loans receivable held for sale (notes 3 and 15)......... 21,212 17,028
Mortgage-backed securities held to maturity (fair value
of $81,378 at June 30, 2000 and $81,485 at June 30,
1999) (notes 4 and 9).................................. 85,457 84,078
Mortgage-backed securities available for sale, at fair
value (notes 4 and 9).................................. 24,404 15,783
Real estate held for sale (note 5)...................... 639 3,138
Federal Home Loan Bank stock, at cost (notes 6 and 9)... 15,607 12,221
Office premises and equipment, net (note 7)............. 7,130 6,430
Accrued interest receivable and other assets (notes 2,
3, 4 and 12)........................................... 11,345 8,435
---------- ---------
$1,201,897 1,013,437
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (note 8)..................................... $ 808,229 677,839
Federal Home Loan Bank advances (notes 3 and 9)....... 290,250 234,700
Deferred tax liability (note 10)...................... 73 1,694
Accounts payable and accrued expenses ................ 5,372 4,612
Other liabilities (notes 8 and 10).................... 9,939 13,288
---------- ---------
Total liabilities................................... 1,113,863 932,133
---------- ---------
Stockholders' Equity (notes 11 and 13):
Common stock, $.01 par value. Authorized 20,000,000
shares; issued and outstanding 5,108,077 shares and
5,457,107 shares at June 30, 2000 and 1999,
respectively......................................... 51 55
Additional paid-in capital............................ 71,726 72,681
Accumulated other comprehensive income (loss) (notes 2
and 4)............................................... (52) 33
Retained earnings, substantially restricted (note 10). 17,318 9,855
Deferred compensation (notes 12 and 13)............... (1,009) (1,320)
---------- ---------
Total stockholders' equity.......................... 88,034 81,304
Commitments and contingent liabilities (notes 3 and 14)
---------- ---------
$1,201,897 1,013,437
========== =========
See accompanying notes to consolidated financial statements.
F-3
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Years ended June 30, 2000, 1999 and 1998
(In thousands, except share data)
2000 1999 1998
--------- --------- ---------
Interest income:
Loans receivable............................ $ 74,977 63,207 54,793
Mortgage-backed securities.................. 7,066 6,149 6,995
Investment securities....................... 1,309 858 1,608
Other....................................... 1,184 1,705 1,474
--------- --------- ---------
Total interest income..................... 84,536 71,919 64,870
--------- --------- ---------
Interest expense:
Deposits (note 8)........................... 34,224 29,532 28,138
Federal Home Loan Bank advances and other
borrowings................................. 14,690 10,784 10,972
--------- --------- ---------
Total interest expense.................... 48,914 40,316 39,110
--------- --------- ---------
Net interest income before provision for
loan losses.............................. 35,622 31,603 25,760
Provision for loan losses (note 3)............ 1,600 1,700 1,450
--------- --------- ---------
Net interest income after provision for
loan losses.............................. 34,022 29,903 24,310
--------- --------- ---------
Other income:
Loan servicing charges and deposit fees..... 3,482 2,796 2,402
Gain on sale of loans held for sale......... 316 332 175
Commissions................................. 882 716 735
Gain on sale of securities available for
sale....................................... -- 616 --
Other....................................... 62 169 16
--------- --------- ---------
4,742 4,629 3,328
--------- --------- ---------
Other expense:
Compensation and employee benefits (notes 12
and 13).................................... 10,470 9,459 8,375
Occupancy, net.............................. 2,848 2,308 1,945
Federal deposit insurance premiums.......... 458 527 517
Data processing............................. 1,049 853 730
Advertising and promotional................. 975 1,007 924
Consulting fees............................. 728 787 471
Other general and administrative expense.... 2,600 2,264 2,139
--------- --------- ---------
Total general and administrative expense.. 19,128 17,205 15,101
Real estate operations, net (note 5)........ (519) 320 595
Amortization of core deposit intangible..... 76 -- 35
--------- --------- ---------
Total other expense....................... 18,685 17,525 15,731
--------- --------- ---------
Earnings before income taxes,
extraordinary item and cumulative effect
of change in accounting principle........ 20,079 17,007 11,907
Income taxes (note 10)........................ 8,329 7,464 5,297
--------- --------- ---------
Net earnings before extraordinary item and
cumulative effect of change in accounting
principle.................................... 11,750 9,543 6,610
Extraordinary item, net of taxes (note 9)..... -- (61) --
Cumulative effect of change in accounting
principle, net of taxes (note 1)............. -- 162 --
--------- --------- ---------
Net earnings.............................. $ 11,750 9,644 6,610
========= ========= =========
Basic earnings per share (note 11)............ $ 2.34 1.79 1.21
========= ========= =========
Diluted earnings per share (note 11).......... $ 2.23 1.70 1.14
========= ========= =========
Weighted average basic shares outstanding..... 5,025,625 5,392,564 5,469,646
Weighted average diluted shares outstanding... 5,279,141 5,660,351 5,795,480
See accompanying notes to consolidated financial statements.
F-4
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years ended June 30, 2000, 1999 and 1998
(In thousands)
2000 1999 1998
------- ----- -----
Net earnings............................................. $11,750 9,644 6,610
------- ----- -----
Other comprehensive income:
Unrealized holding gain (loss) on securities available
for sale arising during the period, net of taxes of
$(61), $(624) and $178 for the years ended June 30,
2000, 1999 and 1998, respectively..................... (85) (879) 254
Less: realized gain included in net earnings and
previously included in other comprehensive income, net
of taxes of $(370) for the year ended June 30, 1999... -- (522) --
------- ----- -----
Increase (decrease) in accumulated other comprehensive
income (loss), net of tax............................... (85) (357) 254
------- ----- -----
Total comprehensive income........................... $11,665 9,287 6,864
======= ===== =====
See accompanying notes to consolidated financial statements.
F-5
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended June 30, 2000, 1999 and 1998
(In thousands)
Accumulated Retained
Additional other earnings,
Common paid-in comprehensive substantially Deferred
Shares stock capital income (loss) restricted compensation Total
------ ------ ---------- ------------- ------------- ------------ ------
Balance, June 30, 1997.. 4,703 $47 44,051 136 28,122 (2,113) 70,243
Net earnings............ -- -- -- -- 6,610 -- 6,610
Shares issued in
connection with stock
dividend............... 1,165 12 29,120 -- (29,132) -- --
Repurchase and
retirement of stock.... (56) (1) (335) -- (821) -- (1,157)
Exercise of stock
options................ 15 -- 87 -- -- -- 87
Unrealized gain on
securities available
for sale, net of tax... -- -- -- 254 -- -- 254
Deferred compensation
amortized to expense... -- -- 797 -- -- 425 1,222
----- --- ------ ---- ------- ------ ------
Balance, June 30, 1998 . 5,827 58 73,720 390 4,779 (1,688) 77,259
Net earnings............ -- -- -- -- 9,644 -- 9,644
Repurchase and
retirement of stock.... (418) (3) (1,995) -- (4,568) -- (6,566)
Exercise of stock
options................ 48 -- 231 -- -- -- 231
Unrealized loss on
securities available
for sale, net of tax... -- -- -- (357) -- -- (357)
Deferred compensation
amortized to expense... -- -- 725 -- -- 368 1,093
----- --- ------ ---- ------- ------ ------
Balance, June 30, 1999.. 5,457 55 72,681 33 9,855 (1,320) 81,304
Net earnings............ -- -- -- -- 11,750 -- 11,750
Repurchase and
retirement of stock.... (381) (4) (1,823) -- (4,316) -- (6,143)
Exercise of stock
options................ 32 -- 179 -- -- -- 179
Unrealized loss on
securities available
for sale, net of tax... -- -- -- (85) -- -- (85)
Deferred compensation
amortized to expense... -- -- 718 -- -- 311 1,029
----- --- ------ ---- ------- ------ ------
Balance, June 30, 2000.. 5,108 $51 71,726 (52) 17,318 (1,009) 88,034
===== === ====== ==== ======= ====== ======
See accompanying notes to consolidated financial statements.
F-6
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 2000, 1999 and 1998
(In thousands)
2000 1999 1998
--------- -------- --------
Cash flows from operating activities:
Net earnings................................... $ 11,750 9,644 6,610
--------- -------- --------
Adjustments to reconcile net earnings to net
cash provided (used) by operating activities:
Cumulative effect of change in accounting
principle, net of taxes..................... -- (162) --
Depreciation and amortization................ (19) (1,574) 293
Provision for loan losses.................... 1,600 1,700 1,450
Write-downs on real estate held for sale..... -- 241 251
Provision for deferred income taxes.......... (1,559) (535) 913
Gain on sale of real estate held for sale.... (779) (394) (176)
Gain on sale of loans held for sale.......... (316) (332) (175)
Gain on sale of securities available for
sale........................................ -- (616) --
Loans originated for sale.................... (53,039) (73,674) (41,321)
Sale of loans held for sale.................. 48,910 63,996 34,324
Federal Home Loan Bank (FHLB) stock dividend
received.................................... (811) (660) (633)
(Increase) decrease in accrued interest
receivable and other assets................. (2,834) (1,852) 370
Increase (decrease) in other liabilities..... (3,349) 6,346 (8,375)
Increase in accounts payable and accrued
expenses.................................... 760 748 321
Other........................................ 1,964 983 1,962
--------- -------- --------
Total adjustments.......................... (9,472) (5,785) (10,796)
--------- -------- --------
Net cash provided (used) by operating
activities................................ 2,278 3,859 (4,186)
--------- -------- --------
Cash flows from investing activities:
Loans originated for investment................ (213,427) (198,296) (95,253)
Loans purchased for investment................. (85,752) (78,075) (48,112)
Principal repayments on loans.................. 127,343 145,612 91,846
Sale of investment securities available for
sale.......................................... -- 1,558 --
Purchases of investment securities available
for sale...................................... (9,500) -- --
Purchases of investment securities held to
maturity...................................... (12,826) (15,985) --
Maturities and principal repayments of
investment securities held to maturity........ 2,925 9,070 31,610
Sale of MBS available for sale................. -- 61,989 --
Purchases of MBS available for sale............ (11,480) -- (8,237)
Principal repayments of MBS available for
sale.......................................... 2,790 8,804 --
Purchases of MBS held to maturity.............. (12,026) (70,624) (63,530)
Principal repayments on MBS held to maturity .. 10,637 16,208 29,595
Sale of real estate held for sale.............. 4,640 2,429 3,545
Purchase of FHLB stock......................... (2,575) -- (1,210)
Investment in office premises and equipment.... (2,084) (2,147) (1,923)
--------- -------- --------
Net cash used by investing activities...... (201,335) (119,457) (61,669)
--------- -------- --------
Cash flows from financing activities:
Increase in deposits........................... 84,490 96,929 27,724
Increase in deposits from branch acquisition... 45,900 -- --
Proceeds from funding of FHLB advances......... 604,434 325,700 382,700
Repayments of FHLB advances.................... (548,884) (307,000) (324,400)
Repurchase and retirement of stock............. (6,143) (6,566) (1,157)
Common stock options exercised................. 179 231 87
--------- -------- --------
Net cash provided by financing activities.. 179,976 109,294 84,954
--------- -------- --------
Increase (decrease) in cash and cash
equivalents............................... (19,081) (6,304) 19,099
Cash and cash equivalents at beginning of year.. 33,148 39,452 20,353
--------- -------- --------
Cash and cash equivalents at end of year........ $ 14,067 33,148 39,452
========= ======== ========
Supplemental disclosures of cash flow
information:
Interest paid (including interest credited).... $ 49,496 40,405 38,604
Cash paid for income taxes..................... 8,690 9,650 5,295
========= ======== ========
Supplemental schedule of noncash investing and
financing activities:
Additions to loans resulting from the sale of
real estate acquired through foreclosure...... $ -- 1,205 1,365
Additions to real estate acquired through
foreclosure................................... 1,362 3,286 6,239
Reclassification of MBS from held to maturity
to available for sale......................... -- 77,961 --
========= ======== ========
See accompanying notes to consolidated financial statements.
