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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 [FEE REQUIRED]
For the fiscal year ended June 30, 1996
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
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
7021 GREENLEAF AVENUE 90602
WHITTIER, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 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 August 31, 1996, on the Nasdaq National Market System was
approximately $48,117,000.
At September 19, 1996, 3,800,600 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 13, 1996 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........................................... 5
Delinquencies and Classification of Assets................... 12
Non-Performing Assets and Restructured Loans................. 13
Allowances for Loan and Real Estate Losses................... 15
Investment Activities........................................ 17
Sources of Funds............................................. 19
Subsidiary Activities........................................ 21
Competition.................................................. 22
Personnel.................................................... 22
Federal Taxation............................................. 22
State and Local Taxation..................................... 24
Regulation and Supervision................................... 25
General..................................................... 25
Activities Restrictions..................................... 25
Deposit Insurance........................................... 26
FIRREA Capital Requirements................................. 28
Prompt Corrective Action Requirements....................... 30
Savings and Loan Holding Company Regulation................. 30
Classification of Assets.................................... 33
Community Reinvestment Act.................................. 34
Federal Home Loan Bank System............................... 34
Required Liquidity.......................................... 34
Federal Reserve System...................................... 35
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...................................... 39
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................... 41
General...................................................... 41
Problem Assets............................................... 41
Results of Operations........................................ 41
Financial Condition.......................................... 43
Capital Resources and Liquidity.............................. 44
Asset/Liability Management................................... 46
Net Interest Income.......................................... 49
Average Balance Sheet........................................ 49
Impact of Inflation and Changing Prices...................... 51
Impact of New Accounting Standards........................... 52
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................. 53
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE..................................... 88
PAGE
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 88
ITEM 11. EXECUTIVE COMPENSATION........................................ 88
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................... 88
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 88
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K................................................... 89
SIGNATURES.................................................... 92
PART I
ITEM 1. BUSINESS
GENERAL
Quaker City Bancorp, Inc. (the "Company"), incorporated in Delaware, is
primarily engaged in the savings and loan business through its wholly owned
subsidiary Quaker City Federal Savings and Loan Association (the
"Association"). The Company was organized on September 13, 1993 for the
purpose of acquiring all of the capital stock of the Association issued in the
conversion of the Association from mutual to stock form effective December 30,
1993. The Association 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 Association. Historical information
presented throughout this report at and for periods ended prior to the
Company's commencement of operations on December 30, 1993 is that of the
Association. The executive offices of the Company are located at 7021
Greenleaf Avenue, Whittier, California 90602, telephone number (310) 907-2200.
The Association operates eight retail full service branches in the Southern
California communities of Whittier (2), La Habra (2), Brea, Fullerton, La
Mirada and Hacienda Heights. At June 30, 1996, the Association also operated
two loan origination centers located in the Southern California communities of
Hacienda Heights and Palm Desert.
The Association's principal business has been and continues to be attracting
retail deposits from the general public in the 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 Association also engages in the sale of insurance
and investment products on an agency basis. See "--Subsidiary Activities." The
Association originates predominantly one-to-four family loans and multifamily
loans within its primary market area and emphasizes multifamily lending in low
and moderate income communities, specifically in the Los Angeles metropolitan
area. To a lesser extent, the Association invests in commercial real estate
loans. At June 30, 1996, the Association's mortgage loan portfolio (including
loans held for sale) aggregated approximately $624.7 million, of which
approximately 48.54% was secured by one-to-four residential properties, 41.45%
was secured by multifamily (five or more units) properties and 9.74% was
secured by commercial properties. See "--Lending Activities." At that same
date, approximately 85.48% of the one-to-four family, 94.03% of the
multifamily and 89.50% of the commercial mortgage portfolios consisted of
adjustable rate loans.
In addition to originating loans to hold in portfolio, the Association also
originates loans for sale. The Association also purchases loans for investment
and for sale. Loan sales come from loans held in the Association's portfolio
designated as being held for sale or originated during the period and being so
designated. Historically, the Association has generally retained the servicing
rights of loans sold, but it may not necessarily do so in the future. In
addition, the Association 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 Association'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 Association's primary sources of funds are deposits, borrowings from the
Federal Home Loan Bank ("FHLB") of San Francisco ("FHLB advances"), securities
sold under agreements to repurchase, principal and interest payments on loans
and proceeds from the sale of loans. At June 30, 1996, the Association had
deposits of approximately $512.5 million, including approximately $66.1
million in time deposits of $100,000 or more. At that date, the Association's
borrowings included $135.3 million in
1
FHLB advances and $300,000 in securities sold under agreements to repurchase.
See "--Sources of Funds."
The Association's deposit accounts are insured by the Federal Deposits
Insurance Corporation (the "FDIC") through the Savings Association Insurance
Fund (the "SAIF"). A number of proposals for recapitalizing the SAIF have been
under discussion by various affected parties, relevant governmental agencies
and members of Congress during 1995 and 1996. The Company is not able to
predict whether or in what form any of the proposals that have been discussed
will be adopted. However, a significant special assessment to recapitalize the
SAIF or a significant increase in regularly assessed insurance premiums would
have an initial adverse effect on the operating expenses and results of the
Association and the Company and would reduce the Association's regulatory
capital. Over the long-term, however, a recapitalization of the SAIF could be
expected to reduce the Association's annual deposit insurance costs. See
"Business--Regulation and Supervision--Deposit Insurance--Insurance Premium
Assessments."
The Company and the Association are subject to the examination, supervision
and reporting requirements of the Office of Thrift Supervision (the "OTS"),
their primary federal banking regulator. The Association is also subject to
examination and supervision by the FDIC. See "--Regulation and Supervision--
General."
Based upon its regulatory capital levels the Association is classified as
"well-capitalized" for purposes of regulations promulgated by the OTS.
For the year ended June 30, 1996, the Company reported net earnings of $3.6
million. This compares to a net earnings of $2.3 million for the year ended
June 30, 1995 and a net loss of $2.3 million for the year ended June 30, 1994.
At June 30, 1996, the Company had total consolidated assets of $725.1 million,
total deposits of $512.5 million and stockholders' equity of $67.9 million,
representing 9.37% of total assets.
The 54% improvement in fiscal 1996 earnings over last year was primarily due
to improvement of the net interest margin and a 13% increase in total assets
during the year. The net interest margin increased to 3.24% for the year
ending June 30, 1996 compared to 3.07% for the previous year. The increase in
the net interest margin is a result of adjustable rate loans, previously
originated at a lower introductory rate, repricing upward during the year, as
well as an increase in originations of higher yielding multifamily loans. In
addition, the Company's cost of funds, which is also a component of the net
interest margin, declined during the period.
Total assets of the Company were $725.1 million at June 30, 1996, an
increase of $83.9 million during the fiscal year. The increase in assets was
primarily in residential lending with loans on multifamily properties
increasing $53.2 million, single family loans increasing $14.6 million, and
with investment securities and mortgage backed securities increasing $14.6
million. The asset growth was funded by an increase in deposits of $31.4
million and borrowings of $48.8 million.
The Southern California economy and real estate markets in the Association's
primary lending area remained weak during 1996; however, the Association's
level of non-performing assets declined from June 30, 1995. The Association
includes nonaccruing loans, troubled debt restructured loans and real estate
acquired through foreclosure ("REO") in determining its level of non-
performing assets. At June 30, 1996 the Company reported $14.9 million in non-
performing assets in the Association's portfolio compared to $16.9 million and
$22.2 million at June 30, 1995 and 1994, respectively. The Association
recorded provisions for loan losses of $2.1 million for the year ended
June 30, 1996 compared to $998,000 and $10.2 million for the years ended June
30, 1995 and 1994, respectively. Management believes that the increase in the
provision for 1996 was necessary in order to replenish the allowance for loan
losses to a level that management believes to be adequate following increased
charge-offs during 1996 compared to 1995. See "--Allowances for Loan and Real
Estate Losses" and "MD&A--Results of Operations."
2
The following tables set forth certain financial and operating information
with respect to the Company.
AT OR FOR THE YEAR ENDED JUNE 30,
------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
SELECTED FINANCIAL DATA:
Total assets........... $725,085 $641,173 $512,102 $487,020 $489,698
Total liabilities...... 657,159 574,732 447,464 445,186 450,090
Stockholders' equity... 67,926 66,441 64,638 41,834 39,608
SELECTED OPERATING DATA:
Interest income........ $ 52,646 $ 41,042 $ 35,286 $ 40,660 $ 38,410
Interest expense....... 31,151 23,503 17,456 20,483 21,723
-------- -------- -------- -------- --------
Net interest income
before provision for
loan losses......... 21,495 17,539 17,830 20,177 16,687
Provision for loan
losses................ 2,103 998 10,200 3,657 304
-------- -------- -------- -------- --------
Net interest income
after provision for
loan losses......... 19,392 16,541 7,630 16,520 16,383
Total other income..... 2,489 2,080 2,856 2,034 1,595
Total other expense.... 15,739 15,033 14,430 14,934 10,889
-------- -------- -------- -------- --------
Earnings (loss) before
income taxes.......... 6,142 3,588 (3,944) 3,620 7,089
Income taxes (benefit). 2,573 1,267 (1,613) 1,394 3,055
-------- -------- -------- -------- --------
Net earnings (loss).... $ 3,569 $ 2,321 $ (2,331) $ 2,226 $ 4,034
======== ======== ======== ======== ========
Net earnings (loss) per
share................. $ 0.92(1) $ 0.60(1) $ (0.66)(2) N/A N/A
======== ======== ======== ======== ========
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(1) Earnings per share in 1996 and 1995 were calculated based on weighted
average shares outstanding of 3,871,290 and 3,850,176, respectively.
(2) Earnings per share data was calculated based on the Company's net loss of
$2,745,000 for the period December 30, 1993 through June 30, 1994 and
4,140,000 shares of common stock of the Company outstanding; the Company
completed its initial public stock offering and commenced operations on
December 30, 1993.
3
AT OR FOR THE YEAR ENDED JUNE 30,
-----------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
SELECTED FINANCIAL RATIOS AND OTHER
DATA:
PERFORMANCE RATIOS:
Return on average assets.......... 0.53% 0.39% (0.46)% 0.45% 0.97%
Return on average equity.......... 5.25 3.53 (4.13) 5.38 10.85
Average equity to average assets.. 10.04 11.18 11.24 8.32 8.99
Equity to total assets............ 9.37 10.36 12.62 8.59 8.09
Interest rate spread during the
period(1)........................ 2.68 2.56 3.20 3.67 3.67
Net interest margin(2)............ 3.24 3.07 3.66 4.06 4.18
Average interest-earning assets to
average
interest-bearing liabilities..... 111.47 112.31 113.02 109.17 109.45
General and administrative expense
to average
assets........................... 2.18 2.39 2.59 2.56 2.60
Other expense to average assets... 2.32 2.55 2.87 3.00 2.63
Dividend pay-out ratio............ -- -- -- N/A N/A
REGULATORY CAPITAL RATIOS:
Tangible capital.................. 7.67 8.11 9.88 8.25 7.84
Core capital...................... 7.67 8.11 9.88 8.25 7.84
Risk-based capital................ 12.74 14.07 16.09 14.24 13.02
ASSET QUALITY RATIOS:
Non-performing loans as a percent-
age of total
loans(3)......................... 2.00 2.67 4.22 2.41(5) 0.52
Non-performing assets as a per-
centage of total
assets(4)........................ 2.06 2.64 4.33 2.65(5) 0.70
Allowance for loan losses as a
percentage of
total loans...................... 1.25 2.17 2.88 1.17 0.36
Allowance for loan losses as a
percentage of
non-performing loans............. 62.64 81.51 68.30 48.39 68.78
Allowance for losses as a percent-
age of total
non-performing assets(6)......... 53.60 72.68 62.18 39.94 48.71
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(1) The interest rate spread represents the difference between the weighted-
average rate on interest-earning assets and the weighted-average rate on
interest-bearing liabilities.
(2) The net interest margin represents net interest income as a percentage of
average interest-earning assets.
(3) Non-performing loans consist of non-accrual and troubled debt restructured
loans. Total loans include loans held for sale.
(4) Non-performing assets consist of non-performing loans and REO.
(5) The non-accrual loan policy was changed in October, 1992 from ninety to
sixty days.
(6) Allowance for losses includes valuation allowances on loans and REO.
4
LENDING ACTIVITIES
General. Since 1982 the Association has emphasized the origination of
adjustable rate mortgage ("ARM") loans for retention in its portfolio. This
practice has enabled the Association to reduce its interest-rate risk exposure
by concentrating its loan portfolio in assets with either shorter terms, more
frequent repricing, or both. The Association originates fixed-rate loans in
response to customer demand as well. The type of loans the Association
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, fixed-rate loans have been sold in the secondary
market to the Federal National Mortgage Association ("FNMA"), Federal Home
Loan Mortgage Corporation ("FHLMC") and others. During 1996 the Association
retained certain fixed rate loans in its portfolio. It is anticipated that the
Association may continue this policy in the immediate future.
During the fiscal year ended June 30, 1996, the Association originated loans
with an outstanding balance of $5.7 million under an agreement with the City
of Los Angeles in which the Association will guarantee up to $10 million of
multifamily housing revenue bonds primarily for the acquisition and renovation
of earthquake-stricken properties. In conjunction with this guarantee, a
standby letter of credit was issued by the Federal Home Loan Bank. During the
fiscal year ended June 30, 1996, the Association entered into an agreement
with the City of Los Angeles to guarantee up to an additional $5 million of
multifamily housing revenue bonds. At June 30, 1996, no loans were originated
under this agreement. In conjunction with this guarantee a standby letter of
credit was issued by the Federal Home Loan Bank.
Loan and Mortgage-Backed Securities Portfolio Composition. The Association's
loan portfolio consists primarily of conventional first mortgage loans secured
by one-to-four family and multifamily (five or more units) residences. At June
30, 1996, the Association had total loans outstanding of $624.7 million, of
which $303.3 million, or 48.54%, were one-to-four family mortgage loans. At
the same date, multifamily mortgage loans totaled $259.0 million, or 41.45% of
total loans. The remainder of the portfolio consists of $60.8 million of
commercial real estate loans, or 9.74% of total loans, $1.0 million of land
loans, or 0.17% of total loans, and other loans of $627,000, or 0.10% of total
loans. Included in these amounts at June 30, 1996 were $2.9 million of loans
held for sale, comprising 0.46% of total loans. At that same date, 85.48% of
the Association's one-to-four family, 94.03% of its multifamily and 89.50% of
its commercial mortgage loans had adjustable interest rates.
The Company has also invested in MBS. At June 30, 1996, MBS totaled $41.2
million, or 5.68% of total assets. At June 30, 1996, all MBS were classified
as held to maturity.
The following table sets forth the composition of the Company's loan and
mortgage-backed securities portfolios in dollar amounts and percentages of the
respective portfolio at the dates indicated.
5
AT JUNE 30,
---------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------ ------------------ ------------------ ------------------ -----------------
PERCENT
PERCENT PERCENT PERCENT PERCENT OF
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT TOTAL
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------
(DOLLARS IN THOUSANDS)
Loans:
Residential:
One-to-four units.... $303,273 48.54% $288,664 51.85% $234,709 49.51% $201,617 46.25% $230,783 52.01%
Multifamily.......... 258,970 41.45 205,731 36.95 177,539 37.46 174,025 39.92 148,882 33.55
Commercial............. 60,822 9.74 60,709 10.91 60,617 12.79 58,975 13.53 62,939 14.18
Construction........... -- -- -- -- -- -- -- -- 660 0.15
Land................... 1,038 0.17 1,046 0.19 691 0.15 720 0.17 -- --
Other................... 627 0.10 546 0.10 412 0.09 595 0.13 480 0.11
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
624,730 100.00% 556,696 100.00% 473,968 100.00% 435,932 100.00% 443,744 100.00%
====== ====== ====== ====== ======
Less:
Undisbursed loan
funds................. 378 187 183 215 225
Unamortized discounts.. 2,864 2,815 1,999 2,385 3,067
Deferred loan fees,
net................... 3,093 2,442 2,184 2,014 1,910
Allowance for loan
losses................ 7,833 12,108 13,660 5,079 1,593
-------- -------- -------- -------- --------
Loans, net........... 610,562 539,144 455,942 426,239 436,949
Less:
Loans held for sale:
One-to-four units.... 1,455 400 5,415 8,989 6,079
Multifamily.......... 1,435 1,266 -- 3,683 19,097
-------- -------- -------- -------- --------
Net loans held for
investment.......... $607,672 $537,478 $450,527 $413,567 $411,773
======== ======== ======== ======== ========
Mortgage-backed
securities:
FNMA................... $ 11,129 26.70% $ 11,367 27.77% $ -- -- % $ -- -- % $ 40 0.28%
FHLMC.................. 1,697 4.07 2,117 5.17 119 0.80 192 1.40 435 3.06
GNMA................... 7,885 18.92 -- -- -- -- -- -- -- --
Issued by other
financial
institutions.......... 5,781 13.87 11,451 27.97 12,659 84.64 11,495 83.98 13,464 94.75
Collateralized
mortgage obligations.. 15,185 36.44 16,004 39.09 2,178 14.56 2,001 14.62 271 1.91
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
41,677 100.00% 40,939 100.00% 14,956 100.00% 13,688 100.00% 14,210 100.00%
====== ====== ====== ====== ======
Plus (Less):
Unamortized premium
(discount)............ (502) (946) (247) (115) (185)
-------- -------- -------- -------- --------
Mortgage-backed
securities, net..... 41,175 39,993 14,709 13,573 14,025
Less:
Mortgage-backed
securities available
for sale.............. -- -- 5,997 6,660 --
-------- -------- -------- -------- --------
Net mortgage-backed
securities held to
maturity............ $ 41,175 $ 39,993 $ 8,712 $ 6,913 $ 14,025
-------- -------- -------- -------- --------
Total net loans and
mortgage-backed
securities held for
investment............. $648,847 $577,471 $459,239 $420,480 $425,798
======== ======== ======== ======== ========
6
Loan Maturity. The following table shows the maturity of the Company's gross
loans and MBS at June 30, 1996. The table includes loans held for sale of $2.9
million. The table does not include principal repayments. Principal repayments
on loans totaled $48.0 million, $39.3 million and $64.1 million for the years
ended June 30, 1996, 1995 and 1994. Principal repayments on mortgage-backed
securities totaled $11.2 million, $2.9 million and $3.1 million for the years
ended June 30, 1996, 1995 and 1994.