F-7
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and 1999
(1) Basis of Presentation and Summary of Significant Accounting Policies
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 June 30, 2000, the Bank operated fourteen retail banking
offices in southern California. 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 following accounting policies, together with those disclosed elsewhere
in the consolidated financial statements, represent the significant accounting
policies of the Company.
Principles of Consolidation and Presentation
The consolidated financial statements include the accounts of Quaker City
Bancorp, Inc., Quaker City Neighborhood Development, Inc., Quaker City Bank
and its wholly owned subsidiary, Quaker City Financial Corporation. All
significant intercompany balances and transactions have been eliminated in
consolidation. Certain reclassifications have been made to the prior years'
consolidated financial statements to conform to the current year's
presentation.
These consolidated financial statements have been prepared in conformity
with generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of
the statement of financial condition, and revenues and expenses for the
periods. The most significant estimate for the Company relates to the
allowance for loan losses. Actual results could differ from those estimates.
Financial Instruments
Accounting Standards require the disclosure of the fair value of financial
instruments, whether or not recognized on the statement of financial
condition, for which it is practicable to estimate the value. A significant
portion of the Company's assets and liabilities are financial instruments as
defined under applicable accounting standards. Fair values, estimates and
assumptions are set forth in note 18, Fair Value of Financial Instruments.
Risks Associated with Financial Instruments
The credit risk of a financial instrument is the possibility that a loss may
result from the failure of another party to perform in accordance with the
terms of the contract. The most significant credit risk associated with the
Company's financial instruments is concentrated in its loans receivable.
Additionally, the Company is subject to credit risk on certain loans sold with
recourse. The Company has established a system for monitoring the level of
credit risk in its loan portfolio and for loans sold with recourse.
Concentrations of credit risk would exist for groups of borrowers when they
have similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic or
other conditions. The ability of the Company's borrowers to repay their
commitments is contingent on several factors, including the economic
conditions in the borrowers' geographic area and the individual financial
condition of the borrowers. The Company generally
F-8
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
requires collateral or other security to support borrower commitments on loans
receivable. This collateral may take several forms. Generally, on the
Company's mortgage loans, the collateral will be the underlying mortgaged
property. The Company's lending activities are primarily concentrated in
southern California.
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, investing 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 is
subject to interest rate risk to the degree that its interest-earning assets
reprice on a different frequency or schedule than its interest-bearing
liabilities. A majority of the Company's loans receivable and mortgage-backed
securities reprice based on the Eleventh District Cost of Funds Index (COFI).
The repricing of COFI tends to lag other interest rate indices. The Company
closely monitors the pricing sensitivity of its financial instruments.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks, interest-bearing deposits and Federal funds sold and other
short-term investments. Generally, Federal funds sold and short-term
investments are held for one-day periods. The amounts included in cash and
cash equivalents and qualifying investment securities generally constitute the
Company's liquidity portfolio. The Company maintains liquidity to satisfy
regulatory requirements. The liquidity portfolio is managed in a manner
intended to maximize flexibility and yield, while minimizing interest rate
risk, credit risk and the cost of the capital required to be maintained for
such assets.
Assets Held or Available for Sale
The Company identifies those loans, mortgage-backed securities (MBS) and
investment securities for which it does not have the positive intent and
ability to hold to maturity. If management has the positive intent and the
Company has the ability to hold such assets until maturity, they are
classified as held to maturity and are carried at amortized historical cost.
Securities that are to be held for indefinite periods of time and not intended
to be held to maturity are generally classified as available for sale and are
carried at fair value, with unrealized gains and losses excluded from earnings
and reported as a separate component of stockholders' equity, net of income
tax effect. However, if a decline in fair value is determined to be other than
temporary, the cost basis of the individual security is written down to fair
value as a new cost basis, and the amount of the writedown is included in
earnings. Gains and losses from the sales of MBS and investment securities
available for sale are recognized at the time of sale and are determined by
the specific-identification method. Premiums and discounts on MBS and
investment securities available for sale are amortized utilizing the interest
method over the contractual terms of the assets. Loans held for sale are
carried at the lower of amortized historical cost or fair value as determined
on an aggregate basis. Assets held for indefinite periods of time include
assets that management intends to use as part of its asset/liability
management strategy and that may be sold in response to changes in interest
rates, resultant prepayment risk and other factors.
Assets Held to Maturity
Loans, MBS and investment securities, excluding those held or available for
sale, are carried at amortized historical cost, adjusted for amortization of
premiums and discounts utilizing the interest method over the contractual
terms of the assets. The carrying value of these assets is not adjusted for
F-9
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
temporary declines in fair value since the Company has the positive intent and
ability to hold them to maturity. If a decline in the fair value of securities
is determined to be other than temporary, the cost basis of the individual
security is written down to fair value as a new cost basis and the amount of
the writedown is included in earnings.
Interest Income on Loans Receivable
Interest income on loans receivable is accrued as it is earned. The Company
defers and amortizes both loan origination fees and the incremental direct
costs relating to the origination of loans held to maturity. Loan origination
fees and incremental direct loan origination costs on loans held for sale are
deferred and included in the computation of gain or loss upon sale of the
loans. The deferred origination fees and costs on loans held to maturity are
amortized into interest income utilizing the interest method over the lives of
the related loans. Loans are placed on nonaccrual status after being
delinquent 60 days, or earlier if the ultimate collectibility of the accrual
is in doubt. Whenever the accrual of interest is stopped, previously accrued
but uncollected interest income is reversed. Thereafter, interest is
recognized only as cash is received until the loan is reinstated. Accretion of
discounts and deferred loan fees is discontinued when loans are placed on
nonaccrual status.
Allowance for Loan Losses
The allowance for loan losses is maintained at an amount management
considers adequate to cover estimated losses on loans receivable which are
deemed probable and estimable. The allowance is based upon a number of
factors, including asset classifications, economic trends, industry experience
and trends, industry and geographic concentrations, estimated collateral
values, management's assessment of credit risk inherent in the portfolio,
historical loss experience and the Company's underwriting practices. As a
result of weaknesses in certain real estate markets, increases in the
allowance for loan losses may be required in future periods. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. These agencies may
require the Bank to establish additional valuation allowances, based on their
judgments of the information available at the time of the examination.
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
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 all loans with principal balances
of less than $300,000.
Factors considered as part of the periodic loan review process to determine
whether a loan is impaired 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 will consider 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 creditor's prior history in dealing with these types of credits. In
evaluating whether a loan is considered impaired, insignificant delays in
payment,
F-10
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(less than 12 months) in the absence of other facts and circumstances would
not alone lead to the conclusion that a loan was impaired.
The Company recognizes impairment on troubled collateral dependent loans by
creating a valuation allowance. The valuation allowance is maintained while
the loans are still in process of collection. At such time that the assets are
deemed uncollectible, the loss is charged to the valuation allowance.
Loan Sales and Servicing
The Company sells loans and participations in loans with yield rates to the
investors based upon current market rates. Gain or loss on the sale of loans
is recognized to the extent that the selling prices differ from the carrying
value of the loans sold based on the estimated relative fair values of the
assets sold and any retained interests, less any liabilities incurred. The
assets obtained on sale are generally loan servicing assets. Liabilities
incurred in a sale may include recourse obligations or servicing liabilities.
The Company may also purchase mortgage servicing assets related to mortgage
loans originated by other institutions. These mortgage servicing assets are
measured initially at fair value, presumptively the price paid. The servicing
asset is amortized in proportion to and over the period of estimated net
servicing income and is assessed for impairment or increased obligation based
on its fair value.
Real Estate Held for Sale
Real estate acquired through foreclosure (REO) is initially recorded at fair
value at the date of foreclosure, less costs of disposition. Fair value is
determined by an appraisal obtained at the time of foreclosure. Thereafter, if
there is a further deterioration in value, the Company writes down the REO
directly and charges operations for the diminution in value.
Real estate held for development is carried at the lower of cost or net
realizable value. All costs of anticipated disposition are considered in the
determination of net realizable value.
Revenue recognition on the disposition of real estate is dependent upon the
transaction meeting certain criteria relating to the nature of the property
sold and the terms of sale.
Depreciation and Amortization
Depreciation is computed utilizing the straight-line method over the
estimated lives of the assets. Amortization of leasehold improvements is
computed utilizing the straight-line method over the shorter of the estimated
useful life of the assets or the terms of the respective leases.
Earnings per Share
The Company reports both basic and diluted earnings per share. Basic
earnings per share is determined by dividing net income by the average number
of shares of common stock outstanding, while diluted earnings per share is
determined by dividing net income by the average number of shares of common
stock outstanding adjusted for the dilutive effect of common stock
equivalents.
F-11
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income Taxes
A deferred tax liability is recognized for taxable temporary differences
(differences between the tax bases of assets and liabilities and their
reported amounts in the financial statements that will result in future
taxable amounts). A deferred tax asset is recognized for all deductible
temporary differences (differences between the tax bases of assets and
liabilities and their reported amounts in the financial statements that will
result in deductible amounts in future years when the financial statement
carrying amounts of the assets and liabilities are recovered and settled) and
operating loss and tax credit carryforwards. The likelihood of realizing the
tax benefits related to a potential deferred tax asset is evaluated and a
valuation allowance is recognized to reduce that deferred tax asset if it is
more likely than not that all or some portion of the deferred tax asset will
not be realized. Deferred tax assets and liabilities are calculated at the
beginning and end of the year; the change in the sum of the deferred tax
asset, valuation allowance and deferred tax liability during the year
generally is recognized as deferred tax expense or benefit. The effect on
deferred taxes of a change in tax rates is recognized in income in the period
for which the change becomes effective.
Stock Option Plans
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), the intrinsic value method, to account for stock based
compensation. In accordance with the SFAS No. 123, "Accounting for Stock Based
Compensation", the Company includes pro forma disclosures reflecting the
impact of the fair value method on net earnings and earnings per share for
stock options granted.
Segment Information and Disclosures
Accounting standards require the Company to report information about
operating segments in annual financial statements and requires reporting of
selected information about operating segments in interim reports to
stockholders. These standards also require disclosures about products and
services, geographic areas and major customers. The Company has concluded it
has one reportable segment.
Derivatives
The Company accounts for derivative instruments in accordance with SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." 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 June 30, 2000, the Company has no derivative
instruments.
Upon implementation of SFAS No. 133 effective July 1, 1998, approximately
$78 million in MBS were transferred to available for sale. The Company has
accounted for the gains or losses on the sale of any such reclassified MBS
sold within 90 days of the reclassification date as the cumulative effect of a
change in accounting principle. Any gains or losses recorded on such
reclassified securities sold 90 days or more after the reclassification date
have been recorded as gain or losses on sale of
F-12
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
securities available for sale. In the first quarter of 1999, the Company sold
$29.6 million of these reclassified MBS for a nonrecurring gain after tax of
$162,000, which is accounted for as a cumulative effect of a change in
accounting principle in the accompanying consolidated statements of earnings.
In the second quarter of fiscal 1999, the Company sold an additional $32.3
million of MBS for a pretax gain of $245,000 and an after tax gain of
$142,000. The pretax gain of $245,000 is included as a gain on sale of
securities available for sale in the accompanying consolidated statements of
earnings.
Other Recent Accounting Pronouncements
In March 2000, the FASB Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation. This Interpretation clarifies
certain issues relating to APB Opinion No. 25, Accounting for Stock Issued to
Employees. FASB Interpretation No. 44 contains information relating to (a) the
definition of employee for purposes of applying Opinion 25, (b) the criteria
for determining whether a plan qualifies as a non-compensatory plan, (c) the
accounting consequence of various modifications to the term of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FASB Interpretation No. 44 is
effective July 1, 2000. The effects of applying this Interpretation are
recognized on a prospective basis from July 1, 2000.
(2) Investment Securities
The following table provides a summary of investment securities with a
comparison of amortized cost and fair values:
Gross Gross
Amortized unrealized unrealized Fair
Cost gains losses value
--------- ---------- ---------- ------
(In thousands)
June 30, 2000:
Held to maturity:
U.S. Government and Federal
agency obligations.............. $21,863 -- (1,083) 20,780
Available for sale:
Marketable Equity Securities..... 9,500 23 (25) 9,498
------- --- ------ ------
Total.......................... $31,363 23 (1,108) 30,278
======= === ====== ======
June 30, 1999:
Held to maturity:
U.S. Government and Federal
agency obligations.............. $11,986 -- (666) 11,320
------- --- ------ ------
Total.......................... $11,986 -- (666) 11,320
======= === ====== ======
At June 30, 2000 and 1999, the Company had accrued interest receivable on
investment securities of $435,000 and $212,000, respectively, which is
included in accrued interest receivable and other assets in the accompanying
consolidated statements of financial condition.
There were no sales of investment securities available for sale in 2000.
Proceeds from sales of investment securities available for sale were $1.6
million during 1999. There were gross gains of $371,000 realized during 1999.
F-13
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The contractual principal maturities of bond obligations for investment
securities held to maturity as of June 30, 2000 are as follows:
Contractual principal maturity
-----------------------------------------
One Maturing
Year 1 year Maturing Maturing
or to 5 5 years to after
Total Less years 10 years 10 years
------- ---- -------- ---------- --------
(In thousands)
Held to maturity:
U.S. Government and Federal
agency obligations.............. $21,863 -- 4,000 11,872 5,991
------- --- ----- ------ -----
$21,863 -- 4,000 11,872 5,991
======= === ===== ====== =====
(3) Loans Receivable, Net
The following table presents carrying values of loans receivable at the
dates indicated:
June 30
------------------
2000 1999
---------- -------
(In thousands)
Real estate:
Residential:
One to four units..................................... $ 315,689 312,407
Multifamily........................................... 505,436 391,596
Commercial and land..................................... 197,962 140,783
---------- -------
1,019,087 844,786
Other..................................................... 8,171 7,730
---------- -------
1,027,258 852,516
Less:
Undisbursed loan funds.................................. 320 684
Unamortized discounts................................... 752 1,078
Deferred loan fees, net................................. 4,138 3,852
Allowance for loan losses............................... 10,161 8,684
---------- -------
1,011,887 838,218
---------- -------
Less:
Held for sale:
One to four units..................................... -- 353
Multifamily........................................... 11,173 7,234
Commercial............................................ 10,031 9,441
Other................................................. 8 --
---------- -------
21,212 17,028
---------- -------
Held to maturity.................................... $ 990,675 821,190
========== =======
The weighted average interest rate on the Company's loan portfolio was 8.22%
and 7.86% at June 30, 2000 and 1999, respectively.
F-14
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Certain mortgage loans aggregating $513.8 million and $370.7 million at June
30, 2000 and 1999, respectively, are collateral for FHLB advances.
At June 30, 2000 and 1999, the Bank had loans with an outstanding balance of
$9.9 million and $10.3 million, respectively, under two separate agreements
with the City of Los Angeles to guarantee up to a total of $15 million of
multifamily housing revenue bonds primarily for the acquisition and renovation
of earthquake-stricken properties. In conjunction with these guarantees,
standby letters of credit were issued by the Federal Home Loan Bank.
Additionally, the principal balances of other loans sold with recourse totaled
$454,000 and $370,000 at June 30, 2000 and 1999, respectively.
At June 30, 2000 and 1999, the Bank had accrued interest receivable on loans
of $6.2 million and $5.0 million, respectively, which is included in accrued
interest receivable and other assets in the accompanying consolidated
statements of financial condition.
The Company serviced loans for investors totaling $299.1 million, $284.2
million and $276.4 million at June 30, 2000, 1999 and 1998, respectively.
Activity in the allowance for loan losses is summarized as follows:
June 30
-----------------------
2000 1999 1998
------- ------ ------
(In thousands)
Allowances for loan losses:
Balance at beginning of year...................... $ 8,684 7,955 7,772
Provision for loan losses......................... 1,600 1,700 1,450
Allowance of portfolios acquired.................. -- 164 --
Charge-offs, net.................................. (123) (1,135) (1,267)
------- ------ ------
Balance at end of year............................ $10,161 8,684 7,955
======= ====== ======
Credit Risk and Concentration
At June 30, 2000 and 1999, the balances of nonaccrual loans totaled $3.6
million and $5.0 million, respectively, net of specific allowances of $0 and
$68,000. The Company's nonaccrual policy requires that loans be placed on
nonaccrual status after being delinquent 60 days or earlier if warranted.
There were no accruing loans contractually past due 60 days or more at
June 30, 2000 and 1999.
The gross amount of interest income on nonaccrual loans that would have been
recorded during the years ended June 30, 2000, 1999 and 1998 if the nonaccrual
loans had been current in accordance with their original terms was $312,000,
$424,000 and $640,000, respectively. For the years ended June 30, 2000, 1999
and 1998, $247,000, $295,000 and $399,000, respectively, were actually earned
on nonaccrual loans and are included in interest income on loans in the
accompanying consolidated statements of earnings. Interest income earned on
nonaccrual loans is generally recorded utilizing the cash-basis method of
accounting.
The Company's real estate loans are predominantly secured by properties
located in southern California.
Impaired Loans
At June 30, 2000 and 1999, the Company had a gross investment in impaired
loans of $1.7 million and $3.5 million, respectively. During the year ended
June 30, 2000, 1999 and 1998, the Company's
F-15
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
average investment in impaired loans was $1.7 million, $5.9 million and $8.2
million, respectively, and for the years then ended, interest income on such
loans totaled $126,000, $531,000 and $752,000, respectively. Interest income
on impaired loans which are performing is generally 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. At June 30, 2000 all
impaired loans were performing in accordance with their contractual terms.
Impaired loans totaling $1.7 million were not performing in accordance with
their contractual terms at June 30, 1999 and have been included in nonaccrual
loans at that date.
Impaired loans at June 30, 2000 included $1.7 million of loans for which
specific valuation allowances of $379,000 had been established. At June 30,
1999, the Company had $1.0 million of impaired loans for which specific
valuation allowances of $155,000 had been established and $2.5 million of such
loans for which no specific valuation allowance was considered necessary. All
such provisions for losses and any related recoveries are recorded as part of
the total allowance for loan losses.
F-16
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(4) Mortgage-Backed Securities
Summarized below are the amortized cost and estimated fair values of MBS:
June 30, 2000
---------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
--------- ---------- ---------- -------
(In thousands)
Held to maturity:
GNMA, FNMA and FHLMC securities.. $ 68,819 4 (2,814) 66,009
Issued by other financial
institutions.................... 1,565 -- (54) 1,511
Collateralized mortgage
obligations..................... 15,073 -- (1,215) 13,858
-------- --- ------ -------
85,457 4 (4,083) 81,378
Available for sale:
GNMA, FNMA and FHLMC securities.. 12,947 84 (16) 13,015
Collateralized mortgage
obligations..................... 11,545 140 (296) 11,389
-------- --- ------ -------
24,492 224 (312) 24,404
-------- --- ------ -------
Total........................... $109,949 228 (4,395) 105,782
======== === ====== =======
June 30, 1999
--------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
--------- ---------- ---------- ------
(In thousands)
Held to maturity:
GNMA, FNMA and FHLMC securities... $62,087 -- (1,578) 60,509
Issued by other financial
institutions..................... 2,186 -- (3) 2,183
Collateralized mortgage
obligations...................... 19,805 -- (1,012) 18,793
------- --- ------ ------
84,078 -- (2,593) 81,485
Available for sale:
GNMA, FNMA and FHLMC securities... 5,653 129 -- 5,782
Collateralized mortgage
obligations...................... 10,073 -- (72) 10,001
------- --- ------ ------
15,726 129 (72) 15,783
------- --- ------ ------
Total............................ $99,804 129 (2,665) 97,268
======= === ====== ======
F-17
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The contractual principal maturities for MBS as of June 30, 2000, are as
follows:
Contractual
principal
maturity
-----------------
Maturity
after
Total 10 years
-------- --------
(In thousands)
GNMA, FNMA and FHLMC securities............................ $ 78,799 78,799
Issued by other financial institutions..................... 1,565 1,565
Collateralized mortgage obligations........................ 29,585 29,585
-------- -------
Total.................................................... $109,949 109,949
======== =======
The mortgage-backed securities included in the above table have contractual
terms to maturity, but require periodic payments to reduce principal. In
addition, expected maturities will differ from contractual maturities because
borrowers have the right to prepay the underlying mortgages.
Proceeds from sales of mortgage-backed securities available for sale were
$62.0 million during 1999. There were gross gains of $245,000 realized during
1999. There were no sales of mortgage-backed securities available for sale in
2000 and 1998. There were no gross gains or losses realized during 2000 and
1998.
The collateralized mortgage obligations held at June 30, 2000 and 1999
represented nonequity interests in mortgage pass-through certificates (Class
A-1 Senior Certificates) and were of investment grade.
The Company had accrued interest receivable on mortgage-backed securities of
$636,000 and $527,000 at June 30, 2000 and 1999, respectively, which is
included in accrued interest receivable and other assets in the accompanying
consolidated statements of financial condition.
(5) Real Estate Held for Sale
The following is a summary of real estate held for sale, net of valuation
allowances:
June 30
----------
2000 1999
---- -----
(In
thousands)
Acquired through foreclosure..................................... $639 2,340
Held for development............................................. -- 798
---- -----
$639 3,138
==== =====
Changes in the valuation allowance on real estate held for sale are
summarized as follows:
June 30
----------------
2000 1999 1998
---- ----- ----
(In thousands)
Balance at beginning of year................................ $-- 175 175
Charge-offs................................................. -- (175) --
---- ----- ---
Balance at end of year...................................... $-- -- 175
==== ===== ===
F-18
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes real estate operations, net:
June 30
------------------
2000 1999 1998
----- ----- ----
(In thousands)
Net (income) loss from operations:
Real estate held for development....................... $ -- 14 (50)
Gain on sale of real estate held for development....... (100)
Gain on sale of foreclosed real estate owned........... (679) (394) (176)
Losses on operations of foreclosed real estate owned... 260 459 570
----- ----- ----
(519) 79 344
Write-downs.............................................. -- 241 251
----- ----- ----
Real estate operations, net.......................... $(519) 320 595
===== ===== ====
(6) Federal Home Loan Bank (FHLB) Stock
As a member of the FHLB System, the Bank is required to own capital stock in
the FHLB of San Francisco in an amount at least equal to the greater of 1% of
the aggregate principal amount of its unpaid residential mortgage loans, home
purchase contracts and similar obligations at the end of each year, or 5% of
its outstanding borrowings from the FHLB of San Francisco. The Bank was in
compliance with this requirement with an investment in FHLB of San Francisco
stock at June 30, 2000 and 1999 of $15.6 million and $12.2 million,
respectively. FHLB stock is recorded at historical cost.