AT JUNE 30, 1996
------------------------------------------------------------------------
TOTALS
---------------------
ONE- MORTGAGE-
TO-FOUR MULTI- LOANS BACKED
FAMILY FAMILY COMMERCIAL LAND OTHER RECEIVABLE SECURITIES TOTAL
-------- -------- ---------- ------ ----- ---------- ---------- --------
(IN THOUSANDS)
Amounts due:
One year or less....... $ 236 $ 1,805 $ 4,042 $ 645 $357 $ 7,085 $ -- $ 7,085
-------- -------- ------- ------ ---- -------- ------- --------
After one year:
More than one year to
three years........... 1,277 7,272 3,532 -- 36 12,117 1,131 13,248
More than three years
to five years......... 12,032 2,233 4,804 334 21 19,424 -- 19,424
More than five years to
10 years.............. 11,527 34,134 18,030 -- 2 63,693 3,267 66,960
More than 10 years to
20 years.............. 31,170 174,840 27,865 -- 206 234,081 81 234,162
More than 20 years..... 247,031 38,686 2,549 59 5 288,330 37,198 325,528
-------- -------- ------- ------ ---- -------- ------- --------
Total due after one
year................. 303,037 257,165 56,780 393 270 617,645 41,677 659,322
-------- -------- ------- ------ ---- -------- ------- --------
Total amounts due..... $303,273 $258,970 $60,822 $1,038 $627 $624,730 $41,677 $666,407
======== ======== ======= ====== ==== ======== ======= ========
The following table sets forth at June 30, 1996, the dollar amount of all
loans due after June 30, 1997, and whether such loans have fixed or adjustable
interest rates.
AT JUNE 30, 1996
---------------------------
FIXED ADJUSTABLE TOTAL
------- ---------- --------
(IN THOUSANDS)
Real estate loans:
One-to-four family................................ $43,787 $259,250 $303,037
Multifamily....................................... 13,658 243,507 257,165
Commercial real estate............................ 5,542 51,238 56,780
Land.............................................. 393 -- 393
Other loans......................................... 256 14 270
------- -------- --------
Total loans....................................... $63,636 $554,009 $617,645
======= ======== ========
Origination, Purchase, Sale and Servicing of Loans. The Association's
mortgage lending activities are conducted primarily through its executive
offices and two loan origination centers. The Association 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 Association purchases or participates in loans originated
by other institutions. The determination to purchase loans is based upon the
Association's investment needs and market opportunities. All loan types may be
purchased. The determination to purchase specific loans or pools of loans is
subject to the Association's underwriting policies, which require
consideration of the financial condition of the borrower and the appraised
value of the property, among other factors. Since
7
1990, the Association has purchased loans from independent parties in various
transactions, a substantial portion of which was purchased as part of certain
branch acquisitions. During the year ended June 30, 1996, $27.8 million, or
18.51% of the Association's total loan originations and purchases, were
purchased.
At origination or time of purchase, the Association 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
Association has generally retained the servicing rights of loans sold, but it
may not necessarily do so in the future. The determination to sell a specific
loan or pool of loans is made based upon the Association'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 Association 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 Association 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 Association would remain obligated to fulfill its
forward commitments. The inability of the Association to originate or acquire
loans to fulfill these commitments may result in the Association being
required to pay non-delivery fees. In an increasing interest-rate environment,
the Association is subject to interest-rate risk in the event its commitments
to make loans to borrowers exceeds its commitments to sell loans. The
Association does not intend to enter into forward commitments on ARM loans.
The Association recognizes at the time of sale, the cash gain or loss on the
sale of the loans based on the difference between the net cash proceeds
received and the carrying value of the loans sold. In addition, excess
servicing, which is the present value of any difference between the interest
rate charged to the borrower and the interest rate paid to the purchaser after
deducting a normal servicing fee, is recognizable as an adjustment to the cash
gain or loss. The excess servicing gain or loss is dependent on prepayment
estimates and discount rate assumptions. Historically, such excess servicing
gains or losses have not been material to the Association. At June 30, 1996,
the Association had no excess servicing asset.
In addition to retaining the servicing rights for originated loans, the
Association may also purchase mortgage servicing rights related to mortgage
loans originated by other institutions. The Association's loan policies
provide that the aggregate amount of purchased mortgage servicing shall not
exceed 75% of the total loans in the Association's portfolio that are serviced
for others. At June 30, 1996, the Association had no purchased mortgage
servicing rights asset.
8
The following table sets forth activity in the Company's loan and mortgage-
backed securities portfolios for the periods indicated:
AT OR FOR THE YEAR ENDED
JUNE 30,
---------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
Gross loans:
Beginning balance................................ $556,696 $473,968 $435,932
Loans originated:
One-to-four family............................. 51,383 60,915 127,251
Multifamily.................................... 70,841 39,177 22,612
Commercial..................................... 122 6,172 5,085
Land........................................... -- -- --
-------- -------- --------
Total loans originated......................... 122,346 106,264 154,948
Loans purchased................................ 27,789 24,792 4,773
Loans to facilitate the sale of REO............ 5,580 7,407 3,170
-------- -------- --------
Total......................................... 155,715 138,463 162,891
Less:
Transfer to REO................................ 7,764 8,593 4,174
Principal repayments........................... 48,032 39,295 64,063
Sales of loans................................. 27,662 10,321 54,869
Other, net..................................... 4,223 (2,474) 1,749
-------- -------- --------
Ending balance................................... $624,730 $556,696 $473,968
======== ======== ========
Gross mortgage-backed securities:
Beginning balance................................ $ 40,939 $ 14,956 $ 13,688
Mortgage-backed securities, purchased.......... 13,766 28,102 4,298
Less:
Principal repayments........................... 11,157 2,906 3,134
Other, net..................................... 1,871 (787) (104)
-------- -------- --------
Ending balance................................... $ 41,677 $ 40,939 $ 14,956
======== ======== ========
One-to-Four Family Mortgage Lending. The Association offers both fixed-rate
mortgage loans and ARM loans secured by one-to-four family residences,
including, to a lesser extent, condominium units, located in the Association's
primary market area, with maturities up to 30 years. Substantially all of such
loans are 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. In addition, the Association offers
fixed-rate personal loans to customers with a first trust deed loan on one-to-
four family units in a minimum amount of $1,000 and a maximum amount of
$25,000. The borrower must meet the Association's underwriting criteria at the
time the loan is made. The Association takes a security interest in the
borrower's first trust deed loan.
At June 30, 1996, the Association's total loans outstanding were $624.7
million, of which $303.3 million, or 48.54%, were one-to-four family mortgage
loans. Of the one-to-four family mortgage loans outstanding at that date,
14.52% were fixed-rate loans, and 85.48% were ARM loans. The Association's
policy is to originate one-to-four family mortgage 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. Subsequent declines in the
real estate values in the Association's primary lending area have resulted in
increases in the loan-to-value ratio on some mortgage loans.
Multifamily Lending. The Association originates multifamily mortgage loans
generally secured by 5-to-36 unit apartment buildings located in the Los
Angeles metropolitan area. In originating a
9
multifamily mortgage loan, the Association considers the qualifications of the
borrower as well as the underlying security. Some of the foremost factors to
be considered are the net operating income of the mortgaged premises before
debt service and depreciation, the debt service ratio (the ratio of net
earnings to debt service) and the ratio of loan amount to appraised value.
Pursuant to the Association's underwriting policies, a multifamily ARM loan
generally may only be made in an amount up to 80% of the appraised value of
the underlying property. The Association also generally requires a debt
service coverage ratio of 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 mortgage loans at June 30,
1996 was approximately $207,000, with the largest loan, as discussed below,
being $1.8 million. Subsequent declines in the real estate values in the
Association's primary lending area have resulted in an increase in the loan-
to-value ratio on some mortgage loans.
When evaluating the qualifications of the borrower for a multifamily loan,
the Association considers the financial resources and income level of the
borrower, the borrower's experience in owning or managing similar property,
and the Association's lending experience with the borrower. The Association'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 Association generally
reviews the financial statements, employment and credit history of the
borrower, as well as other related documentation. The Association's largest
multifamily loan at June 30, 1996 had an outstanding loan balance of $3.6
million, of which the Association owns $1.8 million and has participated the
remaining balance to another financial institution, and is secured by a
residential hotel located in the Los Angeles metropolitan area. This loan is
classified as Substandard by the Association (for definition of Substandard,
see "Delinquencies and Classification of Assets--Classification of Assets"
below). During the year ended June 30, 1996, the Association originated
$70.8 million of multifamily loans. At June 30, 1996, the multifamily loan
portfolio totaled $259.0 million or 41.45% of total loans. Of the $259.0
million in multifamily loans, 5.97% were fixed-rate loans and 94.03% were ARM
loans.
Multifamily 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.
Recessionary economic conditions of the type that have prevailed in the
Company's primary lending market area tend to result in higher vacancy and
reduced rental rates and net operating incomes from multifamily residential
properties. Of the Association's $6.2 million of charge-offs in fiscal 1996,
$4.4 million, or 70.71%, were for multifamily loans. See "Business--Allowances
for Loan and Real Estate Losses."
Commercial Real Estate Lending. The Association originates commercial real
estate loans that are generally secured by properties used for business
purposes such as small office buildings or a combination of residential and
retail facilities and mobile home park loans located in the Association's
primary market area. At June 30, 1996, the commercial real estate loan
portfolio aggregated $60.8 million. Of the $60.8 million, 10.50% were fixed-
rate loans and 89.50% were ARM loans. The Association originated $122,000 of
commercial real estate loans during the year ended June 30, 1996. The
Association's underwriting procedures provide that commercial real estate
loans generally may be made in amounts up to 70% of the appraised value of the
property. These loans may be made with terms up to 30 years for ARM loans. The
Association's underwriting standards and procedures are similar to those
applicable to its multifamily loans, wherein the Association considers the net
operating income of the property and the borrower's expertise, credit history
and profitability. The Association has generally required that the properties
securing commercial real estate loans have debt service coverage ratios of at
least 110%. The largest commercial real estate loan in the Association's
portfolio
10
is secured by a shopping center located in Orange, California and had an
outstanding principal balance at June 30, 1996 of $2.0 million and was not
classified.
Construction and Land Lending. Since April 1991, the Association has not
originated loans to contractors and individuals for the acquisition and
development of property; however, it may do so in the future. The
Association's construction loans primarily have been made to finance the
construction of one-to-four family properties and multifamily real estate
properties. The Association's policies provide that construction loans
generally may be made in amounts up to 85% of the appraised value of the
property for construction of one-to-four family construction loans and up to
80% of the appraised value for multifamily construction loans. The Association
typically requires an independent appraisal of the property. The Association
generally requires personal guarantees and a permanent loan commitment if the
Association will not be making the permanent loan. Loan proceeds are disbursed
in increments as construction progresses and as inspections warrant. Land
loans are determined on an individual basis, but generally they do not exceed
50% of the actual cost or current appraised value of the property, whichever
is less. Since June 1993, the Association has not originated land loans;
however, it may do so in the future. At June 30, 1996, the largest land loan
in the Association portfolio is secured by property in La Habra with a loan
balance of $1.0 million. This loan is classified as Substandard by the
Association. The Association had no construction loans outstanding as of
June 30, 1996.
Certain Loan Terms. The interest rates for the majority of the Association's
ARM loans are indexed to the 11th District Cost of Funds Index ("COFI"). The
Association currently offers a number of ARM loan programs with interest rates
which adjust monthly, semi-annually or annually, 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 Association'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 Association over that which was originally lent. The
Association currently has approximately $336.0 million in mortgage loans that
may be subject to negative amortization. During the years ended June 30, 1996,
1995 and 1994, the negative amortization associated with these loans totaled
$994,000, $430,000 and $46,000, 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 Association, with the exception of one-to-
four family mortgage loans, generally include due-on-sale clauses which
provide the Association with the contractual right to deem the loan
immediately due and payable in the event the borrower transfers ownership of
the property without the Association's consent. Due-on-sale clauses are an
important means of adjusting the rates on the Association's fixed-rate
multifamily and commercial mortgage loan portfolios and the Association has
generally exercised its rights under these clauses.
Loan Approval Procedures and Authority. The Association's Board of Directors
has a standing Loan Committee. The Loan Committee is primarily responsible for
establishing the lending policies of the Association 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 $750,000 and below may be approved by the Loan Division Manager or
his designate; mortgage loans in excess of $750,000 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.
11
For all loans originated by the Association, 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 $100,000 are required,
which appraisals currently are performed by independent appraisers designated
and approved by the Association. The Association's Board annually approves the
independent appraisers used by the Association and approves the Association's
appraisal policy. The Association'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 or private mortgage insurance is required, the borrower will be required
to make payments to a mortgage impound account from which the Association
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 Association with respect to delinquencies vary
depending on the nature of the loan and period of delinquency.
The Association's policies generally provide that delinquent mortgage loans
be reviewed and that a written late charge notice be mailed no later than the
11th or 16th day of delinquency for mortgage loans with 10 day or 15 day grace
periods, respectively. The Association'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 Association will attempt to obtain full payment or
work out a repayment schedule with the borrower to avoid foreclosure. See also
"--Non-Performing Assets and Restructured Loans."
At June 30, 1996, 1995 and 1994, delinquencies in the Association's loan
portfolio were as follows:
1996 1995 1994
--------------------------------- --------------------------------- ---------------------------------
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 fami-
ly.............. 3 $ 246 12 $1,467 3 $ 144 9 $1,359 3 $ 406 14 $ 1,666
Multifamily...... 5 2,220 11 3,991 5 3,293 7 2,804 3 1,222 20 6,858
Commercial....... 1 1,087 7 3,155 2 1,111 4 2,757 1 456 9 4,006
Other loans...... -- -- 4 105 -- -- -- -- -- -- 10 35
--- ------ --- ------ --- ------ --- ------ --- ------ --- -------
Total........... 9 $3,553 34 $8,718 10 $4,548 20 $6,920 7 $2,084 53 $12,565
=== ====== === ====== === ====== === ====== === ====== === =======
Delinquent loans
to total gross
loans........... 0.57% 1.40% 0.82% 1.24% 0.44% 2.65%
The loans in the above table have been considered in connection with the
Association's overall assessment of the adequacy of its allowance for loan
losses. However, there can be no assurance that the Association 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 Association's
Classification of Assets Policy require that the Association utilize an
internal asset classification system as a means of reporting problem and
potential problem assets. The Association has incorporated the OTS internal
asset classifications as a part of its credit monitoring system. The
Association 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. Assets classified as
12
"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." Assets
classified as "Loss" are those considered "uncollectible" and of such little
value that their continuance as assets without the establishment of a specific
loss reserve is not warranted. See "--Regulation and Supervision--
Classification of Assets." The Association's Internal Asset Review Committee
monthly reviews and classifies the Association'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 Association at June 30, 1996.
AT JUNE 30, 1996
-----------------------------------
SUBSTANDARD DOUBTFUL LOSS TOTAL
----------- -------- ------ -------
(IN THOUSANDS)
Real estate loans:
One-to-four family....................... $ 5,723 $-- $ 99 $ 5,822
Multifamily.............................. 13,749 -- 1,624 15,373
Commercial............................... 3,483 -- 461 3,944
Construction/Land........................ 995 -- -- 995
REO........................................ 2,435 -- -- 2,435
Investment in subsidiaries(1).............. 144 -- -- 144
------- ---- ------ -------
Total Classified Assets.................... $26,529 $-- $2,184 $28,713
======= ==== ====== =======
- --------
(1) At June 30, 1996, the Company classified as Substandard 61% of the
Association's equity investment in subsidiaries. At such date, QCFC
reported total assets of $1.2 million. See "--Subsidiary Activities."
In addition to adversely classified assets, assets which do not currently
expose the Association 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, 1996, $9.1 million of assets were graded as Special Mention, compared
to $11.6 million at June 30, 1995.
These assets have been considered in connection with the Association's
overall assessment of the adequacy of its allowance for loan losses; however,
there can be no assurance that the Association 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."
NON-PERFORMING ASSETS AND RESTRUCTURED LOANS
Prior to October 1992, it was the Association's general policy to continue
to accrue interest on all loans up to 90 days past due. As of October 1992,
the Association's non-accrual policy was changed from 90 to 60 days
delinquent. After 60 days, the Association ceases the accrual of interest on
loans and any previously accrued interest is reversed. In addition, the
Association may restructure a loan due to the debtor's financial difficulty
and grant a concession which the Association would not have otherwise
considered. REO is recorded at fair value less estimated costs of disposition.
Effective July 1, 1995, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment
of a Loan." SFAS No. 114 was subsequently amended by SFAS No. 118, "Accounting
by Creditors for Impairment of a Loan--Income Recognition and Disclosure." 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
13
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 adoption of SFAS 114 and 118 did not result in
additional charge-offs, provisions for loan losses or changes in previously
reported earnings, primarily because of the Company's historical practice of
measuring loan impairment based upon the fair value of the loan's underlying
collateral property, which is an acceptable methodology under the provisions
contained in SFAS 114 and 118.
At June 30, 1996, the Company had a gross investment in impaired loans of
$8.6 million, including $6.7 million for which allowance of $1.6 million had
been recorded and $1.9 million for which no allowance was required. During the
year ended June 30, 1996, the Company's average investment in impaired loans
was $11.8 million and income recorded on impaired loans totaled $611,000,
substantially all of which was recorded utilizing the cash-basis method of
accounting. Payments received on impaired loans which are performing under
their contractual terms are allocated to principal and interest in accordance
with the terms of the loans. Impaired loans totaling to $6.4 million were not
performing in accordance with their contractual terms at June 30, 1996, and
have been included in non-accrual loans at that date.
The following table sets forth information regarding non-accrual 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,
------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- ------
(DOLLARS IN THOUSANDS)
Real estate loans:
One-to-four family............... $ 1,713 $ 1,503 $ 2,072 $ 2,983 $ 355
Multifamily...................... 6,211 6,097 8,080 3,107 1,652
Commercial....................... 4,242 3,868 4,462 763 309
Other:
Loans secured by savings
deposits....................... 105 -- 35 32 --
------- ------- ------- ------- ------
Total non-accrual loans......... 12,271 11,468 14,649 6,885 2,316
Troubled debt restructured loans... 234 3,387 5,352 3,611 --
------- ------- ------- ------- ------
Total non-performing loans...... 12,505 14,855 20,001 10,496 2,316
Real estate acquired through
foreclosure....................... 2,435 2,045 2,154 2,458 1,121
------- ------- ------- ------- ------
Total non-performing assets..... $14,940 $16,900 $22,155 $12,954 $3,437
======= ======= ======= ======= ======
Ratios:
Net charge-offs to average loans. 1.13% 0.75% 0.34% 0.03% 0.00%
Allowance for loan losses as a
percentage of total non-accrual
loans........................... 63.83 105.58 93.25 73.77 68.78
Allowance for loan losses as a
percentage of total loans....... 1.25 2.17 2.88 1.17 0.36
Allowance for loan losses as a
percentage of total non-
performing loans................ 62.64 81.51 68.30 48.39 68.78
Allowance for losses as a
percentage of total non-
performing assets(1)............ 53.60 72.68 62.18 39.94 48.71
Total non-accrual loans as a
percentage of total loans....... 1.96 2.06 3.09 1.58 0.52
Non-performing loans as a
percentage of total loans....... 2.00 2.67 4.22 2.41 0.52
Non-performing assets as a
percentage of total assets...... 2.06 2.64 4.33 2.65 0.70
- --------
(1) Allowance for losses includes valuation allowances on loans and real
estate owned.
14
The gross amount of interest income on non-accrual loans that would have
been recorded during the years ended June 30, 1996, 1995 and 1994 if the non-
accrual loans had been current in accordance with their original terms was
$1.1 million, $920,000 and $1.1 million, respectively. For the years ended
June 30, 1996, 1995 and 1994, $565,000, $497,000 and $614,000, respectively,
was actually earned on non-accrual loans and is included in interest income on
loans in the consolidated statements of operations for such years included in
this report. See "Financial Statements and Supplementary Data."
The Association has reached agreements with certain borrowers that provide
for the restructuring of existing loans secured by income-producing
properties. Restructurings are generally in the form of interest-rate
adjustments, extensions of maturities or deferred payments of principal or
interest. At June 30, 1996, the Association had one $234,000 troubled debt
restructured loan which was modified prior to the implementation of SFAS 114
and which was performing in accordance with the modified terms. The Company
accounts for such loans under the provisions of SFAS No. 15 "Accounting by
Debtors and Creditors for Troubled Debt Restructuring," as permitted under
SFAS 114. See "Financial Statements and Supplementary Data."
ALLOWANCES FOR LOAN AND REAL ESTATE LOSSES
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 maintained at an amount management
considers adequate to cover estimated losses in loans receivable which are
deemed probable and estimable in accordance with Statement of Financial
Accounting Standards No. 5, "Accounting for Contingencies." 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
Association's underwriting policies and the regulatory environment. It is the
Association'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.
The Association's allowance for loan losses decreased to $7.8 million, or
1.25% of total loans, at June 30, 1996 from $12.1 million, or 2.17% of total
loans, at June 30, 1995. The decrease in the allowance for loan losses during
the period ended June 30, 1996 reflects management's evaluation of the risks
inherent in its loan portfolio in consideration of various factors, including
trends in its non-performing assets, the regional economy and relevant real
estate values. The Association's ratio of non-performing loans to total loans
decreased to 2.00% at June 30, 1996 from 2.67% at June 30, 1995. The
Association's ratio of non-performing assets to total assets decreased during
this period to 2.06% at June 30, 1996 from 2.64% at June 30, 1995. As of June
30, 1996, the Association's allowance for losses to non-performing assets,
including loans 60 days past due, was 53.60% as compared to 72.68% at June 30,
1995.
The Association recorded a provision for loan losses of $2.1 million for the
year ended June 30, 1996 compared to $998,000 and $10.2 million for the years
ended June 30, 1995 and 1994, respectively. Management believes that the
increase in the provision for 1996 was necessary to replenish the allowance
for loan losses to what management believes is an adequate level following
increased charge-offs during 1996 compared to 1995. Although the Association
believes that the allowance for loan losses at June 30, 1996 is adequate,
there can be no assurance that the Association will not have to establish
additional loss provisions based upon future events. The Association 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 Association's valuation
allowance. These agencies may require the Association 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."
15
It is the policy of the Association 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 Association's
portfolio, is to establish an allowance for loan losses in accordance with the
Association's asset classification process, based on generally accepted
accounting principles ("GAAP"). It has generally been the practice of the
Association 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 policy of the
Association to obtain an appraisal on all REO upon acquisition by the
Association.
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 Association 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. See "MD&A--Impact of
New Accounting Standards."
Included in loans purchased are $4.6 million of participation loan interests
sold by the Association in prior years that were repurchased during the fourth
quarter of fiscal 1995. Prior to the repurchase the Association owned from 20%
to 50% of the individual loans. The remaining interests were repurchased at a
discount amounting to $1.9 million of which $1.3 million was allocated to the
allowance for loan losses.
The following table sets forth activity in the Association's allowance for
loan losses and allowance for losses on REO.
AT OR FOR THE YEAR ENDED JUNE 30,
-----------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------ ------
(IN THOUSANDS)
Accumulated through a charge to
earnings:
Balance at beginning of year..... $10,614 $13,458 $ 4,833 $1,307 $1,003
Provision for loan losses........ 2,103 998 10,200 3,657 304
Charge-offs(1)................... (6,175) (3,842) (1,575) (131) --
Recoveries....................... -- -- -- -- --
------- ------- ------- ------ ------
Subtotal charge-offs, (net)..... (6,175) (3,842) (1,575) (131) --
------- ------- ------- ------ ------
Balance at end of year........... 6,542 10,614 13,458 4,833 1,307
Valuation allowance for portfolios
acquired:
Balance at beginning of year..... 1,494 202 246 286 167
Purchases........................ 294 1,308 -- -- 201
Charge-offs(1)................... (471) -- -- -- --
Reductions credited.............. (26) (16) (44) (40) (82)
------- ------- ------- ------ ------
Balance at end of year........... 1,291 1,494 202 246 286
------- ------- ------- ------ ------
Total allowance for loan losses.. $ 7,833 $12,108 $13,660 $5,079 $1,593
======= ======= ======= ====== ======
Allowance for REO losses:
Balance at beginning of year..... $ 175 $ 115 $ 95 $ 81 $ --
Additions charged to operations.. -- 60 20 14 81
------- ------- ------- ------ ------
Balance at end of year........... $ 175 $ 175 $ 115 $ 95 $ 81
======= ======= ======= ====== ======
- --------
(1) Charge-offs by loan type for the year ended June 30, 1996 were $968,000,
$4,367,000, $795,000, $514,000 and $2,000 for one-to-four family,
multifamily, commercial real estate, land and non-mortgage loans,
respectively.
16
The following table sets forth the Association'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,
-------------------------------------------------------------------------------------------
1996(1) 1995(1) 1994(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...... $1,306 16.67% 48.54% $ 1,338 11.05% 51.85% $ 989 7.24% 49.51%
Multifamily............. 4,744 60.56 41.45 6,499 53.68 36.95 8,613 63.05 37.46
Commercial.............. 1,288 16.44 9.73 2,475 20.44 10.91 2,220 16.25 12.79
Land.................... 199 2.54 0.16 344 2.84 0.19 407 2.98 0.15
Other................... -- -- 0.12 -- -- 0.10 2 0.02 0.09
Unallocated............. 296 3.79 -- 1,452 11.99 -- 1,429 10.46 N/A
------ ------ ------ ------- ------ ------ ------- ------ ------
Total allowance
for loan losses....... $7,833 100.00% 100.00% $12,108 100.00% 100.00% $13,660 100.00% 100.00%
====== ====== ====== ======= ====== ====== ======= ====== ======
AT JUNE 30,
-----------------------------------------------------------
1993 1992
----------------------------- -----------------------------
PERCENTAGE PERCENTAGE
PERCENTAGE OF LOANS PERCENTAGE OF LOANS
OF IN EACH OF IN EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO TO TOTAL TO
AMOUNT ALLOWANCE TOTAL LOANS AMOUNT ALLOWANCE TOTAL LOANS
------ ---------- ----------- ------ ---------- -----------
(DOLLARS IN THOUSANDS)
One-to-four family...... $ 637 12.54% 46.25% $ 252 15.82% 52.01%
Multifamily............. 2,932 57.72 39.92 504 31.64 33.55
Commercial.............. 1,066 20.99 13.53 629 39.48 14.18
Land.................... 13 0.26 0.17 10 0.63 0.15
Other................... -- -- 0.13 -- -- 0.11
Unallocated............. 431 8.49 N/A 198 12.43 N/A
------ ------ ------ ------ ------ ------
Total allowance
for loan losses....... $5,079 100.00% 100.00% $1,593 100.00% 100.00%
====== ====== ====== ====== ====== ======
- --------
(1) In 1996, 1995 and 1994, total specific allowances amounted to $2.2
million, $4.3 million and $5.1 million, respectively.
INVESTMENT ACTIVITIES
Federally chartered savings institutions such as the Association 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
Association must maintain minimum levels of investments that qualify as liquid
assets under OTS regulations. See "--Regulation and Supervision--Required
Liquidity." The Association 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 Association's lending
activities. Specifically, the Company's policy generally limits investments to
government and federal agency-backed securities and other non-government
guaranteed securities,
17
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, 1996, the
Company had federal funds sold and other short-term investments and investment
securities in the aggregate amount of $43.8 million with a market value of
$43.2 million.
The following table sets forth certain information regarding the carrying
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,
--------------------------------------------------
1996 1995 1994
---------------- ---------------- ----------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE VALUE VALUE
-------- ------- -------- ------- -------- -------
(IN THOUSANDS)
Federal funds sold and other
short-term investments..... $ 6,400 $ 6,400 $ 9,450 $ 9,450 $ 2,400 $ 2,400
======= ======= ======= ======= ======= =======
Investment securities:
Held to maturity:
U.S. Government and
Federal agency
obligations............. $37,048 $36,437 $23,509 $23,531 $18,533 $18,244
Municipal bonds.......... 371 371 389 389 410 410
------- ------- ------- ------- ------- -------
Total held to maturity. 37,419 36,808 23,898 23,920 18,943 18,634
Available for sale:
Mutual funds............. -- -- 150 150 470 470
------- ------- ------- ------- ------- -------
Total investment
securities............ $37,419 $36,808 $24,048 $24,070 $19,413 $19,104
======= ======= ======= ======= ======= =======
The table below sets forth certain information regarding the carrying value,
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, 1996.
AT JUNE 30, 1996
-----------------------------------------------------------------------------------------------------
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
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
-------- -------- ---------- --------- ---------- --------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Federal funds sold and
other short-term
investments........... $6,400 4.62% $ -- -- % $ -- -- % $ -- -- % $ 6,400 4.62%
====== ==== ========== ======= ========== ======== ====== ==== ======= ====
Investment securities:
Held to maturity:
U.S. Government and
Federal agency
obligations.......... $ 395 6.33% $ 28,026 6.52% $ 3,635 6.96% $4,992 7.42% $37,048 6.68%
Municipal bonds....... -- -- -- -- -- -- 371 7.00(1) 371 7.00
------ ---------- ---------- ------ -------
Total investment
securities.......... $ 395 6.33% $28,026 6.52% $ 3,635 6.96% $5,363 7.39% $37,419 6.68%
====== ========== ========== ====== =======
- -------
(1) This rate represents the coupon rate on the investment and has not been
computed on a tax equivalent basis.
18
SOURCES OF FUNDS
General. Deposits, FHLB advances, securities sold under agreements to
repurchase, loan repayments and prepayments, proceeds from sales of loans, and
cash flows generated from operations are the primary sources of the
Association's funds for use in lending, investing and for other general
purposes.
Deposits. The Association offers a variety of deposit accounts with a range
of interest rates and terms. The Association's deposits consist of passbook
savings, checking 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 Association's
deposits are obtained predominantly from the areas in which its branch offices
are located. The Association 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 Association's ability to attract and
retain deposits. Certificate of deposit accounts in excess of $100,000 are not
actively solicited by the Association nor does the Association use brokers to
obtain deposits. Management continually monitors the Association's certificate
accounts and historically the Association has retained a large portion of such
accounts upon maturity. See "MD&A--Capital Resources and Liquidity--Sources of
Funds and Liquidity."
The following table presents the deposit activity of the Association for the
periods indicated.
FOR THE YEAR ENDED JUNE 30,
-------------------------------
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
Deposits...................................... $ 579,878 $ 556,933 $ 543,496
Withdrawals................................... (572,111) (519,991) (572,768)
--------- --------- ---------
Net deposits (withdrawals).................... 7,767 36,942 (29,272)
Interest credited on deposits................. 23,592 20,256 16,892
--------- --------- ---------
Total increase (decrease) in deposits....... $ 31,359 $ 57,198 $ (12,380)
========= ========= =========
The following table presents the amount and weighted average rate of time
deposits equal to or greater than $100,000 at June 30, 1996:
FOR THE YEAR ENDED
JUNE 30, 1996
--------------------
MATURITY PERIOD WEIGHTED
AMOUNT AVERAGE RATE
- --------------- ------- ------------
(DOLLARS IN
THOUSANDS)
Three months or less....................................... $19,053 5.81%
Over three through six months.............................. 18,088 5.60
Over six through 12 months................................. 17,607 5.52
Over 12 months............................................. 11,374 6.11
-------
Total...................................................... $66,122 5.72%
=======
19
The following table sets forth the distribution of the Association's deposit
accounts for the periods indicated and the weighted average interest rates on
each category of deposits presented.
FOR THE YEAR ENDED JUNE 30,
--------------------------------------------------------------------------------------
1996 1995 1994
---------------------------- ---------------------------- ----------------------------
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... $ 75,176 15.12% 3.99% $ 56,251 12.26% 3.19% $ 44,505 10.47% 2.33%
Passbook deposits....... 21,028 4.23 1.99 25,572 5.57 1.96 33,545 7.89 2.22
NOW and other demand
deposits............... 23,006 4.63 1.20 23,698 5.16 1.11 25,871 6.08 1.25
Non-interest bearing
deposits............... 6,296 1.46 -- 7,032 1.53 -- 7,259 1.71 --
-------- ------ -------- ------ -------- ------
Total.................. 126,766 25.49 112,553 24.52 111,180 26.15
-------- ------ -------- ------ -------- ------
Certificate accounts:
Three months or less.... 86,940 17.49 5.60 64,327 14.01 4.15 80,341 18.90 4.26
Over three through six
months................. 82,662 16.63 5.73 73,917 16.10 4.72 65,898 15.50 4.18
Over six through 12
months................. 121,386 24.40 5.77 98,100 21.37 5.16 64,994 15.29 4.44
Over one to three years. 43,524 8.75 5.89 70,879 15.44 6.07 67,612 15.91 5.38
Over three to five
years.................. 35,961 7.23 6.20 39,223 8.55 5.69 34,922 8.22 5.90
Over five to ten years.. 42 0.01 7.06 11 0.01 7.96 116 0.03 9.01
-------- ------ -------- ------ -------- ------
Total certificates..... 370,515 74.51 346,457 75.48 313,883 73.85
-------- ------ -------- ------ -------- ------
Total deposits......... $497,281 100.00% $459,010 100.00% $425,063 100.00%
======== ====== ======== ====== ======== ======
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at June 30, 1996.
CERTIFICATE AMOUNTS
AT JUNE 30, MATURING IN THE YEAR ENDING JUNE 30,
-------------------------- ----------------------------------------------------
2001 AND
1994 1995 1996 1997 1998 1999 2000 THEREAFTER TOTAL
-------- -------- -------- -------- ------- ------- ------- ---------- --------
(IN THOUSANDS)
Certificate accounts:
0 to 4.00%.............. $132,048 $ 3,987 $ 720 $ 720 $ -- $ -- $ -- $ -- $ 720
4.001 to 5.00%.......... 104,025 72,194 59,878 56,387 95 3,390 -- 6 59,878
5.001 to 6.00%.......... 34,801 137,191 249,461 216,869 15,153 7,350 5,284 4,805 249,461
6.001 to 7.00%.......... 23,414 130,687 72,907 42,656 5,217 3,087 20,280 1,667 72,907
7.001 to 8.00%.......... 13,480 12,722 6,520 5,982 27 6 355 150 6,520
8.001 to 9.00%.......... 5,958 3,821 57 6 32 19 -- -- 57
Over 9.001%............. 191 140 12 12 -- -- -- -- 12
-------- -------- -------- -------- ------- ------- ------- ------ --------
Total.................. $313,917 $360,742 $389,555 $322,632 $20,524 $13,852 $25,919 $6,628 $389,555
======== ======== ======== ======== ======= ======= ======= ====== ========
Borrowings. From time to time the Association 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 Association and certain of the
Association'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 Association, for purposes other than meeting withdrawals, fluctuates from
time to time in accordance with the policies of the OTS and the FHLB. During
1996, the Association 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,
1996, the Association had $135.3 million in outstanding advances from the
FHLB. During fiscal 1996, the maximum amount of FHLB advances that the
Association had outstanding at any month-end was $135.3 million. As
anticipated by management, the Association's total borrowing from the FHLB
increased in fiscal 1996 comprising 99.78% of borrowings compared to 73.66%
and 64.94% in fiscal 1995 and 1994, respectively.
20
During 1996, the Company borrowed from a registered broker-dealer and FHLB
in transactions known as repurchase agreements. In these transactions, the
Company pledges securities as collateral to the broker and receives cash in
return. These transactions have terms to maturity of generally 30 days or
less. At termination, the securities are returned to the Company and the
Company repays the cash borrowed with interest. At June 30, 1996, the Company
had $300,000 in such transactions. Such transactions are reported as
securities sold under agreements to repurchase.
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,
------------------------------------
1996 1995 1994
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
FHLB advances:
Average balance outstanding.............. $ 96,789 $ 46,029 $ 12,583
Maximum amount outstanding at any month-
end during the period................... $ 135,300 $ 63,950 $ 29,000
Balance outstanding at end of period..... $ 135,300 $ 63,950 $ 13,000
Weighted average interest rate during the
period.................................. 5.76% 5.64% 4.50%
Weighted average interest rate at end of
period.................................. 5.87% 6.63% 5.82%
Securities sold under agreements to
repurchase:
Average balance outstanding.............. $ 8,283 $ 11,342 $ 293
Maximum amount outstanding at any month-
end during the period................... $ 17,146 $ 23,848 $ 7,019
Balance outstanding at end of period..... $ 300 $ 22,873 $ 7,019
Weighted average interest rate during the
period.................................. 5.92% 5.25% 4.10%
Weighted average interest rate at end of
period.................................. 5.57% 6.08% 4.51%
SUBSIDIARY ACTIVITIES
QCFC, a wholly owned subsidiary of the Association, is currently engaged, on
an agency basis, in the sale of casualty insurance, mutual funds and annuity
products primarily to the Association's customers and members of the local
community and as a trustee of the Association's deeds of trust. In the past,
QCFC has been involved in real estate development projects. Currently, the
only real estate development project in which QCFC has an investment is an
apartment building in Pasadena, California. The apartment building is managed
by the general partner. The Association has a limited partner interest in the
project, with a carrying value of $158,000 at June 30, 1996. It is anticipated
that the building will be sold as market conditions permit. The Association
does not currently intend to engage in any future real estate development
projects through QCFC or otherwise. As of June 30, 1996, and for the year then
ended, QCFC had $1.2 million in total assets and net income of $82,000.