(7) Office Premises and Equipment
The following is a summary of office premises and equipment, net:
June 30
--------------
2000 1999
------- ------
(In thousands)
Land......................................................... $ 2,075 1,450
Buildings and leasehold improvements......................... 8,277 7,757
Furniture, fixtures and equipment............................ 5,389 4,822
------- ------
15,741 14,029
Less accumulated depreciation and amortization............... 8,611 7,599
------- ------
$ 7,130 6,430
======= ======
The Company recorded depreciation and amortization expense on premises,
equipment and leasehold improvements of $1.1 million, $1.0 million and
$846,000 during 2000, 1999 and 1998, respectively.
F-19
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(8) Deposits
The following is a summary of deposits:
June 30, 2000 June 30, 1999
----------------- -----------------
Weighted Weighted
average average
rate Amount rate Amount
-------- -------- -------- --------
(Dollars in thousands)
Money market deposits................... 4.33% $149,376 4.61% $154,997
Passbook deposits....................... 1.99 22,643 1.99 19,194
NOW and other demand deposits........... 1.37 45,240 1.41 38,930
Non-interest bearing demand deposits.... -- 15,442 -- 12,537
Certificates of deposit:
3 months or less...................... 5.51 135,975 5.09 134,806
Over 3 through 6 months............... 5.74 152,380 4.75 66,606
Over 6 through 12 months.............. 5.91 222,821 5.22 183,836
Over 12 months........................ 5.85 64,352 5.53 66,933
-------- --------
5.04 $808,229 4.58 $677,839
==== ======== ==== ========
The weighted average interest rates are at the end of the period and are
based upon stated interest rates without giving consideration to daily
compounding of interest or forfeiture of interest because of premature
withdrawal.
Certificates of deposit of $100,000 or more accounted for $183.6 million and
$99.6 million of deposits at June 30, 2000 and 1999 respectively.
At June 30, 2000 and 1999, the Company had accrued interest payable on
deposits of $198,000 and $196,000, respectively, which is included in other
liabilities in the accompanying consolidated statements of financial
condition.
Deposits at June 30, 2000 mature as follows (in thousands):
Immediately withdrawable........................................... $232,701
Year ending June 30:
2001............................................................. 511,176
2002............................................................. 48,050
2003............................................................. 4,841
2004............................................................. 3,174
2005 and thereafter.............................................. 8,287
--------
$808,229
========
Interest expense by type of deposit account is summarized in the following
table for the periods indicated:
Year ended June 30
---------------------
2000 1999 1998
------- ------ ------
(In thousands)
Money market deposits.................................. $ 7,062 6,008 5,022
Passbook deposits...................................... 421 363 351
NOW and other demand deposits.......................... 633 476 336
Certificates of deposit................................ 26,108 22,685 22,429
------- ------ ------
$34,224 29,532 28,138
======= ====== ======
F-20
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(9) Federal Home Loan Bank Advances
Federal Home Loan Bank (FHLB) advances are summarized as follows:
June 30
------------------
2000 1999
--------- -------
(In thousands)
FHLB advances, due at various dates through 2009, with
interest rates from 4.70% to 7.20% and a weighted
average rate of 6.30% at June 30, 2000 and from 4.70%
to 6.62% and a weighted average rate of 5.59% at June
30, 1999............................................. $290,250 234,700
========= =======
These advances are secured by the Bank's stock in the FHLB, certain MBS and
certain mortgage loans aggregating $513.8 million and $370.7 million at June
30, 2000 and 1999, respectively. At June 30, 2000, the amount of additional
credit available from the FHLB was $86.9 million.
The maturities of FHLB advances are as follows (in thousands):
Year ending June 30:
2001.............................. $163,100
2002.............................. 47,050
2003.............................. 45,600
2004.............................. 3,250
2005 and thereafter............... 31,250
--------
$290,250
========
During the fiscal year ended June 30, 1999, the Company prepaid
approximately $8.0 million of its higher cost borrowings and replaced the funds
with less expensive borrowings and retail deposits. In association with the debt
prepayment, the Company paid a prepayment fee of $61,000, after tax. The
prepayment fee is disclosed as an extraordinary item on the accompanying
consolidated statements of earnings.
(10) Income Taxes
Income taxes for the fiscal years ended June 30, 2000, 1999 and 1998 are
comprised of the following:
Federal State Total
------- ----- ------
(In thousands)
Year ended June 30, 2000:
Current........................................... $7,441 2,447 9,888
Deferred.......................................... (1,045) (514) (1,559)
------ ----- ------
6,396 1,933 8,329
====== ===== ======
Year ended June 30, 1999:
Current........................................... 6,051 1,948 7,999
Deferred.......................................... (582) 47 (535)
------ ----- ------
5,469 1,995 7,464
====== ===== ======
Year ended June 30, 1998:
Current........................................... 3,606 778 4,384
Deferred.......................................... 209 704 913
------ ----- ------
$3,815 1,482 5,297
====== ===== ======
F-21
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation from expected Federal income taxes to consolidated
effective income taxes for the periods indicated follows. The statutory
Federal income tax rates for June 30, 2000, 1999 and 1998 were 35%, 35% and
34%, respectively.
Year ended June 30
--------------------
2000 1999 1998
------ ----- -----
(In thousands)
Expected Federal income taxes.......................... $7,028 5,952 4,048
Increases (decreases) in computed tax resulting from:
State taxes, net of Federal benefit.................. 1,256 1,297 978
Fair value of ESOP shares over cost.................. 251 254 271
Other, net........................................... (206) (39) --
------ ----- -----
$8,329 7,464 5,297
====== ===== =====
The Bank's tax bad debt reserve balance of approximately $10.9 million as of
June 30, 2000, will, in future years, be subject to recapture in whole or in
part upon the occurrence of certain events, such as a distribution to
stockholders in excess of the Bank's current and accumulated earnings and
profit, a redemption of shares or upon a partial or complete liquidation of
the Bank. The Bank does not intend to make distributions to stockholders that
would result in recapture of any portion of its bad debt reserve. Since
management intends to use the reserve only for the purpose for which it was
intended, a deferred tax liability of approximately $3.8 million has not been
recorded.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June 30,
2000 and 1999 are presented below:
2000 1999
------- ------
(In thousands)
Deferred tax assets:
Loan valuation allowances................................. $ 3,424 2,610
State income taxes........................................ 993 1,064
Deferred compensation..................................... 917 880
Amortization of core deposit.............................. 291 325
Unrealized losses on securities available for sale........ 38 --
Accelerated depreciation.................................. 3 212
Other..................................................... 166 --
------- ------
Total gross deferred tax assets......................... 5,832 5,091
------- ------
Deferred tax liabilities:
Accrued interest income................................... -- (1,449)
Deferred loan fees........................................ (3,388) (3,124)
FHLB stock dividends...................................... (2,517) (2,135)
Unrealized gains on securities available for sale......... -- (26)
Other..................................................... -- (53)
------- ------
Total gross deferred tax liabilities.................... (5,905) (6,787)
------- ------
Net deferred tax liability.............................. $ (73) (1,696)
======= ======
Deferred tax assets are initially recognized for differences between the
financial statement carrying amount and the tax bases of assets and
liabilities which will result in future deductible
F-22
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
amounts and operating loss and tax credit carryforwards. A valuation allowance
is then established to reduce that deferred tax asset to the level at which it
is "more likely than not" that the tax benefits will be realized. Realization
of tax benefits of deductible temporary differences and operating loss or tax
credit carryforwards depends on having sufficient taxable income of an
appropriate character within the carryback and carryforward periods. Sources
of taxable income that may allow for the realization of tax benefits include
(1) taxable income in the current year or prior years that is available
through carryback, (2) future taxable income, exclusive of the reversal of
existing temporary differences, that will result from the reversal of existing
taxable temporary differences and (3) future taxable income generated by
future operations. In addition, tax planning strategies may be available to
accelerate taxable income or deductions, change the character of taxable
income or deductions, or switch from tax-exempt to taxable investments so that
there will be sufficient taxable income of an appropriate character and in the
appropriate periods to allow for realization of the tax benefits. Management
believes that the above-described deferred tax assets are more likely than not
to be realized and, accordingly, has not established a valuation allowance for
the years ended June 30, 2000 and 1999.
Included in other assets are current taxes receivable of $1.4 million at
June 30, 1999.
Included in other liabilities are current taxes payable of $282,000 and
$585,000 at June 30, 2000 and 1999, respectively.
(11) Regulatory Capital and Earnings Per Share
The Bank is required to maintain certain minimum levels of regulatory
capital as set forth by the OTS in capital standards applicable to all
thrifts. These capital standards include a core capital requirement, a
tangible capital requirement and a risk-based capital requirement. The Bank
exceeds all capital requirements at June 30, 2000, as shown in the following
table:
Tangible capital Core capital Risk-based capital
------------------ ------------------ ------------------
Amount Percentage Amount Percentage Amount Percentage
------- ---------- ------- ---------- ------- ----------
(Dollars in thousands)
Actual............. $86,358 7.20% $86,358 7.20% $95,999 12.03%
Required........... 17,979 1.50 47,944 4.00 63,836 8.00
------- ---- ------- ---- ------- -----
Excess............. $68,379 5.70% $38,414 3.20% $32,163 4.03%
======= ==== ======= ==== ======= =====
F-23
The Federal Deposit Corporation Improvement Act of 1991 contains prompt
corrective action (PCA) provisions pursuant to which banks and savings
institutions are to be classified into one of five categories, based primarily
upon capital adequacy, and which require specific supervisory actions as
capital levels decrease. The OTS regulations implementing the PCA provisions
define the five capital categories. The following table sets forth the
definitions of the categories and the Bank's ratios as of June 30, 2000 and
1999:
Total Core Core
Capital Capital Capital
to Risk- to Risk- to Adjusted
Tangible Weighted Weighted Total
Capital category Capital Ratio Assets Assets Assets
---------------- ----------------- -------- -------- -----------
Well-capitalized........... N/A (greater than or =) 10% (greater than or =) 6% (greater than or =) 5%
Adequately capitalized..... N/A (greater than or =) 8% (greater than or =) 4% (greater than or =) 4%
Undercapitalized........... N/A (less than) 8% (less than) 4% (less than) 4%
Significantly
undercapitalized.......... N/A (less than) 6% (less than) 3% (less than) 3%
Critically
undercapitalized.......... (less than or =)2% N/A N/A N/A
Association at June 30,
2000...................... 7.20% 12.03% 10.82% 7.20%
================= ===== ===== ====
Association at June 30,
1999...................... 7.48% 12.26% 11.05% 7.48%
================= ===== ===== ====
The OTS also has authority, after an opportunity for a hearing, to downgrade
an institution from well-capitalized to adequately capitalized, or to subject
an adequately capitalized or undercapitalized institution to the supervisory
actions applicable to the next lower category, for supervisory concerns. At
June 30, 2000 and 1999, the Bank was a well-capitalized institution. There are
no conditions or events that management believes has changed the institution's
category under the capital guidelines.
Dividends
Savings association subsidiaries of holding companies generally are required
to provide their OTS District Director not less than 30 days' advance notice
of any proposed declaration of a dividend on the association's stock. Under
regulations adopted by the OTS, the insured institution's ability to declare
and pay a dividend to its holding company is subject to certain limitations.
The regulation establishes a three-tiered system of regulation, with the
greatest flexibility being afforded to well-capitalized associations. The Bank
is considered a well-capitalized institution for purposes of dividend
declarations. On May 19, 2000, the Bank declared a $1.0 million dividend
payable to the Company based on a $5.0 million total authorization by the
Board of Directors of the Bank. No dividends were declared or paid by the Bank
in 1999.
F-24
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Earnings Per Share
The following is the reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations for the years as indicated:
For the Year Ended For the Year Ended For the Year Ended
June 30, 2000 June 30, 1999 June 30, 1998
-------------------------------- -------------------------------- --------------------------------
Per- Per- Per-
Earnings Shares Share Earnings Shares Share Earnings Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------ ----------- ------------- ------
(Dollars in thousands)
Basic EPS
Net earnings before
extraordinary item
and cumulative
effect of change in
accounting
principle.......... $11,750 5,025,625 $2.34 $9,543 5,392,564 $1.77 $6,610 5,469,646 $1.21
Extraordinary item,
net of taxes....... -- -- -- (61) -- (0.01) -- -- --
Cumulative effect of
change in
accounting
principle, net of
taxes.............. -- -- -- 162 -- 0.03 -- -- --
------- --------- ----- ------ --------- ----- ------ --------- -----
Earnings available
to common
stockholders....... $11,750 5,025,625 $2.34 $9,644 5,392,564 $1.79 $6,610 5,469,646 $1.21
======= ========= ===== ====== ========= ===== ====== ========= =====
Diluted EPS
Net earnings before
extraordinary item
and cumulative
effect of change in
accounting
principle.......... $11,750 5,025,625 $2.34 $9,543 5,392,564 $1.79 $6,610 5,469,646 $1.21
------- --------- ----- ------ --------- ----- ------ --------- -----
Options-common stock
equivalents........ 253,516 267,787 325,834
--------- --------- ---------
Earnings available
to common
stockholders plus
assumed conversions
before
extraordinary item
and cumulative
effect of change in
accounting
principle.......... 11,750 5,279,141 2.23 9,543 5,660,351 1.68 6,610 5,795,480 1.14
------- --------- ----- ------ --------- ----- ------ --------- -----
Extraordinary item,
net of taxes....... -- -- -- (61) -- (0.01) -- -- --
Cumulative effect of
change in account-
ing principle, net
of taxes........... -- -- -- 162 -- 0.03 -- -- --
------- --------- ----- ------ --------- ----- ------ --------- -----
Earnings available
to common stock-
holders plus as-
sumed conversions.. $11,750 5,279,141 $2.23 $9,644 5,660,351 $1.70 $6,610 5,795,480 $1.14
======= ========= ===== ====== ========= ===== ====== ========= =====
F-25
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(12) Retirement Plans
Defined Benefit/Cash Balance Plan
The Bank maintains a noncontributory defined benefit pension plan (the
Plan). Employees become eligible to participate in the Plan upon attaining the
age of 21 and completing one year of service during which they have served a
minimum of 1,000 hours. Until December 31, 1999, the Plan was an income
replacement retirement plan. The benefits were based on years of service and
the three consecutive years of employment during which the participant earned
the highest compensation. Contributions were intended to provide not only for
benefits attributed to service to date, but also for those expected to be
earned in the future. Effective December 31, 1993, the Plan was frozen for
benefit service accrued, and employees hired after November 30, 1992 did not
participate in the Plan.
Due to the December 31, 1993 freezing of participants' years of service
credited, the Board of Directors approved the conversion of the Plan into a
Cash Balance Plan effective January 1, 2000. Under the provisions of the Cash
Balance Plan, a cash balance account is established for each participant at
plan entry and increased over time with pay and interest credits. Pay credits
are equal to 5.0% of eligible pay and are credited to each participant's cash
balance account annually. Interest credits are based on ten-year Treasury Note
rates and are credited to a participant's cash balance account quarterly. At
termination of employment, a participant (if vested) becomes entitled to
receive his or her cash balance account in a single payment or have it
converted to a monthly annuity payable for life (or over a joint lifetime with
his or her beneficiary) at retirement. Employees are eligible to participate
in the Cash Balance Plan upon attaining the age of 21 and completing one year
of service during which they have served a minimum of 1,000 hours. Although
the Cash Balance Plan is intended to be an ERISA-qualified plan, the Bank has
not yet submitted the Cash Balance Plan for approval as such, due to the
recent Internal Revenue Service (IRS) moratorium on the consideration of cash
balance plans. The Bank has implemented the Cash Balance Plan, effective
January 1, 2000, on a provisional basis, and intends to apply for IRS approval
as soon as practicable.
Plan assets, at fair value, are primarily comprised of government
obligations and short-term investments.
F-26
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table sets forth the Plan's funded status and amounts
recognized in the Bank's consolidated statements of financial condition:
June 30
-------------
2000 1999
------ -----
(In
thousands)
Change in Benefit Obligation
Projected benefit obligation, beginning of year............... $3,620 3,796
Service cost.................................................. 106 --
Interest cost................................................. 238 206
Benefits paid................................................. (95) (204)
Plan amendment................................................ 447 --
Actuarial gain................................................ (465) (178)
------ -----
Projected benefit obligation, end of year..................... 3,851 3,620
------ -----
Change in Plan Assets
Fair value of plan assets, beginning of year.................. 3,024 3,402
Actual return on plan assets.................................. 60 (174)
Benefits paid................................................. (95) (204)
------ -----
Fair value of plan assets, end of year........................ 2,989 3,024
------ -----
Funded Status
Unrecognized transition asset................................. (4) (5)
Unrecognized prior service cost............................... 352 (94)
Unrecognized loss............................................. 334 779
------ -----
Net amount recognized......................................... $ (180) 84
====== =====
Components of Net Periodic Benefit Cost
Service cost.................................................. $ 106 --
Interest cost................................................. 238 206
Expected return on plan assets................................ (176) (184)
Amortization of unrecognized transition obligation............ (1) (1)
Amortization of unrecognized prior service cost............... 1 (34)
Amortization of unrecognized loss............................. 96 101
------ -----
Net periodic benefit cost .................................... $ 264 88
====== =====
Accumulated Benefit Obligation, end of year................... $3,489 3,234
====== =====
Amounts Recognized in Statement of Financial Condition
Accrued benefit liability..................................... $ (500) (210)
Intangible asset.............................................. 320 --
Accumulated comprehensive income.............................. -- 294
------ -----
Net amount recognized......................................... $ (180) 84
====== =====
The weighted average discount rates used in determining the actuarial
present value of the benefit obligations were 7.75% as of June 30, 2000 and
6.00% as of June 30, 1999. The salary increase assumption was 4.00% as of June
30, 2000 and 1999, respectively.
F-27
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Supplemental Executive Retirement Plan
The Bank has a supplemental executive defined benefit pension plan covering
specified employees. The benefits are based on employee compensation and
length of service and are offset by benefits provided by Social Security and
the Company's other qualified retirement plans.
The following table sets forth the Plan's funded status and amounts
recognized in the Bank's consolidated statements of financial condition:
June 30
-----------
2000 1999
----- ----
(In thousands)
Change in Benefit Obligation
Projected benefit obligation, beginning of year................ $ 873 743
Service cost................................................... 47 79
Interest cost.................................................. 44 48
Curtailment/Settlement......................................... (623) --
Actuarial loss................................................. 10 2
----- ----
Projected benefit obligation, end of year...................... 351 872
----- ----
Funded Status
Unrecognized prior service cost................................ -- 256
Unrecognized gain.............................................. -- (259)
----- ----
Net amount recognized.......................................... $(351) (875)
===== ====
Components of Net Periodic Benefit Cost
Service cost................................................... $ 47 79
Interest cost.................................................. 44 48
Amortization of unrecognized prior service cost................ 24 47
Amortization of unrecognized gain.............................. (88) (19)
Effect of Curtailment/Settlement............................... 72 --
----- ----
Net periodic benefit cost...................................... $ 99 155
===== ====
Accumulated Benefit Obligation, end of year.................... $ 351 413
===== ====
Amounts Recognized in Statement of Financial Condition
Accrued benefit liability...................................... $(351) (874)
----- ----
Net amount recognized.......................................... $(351) (874)
===== ====
The weighted average discount rates used in determining the actuarial
present value of the benefit obligations were 7.75% as of June 30, 2000 and
7.25% as of June 30, 1999. The salary increase assumption was 6.00% as of June
30, 2000 and 1999.
Retirement Benefit Equalization Plan
In conjunction with the conversion of the Bank's Defined Benefit Plan into a
Cash Balance Plan effective January 1, 2000, the SERP was converted into a
Retirement Benefit Equalization Plan (RBEP) for certain employees. The
Retirement Benefit Equalization Plan (RBEP) is a supplemental plan to the Cash
Balance Plan, 401(k) Plan, and ESOP and is intended to provide certain covered
F-28
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
employees with the total amount of retirement income that they would otherwise
receive under these plans if not for legislated ceilings in compliance with
certain sections of the Internal Revenue Code which limit retirement benefits
payable from qualified plans.
Under the provisions of the RBEP, a cash balance account is established for
each participant at plan entry and increased over time with contribution and
interest credits. Contribution credits are equal to the amounts not
contributed under the qualified plans due to IRS limitations and are credited
to each participant's cash balance account annually.
Interest credits are based on ten-year Treasury Note rates and are credited
to a participant's cash balance account quarterly.
During 2000, the expense for this plan totaled $47,000. As this plan was
newly created, there were no expenses for this plan for 1999 or 1998.
Employee Stock Ownership Plan (ESOP)
The Company has established an ESOP for all employees who are age 21 or
older and have completed one year of service with the Bank during which they
have served a minimum of 1,000 hours. The ESOP is internally leveraged and
borrowed $3.1 million from the Company to purchase 10% of the outstanding
shares of the common stock of Quaker City Bancorp, Inc. issued in the original
conversion to common stock ownership. The loan will be repaid principally from
the Bank's discretionary contributions to the ESOP. In conjunction with the
conversion of the Bank's Defined Benefit Plan into a Cash Balance Plan
effective January 1, 2000, and the inclusion of all eligible employees as
participants in the Plan, the Board of Directors approved an amendment to the
ESOP which allows the loan underlying the ESOP to be reamortized over a longer
period of time. ESOP participants will receive essentially the same benefit,
but the length of time by which it will be received will be extended from
September 2003 to December 2004. At June 30, 2000 and 1999, the outstanding
balance on the loan was $1.0 million and $1.3 million, respectively. Shares
purchased with the loan proceeds are held in a suspense account for allocation
among participants as the loan is repaid. Contributions to the ESOP and shares
released from the suspense account are allocated among participants on the
basis of compensation, as described in the plan, in the year of allocation.