The Company incorporated Quaker City Neighborhood Development, Inc.
("QCND"), a wholly owned community development subsidiary, during the first
quarter of fiscal 1994. The purpose of QCND is to engage in community lending
and development activities including affordable housing loans to low-and
moderate-income individuals in the Association's lending communities. The
subsidiary complements the Association's community reinvestment activities and
its "Outstanding" Community Reinvestment Act rating. The Company funded
operations for the subsidiary on June 30, 1994 in the amount of $2.4 million.
QCND, in turn, invested those funds in a short-term note to the city of
Whittier for the purpose of facilitating community development projects
consistent with the goals of the subsidiary.
21
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.
Competition may increase as a result of recent legislation which, beginning
in September 1995, will generally allow bank holding companies based in any
state to acquire banks in California, and beginning in September 1997 will
generally allow banks based in any state to acquire by merger banks based in
California. In addition, under existing regulations, federal savings
associations may generally 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. Additionally,
provisions of the Federal Deposit Insurance Corporation Improvement Act of
1991 further removed barriers to mergers and acquisitions among savings
associations and banks, allowing savings associations and banks to merge with
each other.
PERSONNEL
As of June 30, 1996, the Association had 122 full-time employees and 53
part-time employees. The employees are not represented by a collective
bargaining unit and the Association considers its relationship with its
employees to be good.
FEDERAL TAXATION
General. The Company reports its income for tax purposes on a calendar year
basis 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 Association'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. Savings institutions such as the Association which
meet certain definitional tests primarily relating to their assets and the
nature of their business ("qualifying thrifts") are permitted to establish a
reserve for bad debts and to make annual additions thereto, which additions
may, within specified formula limits, be deducted in arriving at their taxable
income. The Association's deduction with respect to "qualifying loans,"
generally loans secured by certain interests
22
in real property, may be computed using the Association's actual loss
experience, or 8% of the Association's taxable income. Use of the percentage
of taxable income method of calculating its deductible addition to its loss
reserve has the effect of reducing the maximum marginal rate of federal tax on
the Association's income to 31.28%, exclusive of any minimum or environmental
tax, as compared to the general maximum corporate federal income tax rate of
34% that would be applicable to the Association for tax year 1994. The
Association's deduction with respect to non-qualifying loans must be computed
under the experience method which essentially allows a deduction for actual
charge-offs. Historically, the Association has reviewed each year the most
favorable way to calculate the deduction attributable to an addition to the
tax bad debt reserve.
The amount of the addition to the reserve for losses on qualifying real
property loans under the percentage of taxable income method cannot exceed the
amount necessary to increase the balance of the reserve for losses on
qualifying real property loans at the close of the taxable year to 6% of the
balance of the qualifying real property loans outstanding at the end of the
taxable year. At June 30, 1996, the Association's total tax bad debt reserve
is approximately $10.9 million, which is less than 6% of its qualifying real
property loans outstanding. Also, if the qualifying thrift uses the percentage
of taxable income method, then the qualifying thrift's aggregate addition to
its reserve for losses on qualifying real property loans cannot, when added to
the addition to the reserve for losses on non-qualifying loans, exceed the
amount by which (i) 12% of the amount that the total deposits or withdrawable
accounts of depositors of the qualifying thrift at the close of the taxable
year exceeded (ii) the sum of the qualifying thrift's surplus, undivided
profits and reserves at the beginning of such year. At June 30, 1996, 12% of
the Association's deposits and withdrawable accounts, less its surplus,
undivided profits and reserves, exceeds the balance of its reserve for losses
on qualifying real property loans.
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 Association have been
repealed. Under the Act, the Association is required to change 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 Association does not have applicable excess reserves subject to
recapture. However, the Association's tax bad debt reserve balance of
approximately $10.9 million (as of June 30, 1996) 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 Association's
current and accumulated earnings and profits, a redemption of shares, or upon
a partial or complete liquidation of the Association. The Association does not
intend to make distributions to stockholders that would result in recapture of
any portion of its bad debt reserve.
Distributions. To the extent that (i) the Association's tax bad debt reserve
for losses on qualifying real property loans exceeds the amount that would
have been allowed under an experience method and (ii) the Association makes
"non-dividend distributions" to stockholders that are considered to result in
distributions from the excess tax bad debt reserve or the reserve for losses
on loans ("Excess Distributions"), then an amount based on the amount
distributed will be included in the Association's taxable income. Non-dividend
distributions include distributions in excess of the Association'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 Association'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 Association's tax bad debt reserves. Thus, any
dividends to the Company that
23
would reduce amounts appropriated to the Association's tax bad debt reserves
and deducted for federal income tax purposes may create a tax liability for
the Association. The tax treatment of non-dividend distributions under the Act
is the same as under existing law, except that recapture of reserves for
qualifying real property loans is required without regard to the portion which
would have been allowed under the experience method.
The amount of additional taxable income created from an Excess Distribution
is an amount that when reduced by the tax attributable to the income is equal
to the amount of the distribution. If certain portions of the Association's
accumulated tax bad debt reserve amounting to $10.9 million are used for any
purpose other than to absorb qualified tax bad debt loans, such as for the
payment of dividends or other distributions with respect to the Association's
capital stock (including distributions upon redemption or liquidation),
approximately one and one-half times the amount so used would be includable in
gross income for federal income tax purposes, assuming a 34% corporate income
tax rate (exclusive of state taxes). 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 Association. The Association does not intend to pay dividends that
would result in a recapture of any portion of its tax bad debt reserve.
The date of the Association'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 1993 through 1995 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 Association as a member of the
same affiliated group of corporations. The corporate dividends received
deduction is generally 70% in the case of dividends received from unaffiliated
corporations with which the Company and the Association will not file a
consolidated tax return, except that if the Company and the Association 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
Association 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 Association); however, the total
tax rate currently applicable to the Association cannot exceed 11.30% for the
1996 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 Association and its California
subsidiary file California state franchise tax returns on a combined basis.
Assuming that the holding Association form of organization is utilized, the
Association, as a savings and loan holding Association commercially domiciled
in California, will generally be treated as a financial corporation and
subject to the general corporate tax rate plus the "in lieu" rate as discussed
previously for the Association.
The Company is currently under examination by the California Franchise Tax
Board for tax years ending December 1990-1993. No adjustments have been
proposed at this time.
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.
24
REGULATION AND SUPERVISION
GENERAL
The Association 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 Association's deposits are insured by the FDIC through the SAIF. As
a result of its ownership of the Association, 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 Association govern
such matters as the investments and activities in which the Association can
engage; the amount of capital the Association must hold; mergers and changes
of control; establishment and closing of branch offices; and dividends payable
by the Association. Statutes and regulations applicable to the Company govern
such matters as changes of control of the Company and transactions between the
Association and the Company.
The Company and the Association are subject to the examination, supervision
and reporting requirements of the OTS, their primary federal regulator,
including a requirement for the Association of at least one full scope, on-
site examination every year. The Director of the OTS is authorized to impose
assessments on the Association to fund OTS operations, including the cost of
examinations. The Association 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 Association if the OTS fails to take
such action after a recommendation by the FDIC. The FDIC may impose
assessments on the Association to cover the cost of FDIC examinations.
Beginning in 1996, the FDIC will no longer be able to conduct separate
examinations of the Association except in exigent circumstances. In addition,
the Association 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.
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. If the Association 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 Association 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, 1996, approximately
91.73% of the Association's portfolio assets constituted qualified thrift
investments and the Association met the QTL test each month in fiscal 1996.
Investment and Loan Limits. In general, federal savings institutions such as
the Association 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 or (for certain subsidiaries owned by the institution prior
toApril 12, 1989) phased out of capital by no later than July 1, 1996.
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 Association
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 Association's total assets, and consumer
loans may not exceed 35% of the
25
Association's total assets. At June 30, 1996, the Association 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 Association may be able to engage in activities
that are not permissible for the Association directly, if the OTS determines
that such activities are reasonably related to the Association's business, but
the Association 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") requires the OTS to prescribe for savings
associations minimum acceptable operational and managerial standards, and
standards for asset quality, earnings, and stock valuation. Such standards
were to be effective no later than December 1, 1993, but were finalized only
as of July 10, 1995. The standards were implemented as Guidelines Establishing
Standards of Safety and Soundness, rather than as regulations. The Safety and
Soundness Guidelines cover internal controls, loan documentation, credit
underwriting, interest rate exposure, asset growth, and employee compensation.
Any institution that fails to meet any regulation promulgated under the safety
and soundness requirements must submit a plan for compliance and is subject to
the ability of the OTS, in its discretion, to impose sanctions similar to
those that would apply to a failure to meet minimum capital requirements. Any
institution that fails to meet any of the Safety and Soundness Guidelines may
be required to submit a plan for compliance to the OTS.
The safety and soundness standards initially proposed would have established
quantitative asset quality and earnings standards. The final Safety and
Soundness Guidelines adopted do not contain any asset quality or earnings
standards. However, asset quality and earnings standards were proposed in
connection with the adoption of the Guidelines. The new proposed asset quality
and earnings standards would not set quantitative standards and would require
monitoring and reporting systems to identify emerging problems and resolve
them.
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. Among the
guidelines adopted by the agencies are maximum loan-to-value ratios for land
loans (65%); development loans (75%); construction loans (80%-85%); loans on
owner-occupied one-to-four family property, including home equity loans (no
limit, but loans at or above 90% require private mortgage insurance); and
loans on other improved property (85%).
The guidelines permit institutions to make loans in excess of the
supervisory loan-to-value limits if such loans are supported by other credit
factors, but the aggregate of such nonconforming loans should not exceed the
institution's risk-based capital, and the aggregate of nonconforming loans
secured by real estate other than one-to-four family property should not
exceed 30% of risk-based capital. The Association believes that its current
lending policies and practices are consistent with the OTS's guidelines.
DEPOSIT INSURANCE
General. The Association's deposits are insured by the FDIC to the full
extent permitted by applicable law (generally, a maximum of $100,000 for each
insured depositor). Under the Financial
26
Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), the FDIC
administers two separate deposit insurance funds: the Bank Insurance Fund (the
"BIF") which insures the deposits of institutions that were insured by the
FDIC prior to FIRREA, and the SAIF which maintains a fund to insure the
deposits of institutions, such as the Association, that were insured by the
Federal Savings and Loan Insurance Corporation ("FSLIC") prior to FIRREA.
Insurance Premium Assessments. FDICIA directed the FDIC to establish by
January 1, 1994 a risk-based system for setting deposit insurance assessments.
The FDIC has implemented such a system, under which an institution's insurance
assessments 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.
Under the FDIC's system, the assessment rate for SAIF deposits varies from
0.23% of covered deposits for well-capitalized institutions that are deemed to
have no more than a few minor weaknesses, to 0.31% of covered deposits for
less than adequately capitalized institutions that pose substantial
supervisory concern. Currently, the Association's assessment rate is 0.23%.
The same schedule was applicable to BIF insured institutions until the BIF
reached its designated reserve ratio of 1.25% on May 31, 1995. Once the BIF
reached the designated reserve ratio, a second BIF assessment rate schedule
became effective. The assessment rate for BIF deposits ranges from 0% of
covered deposits with a $2,000 minimum payment for well-capitalized
institutions that are deemed to have no more than a few minor weaknesses, to
.27% of covered deposits for less than adequately capitalized institutions
that pose substantial supervisory concern. As a result, there is a significant
disparity between the assessment rate of BIF and SAIF member institutions. As
long as the deposit rate premium disparity continues, SAIF-insured
institutions will be placed at a significant competitive disadvantage due to
their higher premium costs and the financial condition of the SAIF could
worsen if its deposit base shrinks as a result of the disparity.
Under current law, the SAIF has three major obligations: to fund losses
associated with the failure of institutions with SAIF-insured deposits; to
increase the SAIF's reserves to 1.25% of insured deposits over a reasonable
period of time; and to make interest payments on debt incurred to provide
funds to the FSLIC ("FICO debt"). The SAIF has not yet reached its designated
reserve ratio of 1.25% and it is not anticipated that the SAIF will be
recapitalized without assistance before 2002. One of the reasons the BIF was
able to be recapitalized well before the SAIF is that the BIF does not have an
obligation to pay interest on the FICO debt.
A number of proposals for assisting the SAIF in attaining its required
reserve level, and thereby permitting SAIF deposit insurance premiums to be
reduced to levels more closely in line with those paid by BIF-insured
institutions, have been under discussion by various of the affected parties,
relevant governmental agencies and members of Congress. The bill currently
pending in Congress would provide for a special assessment to be collected no
later than 60 days after the date of enactment based on deposits held as of
March 31, 1995, at a rate sufficient to provide the SAIF with reserves equal
to 1.25% of total deposits. The FDIC now estimates that this special
assessment would be in the 70 basis point range. This bill also provides that
SAIF and BIF shall be merged on January 1, 1999, provided that all savings
associations have converted to banks by that date, but does not provide
legislation to implement such a conversion. The bill further provides that
between January 1, 1997, and December 31, 1999 (or the date the last savings
association ceases to exist, whichever is earlier), the interest costs for
FICO debt will be shared by SAIF and BIF assessments, with SAIF institutions
paying regular assessments at a rate of approximately .065% (or about 60% of
the dollar amount) and BIF institutions paying regular assessments at a rate
of approximately .013% (or 40% of the dollar amount). Currently, the
Association's regular assessment rate is 0.23%. If the BIF and SAIF have not
merged by January 1, 2000, these FICO interest costs will be assessed pro
rata, with all insured institutions paying the same rate. The bill also
includes a provision intended to limit "deposit shifting" from a SAIF-insured
institution to a BIF-insured affiliate. In 1995, the then pending legislative
proposals contained one or more of the following additional elements:
elimination of the separate Federal savings
27
association charter, coupled with a requirement that each federally chartered
savings association convert to a national bank, a state chartered bank or a
state chartered savings and loan association by January 1, 1998; merger of the
BIF and the SAIF as of that date; the elimination of the OTS as a separate
regulatory agency; and treatment of thrift holding companies as bank holding
companies for federal regulatory purposes. See "Business--Federal Taxation"
for a discussion of recent changes enacted regarding certain bad debt tax
deductions historically available to qualifying thrift institutions. The
Company is not able to predict whether or in what form any of the proposals
that have been discussed will be adopted. However, were a special assessment
to be imposed based upon deposits held at March 31, 1995 at a rate of
approximately 70 basis points, the Company would incur a pre-tax operating
expense of approximately $3.4 million in the fiscal year that the special
assessment were to be imposed, which would reduce the Company's operating
results and the Association's regulatory capital after adjusting for the tax
benefit associated with decreased earnings. If a special assessment on the
basis described in the immediately preceding sentence had been imposed at June
30, 1996, the Association would have remained a "well capitalized" institution
at such date. Over the long term, the recapitalization of the SAIF could be
expected to reduce the Association's annual deposit insurance costs.
FIRREA CAPITAL REQUIREMENTS
The OTS's capital regulations, as required by FIRREA, include three separate
minimum capital requirements for the savings institution industry--a "tangible
capital requirement," a "leverage limit" (also referred to as the "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. 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 (including
unrealized gains and losses on securities classified as available-for-
sale), and (2) 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 subject to a phase-out
rather than a deduction for the amount of investments made or committed to
be made prior to April 12, 1989, (b) intangible assets other than purchased
mortgage servicing rights, and (c) any purchased mortgage servicing rights
that exceed 50% of the institution's core capital. 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, 1996, the Association's ratio of tangible capital to
adjusted total assets was 7.67 percent.
Core capital of at least 3% of adjusted total assets. Core capital
consists of tangible capital plus (1) goodwill resulting from pre-April 12,
1989 acquisitions of troubled savings institutions,
28
subject to a phase-out by December 31, 1994; (2) purchased credit card
relationships, as long as they do not exceed 25% of core capital and, when
aggregated with purchased mortgage servicing rights, do not exceed 50% of
core capital; and (3) any core deposit premium in existence on March 4,
1994 whose inclusion in core capital is grandfathered by the OTS. At
June 30, 1996, the Association's core capital ratio was 7.67 percent.
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), but equity investments (with
the exception of investments in subsidiaries and investments permissible
for national banks) and portions of certain high-risk land loans and
nonresidential construction loans must be deducted from total capital,
subject to a phase-out rather than a deduction until July 1, 1994. At least
half of total capital must consist of core capital.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("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, 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.
The OTS also implemented a final regulation that requires a deduction from
total capital by any savings institution that is projected to experience a two
percent decline in net portfolio value in the event interest rates were to
increase or decrease immediately by two percentage points. Net portfolio value
is defined as the net present value of the expected cash flows from the
institution's assets, liabilities and off balance sheet contracts. The amount
of the deduction from the total capital would be one-half of the amount by
which the decline in net portfolio value exceeds two percent of the present
value of the institution's assets. The effective date of the interest-rate
risk component has been delayed. Had it been in effect at June 30, 1996, the
Association would not have been required to take any deduction from total
capital.
As of August 23, 1995, an institution whose prompt corrective action
category is reduced by the application of the OTS' interest rate risk
component may request an adjustment to its capital requirement if it is able
to demonstrate that the accuracy of the OTS' estimate of interest rate risk
exposure can be materially improved through the use of more refined data or
more appropriate assumptions tailored to the specific institution.
Additionally, well-capitalized institutions may request to use their own
internal interest rate risk model in place of the OTS model in calculating its
interest rate risk capital requirements. The internal model must meet certain
OTS standards, including reasonable assumptions about future interest rates,
prepayment rates for assets and attrition rates for liabilities.