Benefits generally become 100% vested after five years of vesting service.
Vesting will accelerate upon retirement, death or disability of the
participant or in the event of a change in control of the Bank or the Company.
Forfeitures will be reallocated among remaining participating employees, in
the same proportion as contributions. Benefits may be payable upon death,
retirement, early retirement, disability or separation from service. Since the
annual contributions are discretionary, the benefits payable under the ESOP
cannot be estimated. The Company accounts for its ESOP in accordance with
Statement of Position 93-6. Accordingly, the Company reports compensation
expense equal to the fair value of the shares allocated, and the allocated
shares are considered outstanding for the computation of earnings per share.
The expense related to the ESOP totaled $1.0 million, $1.0 million and $1.1
million for the fiscal years ended June 30, 2000, 1999 and 1998, respectively.
At June 30, 2000 and 1999, unearned compensation related to the ESOP
approximated $1.0 million and $1.3 million, respectively, and is shown as a
reduction of stockholders' equity in the accompanying consolidated statements
of financial condition.
F-29
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The table below reflects ESOP activity for the periods indicated:
Year ended June 30
------------------
2000 1999
-------- --------
Unallocated shares at beginning of period.................. 274,922 339,609
Allocated.................................................. (64,687) (64,687)
-------- --------
Unallocated shares at end of period........................ 210,235 274,922
======== ========
The fair value of unallocated ESOP shares totaled $3.2 million and $4.5
million at June 30, 2000 and 1999, respectively.
401(k) Plan
Effective July 1, 1997, the Bank implemented a 401(k) plan. Employees become
eligible to participate in the Plan upon attaining the age of 21 and
completing one year of service during which they have served a minimum of
1,000 hours. The benefits are based on employee compensation. During 2000,
1999 and 1998, the expense for this plan totaled $89,000, $57,000 and $52,000,
respectively.
(13) Incentive Plans
Recognition and Retention Plan (RRP)
The Bank adopted the RRP as a method of providing officers, employees and
nonemployee directors of the Bank with a proprietary interest in the Company
in a manner designed to encourage such persons to remain with the Bank. The
Bank contributed funds to the RRP to enable the trust to acquire, in the
aggregate, 4% of the shares of common stock in the conversion. Under the RRP,
awards are granted in the form of shares of common stock held by the RRP.
These shares represent deferred compensation and have been accounted for as a
reduction of stockholders' equity. Shares allocated vest over a period of
three to five years commencing on January 1, 1995 and continuing on each
anniversary date thereafter. Awards are automatically vested upon a change in
control of the Company or the Bank. In the event that before reaching normal
retirement, an officer or employee terminates service with the Company or the
Bank, that person's nonvested awards are forfeited.
The expense related to the RRP for the fiscal years ended June 30, 1999 and
1998 was approximately $115,000 and $221,000, respectively. There was no
expense related to the RRP for fiscal year ended June 30, 2000. All shares
under the RRP were distributed as of January, 1999. Currently, there is no
intention to continue this plan.
Stock Option and Incentive Plans
In March of 1994 the stockholders of the Company ratified two stock option
plans, the 1993 Incentive Stock Option Plan (the Stock Plan) and the 1993
Stock Option Plan for Outside Directors (the Directors' Plan). In fiscal 1998,
the stockholders of the Company ratified the 1997 Stock Incentive Plan (the
1997 Stock Plan). All Plans provide for the grant of options at an exercise
price equal to the fair market value on the date of grant. The Plans are
intended to promote stock ownership by directors and selected officers and
employees of the Company to increase their proprietary interest in the success
of the Company and to encourage them to remain in the employ of the Company or
its subsidiaries. Awards granted under the Plans may include incentive stock
options, nonstatutory options, limited rights which are exercisable only upon
a change in control of the Bank or the Company, restricted stock, stock
appreciation rights and other stock-based benefits.
F-30
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company applies APB Opinion No. 25 and related interpretations for its
plans, all of which are fixed stock option plans. Accordingly, the Company did
not recognize compensation expense in connection with awards of stock options
because the exercise price and the fair market value were the same at the
dates of award. Had compensation cost for the Company Plans been recognized
based upon the fair value of the options at the grant date consistent with the
methodology specified in SFAS No. 123, the Company's net earnings and net
earnings per share at June 30, 2000, 1999 and 1998 would have been reduced to
the pro forma amounts indicated below (in thousands, except per share
amounts):
Year Ended June 30
-------------------
2000 1999 1998
------- ----- -----
Net earnings as reported.................................... $11,750 9,644 6,610
Net earnings pro forma...................................... 11,318 9,359 6,404
Basic earnings per share as reported........................ 2.34 1.79 1.21
Basic earnings per share pro forma.......................... 2.25 1.74 1.17
Diluted earnings per share as reported...................... 2.23 1.70 1.14
Diluted earnings per share pro forma........................ 2.14 1.65 1.10
The per share weighted-average fair value of stock options granted during
2000, 1999 and 1998 were $7.36, $6.69 and $8.42, respectively, on the date of
grant using the Black-Scholes option-pricing model. The following weighted-
average assumptions were used for fiscal 2000: volatility of 25.12%, no
expected dividends, risk free interest rate of 6.33% and an expected life of 8
years. The following weighted-average assumptions were used for fiscal 1999:
volatility of 18.54%, no expected dividends, risk-free interest rate of 5.93%
and an expected life of 8 years. The following weighted-average assumptions
were used for fiscal 1998: volatility of 25.27%, no expected dividends, risk-
free interest rate of 5.66%, and an expected life of 10 years. During the
initial phase-in period, the effects of applying SFAS No. 123 for these pro
forma disclosures are not likely to be representative of the effects on
reported income for future years as options vest over several years and
additional awards may be made each year.
The Directors' Plan authorizes the granting of stock options for a total of
161,719 shares of common stock. The Stock Plan authorizes the granting of
stock options for a total of 485,156 shares of common stock. All options
granted under both plans were granted at an exercise price of $4.80 per share.
The aggregate number of shares of common stock outstanding and available for
issuance pursuant to the 1997 Stock Plan is 560,465 shares. Options covering a
total of 100,257 shares were granted in fiscal 2000 at a weighted average
exercise price of $15.70 per share, which was the fair market value on the
grant date. Options covering a total of 110,000 shares were granted in fiscal
1999 at a weighted average exercise price of $16.13 per share, which was the
fair market value on the grant date. Options covering a total of 181,250
shares were granted in fiscal 1998 at a weighted average exercise price of
$16.50 per share, which was the fair market value on the grant date.
All options granted under the Directors' Plan became fully exercisable
January 1, 1995. Each option granted under the Directors' Plan expires upon
the earlier of ten years following the date of grant or one year following the
date the optionee ceases to be a director. All options granted under the Stock
Plan are exercisable in three equal annual installments commencing January 1,
1995 and continuing on each anniversary date thereafter. Each option granted
under the Stock Plan expires upon the earlier of ten years following the date
of grant or three months following the date on which
F-31
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the employee ceases to perform services for the Bank or the Company, except
that in the event of death, disability, retirement or upon a change in control
of the Company or the Bank, options may be exercisable for up to one year
thereafter or such longer period as determined by the Company. Each option
granted under the 1997 Stock Plan expires upon the earlier of ten years
following the date of grant or 30 days following the date on which the
employee ceases to perform services for the Bank or the Company, except that
in the event of death, disability, retirement or upon a change in control of
the Company or the Bank, options may be exercisable for up to six months
thereafter or such longer period as determined by the Company.
The table below reflects option activity for the periods indicated:
Year ended June 30
--------------------------------------------------------
2000 1999 1998
------------------ ------------------ ------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- --------- ------- --------- ------- ---------
Balance at beginning of
period................. 674,696 $9.79 613,039 $ 8.26 449,923 $ 4.80
Granted................. 100,257 15.70 110,000 16.13 181,250 16.50
Expired................. (10,815) 16.55 -- -- -- --
Exercised............... (31,470) 4.80 (48,343) 4.80 (18,134) 4.80
------- ------- -------
Balance at end of
period................. 732,668 10.71 674,696 9.79 613,039 8.26
======= ======= =======
Options exercisable..... 568,643 9.24 443,863 6.39 431,789 4.80
======= ======= =======
Remaining shares
available for grant.... 187,858 8,085 118,085
======= ======= =======
The following table summarizes information about stock options outstanding
at June 30, 2000:
Options Outstanding Options Exercisable
-------------------------------------- ---------------------
Number Weighted- Number Weighted-
Outstanding Weighted-Average Average Exercisable Average
at June 30, Remaining Exercise at June 30, Exercise
Range of Exercise Prices 2000 Contractual Life Price 2000 Price
------------------------ ----------- ---------------- --------- ----------- ---------
$ 4.80.................. 351,976 3.5 years $ 4.80 351,976 $ 4.80
$13.375 to $17.85....... 380,692 8.4 years 16.18 216,667 16.46
F-32
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(14) Commitments and Contingent Liabilities
The Company leases certain premises and equipment on a long-term basis. Some
of these leases require the Company to pay property taxes and insurance. Lease
expense was approximately $730,000, $524,000 and $430,000 in 2000, 1999 and
1998, respectively. Annual minimum lease commitments attributable to long-term
operating leases at June 30, 2000 were (in thousands):
Year ending June 30:
2001................................................................ $ 656
2002................................................................ 648
2003................................................................ 566
2004................................................................ 460
2005................................................................ 437
Thereafter through 2013............................................. 1,556
------
$4,323
======
At June 30, 2000 and 1999, the Company had approved commitments to originate
loans of approximately $15.0 million and $14.0 million, respectively,
substantially all of which were for adjustable rate one to four unit
residential loans and multifamily residential loans. Commitments to extend
credit are agreements to lend to a customer as long as there is no violation
of any condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a
fee. Since certain of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Company minimizes its exposure to loss under these
commitments by requiring that customers meet certain conditions prior to
disbursing funds. The amount of collateral, if any, is based on a credit
evaluation of the borrower and generally involves residential real estate.
At June 30, 2000 and 1999, the Company had $25.5 million and $21.1 million
of approved undisbursed lines of credit, respectively.
At June 30, 2000 and 1999, the Company had commitments to sell loans of
$11.2 million and $6.0 million, respectively, for which the related loans are
included in loans held for sale. There were commitments to purchase loans of
$3.7 million at June 30, 1999 and no commitments to purchase loans at June 30,
2000. The Company had no commitments to sell investment securities or MBS at
June 30, 2000 and 1999. There were no commitments to purchase investment
securities at June 30, 2000 and 1999.
The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings in the aggregate are believed by management to be
immaterial to the Company's financial condition and results of operations.
F-33
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(15) Loan Servicing and Sale Activities
Loan servicing and sale activities are summarized as follows:
At or for the year ended
June 30
--------------------------
2000 1999 1998
-------- ------- -------
(In thousands)
Statement of financial condition information:
Loans receivable held for sale.................. $ 21,212 17,028 7,507
Purchased mortgage servicing rights............. 197 215 471
======== ======= =======
Statement of earnings information:
Loan servicing fees............................. $ 974 699 870
Gain on sale of loans held for sale............. 316 332 175
======== ======= =======
Statement of cash flows information:
Loans originated for sale....................... $(53,039) (73,674) (41,321)
Sale of loans held for sale..................... 48,910 63,996 34,324
======== ======= =======
The Company originates mortgage loans, which depending upon whether the
loans meet the Company's investment objectives, may be sold in the secondary
market or to other private investors. The servicing of these loans may or may
not be retained by the Company. Direct origination and servicing costs for
loan servicing and sale activities cannot be presented as these operations are
integrated with and not separable from the origination and servicing of
portfolio loans and, as a result, cannot be accurately estimated.