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. As of August 31,
1995, the amount of risk-based capital that may be required to be maintained
by the institution for recourse assets cannot be greater than the total of the
recourse liability. Thus, whenever the above method of calculating risk-based
assets including assets sold with recourse would result in a capital charge
greater than the institution's maximum recourse liability, the institution's
risk-based
29
capital requirement will be increased by the institution's maximum recourse
liability. Moreover, qualified savings associations may include in their risk-
weighted assets, for the purpose of capital standards and other capital
measures, only the amount of retained recourse of small business obligation
transfers multiplied by the appropriate risk weight percentage. The regulation
sets reserve requirements and aggregate limits for recourse held under the
modified treatment. Only well-capitalized institutions and adequately
capitalized institutions with OTS permission may use this reduced capital
treatment.
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, 1996, the Association's risk-
based capital ratio was 12.74%, and accordingly the Association exceeded all
three of the industry minimum capital requirements.
PROMPT CORRECTIVE ACTION REQUIREMENTS
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. The OTS was required
to and has established specific capital ratios for five separate capital
categories: "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized." 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.
Under the OTS regulations implementing FDICIA, 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 is at least 5.0%, and it is not
subject to any order or directive by the OTS to meet a specific capital level.
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 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%. At
June 30, 1996, the Association had a risk-based capital ratio of 12.74%, a
Tier 1 risk-based capital ratio of 11.53%, and a core capital ratio of 7.67%,
which qualified the Association for the well-capitalized category. The
Association's capital category under the prompt corrective action system may
not be an accurate representation of the Association's overall financial
condition or prospects.
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 controls only one
savings association, the Company generally is not restricted under
30
existing laws as to the types of business activities in which it may engage,
provided that the Association continues to be a QTL. See "Regulation--
Activities Restrictions--QTL Test" for a discussion of the QTL requirements.
If the Association 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 Association, 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 Association 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 Association and an
affiliate must be on arms' length terms. The term "affiliate" covers any
company that controls or is under common control with the Association, but
does not include individuals and generally does not include the Association's
subsidiaries.
Under Section 23A and section 11 of HOLA, specific restrictions apply to
transactions in which the Association provides funding to its affiliates: the
Association 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 Association to its directors, executive officers, and 10%
shareholders of the Association, 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 Association's
Board of Directors; and the Association's total of such loans may not exceed
100% of the Association's capital. Loans by the Association 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 Association 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 Association or
the Company (or more than 25% of
31
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 Association or the Company, or has the power to control in any manner the
election of a majority of directors.
In addition, federal regulations governing conversions of mutual savings
institutions to the stock form of organization generally require an acquiror
to obtain prior OTS approval in order to acquire, or offer to acquire,
directly or indirectly, more than 10% of any equity security of a savings
institution within three years of the savings institution's conversion to
stock form. Because the Association converted from the mutual to the stock
form on December 30, 1993, this limitation will apply until December 30, 1996
to acquisitions or offers to acquire, directly or indirectly, more than 10% of
the stock of the Association.
Payment of Dividends and Other Capital Distributions by Association. The
payment of dividends, stock repurchases, and other capital distributions by
the Association to the Company is subject to regulation by the OTS. Currently,
30 days prior notice to the OTS of any capital distribution is required. The
OTS has promulgated a regulation that measures a savings institution's ability
to make a capital distribution according to the institution's capital
position. The rule establishes "safe-harbor" amounts of capital distributions
that institutions can make after providing notice to the OTS, but without
needing prior approval. Institutions can distribute amounts in excess of the
safe harbor only with the prior approval of the OTS.
For institutions such as the Association that meet their fully phased-in
capital requirements (the requirements that apply now that the phase-out of
supervisory goodwill and investments in certain subsidiaries from capital is
complete), the safe harbor amount is the greater of (a) 75% of net income for
the prior four quarters, or (b) the sum of (1) the current year's net income
and (2) the amount that causes the excess of the institution's total capital-
to-risk-weighted assets ratio over 8% to be only one-half of such excess at
the beginning of the current year. For institutions that meet their current
capital requirements but do not meet their fully phased-in requirements, the
safe harbor distribution is 75% of net income for the prior four quarters.
Savings institutions that do not meet their current capital requirements may
not make any capital distributions, with the exception of repurchases or
redemptions of the institution's shares that are made in connection with the
issuance of additional shares and that will improve the institution's
financial condition. The OTS has proposed an amendment to its capital
distribution regulation to conform to its prompt corrective action regulations
by replacing the current "tiered" approach summarized above with one that
would allow an institution to make capital distributions that would not result
in the institution falling below the prompt corrective action "adequately
capitalized" capital category. Under this proposal, an institution would be
able to make a capital distribution (i) without notice or application, if the
institution is not held by a savings and loan holding company and received a
rating of 1 or 2 on the CAMEL regulatory rating scale, (ii) by providing
notice to the OTS if, after the capital distribution, the institution would
remain at least "adequately capitalized" or (iii) by submitting an application
to the OTS.
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.
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.
32
Additionally, as of June 30, 1996, the Association's accumulated tax
reserves for losses on qualifying real property loans exceeded the reserve
that could have been accumulated under the experience method, and as a result
any distribution by the Association to the Company that exceeds the
Association's current or accumulated earnings and profits as calculated for
federal income tax purposes would be treated as a distribution of the excess
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 Association does not intend to make
distributions to stockholders that would result in recapture of any portion of
its bad debt reserve.
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.
Notification of New Officers and Directors. A savings and loan holding
company that has undergone a change in control in the preceding two years, is
subject to a supervisory agreement with the OTS, or is deemed to be in
"troubled condition" by the OTS, must give the OTS 30 days' notice of any
change to its Board of Directors or its senior executive officers. The OTS
must disapprove such change if the competence, experience or integrity of the
affected individual indicates that it would not be in the best interests of
the public to permit his appointment.
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.
33
Loss Assets. Assets classified as "Loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. 100%
of the amount classified as Loss must be charged off, or a specific
allowance of 100% of the amount classified as Loss must be established.
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.
In connection with its assessment of CRA performance, the OTS assigns a
rating of "outstanding," "satisfactory," "needs to improve," or "substantial
noncompliance." Based on an examination conducted during 1994, the Association
was rated outstanding.
The OTS and the other federal banking agencies adopted substantive
amendments to their CRA regulations on May 4, 1995, effective July 1, 1995.
Evaluation under the amended regulations becomes mandatory on July 1, 1997,
while related data collection and reporting requirements are effective on
January 1, 1996 and January 1, 1997, respectively. The regulations replace the
current assessment system, which is based on the adequacy of the processes
that an institution has established to comply with the CRA, with a new system
based on the institution's performance in making loans and investments and
maintaining branches in low- and moderate-income areas within the communities
that it serves.
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 Association 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, 1996 the Association was
34
in compliance with this requirement. Furthermore, FHLB advances must be
collateralized with certain types of assets. Accordingly, the Association has
pledged certain loans to the FHLB of San Francisco as collateral for its
advances.
REQUIRED LIQUIDITY
OTS regulations require savings institutions to maintain, for each calendar
month, 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 5% of the average daily
balance of its net withdrawable accounts plus short-term borrowings during the
preceding calendar month. 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.
OTS regulations also require each member institution to maintain, for each
calendar month, an average daily balance of short-term liquid assets
(generally those having maturities of 12 months or less) equal to at least 1%
of the average daily balance of its net withdrawal accounts plus short-term
borrowings during the preceding calendar month. Monetary penalties may be
imposed for failure to meet liquidity ratio requirements. The Association's
average liquidity and average short-term liquidity ratios exceeded the
applicable requirements at all times during fiscal 1996.
FEDERAL RESERVE SYSTEM
The FRB 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,
1996, the Association was not required to maintain reserves and was in
compliance with this requirement. The balances maintained to meet the reserve
requirements imposed by the FRB do not earn interest but may be used to
satisfy the Association's liquidity requirements discussed above.
As a creditor and a financial institution, the Association is subject to
certain regulations promulgated by the FRB, 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
Association, 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.
35
ITEM 2. PROPERTIES.
At June 30, 1996, the Company conducted its business through an
administrative office located in Whittier, eight retail full service branch
offices and two loan origination centers. 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, 1996
-------- ------------- --------- ---------- -----------------
7021 Greenleaf Avenue Owned 7/65 None $ 686,200
Whittier, CA 90602
(Administration)
7355 Greenleaf Avenue Owned 8/18/85 None $1,215,048
Whittier, CA 90608
(Main Office)
15335 Whittier Blvd. Owned/Bldg 4/1/70 None $ 97,326
Whittier, CA 90603 Leased/Land 3/31/05
(Branch)
401 E. Whittier Blvd. Owned 12/72 None $ 338,403
La Habra, CA 90631
(Branch)
220 S. State College Leased/Bldg/ 1/31/92 12/31/02 $ 125,822
Blvd. Common Area
Brea, CA 92821
(Branch)
1701 N. Euclid Avenue Owned/Bldg 7/6/76 None $ 96,398
Fullerton, CA 92835 Leased/Land 11/30/97
(Branch)
12333 S. La Mirada Blvd. Owned/Bldg 1/31/92 None $ 218,183
La Mirada, CA 90638 Leased/Land 7/9/01
(Branch)
3160 Colima Road Leased 1/17/92 12/31/99 $ 108,752
Hacienda Heights, CA
91745
(Branch)
1921 W. Imperial Hwy. Leased/Office 12/1/94 11/30/01 $ 51,585
Suite A
La Habra, CA 90631
(Branch)
12525 Beverly Blvd. Owned 2/27/86 None $ 141,519
Whittier, CA 90601
(Training Center)
Wardman and Comstock Leased/Land 1/2/70 Month --
Whittier, CA 90602 to
(Parking Lot) Month
3103 Colima Road Leased/Land 3/1/83 2/28/98 $ 88,020
Hacienda Heights, CA Owned/Bldg None
91745
(Loan Office)
73-555 Alessandro Dr. Leased/Office 12/15/93 12/14/96 $ 807
Palm Desert, CA 92260
(Loan Office)
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, 1996.
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, 1996. On
November 15, 1995, Mr. McGill was appointed President of the Company and of
the Association, and Mr. Thomas was elected Chairman of the Board of the
Company and of the Association. Effective July 1, 1996, Mr. McGill was elected
Chief Executive Officer of the Company and of the Association; Mr. Thomas
remains Chairman of the Board and a member of the management team.
NAME PRINCIPAL OCCUPATION
---------------------- -------------------------------------------------------
DIRECTORS:
D. W. Ferguson Director Emeritus of the Company and of the Association
J. L. Thomas Chairman of the Board and Chief Executive Officer of
the Company and of the Association
Frederic R. McGill President and Chief Operating Officer of the Company
and of the Association
David T. Cannon D.T. Cannon Associates, a marketing and management
consulting firm; retired Western Regional Director for
Industrial Relations of Eastman Kodak Company
Wayne L. Harvey C.P.A., Managing Partner, Harvey & Parmelee, certified
public
accountants
Edward L. Miller Partner, law firm of Bewley, Lassleben & Miller
David K. Leichtfuss President, Broadview Mortgage, a mortgage banking
company
Alfred J. Gobar President and Chairman, AJGA, Inc., an economics
consulting firm
EXECUTIVE OFFICERS(1):
D. W. Ferguson Director Emeritus
J. L. Thomas Chairman of the Board and Chief Executive Officer
Frederic R. McGill President and Chief Operating Officer
Kathryn M. Hennigan Corporate Secretary and Senior Vice President,
Administrative Services
Harold L. Rams Senior Vice President, Lending of the Association
Karen A. Tannheimer Senior Vice President, Loan Service of the Association
Robert C. Teeling Senior Vice President, Retail Banking of the
Association
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 Association.
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 19, 1996, the Company had
approximately 376 stockholders of record (not including the number of persons
or entities holding stock in nominee or street name through various brokerage
firms) and 3,800,600 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 1996 FISCAL 1995
------------------------------- --------------------------------
4TH 3RD 2ND 1ST 4TH 3RD 2ND 1ST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- -------
High.......... 14 3/4 14 3/8 14 1/8 14 5/8 12 3/8 10 1/8 10 11 3/4
Low........... 13 5/8 12 1/2 12 3/4 11 1/8 9 7/8 7 5/8 7 1/2 9 7/8
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 dividends in the past and
does not presently intend to pay dividends.
The Company's principal source of income in fiscal 1996 was interest from
investments. Dividends from the Association are a potential source of income
for the Company. The payment of dividends and other capital distributions by
the Association to the Company is subject to regulation by the OTS. Currently,
30 days' prior notice to the OTS is required before any capital distribution
is made. The OTS has promulgated a regulation that measures a savings
institution's ability to make a capital distribution according to the
institution's capital position. The rule establishes "safe-harbor" amounts of
capital distributions that institutions can make after providing notice to the
OTS, but without needing prior approval. Institutions can distribute amounts
in excess of the safe harbor only with the prior approval of the OTS. For
institutions such as the Association that meet their fully phased-in capital
requirements (the requirements that apply now that the phase-out of
supervisory goodwill and investments in certain subsidiaries from capital is
complete), the safe harbor amount is the greater of (a) 75% of net income for
the prior four quarters, or (b) the sum of (1) the current year's net income
and (2) the amount that causes the excess of the institution's total capital-
to-risk-weighted assets ratio over 8% to be only one-half of such excess at
the beginning of the current year. See "Business--Regulation and Supervision--
Savings and Loan Holding Company Regulation--Payment of Dividends and Other
Capital Distributions by Association" regarding proposed amendments to the OTS
capital distribution regulation that would allow an institution to make
capital distributions that would not result in the institution falling below
the prompt corrective action "adequately capitalized" capital category.
The Association'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 Association from mutual to stock form in December
1993. The Association 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 Association."
38
Additionally, as of June 30, 1996, the Association's accumulated tax
reserves for losses on qualifying real property loans exceeded the reserve
that could have been accumulated under the experience method, and as a result
any distribution by the Association to the Company that exceeds the
Association's current or accumulated earnings and profits as calculated for
federal income tax purposes would be treated as a distribution of the excess
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 Association does not intend to pay dividends
that would result in a recapture of any portion of its bad debt reserve.
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,
------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
SELECTED FINANCIAL DATA:
Total assets........... $725,085 $641,173 $512,102 $487,020 $489,698
Total liabilities...... 657,159 574,732 447,464 445,186 450,090
Loans receivable, net.. 607,672 537,478 450,527 413,567 411,773
Loans receivable held
for sale.............. 2,890 1,666 5,415 12,672 25,176
Investment
securities(1)......... 37,419 24,048 19,413 19,900 10,981
Mortgage-backed
securities(2)......... 41,175 39,993 14,709 13,573 14,025
Deposits............... 512,517 481,158 423,960 436,340 379,012
Federal Home Loan Bank
(FHLB) advances....... 135,300 63,950 13,000 2,000 60,000
Securities sold under
agreements to
repurchase............ 300 22,873 7,019 -- --
Stockholders' equity... 67,926 66,441 64,638 41,834 39,608
SELECTED OPERATING DATA:
Interest income........ $ 52,646 $ 41,042 $ 35,286 $ 40,660 $ 38,410
Interest expense....... 31,151 23,503 17,456 20,483 21,723
-------- -------- -------- -------- --------
Net interest income
before provision for
loan losses......... 21,495 17,539 17,830 20,177 16,687
Provision for loan
losses................ 2,103 998 10,200 3,657 304
-------- -------- -------- -------- --------
Net interest income
after provision for
loan losses......... 19,392 16,541 7,630 16,520 16,383
-------- -------- -------- -------- --------
Other income:
Loan servicing
charges and fees.... 1,629 1,490 1,675 1,035 1,543
Gain (loss) on sale
of loans held for
sale................ 175 86 511 502 (298)
Commissions.......... 606 420 481 331 339
Other................ 79 84 189 166 11
-------- -------- -------- -------- --------
Total other income. 2,489 2,080 2,856 2,034 1,595
-------- -------- -------- -------- --------
Other expense:
Compensation and
employee benefits... 7,565 7,371 6,411 5,808 4,716
Occupancy, net....... 1,970 1,894 1,833 1,818 1,409
Federal Deposit
Insurance premiums.. 1,254 1,115 1,101 928 820
Other general and
administrative
expense............. 3,991 3,704 3,677 4,180 3,819
-------- -------- -------- -------- --------
Total general and
administrative
expense............. 14,780 14,084 13,022 12,734 10,764
-------- -------- -------- -------- --------
Real estate
operations, net..... 656 646 1,105 1,933 87
Amortization of core
deposit intangible.. 303 303 303 267 38
-------- -------- -------- -------- --------
Total other
expense........... 15,739 15,033 14,430 14,934 10,889
-------- -------- -------- -------- --------
Earnings (loss) before
income taxes.......... 6,142 3,588 (3,944) 3,620 7,089
Income taxes
(benefit)............. 2,573 1,267 (1,613) 1,394 3,055
-------- -------- -------- -------- --------
Net earnings (loss).... $ 3,569 $ 2,321 $ (2,331) $ 2,226 $ 4,034
======== ======== ======== ======== ========
Net earnings (loss)
per share............. $ 0.92(3) $ 0.60(3) $ (0.66)(4) N/A N/A
======== ======== ======== ======== ========
- -------
(1) Includes $150,000, $470,000, $10,508,000 and $5,560,000 of investment
securities available for sale at June 30, 1995, 1994, 1993 and 1992,
respectively. No investment securities were available for sale at June 30,
1996.
(2) Includes $5,997,000 and $6,660,000 of mortgage-backed securities available
for sale at June 30, 1994 and 1993, respectively. No mortgage-backed
securities were available for sale in 1996, 1995 or 1992.
(3) Earnings per share in 1996 and 1995 were calculated based on weighted
average shares outstanding of 3,871,209 and 3,850,176, respectively.
(4) Earnings per share data has been calculated based on the Company's net
loss of $2,745,000 for the period December 30, 1993 through June 30, 1994
and 4,140,000 shares of common stock of the Company outstanding; the
Company completed its initial public stock offering and commenced
operations on December 30, 1993.