In addition to retaining the servicing assets for originated loans, the
Company may also purchase mortgage servicing assets related to mortgage loans
originated by other institutions. At June 30, 2000, the Company had purchased
mortgage servicing assets with a book value of $197,000 and originated
mortgage servicing assets with a book value of $72,000.
(16) Parent Company Condensed Financial Information
This information should be read in conjunction with the other notes to the
consolidated financial statements. The following are the condensed financial
statements for Quaker City Bancorp, Inc. (parent company only) as of June 30,
2000 and 1999 and for the years ended June 30, 2000, 1999 and 1998:
Statements of Financial Condition
June 30
--------------
2000 1999
Assets ------- ------
(In thousands)
Cash........................................................ $ 175 38
Short-term investments...................................... -- 7,320
Investment in subsidiaries.................................. 90,554 77,996
Other assets................................................ 835 34
------- ------
$91,564 85,388
======= ======
Liabilities and Stockholders' Equity
Liabilities--other liabilities.............................. $ 2,530 4,084
Stockholders' equity........................................ 89,034 81,304
------- ------
$91,564 85,388
======= ======
F-34
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Statements of Earnings
Year ended June 30
---------------------
2000 1999 1998
------- ----- -----
(In thousands)
Dividend from bank.................................... $ 1,000 -- --
Interest income....................................... 171 566 660
Other income.......................................... -- 371 --
Other expense......................................... (386) (377) (373)
Income taxes.......................................... 40 (275) (148)
------- ----- -----
Earnings before equity in undistributed earnings
of subsidiaries.................................. 825 285 139
Equity in undistributed earnings of subsidiaries...... 10,925 9,359 6,471
------- ----- -----
Net earnings.......................................... $11,750 9,644 6,610
======= ===== =====
Statements of Cash Flows
Year ended June 30
-------------------------
2000 1999 1998
-------- ------- ------
(In thousands)
Cash flows from operating activities:
Net earnings...................................... $ 11,750 9,644 6,610
Adjustments to reconcile net earnings to cash
provided by operating activities:
Equity in undistributed earnings of
subsidiaries................................... (10,925) (9,359) (6,471)
Gain on sale of securities available for sale .. -- (371) --
Decrease (increase) in other assets............. (801) 3 (9)
Increase (decrease) in other liabilities........ (1,554) 1,297 (837)
Other........................................... 311 637 266
-------- ------- ------
Total adjustments............................. (12,969) (7,793) (7,051)
Net cash provided (used) by operating
activities................................... (1,219) 1,851 (441)
-------- ------- ------
Cash flows from investing activities:
Proceeds from maturity of investment securities
held to maturity................................. -- -- 5,000
Principal payments on MBS held to maturity........ -- -- 108
Sale of investment securities available for sale.. -- 1,558 --
-------- ------- ------
Net cash provided by investing activities..... -- 1,558 5,108
-------- ------- ------
Cash flows from financing activities:
Repurchase and retirement of stock................ (6,143) (6,566) (1,157)
Common stock options exercised.................... 179 231 87
-------- ------- ------
Net cash used in financing activities......... (5,964) (6,335) (1,070)
-------- ------- ------
Net increase (decrease) in cash and cash
equivalents.................................. (7,183) (2,926) 3,597
Cash and cash equivalents, beginning of year...... 7,358 10,284 6,687
-------- ------- ------
Cash and cash equivalents, end of year............ $ 175 7,358 10,284
======== ======= ======
F-35
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(17) Quarterly Results of Operations (Unaudited)
Three months ended
--------------------------------------------
June
30, March 31, December 31, September 30,
2000 2000 1999 1999
------- --------- ------------ -------------
(In thousands, except per share amounts)
Interest income............... $23,211 21,740 20,250 19,335
Interest expense.............. 13,838 12,487 11,613 10,976
------- ------ ------ ------
Net interest income......... 9,373 9,253 8,637 8,359
Provision for losses.......... 400 400 400 400
Other income.................. 1,343 1,148 1,191 1,060
Other expense................. 5,047 4,954 4,467 4,217
------- ------ ------ ------
Earnings before income taxes
........................... 5,269 5,047 4,961 4,802
Income taxes ................. 1,830 2,207 2,180 2,112
------- ------ ------ ------
Net earnings................ $ 3,439 2,840 2,781 2,690
======= ====== ====== ======
Basic earnings per share...... $ 0.70 0.57 0.55 0.52
======= ====== ====== ======
Diluted earnings per share.... $ 0.67 0.54 0.52 0.49
======= ====== ====== ======
Three months ended
--------------------------------------------
June
30, March 31, December 31, September 30,
1999 1999 1998 1998
------- --------- ------------ -------------
(In thousands, except per share amounts)
Interest income............... $18,819 18,295 17,630 17,175
Interest expense.............. 10,373 9,908 10,028 10,007
------- ------ ------ ------
Net interest income......... 8,446 8,387 7,602 7,168
Provision for losses.......... 400 500 400 400
Other income.................. 1,064 1,011 1,177 1,377
Other expense................. 4,460 4,448 4,539 4,078
------- ------ ------ ------
Earnings before income taxes
........................... 4,650 4,450 3,840 4,067
Income taxes ................. 2,043 1,952 1,698 1,771
------- ------ ------ ------
Net earnings before
extraordinary item and
cumulative effect of change
in accounting principle.... 2,607 2,498 2,142 2,296
Extraordinary item, net of
taxes...................... -- -- (61) --
Cumulative effect of change
in accounting principle,
net of taxes............... -- -- -- 162
------- ------ ------ ------
Net earnings................ $ 2,607 2,498 2,081 2,458
======= ====== ====== ======
Basic earnings per share...... $ 0.50 0.47 0.39 0.45
======= ====== ====== ======
Diluted earnings per share.... $ 0.47 0.45 0.36 0.42
======= ====== ====== ======
F-36
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(18) Fair Value of Financial Instruments
Pursuant to requirements under generally accepted accounting principles, the
Company has included information about the fair values of the Company's
financial instruments, whether or not such instruments are recognized in the
accompanying consolidated statements of financial condition. In cases where
quoted market prices are not available, fair values are estimated based upon
discounted cash flows. Those techniques are significantly affected by the
assumptions utilized, including the assumed discount rates and estimates of
future cash flows. In this regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could
not be realized in an immediate sale or other disposition of the instrument.
SFAS No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. All components of cash and cash
equivalents and accrued interest receivable and payable are presumed to have
approximately equal book and fair values because the periods over which such
amounts are realized are relatively short. As a result of the assumptions
utilized, the aggregate fair value estimates presented herein do not
necessarily represent the Company's aggregate underlying fair value.
The fair values of investment securities and MBS are generally obtained from
market bids for similar or identical securities, or are obtained from quotes
from independent security brokers or dealers.
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as one to four units,
multifamily, commercial real estate and other. Each loan category is further
segmented into fixed and adjustable rate interest terms and by performing and
nonperforming categories. The fair value of performing loans is calculated by
discounting scheduled cash flows through the estimated maturity using
estimated market discount rates that reflect the credit and interest rate risk
inherent in the loan. The estimate of maturity is based on the contractual
term of the loans to maturity, adjusted for estimated prepayments. Fair value
for nonperforming loans is based on management's evaluation of fair value as
determined by specific borrower information and, if appropriate, the fair
value of the underlying collateral.
The fair values of deposits are estimated based upon the type of deposit
product. Demand and money market deposits are presumed to have equal book and
fair values. The estimated fair values of time deposits are determined by
discounting the cash flows of segments of deposits having similar maturities
and rates, utilizing a yield curve that approximated the rates offered as of
the reporting date. No value has been estimated for the Company's long-term
relationships with depositors (commonly known as the core deposit premium)
since such intangible asset is not a financial instrument pursuant to the
definitions contained in SFAS No. 107.
The fair values of borrowings were estimated using current market rates of
interest for similar borrowings.
The fair values of off-balance sheet items are based on rates for similar
transactions as of the reporting date.
F-37
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents the carrying values and fair values of the
Company's financial instruments at the dates indicated:
June 30
------------------------------------
2000 1999
------------------ ----------------
Carrying Fair Carrying Fair
value value value value
-------- --------- -------- -------
ASSETS:
Cash and due from banks............... $ 9,494 9,494 $ 7,705 7,705
Interest-bearing deposits............. 673 673 323 323
Federal funds sold and other short-
term investments..................... 3,900 3,900 25,120 25,120
Investment securities................. 21,863 20,780 11,986 11,320
Investment securities available for
sale................................. 9,498 9,498 -- --
Loans receivable, net................. 990,675 1,005,179 821,190 834,320
Loans receivable held for sale........ 21,212 21,212 17,028 17,028
Mortgage-backed securities held to
maturity............................. 85,457 81,378 84,078 81,485
Mortgage-backed securities available
for sale............................. 24,404 24,404 15,783 15,783
Federal Home Loan Bank stock.......... 15,607 15,607 12,221 12,221
LIABILITIES:
Deposits.............................. 808,229 807,607 677,839 676,452
Federal Home Loan Bank advances....... 290,250 288,567 234,700 234,467
OFF-BALANCE SHEET:
Commitments to extend credit........ -- 165 -- 61
Unused lines of credit.............. -- 1,631 -- 135
Loans sold with recourse (including
bond loans)........................ -- (960) -- (314)
======== ========= ======== =======
F-38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by this reference is the information set forth in the
sections entitled "DIRECTORS AND EXECUTIVE OFFICERS--Directors" and "--
Executive Officers" and SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING
COMPLIANCE contained in the Company's Proxy Statement for its 2000 Annual
Meeting of Stockholders (the "2000 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by this reference is the information set forth in the
sections entitled "COMPENSATION AND OTHER INFORMATION" and "COMPENSATION
COMMITTEE REPORT ON EXECUTIVE COMPENSATION" contained in the 2000 Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by this reference is the information set forth in the
sections entitled "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS" and
"SECURITY OWNERSHIP OF MANAGEMENT" contained in the 2000 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by this reference is the information set forth in the
section entitled "RELATED PARTY TRANSACTIONS" contained in the 2000 Proxy
Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
Page
Description No.
----------- ----
Independent Auditors' Report.............................................. F-2
Consolidated Statements of Financial Condition at June 30, 2000 and 1999.. F-3
Consolidated Statements of Earnings for Each of the Years in the Three-
Year Period Ended June 30, 2000.......................................... F-4
Consolidated Statements of Comprehensive Income for Each of the Years in
the Three-Year Period Ended June 30, 2000................................ F-5
Consolidated Statements of Stockholders' Equity for Each of the Years in
the Three-Year Period Ended June 30, 2000................................ F-6
Consolidated Statements of Cash Flows for Each of the Years in the Three-
Year Period Ended June 30, 2000.......................................... F-7
Notes to Consolidated Financial Statements................................ F-8
(a)(2) Financial Statement Schedules
All schedules are omitted as the required information is inapplicable or the
information is presented in the consolidated financial statements or related
notes.