39
AT OR FOR THE YEAR ENDED JUNE 30,
-----------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
SELECTED FINANCIAL RATIOS AND OTHER
DATA:
PERFORMANCE RATIOS:
Return on average assets.......... 0.53% 0.39% (0.46)% 0.45% 0.97%
Return on average equity.......... 5.25 3.53 (4.13) 5.38 10.85
Average equity to average assets.. 10.04 11.18 11.24 8.32 8.99
Equity to total assets............ 9.37 10.36 12.62 8.59 8.09
Interest rate spread during the
period(1)........................ 2.68 2.56 3.20 3.67 3.67
Net interest margin(2)............ 3.24 3.07 3.66 4.06 4.18
Average interest-earning assets to
average interest-bearing
liabilities...................... 111.47 112.31 113.02 109.17 109.45
General and administrative expense
to average assets................ 2.18 2.39 2.59 2.56 2.60
Other expense to average assets... 2.32 2.55 2.87 3.00 2.63
Dividend pay-out ratio............ -- -- -- N/A N/A
REGULATORY CAPITAL RATIOS:
Tangible capital.................. 7.67 8.11 9.88 8.25 7.84
Core capital...................... 7.67 8.11 9.88 8.25 7.84
Risk-based capital................ 12.74 14.07 16.09 14.24 13.02
ASSET QUALITY RATIOS:
Non-performing loans as a
percentage of total
loans(3)......................... 2.00 2.67 4.22 2.41(5) 0.52
Non-performing assets as a
percentage of total assets(4).... 2.06 2.64 4.33 2.65(5) 0.70
Allowance for loan losses as a
percentage of total loans........ 1.25 2.17 2.88 1.17 0.36
Allowance for loan losses as a
percentage of non-performing
loans............................ 62.64 81.51 68.30 48.39 68.78
Allowance for losses as a
percentage of total
non-performing assets(6)......... 53.60 72.68 62.18 39.94 48.71
NUMBER OF:
Deposit accounts.................. 37,628 38,000 35,298 37,337 34,284
Mortgage loans in portfolio....... 4,485 4,185 3,685 3,767 3,966
Mortgage loans serviced for
others........................... 1,710 1,661 1,919 2,022 2,183
Total full-service customer
facilities(7).................... 8 8 7 7 8
- --------
(1) The interest rate spread represents the difference between the weighted-
average rate on interest-earning assets and the weighted-average rate on
interest-bearing liabilities.
(2) The net interest margin represents net interest income as a percentage of
average interest-earning assets.
(3) Non-performing loans consist of non-accrual and troubled debt restructured
loans. Total loans include loans held for sale.
(4) Non-performing assets consist of non-performing loans and REO.
(5) The non-accrual loan policy was changed in October, 1992 from ninety to
sixty days.
(6) Allowance for losses includes valuation allowances on loans and REO.
(7) The Association also conducts business from two loan origination centers
which are not full-service customer facilities.
40
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
For the year ended June 30, 1996, the Company reported net earnings of $3.6
million, $0.92 per share. This compares to net earnings of $2.3 million, $0.60
per share for the year ended June 30, 1995. The Company had total consolidated
assets of $725.1 million, total deposits of $512.5 million and stockholders'
equity of $67.9 million, representing 9.37% of total assets. This compares to
total consolidated assets of $641.2 million, total deposits of $481.2 and
stockholders' equity of $66.4 million at June 30, 1995. This represents a
13.09% increase in assets during the 1996 fiscal year.
The Southern California economy and real estate markets in the Association's
primary lending area continued to remain weak during 1996, however, the
Association's level of non-performing assets declined from June 30, 1995. The
Association currently includes nonaccruing loans, troubled debt restructured
loans and REO in determining its level of non-performing assets. At June 30,
1996, the Company reported $14.9 million in non-performing assets in the
Association's portfolio compared to $16.9 million and $22.2 million at June
30, 1995 and 1994, respectively. The Association recorded provisions for loan
losses of $2.1 million for the year ended June 30, 1996 compared to $998,000
and $10.2 million for the years ended June 30, 1995 and 1994, respectively.
See "Business--Allowances for Loan and Real Estate Losses" and "--Results of
Operations--Provision for Loan Losses," below.
PROBLEM ASSETS
Even though non-performing assets declined during the year, recognition,
control, and disposition of problem assets (non-performing loans and REO)
continues to be a primary objective of the Association. The Association's
ratio of non-performing loans to total loans was 2.00%, 2.67%, and 4.22% at
June 30, 1996, 1995, and 1994, respectively. The Association attributes the
decrease in its non-performing loans primarily to the disposition of real
estate acquired through foreclosure including some real estate properties
damaged in the Northridge earthquake in January 1994. However, the
Association's primary lending area, Southern California, continues to
experience weak real estate values that may cause an increase in nonperforming
assets and a corresponding increase in provisions for loan losses in the
future.
RESULTS OF OPERATIONS
General. The Company reported net earnings of $3.6 million for the year
ended June 30, 1996, compared to net earnings of $2.3 million for the year
ended June 30, 1995 and a net loss of $2.3 million for the year ended June 30,
1994. The increase in earnings for fiscal 1996 was primarily attributable to
an increase in net interest income before provision for loan losses. The
increase in earnings in fiscal 1995 over 1994 was primarily due to a reduction
in provision for loan losses of $9.2 million in 1995 from the amount recorded
in 1994.
Interest Income. Interest income was $52.6 million, $41.0 million and $35.3
million for the years ended June 30, 1996, 1995, and 1994, respectively. The
$11.6 million increase in interest income in 1996 compared to 1995 resulted
from an increase in the average balance of interest-earning assets of
$90.9 million and an increase in the average yield on interest-earning assets
of 0.77% to 7.94%. The $5.8 million increase in interest income in 1995
compared to 1994 resulted from an increase in the average balance of interest-
earning assets of $85.3 million, partially offset by a decrease in the average
yield on interest-earning assets of 0.08% to 7.18%.
Interest Expense. Interest expense was $31.2 million, $23.5 million, and
$17.5 million for the years ended June 30, 1996, 1995 and 1994, respectively.
The $7.7 million increase in 1996 compared to 1995 resulted from an increase
in the average balance of interest bearing liabilities of $83.1 million
41
and an increase in the average cost on interest-bearing liabilities of 0.65%
to 5.26%. The $6.0 million increase in 1995 compared to 1994 resulted from an
increase in the average balance of interest-bearing liabilities of $78.7
million, as well as an increase in the average cost on interest-bearing
liabilities of 0.56% to 4.61%. The increase in the average rate paid on
interest-bearing liabilities in fiscal 1996 and 1995 resulted primarily from
increasing market rates during the period.
Net Interest Income Before Provision for Loan Losses. Net interest income
before provision for loan losses was $21.5 million, $17.5 million, and $17.8
million for the years ended June 30, 1996, 1995, and 1994, respectively. The
increase in 1996 compared to 1995 was primarily a result of the net interest
margin increasing to 3.24% from 3.07% during the year. Net interest income
before provision for loan losses remained relatively unchanged in 1995 as
compared to 1994. Although there was a decline in net interest margin in 1995
as compared to 1994 this was offset by asset growth.
Provision for Loan Losses. During 1996, 1995, and 1994 the Association
established $2.1 million, $998,000, and $10.2 million, respectively, of
provisions for losses on loans. Management believes the increase of
$1.1 million in 1996 compared to 1995 was necessary in order to replenish the
allowance for loan losses to a level that management believes to be adequate
following increased charge-offs during 1996 compared to 1995 and 1994. The
decrease of $9.2 million in 1995 compared to 1994 was primarily a result of
the reduction in nonperforming assets. Non-performing loans decreased
$5.1 million to $14.9 million during fiscal 1995. In 1994, the Association was
only beginning to acquire title or resolve properties damaged in the January
1994 Northridge earthquake. As of the end of fiscal 1995, the Association had
either acquired title to all of the earthquake affected properties or entered
into workout agreements allowing the owners of the remaining damaged property
to make partial payments. The $10.2 million provision for loan losses in 1994
reflected management's assessment of the loan portfolio in consideration of
various factors, including the trends in the Association's nonperforming
assets during that time, continued declines in the Southern California economy
and the real estate markets in the Association's primary lending area, the
Northridge earthquake and the regulatory environment. Management considers the
level of non-performing assets, the regional economic conditions and relevant
real estate values and other factors when assessing the adequacy of the
allowance for loan loss. The Southern California economy and real estate
markets in the Association's primary lending area remained weak during 1996
although management considers the level of allowance for loan losses at
June 30, 1996 to be adequate. There can be no assurance that the Association
will not have to establish additional loss provisions in the future.
Other Income. Other income increased by $409,000, or 19.66%, in 1996 to
$2.5 million as compared to 1995. Fee income for deposits and loans serviced
increased due to a larger loan and deposit base. In addition, commissions from
the sale on noninsured deposit products increased due to improved sales
volumes. Other income declined by $776,000, or 27.17%, in 1995 to $2.1 million
as compared to 1994 primarily as a result of a reduced volume of loans
originated and sold.
Other Expense. Other expense increased $706,000, or 4.70%, from $15.0
million in 1995 to $15.7 million in 1996. Compensation and employee benefits
increased $194,000 or 2.63% in 1996 as compared to 1995 due to increases in
salaries and accounting for the ESOP plan. FDIC insurance increased $139,000
in 1996 compared to the previous year due to an increase in the deposit
balances that the insurance premium is based upon. Other general and
administrative expense increased $287,000 primarily relating to data
processing due to the Association converting to new deposit software and
hardware, and increased consulting costs relating to these changes.
42
The following is a summary of other general and administrative expenses for
the fiscal years ended:
JUNE 30,
--------------------
1996 1995 1994
------ ------ ------
(IN THOUSANDS)
Professional fees................................... $ 219 $ 215 $ 421
Data processing..................................... 641 561 591
Advertising and promotional......................... 513 464 396
Bank service charges................................ 380 375 349
Miscellaneous loan expenses......................... 630 660 449
Consulting fees..................................... 350 250 252
Other............................................... 1,258 1,179 1,219
------ ------ ------
$3,991 $3,704 $3,677
====== ====== ======
Income Taxes (Benefit). Income taxes increased by $1.3 million from $1.3
million in 1995 to $2.6 million in 1996. Income taxes increased by $2.9
million from a $1.6 million benefit in 1994 to a $1.3 million expense in 1995.
The increases are due to the increase in earnings before income taxes.
FINANCIAL CONDITION
The Company's consolidated assets totaled $725.1 million at June 30, 1996,
compared to $641.2 million at June 30, 1995. Stockholders' equity totaled
$67.9 million at June 30, 1996, compared to $66.4 million June 30, 1995. The
increase in assets is primarily attributable to the implementation of the
Company's growth strategies funded by deposit promotions and FHLB advances.
Loans and MBS (including assets held or available for sale) increased to
$651.7 million at June 30, 1996, from $579.1 million at June 30, 1995. Loans
originated and purchased for investment increased slightly to $121.2 million
for the year ended June 30, 1996 compared to $118.8 million for the same
period the previous year.
At June 30, 1996, the Association's multifamily loan portfolio totaled
$259.0 million, or 41.45% of total loans. Of the Association's $6.2 million of
charge-offs in fiscal 1996, $4.4 million, or 70.71%, were for multifamily
loans. See "Business--Allowances for Loan and Real Estate Losses." Multifamily
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. Recessionary economic conditions of
the type that have prevailed in the Company's primary lending market area tend
to result in higher vacancy and reduced rental rates and net operating incomes
from multifamily residential properties.
Loan sales increased to $27.7 million for the year ended June 30, 1996,
compared to $10.3 million for the same period ended June 30, 1995. The
increase in loan sales is primarily a result of an increase in funding of
fixed-rate loans that were generally held for sale during this period. Loans
serviced for others increased slightly to $212.6 million at June 30, 1996 from
$204.7 million at June 30, 1995 primarily due to the increase in fixed rate
loans sold with servicing retained.
43
CAPITAL RESOURCES AND LIQUIDITY
Regulatory Capital Requirements
FIRREA and implementing OTS capital regulations require the Association to
maintain certain minimum tangible, core and risk-based regulatory capital
levels.
The following table summarizes the regulatory capital requirements for the
Association at June 30, 1996. As indicated in the table, the Association's
capital levels exceed all three of the currently applicable minimum capital
requirements.
JUNE 30, 1996
-----------------------------------------
TANGIBLE RISK-BASED
CAPITAL CORE CAPITAL CAPITAL
------------ ------------ -------------
BALANCE % BALANCE % BALANCE %
------- ---- ------- ---- ------- -----
(DOLLARS IN THOUSANDS)
Regulatory capital................... $54,650 7.67% $54,650 7.67% $60,367 12.74%
Required minimum..................... 10,681 1.50 21,362 3.00 37,919 8.00
------- ---- ------- ---- ------- -----
Excess capital....................... $43,969 6.17% $33,288 4.67% $22,448 4.74%
======= ==== ======= ==== ======= =====
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 is
at least 5%, its ratio of core capital to risk-weighted assets is at least 6%
and its risk-based capital ratio is at least 10%. The following table
summarizes the capital ratios of the well capitalized category and the
Association's regulatory capital at June 30, 1996 as compared to such ratios.
As indicated in the table, the Association's capital levels exceeded the three
minimum capital ratios of the well capitalized category.
JUNE 30, 1996
--------------------------------------------
CORE CAPITAL
TO RISK- RISK-
CORE CAPITAL WEIGHTED ASSETS BASED CAPITAL
------------ --------------- -------------
BALANCE % BALANCE % BALANCE %
------- ---- --------------- ------- -----
(DOLLARS IN THOUSANDS)
Regulatory capital................ $54,650 7.67% $ 54,650 11.53% $60,367 12.74%
Well capitalized requirement...... 35,604 5.00 42,724 6.00 47,399 10.00
------- ---- -------- ------ ------- -----
Excess capital.................... $19,046 2.67% $ 11,926 5.53% $12,968 2.74%
======= ==== ======== ====== ======= =====
During the third quarter of fiscal year 1996, the Company received approval
to repurchase in the open market up to 5% of the Company's outstanding stock
or 197,000 shares. At June 30, 1996, a total of 164,000 shares had been
repurchased at prices ranging from $12.90 to $14.60 per share. For the year
ended December 31, 1995, 206,400 shares had been repurchased under a previous
repurchase plan. The Company may resume repurchasing shares shortly and
complete the repurchase over the next several months. The increase in the
Company's book value per share reflects both the Company's earnings and the
reduced number of shares outstanding resulting from the stock repurchase
program.
44
Sources of Funds and Liquidity
The Association's primary sources of funds are deposits, principal and
interest payments on loans, proceeds from the sale of loans and advances from
the FHLB. 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. Although
competition for deposits in the Southern California area is substantial, the
Association experienced an increase in deposits. The Association also has
other potential sources of liquidity, such as securities sold under agreements
to repurchase and liquidating existing short-term assets.
The Association 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 5%. The Association's average
liquidity ratios were 5.37%, 5.13% and 5.15% at June 30, 1996, 1995 and 1994,
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.
The Company's cash flows are comprised of three primary classifications:
cash flows from operating activities, 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 $27.7 million,
$10.3 million, and $54.9 million for fiscal 1996, 1995, and 1994,
respectively. The Association originated loans for sale of $28.9 million,
$12.2 million, and $47.6 million during fiscal years 1996, 1995, and 1994,
respectively. Net cash used by investing activities consisted primarily of
loan originations 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
$121.2 million, $118.8 million, and $112.2 million for fiscal 1996, 1995, and
1994, respectively. Proceeds from maturities and principal payments of
investment securities and sales of MBS available for sale were $33.4 million,
$12.0 million, and $11.0 million for fiscal years ended 1996, 1995, and 1994,
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 $31.4 million for
fiscal 1996, an increase of $57.2 million for fiscal 1995, and a decrease of
$12.4 million for fiscal 1994. The net proceeds from FHLB advances were $71.4
million, $51.0 million, and $11.0 million for fiscal 1996, 1995, and 1994,
respectively.
The major variances in the statements of cash flows for fiscal 1996, 1995,
and 1994 included in this report can be explained largely by the change in the
Association's liquidity management activities. See "Financial Statements and
Supplementary Data." Due to the Association's growth strategies in fiscal 1996
and 1995, the Association's use of FHLB advances increased. In fiscal 1994,
the Association's use of FHLB advances increased due to a decrease in
deposits. At June 30, 1996, the Association had $135.3 million in advances
outstanding from the FHLB. During fiscal 1996, the maximum amount of FHLB
advances that the Association had outstanding at any month-end was $135.3
million. Management anticipates increased borrowing from the FHLB in fiscal
1997. See "Business--Sources and Funds--Borrowings."
Liquidity levels were maintained in fiscal 1996 with a higher level of
reliance on short-term borrowings. The Association's most liquid assets are
cash and short-term investments. The levels of these assets are dependent on
the Association's operating, financing, lending and investing activities
during any given period. At June 30, 1996, cash and short-term investments
totaled $13.6 million.
At June 30, 1996, the Association had outstanding commitments to originate
loans of $26.7 million. The Association anticipates that it will have
sufficient funds available to meet its current loan origination commitments.
Certificates of deposit which are scheduled to mature in one year or less
45
from June 30, 1996, totaled $322.6 million. 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 Association.
Other sources of capital and liquidity for the Company include distributions
from the Association and borrowings, such as repurchase transactions.
Dividends and other capital distributions from the Association are subject to
regulatory restrictions. See "Business--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."
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 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 Association'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 Association'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
Association primarily due to the effect of the lagging market index which has
resulted in the interest income declining at a slower rate than interest
expense. This effect of the lagging index has been partially offset by the
increase in refinancings of portfolio loans to lower yielding loans.
The Association has managed its interest-rate risk through the aggressive
marketing and funding of adjustable rate loans, which generally reprice at
least semi-annually and are generally indexed to COFI. As a result of this
strategy, and based upon the assumptions used in the table set forth below, at
June 30, 1996 the Association's total net interest-earning assets maturing or
repricing within one year exceeded its total interest-bearing liabilities
maturing or repricing in the same time by $50.1 million, representing a one
year cumulative gap ratio of positive 6.91%. This compares to $154.3 million
at June 30, 1995, which represented a positive GAP ratio of 24.06%. The
decline in 1996 is primarily the result of the shortening time remaining to
maturity on the Association's certificate accounts. At June 30, 1995
certificate accounts maturing in one year or less totaled $247.1 million
compared to June 30, 1996 which totaled $348.0 million. The increase in
certificates with terms to maturity of one year or less, is primarily a result
of customers desire for shorter term certificates.
Furthermore, the Association moderately increased the level of short term
borrowings during 1996. FHLB advances and borrowings with maturities of one
year or less totalled $94.9 million at June 30,
46
1996 compared to $59.8 million at June 30, 1995. The Association closely
monitors its interest-rate risk as such risk relates to its operational
strategies. The Association'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 Association'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 Association.
The Association 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 Association does not intend to engage 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, 1996, which are
anticipated by the Association, 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 Association assumed a prepayment rate ranging from 6% to 18% on ARM loans,
and 6% to 37% on fixed-rate loans. Additionally, the Association utilized
deposit decay rate assumptions ranging from 14% to 17% for passbook accounts,
17% to 37% for checking accounts and 79% for money market deposit accounts in
the one year or less category. For information regarding the contractual
maturities of the Association's loans, investments and deposits, see
"Business-- Lending Activities," "--Investment Activities" and "--Sources of
Funds."
47
AT JUNE 30, 1996
-----------------------------------------------------------------------------------------------
MORE THAN MORE THAN MORE THAN MORE THAN MORE THAN NON-
3 MONTHS 3 MONTHS TO 6 MONTHS TO 1 YEAR TO 3 YEARS TO 5 YEARS TO MORE THAN INTEREST
OR LESS 6 MONTHS 1 YEAR 3 YEARS 5 YEARS 10 YEARS 10 YEARS BEARING TOTAL
-------- ----------- ----------- --------- ---------- ---------- --------- -------- --------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Interest-earning
deposits............... $ 4,984 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 4,984
Federal funds sold and
other short-term
investments............ 6,400 -- -- -- -- -- -- -- 6,400
Investment securities,
net(3)................. 395 -- -- 10,349 18,311 3,000 5,364 -- 37,419
Loans
receivable(1)(3)....... 372,139 127,645 20,684 24,459 21,222 20,269 26,341 -- 612,759
Mortgage-backed
securities(3).......... 17,414 4,361 6,005 1,132 -- 792 11,976 -- 41,680
FHLB stock............. 8,151 -- -- -- -- -- -- -- 8,151
-------- -------- --------- -------- ------- ------- ------- -------- --------
Total interest-
earning assets....... 409,483 132,006 26,689 35,940 39,533 24,061 43,681 -- 711,393
-------- -------- --------- -------- ------- ------- ------- -------- --------
LESS:
Unearned discount and
deferred fees(2)....... 4,069 1,379 279 267 222 220 400 -- 6,836
Allowance for loan
losses................. -- -- -- -- -- -- -- 7,833 7,833
Net interest-earning
assets................ 405,414 130,627 26,410 35,673 39,311 23,841 43,281 (7,833) 696,724
Non-interest-earning
assets................. -- -- -- -- -- -- -- 28,361 28,361
-------- -------- --------- -------- ------- ------- ------- -------- --------
Total assets......... $405,414 $130,627 $ 26,410 $ 35,673 $39,311 $23,841 $43,281 $ 20,528 $725,085
======== ======== ========= ======== ======= ======= ======= ======== ========
INTEREST-BEARING
LIABILITIES:
Money market deposits.. $ 19,574 $ 19,574 $ 17,941 $ 7,950 $ 3,786 $ 2,902 $ 542 $ -- $ 72,269
Passbook deposits...... 813 813 1,480 4,719 3,251 4,188 2,971 -- 18,235
NOW and other demand
deposits............... 2,583 2,583 4,102 8,488 2,271 3,048 1,984 -- 25,059
Certificate accounts... 131,811 106,576 109,616 25,582 15,944 6 20 -- 389,555
FHLB advances.......... 57,600 15,200 21,800 25,500 13,800 1,400 -- -- 135,300
Borrowings............. 300 -- -- -- -- -- -- -- 300
-------- -------- --------- -------- ------- ------- ------- -------- --------
Total interest-
bearing liabilities.. 212,681 144,746 154,939 72,239 39,052 11,544 5,517 -- 640,718
Non-interest bearing
liabilities............ -- -- -- -- -- -- -- 16,441 16,441
Stockholders' Equity... -- -- -- -- -- -- -- 67,926 67,926
-------- -------- --------- -------- ------- ------- ------- -------- --------
Total liabilities and
stockholders' equity. $212,681 $144,746 $ 154,939 $ 72,239 $39,052 $11,544 $ 5,517 $ 84,367 $725,085
======== ======== ========= ======== ======= ======= ======= ======== ========
Interest sensitivity
gap(4).................. $192,733 $(14,119) $(128,529) $(36,566) $ 259 $12,297 $37,764 $(63,839) $ --
======== ======== ========= ======== ======= ======= ======= ======== ========
Cumulative interest
sensitivity gap......... $192,733 $178,614 $ 50,085 $ 13,519 $13,778 $26,075 $63,839 $ -- $ --
======== ======== ========= ======== ======= ======= ======= ======== ========
Cumulative interest
sensitivity gap as a
percent of total assets. 26.58% 24.63% 6.91% 1.86% 1.90% 3.60% 8.80%
Cumulative net interest-
earning assets as a
percent of cumulative
interest-bearing
liabilities............. 190.62% 149.97% 109.78% 102.31% 102.21% 104.11% 109.97%
- -----
(1)For purposes of the gap analysis, mortgage and other loans are reduced for
non-accrual 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 and mortgage-backed securities.
(3)Includes assets held or available for sale.
(4)Interest sensitivity gap represents the difference between net-interest
earning assets and interest-bearing liabilities.
48
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.
NET INTEREST INCOME
Net interest income represents the difference between income on interest-
earning assets and expense on interest-bearing liabilities. Net interest
income also depends upon the relative amounts of interest-earning assets and
interest-bearing liabilities and the interest rate earned or paid on them.
AVERAGE BALANCE SHEET
The following table sets forth certain information relating to the Company
for the years ended June 30, 1996, 1995 and 1994. 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 Association
has discontinued accruing interest. The yields and costs include fees which
are considered adjustments to yields.
49
YEAR ENDED JUNE 30,
------------------------------------------------------------------------------- AT JUNE 30,
1996 1995 1994 1996
------------------------- ------------------------- ------------------------- -----------
YIELD/ YIELD/ YIELD/
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE RATE END
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST OF PERIOD
-------- -------- ------- -------- -------- ------- -------- -------- ------- -----------
(DOLLARS IN THOUSANDS)
ASSETS:
Interest-earning
assets:
Interest-earning
deposits............... $ 3,281 $ 25 0.76% $ 3,895 $ 43 1.10% $ 3,732 $ 44 1.18% 2.00%
Federal funds sold and
other short-term
investments............ 10,203 515 5.05 6,305 317 5.03 5,384 202 3.75 4.62
Investment securities,
net(1)................. 25,314 1,717 6.78 24,077 1,373 5.70 21,649 830 3.83 6.70
Loans receivable(2).... 577,613 47,078 8.15 502,408 36,953 7.36 438,979 33,153 7.55 8.06
Mortgage-backed
securities, net(1)..... 40,781 3,030 7.43 30,941 2,120 6.85 12,854 909 7.07 7.35
FHLB stock............. 5,814 281 4.83 4,446 236 5.31 4,139 148 3.58 5.16
-------- ------- -------- ------- -------- -------
Total interest-earning
assets................ 663,006 52,646 7.94 572,072 41,042 7.17 486,737 35,286 7.25 7.83
Non-interest earning
assets................. 14,724 16,701 15,288
-------- -------- --------
Total assets.......... $677,730 $588,773 $502,025
======== ======== ========
Liabilities and
Stockholders' equity:
Interest-bearing
liabilities:
Money market deposits.. $ 75,176 3,000 3.99 $ 56,251 1,794 3.19 $ 44,505 1,038 2.33 3.39
Passbook deposits...... 21,028 418 1.99 25,572 500 1.96 33,545 745 2.22 1.99
NOW and other demand
deposits............... 23,006 275 1.20 23,698 263 1.11 25,871 323 1.25 1.10
Certificate accounts... 370,515 21,396 5.78 346,457 17,755 5.12 313,883 14,772 4.71 5.66
-------- ------- -------- ------- -------- -------
Total savings accounts. 489,725 25,089 451,978 20,312 417,804 16,878 4.04 4.91
FHLB advances.......... 96,789 5,572 5.76 46,029 2,596 5.64 12,583 566 4.50 5.87
Securities sold under
agreements
to repurchase.......... 8,283 490 5.92 11,342 595 5.25 293 12 4.10 5.57
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities........... 594,797 31,151 5.26 509,349 23,503 4.61 430,680 17,456 4.05 5.10
Non-interest-bearing
liabilities............ 14,921 13,593 14,896
Stockholders' equity... 68,012 65,831 56,449
-------- -------- --------
Total liabilities and
stockholders' equity... $677,730 $588,773 $502,025
======== ------- ======== ------- ======== -------
Net interest rate
spread(3).............. $21,495 2.68% $17,539 2.56% $17,830 3.20%
======= ====== ======= ====== ======= ======
Net interest margin(4). 3.24% 3.07% 3.66%
====== ====== ======
Ratio of interest-
earning assets to
interest-bearing
liabilities............ 111.47% 112.31% 113.02%
====== ====== ======
- ----
(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 non-accrual 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.
50
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, 1996 YEAR ENDED JUNE 30, 1995
COMPARED TO COMPARED TO
YEAR ENDED JUNE 30, 1995 YEAR ENDED JUNE 30, 1994
-------------------------- --------------------------
INCREASE (DECREASE) IN INCREASE (DECREASE) IN
NET NET
INTEREST INCOME INTEREST INCOME
-------------------------- --------------------------
DUE TO DUE TO
---------------- -----------------
VOLUME RATE NET VOLUME RATE NET
---------------- -------- ----------------- -------
(IN THOUSANDS)
Interest-earning assets:
Interest-earning
deposits.............. $ (4) $ 6 $ 2 $ 2 $ (3) $ (1)
Federal funds sold and
other short-term
investments........... 189 (11) 178 38 77 115
Investment securities,
net(2)................ 73 271 344 101 442 543
Loans receivable,
net(1), (2)........... 5,895 4,230 10,125 4,601 (801) 3,800
Mortgage-backed
securities, net(2).... 719 191 910 1,238 (27) 1,211
FHLB stock............. 64 (19) 45 12 76 88
------- ------- -------- ------- -------- -------
Total interest-
earning assets...... 6,936 4,668 11,604 5,992 (236) 5,756
------- ------- -------- ------- -------- -------
Interest-bearing
liabilities:
Money market deposits.. 691 515 1,206 315 441 756
Passbook deposits...... (89) 7 (82) (164) (81) (245)
NOW and other demand
deposits.............. (7) 19 12 (26) (34) (60)
Certificate accounts... 1,281 2,360 3,641 1,622 1,361 2,983
FHLB advances.......... 2,921 55 2,976 1,853 177 2,030
Other borrowings....... 514 (619) (105) 560 23 583
------- ------- -------- ------- -------- -------
Total interest-
bearing liabilities. 5,311 2,337 7,648 4,160 1,887 6,047
------- ------- -------- ------- -------- -------
Change in net interest
income................. $ 1,625 $ 2,331 $ 3,956 $ 1,832 $ (2,123) $ (291)
======= ======= ======== ======= ======== =======
- --------
(1) Includes non-accrual loans.
(2) Includes assets held or available for sale.
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 Association's operations. Unlike industrial companies, nearly all
of the assets and liabilities of the Association are monetary in nature. As a
result, interest rates have a greater impact on the Association'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 "--Asset/Liability Management."
51
IMPACT OF NEW ACCOUNTING STANDARDS
In November 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." This statement establishes financial accounting standards for
stock-based employee compensation plans. SFAS No. 123 permits the Company to
choose either a new fair-value-based method or the current APB Opinion 25
intrinsic valued-based method of accounting for its stock-based compensation
arrangements with pro forma disclosures of net earnings and earnings per share
computed as if the fair-value-based method had been applied. SFAS No. 123 is
effective for fiscal years beginning after December 15, 1995. It is not
expected that SFAS No. 123 will have a material effect on the Company's
financial condition or results of operations.
In June 1996, the FASB issued SFAS 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." This
statement specifies when financial assets and liabilities are to be removed
from an entity's financial statements, specifies the accounting for servicing
assets and liabilities, and the accounting for assets that can be
contractually prepaid in such a way that the holder would not recover
substantially all of its recorded investment.
Under SFAS 125, an entity recognizes only assets it controls and liabilities
it has incurred, derecognizes assets only when control has been surrendered,
and derecognizes liabilities only when they have been extinguished. SFAS 125
requires that the selling entity continue to carry retained interests,
including servicing assets, in assets it has derecognized. Such retained
interests are based on their relative fair values at the date of transfer.
Transfers not meeting the criteria for sale recognition are accounted for as a
secured borrowing with pledge of collateral. Under SFAS 125 certain
collateralized borrowings may result in asset derecognition when the assets
provided as collateral may be derecognized based on whether the secured party
takes control over the collateral and whether the secured party is: (1)
permitted to repledge or sell the collateral; and (2) the debtor does not have
the right to redeem the collateral on short notice. Extinguishments of
liabilities are recognized only when the debtor pays the creditor and is
relieved of its obligation for the liability or when the debtor is legally
released from being the primary obligor under the liability, either
judicially, or by the creditor.
SFAS 125 requires an entity to recognize its obligation to service financial
assets, that are retained in a transfer of assets, in the form of a servicing
asset or liability. The servicing asset or liability is to be amortized in
proportion to and over the period of net servicing income or loss. Servicing
assets and liabilities are to be assessed for impairment based on their fair
value.
SFAS 125 modifies the accounting for interest-only strips or retained
interests in securitizations, such as capitalized servicing fees receivable,
that can contractually be prepaid or otherwise settled in such a way that the
holder would not recover substantially all of its recorded investment, to
require their classification as available for sale or as trading securities.
Interest-only strips and retained interests are to be recorded at market
value. Changes in market value are included in stockholders' equity as
unrealized holding gains or losses net of the related tax effect.
SFAS 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is
required to be applied prospectively. The Association enters into transactions
covered by SFAS 125, including sales of securities under agreements to
repurchase, collateralized borrowings from the Federal Home Loan Bank and
others. The Association does not anticipate a material impact on transactions
covered by SFAS 125.
52
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report............................................... 54
Consolidated Statements of Financial Condition as of June 30, 1996 and
1995...................................................................... 55
Consolidated Statements of Operations for Each of the Years in the Three-
Year Period Ended June 30, 1996........................................... 56
Consolidated Statements of Stockholders' Equity for Each of the Years in
the Three-Year Period Ended June 30, 1996................................. 57
Consolidated Statements of Cash Flows for Each of the Years in the Three-
Year Period Ended June 30, 1996........................................... 58
Notes to Consolidated Financial Statements................................. 60
53
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. (the Company) and subsidiaries as of
June 30, 1996 and 1995 and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended June 30, 1996. 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 generally accepted auditing
standards. 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, 1996 and 1995 and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 1996 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Los Angeles, California
July 30, 1996
54
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
1996 1995
ASSETS -------- -------
Cash and due from banks.................................... $ 2,184 2,430
Interest-bearing deposits.................................. 4,984 7,468
Federal funds sold and other short-term investments........ 6,400 9,450
Investment securities held to maturity (fair value of
$36,808 at June 30, 1996 and $23,920 at June 30, 1995)
(note 2).................................................. 37,419 23,898
Investment securities available for sale, at fair value
(note 2).................................................. -- 150
Loans receivable, net (notes 3 and 9)...................... 607,672 537,478
Loans receivable held for sale (fair value of $2,890 at
June 30, 1996 and $1,671 at June 30, 1995) (note 3)....... 2,890 1,666
Mortgage-backed securities held to maturity (fair value of
$41,561 at June 30, 1996 and $40,631 at June 30, 1995)
(note 4).................................................. 41,175 39,993
Real estate held for sale (note 5)......................... 3,058 2,743
Federal Home Loan Bank stock, at cost (notes 6 and 9)...... 8,151 4,736
Office premises and equipment, net (note 7)................ 4,176 3,992
Accrued interest receivable and other assets (notes 2, 3, 4
and 11)................................................... 6,976 7,169
-------- -------
$725,085 641,173
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (note 8)......................................... $512,517 481,158
Federal Home Loan Bank advances (notes 3, 6 and 9)........ 135,300 63,950
Securities sold under agreements to repurchase (note 10).. 300 22,873
Deferred tax liability (note 11).......................... 1,174 --
Accounts payable and accrued expenses (note 11)........... 2,870 3,419
Other liabilities (note 8)................................ 4,998 3,332
-------- -------
Total liabilities...................................... 657,159 574,732
-------- -------
Stockholders' equity (notes 12 and 17):
Common stock, $.01 par value. Authorized 10,000,000
shares; issued and outstanding 3,813,600 shares and
4,014,100 at June 30, 1996 and 1995, respectively........ 38 40
Additional paid-in capital................................ 27,017 28,260
Retained earnings, substantially restricted (note 11)..... 43,515 41,437
Deferred compensation (notes 13 and 14)................... (2,644) (3,296)
-------- -------
Total stockholders' equity............................. 67,926 66,441
Commitments and contingent liabilities (notes 3 and 15)
-------- -------
$725,085 641,173
======== =======
See accompanying notes to consolidated financial statements.
55
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE DATA)
1996 1995 1994
--------- --------- ---------
Interest income:
Loans receivable............................... $ 47,078 36,953 33,153
Mortgage-backed securities..................... 3,030 2,120 909
Investment securities.......................... 1,717 1,373 830
Other.......................................... 821 596 394
--------- --------- ---------
Total interest income....................... 52,646 41,042 35,286
--------- --------- ---------
Interest expense:
Deposits (note 8).............................. 25,089 20,312 16,878
Federal Home Loan Bank advances and other
borrowings.................................... 6,062 3,191 578
--------- --------- ---------
Total interest expense...................... 31,151 23,503 17,456
--------- --------- ---------
Net interest income before provision for
loan losses................................ 21,495 17,539 17,830
Provision for loan losses (note 3).............. 2,103 998 10,200
--------- --------- ---------
Net interest income after provision for loan
losses..................................... 19,392 16,541 7,630
--------- --------- ---------
Other income:
Loan servicing charges and fees................ 1,629 1,490 1,675
Gain on sale of loans held for sale............ 175 86 511
Commissions.................................... 606 420 481
Other.......................................... 79 84 189
--------- --------- ---------
2,489 2,080 2,856
--------- --------- ---------
Other expense:
Compensation and employee benefits (notes 13
and 14)....................................... 7,565 7,371 6,411
Occupancy, net................................. 1,970 1,894 1,833
Federal deposit insurance premiums............. 1,254 1,115 1,101
Other general and administrative expense....... 3,991 3,704 3,677
--------- --------- ---------
Total general and administrative expense.... 14,780 14,084 13,022
Real estate operations, net (note 5)........... 656 646 1,105
Amortization of core deposit intangible........ 303 303 303
--------- --------- ---------
15,739 15,033 14,430
--------- --------- ---------
Earnings (loss) before income taxes......... 6,142 3,588 (3,944)
Income taxes (benefit) (note 11)................ 2,573 1,267 (1,613)
--------- --------- ---------
Net earnings (loss)......................... $ 3,569 2,321 (2,331)
========= ========= =========
Net earnings (loss) per share (notes 1 and 17).. $ .92 .60 (.66)
========= ========= =========
Weighted average shares outstanding............. 3,871,290 3,850,176 4,140,000
========= ========= =========
See accompanying notes to consolidated financial statements.