II-1
(a)(3) Exhibits
Exhibit
Number Description
------- -----------
3.1 Certificate of Incorporation of Quaker City Bancorp, Inc.(1)
3.2 Bylaws of Quaker City Bancorp, Inc.(1)
10.1 Quaker City Bancorp, Inc. 1993 Incentive Stock Option Plan.*(1)
Quaker City Bancorp, Inc. 1993 Stock Option Plan for Outside
10.2 Directors.*(1)
10.3 Quaker City Federal Savings and Loan Association Recognition and
Retention Plan for Officers and Employees.*(1)
10.4 Quaker City Federal Savings and Loan Association Recognition and
Retention Plan for Outside Directors.*(1)
10.5 Employment Agreements between Quaker City Bancorp, Inc. and Quaker
City Federal Savings and Loan Association, respectively, and J.L.
Thomas as of January 1, 1994 and as amended to September 27, 1994,
respectively.*(1)
10.5.1 Quaker City Federal Savings and Loan Association Three Year Employment
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and J.L. Thomas dated June 23,
1995.*(2)
10.5.2 Employment Agreements between Quaker City Bancorp, Inc. and Quaker
City Federal Savings and Loan Association, respectively, and J.L.
Thomas as of July 1, 1996.*(3)
10.5.3 Quaker City Federal Savings and Loan Association Three Year Employment
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and J.L. Thomas dated July 1,
1997.*(4)
10.5.4 Quaker City Federal Savings and Loan Association Three Year Employment
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and J. L. Thomas dated July 1,
1998.*(5)
10.6 Employment Agreements between Quaker City Bancorp, Inc. and Quaker
City Federal Savings and Loan Association, respectively, and Frederic
R. (Rick) McGill as of January 1, 1994 and as amended to September 27,
1994, respectively.*(1)
10.6.1 Quaker City Federal Savings and Loan Association Two Year Employment
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Frederic R (Rick) McGill
dated June 23, 1995.*(2)
10.6.2 Employment Agreements between Quaker City Bancorp, Inc. and Quaker
City Federal Savings and Loan Association, respectively, and Frederic
R. (Rick) McGill as of July 1, 1996.*(3)
10.6.3 Quaker City Federal Savings and Loan Association Three Year Employment
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Frederic R. McGill dated July
1, 1997.*(4)
10.6.4 Quaker City Federal Savings and Loan Association Three Year Employment
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Frederic R. McGill dated July
1, 1998.*(5)
10.6.5 Quaker City Federal Savings and Loan Association Three Year Employment
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Frederic R. McGill dated July
1, 1999.*(6)
10.6.6 Quaker City Bank Three Year Employment Agreement Renewal and Extension
Acknowlegment between Quaker City Bank and Frederic R. McGill dated
July 1, 2000.*
10.7 Change-in-Control Agreements between Quaker City Bancorp, Inc. and
Quaker City Federal Savings and Loan Association, respectively, and
Dwight L. Wilson as of January 1, 1994 and as amended to September 27,
1994, respectively.*(1)
II-2
Exhibit
Number Description
------- -----------
10.7.1 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Dwight L. Wilson dated
September 7, 1995.*(2)
10.7.2 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Dwight L. Wilson dated July
1, 1996.*(3)
10.7.3 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Dwight L. Wilson dated July
1, 1997.*(4)
10.7.4 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Dwight L. Wilson dated July
1, 1998.*(5)
10.7.5 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Dwight L. Wilson dated July
1, 1999.*(6)
10.7.6 Quaker City Bank Change in Control Agreement Renewal and Extension
Acknowledgment between Quaker City Bank and Dwight L. Wilson dated
July 1, 2000.*
10.8 Change-in-Control Agreements between Quaker City Bancorp, Inc. and
Quaker City Federal Savings and Loan Association, respectively, and
Harold L. Rams as of January 1, 1994 and as amended to September 27,
1994, respectively.*(1)
10.8.1 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Harold Rams dated July 1,
1995.*(2)
10.8.2 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Harold Rams dated July 1,
1996.*(3)
10.8.3 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Harold Rams dated July 1,
1997.*(4)
10.8.4 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Harold Rams dated July 1,
1998.*(5)
10.8.5 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Harold Rams dated July 1,
1999.*(6)
10.8.6 Quaker City Bank Change in Control Agreement Renewal and Extension
Acknowledgment between Quaker City Bank and Harold Rams dated July 1,
2000.*
10.9 Change-in-Control Agreements between Quaker City Bancorp, Inc. and
Quaker City Federal Savings and Loan Association, respectively, and
Kathryn M. Hennigan as of January 1, 1994 and as amended September 27,
1994, respectively.*(1)
10.9.1 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Kathryn M. Hennigan dated
July 1, 1995.*(2)
10.9.2 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Kathryn M. Hennigan dated
July 1, 1996.*(3)
10.9.3 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Kathryn M. Hennigan dated
July 1, 1997.*(4)
II-3
Exhibit
Number Description
------- -----------
10.9.4 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Kathryn M. Hennigan dated
July 1, 1998.*(5)
10.9.5 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Kathryn M. Hennigan dated
July 1, 1999.*(6)
10.9.6 Quaker City Bank Change in Control Agreement Renewal and Extension
Acknowledgment between Quaker City Bank and Kathryn M. Hennigan dated
July 1, 2000.*
10.10 Change-in-Control Agreements between Quaker City Bancorp, Inc. and
Quaker City Federal Savings and Loan Association, respectively, and
Karen A. Tannheimer as of January 1, 1994 and as amended to September
27, 1994, respectively.*(1)
10.10.1 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Karen A. Tannheimer dated
June 23, 1995.*(2)
10.10.2 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Karen A. Tannheimer dated
July 1, 1996.*(3)
10.10.3 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Karen A. Tannheimer dated
July 1, 1997.*(4)
10.10.4 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Karen A. Tannheimer dated
July 1, 1998.*(5)
10.10.5 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Karen A. Tannheimer dated
July 1, 1999.*(6)
10.10.6 Quaker City Bank Change in Control Agreement Renewal and Extension
Acknowledgment between Quaker City Bank and Karen A. Tannheimer dated
July 1, 2000.*
10.11 Change-in-Control Agreements between Quaker City Bancorp, Inc. and
Quaker City Federal Savings and Loan Association, respectively, and
Robert C. Teeling as of January 1, 1994 and as amended to September
27, 1994, respectively.*(1)
10.11.1 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Robert C. Teeling dated July
1, 1995.*(2)
10.11.2 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Robert C. Teeling dated July
1, 1996.*(3)
10.11.3 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Robert C. Teeling dated July
1, 1997.*(4)
10.11.4 Quaker City Federal Savings and Loan Association Change in Control
Agreement
Renewal and Extension Acknowledgment between Quaker City Federal
Savings and
Loan Association and Robert C. Teeling dated July 1, 1998.*(5)
10.11.5 Quaker City Federal Savings and Loan Association Change in Control
Agreement
Renewal and Extension Acknowledgment between Quaker City Federal
Savings and
Loan Association and Robert C. Teeling dated July 1, 1999.*(6)
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Exhibit
Number Description
------- -----------
10.11.6 Quaker City Bank Change in Control Agreement Renewal and Extension
Acknowledgment between Quaker City Bank and Robert C. Teeling dated
July 1, 2000.*
10.12 The Quaker City Federal Savings and Loan Association Supplemental
Executive Retirement Plan.*(1)
10.13 Quaker City Federal Savings Association Employee Stock Ownership Trust
Loan and Security Agreement between California Central Trust Bank, as
trustee (the "Trustee") and Quaker City Bancorp, Inc. dated as of
December 30, 1993 and related Promissory Note and Security Agreement
Re Instruments or Negotiable Documents to be Deposited of the Trustee
dated December 30, 1993.*(1)
10.14 Quaker City Bancorp, Inc. 1997 Stock Incentive Plan.*(4)
10.15 Change in Control Agreements between Quaker City Bancorp, Inc. and
Quaker City Federal Savings and Loan Association, respectively, and
Hank H. Kadowaki as of April 1, 1998.*(5)
10.15.1 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Hank H. Kadowaki dated July
1, 1998.*(5)
10.15.2 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Hank H. Kadowaki dated July
1, 1999.*(6)
10.15.3 Quaker City Bank Change in Control Agreement Renewal and Extension
Acknowledgment between Quaker City Bank and Hank H. Kadowaki dated
July 1, 2000.*
10.16 Change in Control Agreements between Quaker City Bancorp, Inc. and
Quaker City Bank, respectively, and Jerrold S. Perisho as of May 22,
2000.*
10.16.1 Quaker City Bank Change in Control Agreement Renewal and Extension
Acknowledgment between Quaker City Bank and Jerrold S. Perisho dated
July 1, 2000.*
10.17 Quaker City Bank Employees Retirement Plan.*
10.18 Quaker City Bank Retirement Benefit Equalization Plan.*
11.1 Statement Regarding Computation of Earnings Per Share.
21 Subsidiaries of Quaker City Bancorp, Inc.
23 Consent of KPMG LLP.
27 Financial Data Schedule.
- --------
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit to the Annual Report on Form 10-K pursuant to Item 14(c) of
Form 10-K.
(1) Incorporated by reference to the corresponding exhibit to the Registrant's
Form 10-K as filed with the Securities and Exchange Commission for the
fiscal year ended June 30, 1994.
(2) Incorporated by reference to the corresponding exhibit to the Registrant's
Form 10-K as filed with the Securities and Exchange Commission for the
fiscal year ended June 30, 1995.
(3) Incorporated by reference to the corresponding exhibit to the Registrant's
Form 10-K as filed with the Securities and Exchange Commission for the
fiscal year ended June 30, 1996.
(4) Incorporated by reference to the corresponding exhibit to the Registrant's
Form 10-K as filed with the Securities and Exchange Commission for the
fiscal year ended June 30, 1997.
II-5
(5) Incorporated by reference to the corresponding exhibit to the Registrant's
Form 10-K as filed with the Securities and Exchange Commission for the
fiscal year ended June 30, 1998.
(6) Incorporated by reference to the corresponding exhibit to the Registrant's
Form 10-K as filed with the Securities and Exchange Commission for the
fiscal year ended June 30, 1999.
(b) Reports on Form 8-K
None.
II-6
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.,
a Delaware corporation
/s/ Frederic R. (Rick) McGill
By: _________________________________
Frederic R. (Rick) McGill
President and Chief Executive
Officer
DATE: September 27, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ J. L. Thomas Chairman of the Board September 27, 2000
____________________________________
J. L. Thomas
/s/ Frederic R. (Rick) McGill Director, President and September 27, 2000
____________________________________ Chief Executive Officer
Frederic R. (Rick) McGill (Principal Executive
Officer)
/s/ Dwight L. Wilson Senior Vice President, September 27, 2000
____________________________________ Treasurer and
Dwight L. Wilson Chief Financial Officer
(Principal Financial
Officer)
(Principal Accounting
Officer)
/s/ David S. Engelman Director September 27, 2000
____________________________________
David S. Engelman
/s/ Alfred J. Gobar Director September 27, 2000
____________________________________
Alfred J. Gobar
/s/ Wayne L. Harvey Director September 27, 2000
____________________________________
Wayne L. Harvey
/s/ David K. Leichtfuss Director September 27, 2000
____________________________________
David K. Leichtfuss
/s/ Edward L. Miller Director September 27, 2000
____________________________________
Edward L. Miller
II-7