56
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(IN THOUSANDS)
RETAINED
ADDITIONAL EARNINGS
COMMON PAID-IN SUBSTANTIALLY DEFERRED
SHARES STOCK CAPITAL RESTRICTED COMPENSATION TOTAL
------ ------ ---------- ------------- ------------ ------
Balance, June 30, 1993.. -- $-- -- 41,834 -- 41,834
Net loss................ -- -- -- (2,331) -- (2,331)
Proceeds from issuance
of stock............... 4,140 41 29,083 -- -- 29,124
Purchase of shares for
deferred compensation
plans.................. -- -- -- -- (4,347) (4,347)
Deferred compensation
amortized to expense... -- -- -- -- 358 358
----- ---- ------ ------ ------ ------
Balance, June 30, 1994.. 4,140 41 29,083 39,503 (3,989) 64,638
Net earnings............ -- -- -- 2,321 -- 2,321
Repurchase and
retirement of stock.... (136) (1) (1,018) (387) -- (1,406)
Proceeds from exercise
of stock options....... 10 -- 75 -- -- 75
Deferred compensation
amortized to expense... -- -- 120 -- 693 813
----- ---- ------ ------ ------ ------
Balance, June 30, 1995.. 4,014 40 28,260 41,437 (3,296) 66,441
Net earnings............ -- -- -- 3,569 -- 3,569
Repurchase and
retirement of stock.... (234) (2) (1,756) (1,491) -- (3,249)
Proceeds from exercise
of stock options....... 34 -- 255 -- -- 255
Deferred compensation
amortized to expense... -- -- 258 -- 652 910
----- ---- ------ ------ ------ ------
Balance, June 30, 1996.. 3,814 $ 38 27,017 43,515 (2,644) 67,926
===== ==== ====== ====== ====== ======
See accompanying notes to consolidated financial statements.
57
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(IN THOUSANDS)
1996 1995 1994
-------- -------- --------
Cash flows from operating activities:
Net earnings (loss)............................ $ 3,569 2,321 (2,331)
-------- -------- --------
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Depreciation and amortization................ (634) (219) (4)
Provision for loan losses.................... 2,103 998 10,200
Write-downs and provision for losses on real
estate held for sale........................ 252 589 499
Provision for deferred income taxes.......... 1,407 1,406 (1,993)
Gain on sale of loans held for sale.......... (175) (86) (511)
Loans originated for sale.................... (28,922) (12,214) (47,554)
Sale of loans held for sale.................. 27,662 10,321 54,869
Federal Home Loan Bank (FHLB) stock dividend
received.................................... (263) (223) (159)
Increase in accrued interest receivable and
other assets................................ (343) (2,579) (92)
Increase (decrease) in other liabilities..... 1,666 1,676 (3,415)
Increase (decrease) in accounts payable and
accrued expenses............................ (549) 1,590 54
Other........................................ 1,502 (2,273) 1,631
-------- -------- --------
Total adjustments.......................... 3,706 (1,014) 13,525
-------- -------- --------
Net cash provided by operating activities.. 7,275 1,307 11,194
-------- -------- --------
Cash flows from investing activities:
Loans originated for investment................ (93,424) (94,050) (107,394)
Loans purchased for investment................. (27,789) (24,792) (4,773)
Principal repayments on loans.................. 48,032 39,295 64,063
Sale of investment securities available for
sale.......................................... 2,550 14,900 51,034
Purchases of investment securities available
for sale...................................... (2,400) (14,580) (40,984)
Purchases of investment securities held to
maturity...................................... (45,149) (17,055) (20,560)
Maturities and principal repayments of
investment securities held to maturity........ 31,638 12,021 11,000
Sale of MBS available for sale................. 1,754 -- --
Purchases of MBS held to maturity.............. (13,766) (28,102) (4,298)
Principal payments on MBS held to maturity..... 11,157 2,906 3,134
Sale of real estate held for sale.............. 1,393 1,139 1,829
Purchase of FHLB stock......................... (3,152) (314) --
Investment in office premises and equipment.... (1,041) (325) (259)
-------- -------- --------
Net cash used by investing activities...... (90,197) (108,957) (47,208)
-------- -------- --------
(Continued)
58
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(IN THOUSANDS)
1996 1995 1994
--------- -------- --------
Cash flows from financing activities:
Increase (decrease) in deposits............... $ 31,359 57,198 (12,380)
Proceeds from funding of FHLB advances........ 363,780 309,450 126,000
Repayments of FHLB advances................... (292,430) (258,500) (115,000)
Proceeds from securities sold under agreement
to repurchase................................ 74,078 129,683 7,019
Repayments of securities sold under agreement
to repurchase................................ (96,651) (113,829) --
Proceeds from issuance of stock............... -- -- 29,124
Repurchase of stock........................... (3,249) (1,406) --
Common stock options exercised................ 255 75 --
Purchase of shares for deferred compensation
plans........................................ -- -- (4,347)
--------- -------- --------
Net cash provided by financing activities... 77,142 122,671 30,416
--------- -------- --------
Increase (decrease) in cash and cash
equivalents................................ (5,780) 15,021 (5,598)
Cash and cash equivalents at beginning of year.. 19,348 4,327 9,925
--------- -------- --------
Cash and cash equivalents at end of year........ $ 13,568 19,348 4,327
========= ======== ========
Supplemental disclosures of cash flow
information:
Interest paid (including interest credited)... $ 30,987 23,436 17,464
Cash paid for income taxes.................... 1,155 785 1,548
========= ======== ========
Supplemental schedule of noncash investing and
financing activities:
Additions to loans resulting from the sale of
real estate acquired through foreclosure..... $ 5,580 7,407 3,170
Additions to real estate acquired through
foreclosure.................................. 7,764 8,593 4,174
========= ======== ========
See accompanying notes to consolidated financial statements.
59
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1995
(1) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNT POLICIES
As more fully described in note 17, pursuant to a plan of conversion, Quaker
City Federal Savings and Loan Association (the Association) converted from a
Federally chartered mutual savings and loan to a Federally chartered stock
savings association effective December 30, 1993. Quaker City Bancorp, Inc.
(the Company), a Delaware corporation organized by the Association, acquired
all of the capital stock of the Association issued in the conversion. Any
references to financial information for periods prior to December 30, 1993
refer to the Association prior to conversion.
The following accounting policies, together with those disclosed elsewhere
in the consolidated financial statements, represent the significant accounting
policies of Quaker City Bancorp, Inc. and subsidiaries.
Principles of Consolidation and Presentation
The consolidated financial statements include the accounts of Quaker City
Bancorp, Inc., Quaker City Neighborhood Development, Inc., Quaker City Federal
Savings and Loan Association and its wholly owned subsidiary, Quaker City
Financial Corporation. Quaker City Financial Corporation includes the accounts
of FGK, a 92.8%-owned joint venture. 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.
The Association is engaged primarily in the savings and loan business. At
June 30, 1996, the Association operated eight retail banking offices in
Southern California. The Association is subject to significant competition
from other financial institutions, and is also subject to the regulations of
various government agencies and undergoes periodic examinations by those
regulatory authorities.
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. Actual results could differ from those estimates.
Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" (SFAS No. 107), requires 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 is
financial instruments as defined under SFAS No. 107. SFAS No. 107 requires
that the Company disclose fair values for its financial instruments. Fair
values, estimates and assumptions are set forth in note 20, 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.
60
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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's lending activities are primarily
concentrated in Southern California.
The market risk of a financial instrument is the possibility that future
changes in market prices may reduce the value of a financial instrument or
increase the contractual obligations of the Company. The Company's market risk
is concentrated in its portfolios of loans receivable and real estate acquired
through foreclosure. When a borrower fails to meet the contractual
requirements of his loan agreement, the Company is subject to the market risk
of the collateral securing the loan. Likewise, the Company is subject to the
volatility of real estate prices with respect to real estate acquired by
foreclosure. The Company's securities available for sale are traded in active
markets. The value of these securities is susceptible to the fluctuations of
the market.
Interest Rate Risk
Financial instruments are subject to interest rate risk to the extent that
they reprice on a frequency degree or basis that varies from market pricing.
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 market interest rates.
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. At June 30, 1996 and 1995, short-term investments
included separate notes to the City of Whittier in the amount of $2.3 million
and $2.4 million, respectively. Generally, Federal funds sold and short-term
investments are held for one-day periods.
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 (or the foreseeable
future for loans), 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 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. Loans held for sale are
carried at the lower of amortized historical cost or fair value. 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.
61
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
temporary declines in fair value since the Company has the positive intent and
ability to hold them to maturity.
Interest Income on Loans Receivable
Interest income on loans receivable is accrued as it is earned. The Company
defers and amortizes both the loan origination fees and the incremental direct
costs relating to the origination of the loan. The deferred origination fees
and costs 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 Association's allowance for loan losses. These
agencies may require the Association to establish additional valuation
allowances, based on their judgments of the information available at the time
of the examination.
Loan Sales and Servicing
The Company sells loans and participations in loans for cash proceeds equal
to the fair value of the loans and participations sold, with yield rates to
the investors based upon current market rates. Gain or loss is recognized
equal to the difference between the cash proceeds received and the carrying
value of the loans and participations sold. Loan sales may also result in
gains or losses at the time of sale based upon the net present value of the
amounts expected to be received resulting from the difference between the
contractual interest rates received from the borrowers and the rates paid to
the investors, net of a normal servicing fee.
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights," which amends SFAS No. 65, "Accounting for Certain Mortgage
Banking Activities." This statement is effective for financial statements
issued for fiscal years beginning after December 15, 1995 and is required to
be adopted prospectively. This statement amends certain provisions of SFAS No.
65 to eliminate the accounting distinction between rights to service mortgage
loans for others that are acquired through loan origination activities and
those acquired through purchase transactions. This statement requires that a
mortgage banking enterprise measure mortgage servicing rights at cost by
allocating the cost of the mortgage loans between the mortgage servicing
rights and the mortgage
62
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
loans based on their relative fair values. SFAS No. 122 will require the
Company to disclose the fair value of the mortgage servicing rights and the
methods and significant assumptions used to estimate that fair value. The
Company intends to implement SFAS No. 122 during fiscal year 1997 and does not
believe there will be a material impact on its financial condition or results
of operations upon adoption.
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. 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.
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets." This statement is effective for financial statements
issued for fiscal years beginning after December 15, 1995. SFAS No. 121
requires that long-lived assets and certain identifiable intangibles to be
held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. In performing the review for recoverability, the entity should
estimate the future cash flows expected to result from the use of the asset
and its eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount
of the asset, an impairment loss is recognized. Otherwise, an impairment loss
is not recognized. Measurement of an impairment loss for long-lived assets and
identifiable intangibles that an entity expects to hold and use should be
based on the fair value of the asset. An impairment loss for assets to be held
and used shall be reported as a component of income from continuing operations
before income taxes. SFAS No. 121 will require the Company to disclose a
description of the impaired assets and the facts and circumstances leading to
the impairment, the amount of the impairment loss and how fair value was
determined and a caption in the income statement or parenthetical reference on
the face of the statement. The Company intends to implement SFAS No. 121
during fiscal year 1997 and does not believe there will be a material impact
on its financial condition or results of operations upon adoption.
Core Deposit Premium
The Company has acquired customer deposit accounts from financial
institutions in its market area. The core deposit premium amounting to
$299,000 and $602,000, respectively, at June 30, 1996 and 1995 relates to the
value of the depositor relationship and is an identifiable intangible which is
amortized over a five-year period using the straight-line method.
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.
63
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes
Deferred tax liabilities are recognized on all taxable temporary differences
(reversing differences where tax deductions initially exceed financial
statement expense, or income is reported for financial statement purposes
prior to being reported for tax purposes). In addition, deferred tax assets
are recognized on all deductible temporary differences (reversing differences
where financial statement expense initially exceeds tax deductions, or income
is reported for tax purposes prior to being reported for financial statement
purposes) and operating loss and tax credit carryforwards. Valuation
allowances are established to reduce deferred tax assets if it is determined
to be "more likely than not" that all or some portion of the potential
deferred tax assets will not be realized. A deferred tax asset may be
recognized for the financial statement general valuation allowance for loans
and REO, while a deferred tax liability must be recognized for that portion of
the tax bad debt reserve exceeding the "base year" reserves, and current tax
benefits based upon the future implementation of tax planning strategies
should be net of any expenses or losses, and the underlying strategy must be
prudent and feasible.
Other Recent Accounting Pronouncements
In November 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." This statement establishes financial accounting standards for
stock-based employee compensation plans. SFAS No. 123 permits the Company to
choose either a new fair-value-based method or the current APB Opinion 25
intrinsic valued-based method of accounting for its stock-based compensation
arrangements with pro forma disclosures of net earnings and earnings per share
computed as if the fair-value-based method had been applied. SFAS No. 123 is
effective for fiscal years beginning after December 15, 1995. It is not
expected that SFAS No. 123 will have a material effect on the Company's
financial condition or results of operations.
In June 1996, the FASB issued SFAS 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." This
statement specifies when financial assets and liabilities are to be removed
from an entity's financial statements, specifies the accounting for servicing
assets and liabilities, and the accounting for asset's that can be
contractually prepaid in such a way that the holder would not recover
substantially all of its recorded investment.
Under SFAS 125, an entity recognizes only assets it controls and liabilities
it has incurred, derecognizes assets only when control has been surrendered,
and derecognizes liabilities only when they have been extinguished. SFAS 125
requires that the spelling entity continue to carry retained interests,
including servicing assets, in assets it has derecognized. Such retained
interests are based on their relative fair values at the date of transfer.
Transfers not meeting the criteria for sale recognition are accounted for as a
secured borrowing with pledge of collateral. Under SFAS 125 certain
collateralized borrowings may result in asset derecognition when the assets
provided as collateral may be derecognized based on whether the secured party
takes control over the collateral and whether the secured party is: (1)
permitted to repledge or sell the collateral; and (2) the debtor does not have
the right to redeem the collateral on short notice. Extinguishments of
liabilities are recognized only when the debtor pays the creditor and is
relieved of its obligation for the liability or when the debtor is legally
released from being the primary obligor under the liability, either judicially
or by the creditor.
SFAS 125 requires an entity to recognize its obligation to service financial
assets, that are retained in a transfer of assets, in the form of a servicing
asset or liability. The servicing asset or liability is to be amortized in
proportion to and over the period of net servicing income or loss. Servicing
assets and liabilities are to be assessed for impairment based on their fair
value.
64
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SFAS 125 modifies the accounting for interest-only strips or retained
interests in securitizations, such as capitalized servicing fees receivable,
that can contractually be prepaid or otherwise settled in such a way that the
holder would not recover substantially all of its recorded investment, to
require their classification as available for sale or as trading securities.
Interest-only strips and retained interests are to be recorded at fair value.
Changes in fair value are included in stockholders' equity as unrealized
holding gains or losses, net of the related tax effect.
SFAS 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is
required to be applied prospectively. The Company has entered into
transactions covered by SFAS 125, including sales of securities under
agreements to repurchase, collateralized borrowings from the Federal Home Loan
Bank and others. The Company does not anticipate a material impact on
transactions covered by SFAS 125.
(2) INVESTMENT SECURITIES
The following table provides a summary of investment securities with a
comparison of carrying and fair values:
GROSS GROSS
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
-------- ---------- ---------- ------
(IN THOUSANDS)
June 30, 1996:
Held to maturity:
U.S. Government and Federal agency
obligations......................... $37,048 -- (611) 36,437
Municipal bonds...................... 371 -- -- 371
------- --- ---- ------
Total.............................. $37,419 -- (611) 36,808
======= === ==== ======
June 30, 1995:
Held to maturity:
U.S. Government and Federal agency
obligations......................... $23,509 22 -- 23,531
Municipal bonds...................... 389 -- -- 389
------- --- ---- ------
23,898 22 -- 23,920
Available for sale--mutual funds....... 150 -- -- 150
------- --- ---- ------
Total.............................. $24,048 22 -- 24,070
======= === ==== ======
At June 30, 1996 and 1995, the Company had accrued interest receivable on
investment securities of $262,000 and $249,000, respectively, which is
included in accrued interest receivable and other assets in the accompanying
consolidated statements of financial condition.
Proceeds from sales of investment securities available for sale were $2.6
million, $14.9 million and $51.0 million during 1996, 1995 and 1994,
respectively. There were no gross gains realized in 1996 and 1995. Gross gains
of $12,000 were realized on such sales during 1994. There were no gross losses
realized during 1996, 1995 and 1994.
65
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The remaining contractual principal maturities for investment securities as
of June 30, 1996 are as follows:
REMAINING CONTRACTUAL PRINCIPAL MATURITY
---------------------------------------------
MATURING
MATURING 1 YEAR MATURING MATURING
WITHIN TO 5 YEARS TO AFTER
TOTAL 1 YEAR 5 YEARS 10 YEARS 10 YEARS
------- -------- -------- ---------- --------
(IN THOUSANDS)
U.S. Government and Federal
agency obligations.............. $37,048 395 28,026 3,635 4,992
Municipal bonds.................. 371 -- -- -- 371
------- --- ------ ----- -----
Total.......................... $37,419 395 28,026 3,635 5,363
======= === ====== ===== =====
(3) LOANS RECEIVABLE, NET
The following table presents carrying values of loans receivable at the
dates indicated:
JUNE 30
----------------
1996 1995
-------- -------
(IN THOUSANDS)
Real estate:
Residential:
One to four units....................................... $303,273 288,664
Multifamily............................................. 258,970 205,731
Commercial and land....................................... 61,860 61,755
-------- -------
624,103 556,696
Other....................................................... 627 546
-------- -------
624,730 556,696
Less:
Undisbursed loan funds.................................... 378 187
Unamortized discounts..................................... 2,864 2,815
Deferred loan fees, net................................... 3,093 2,442
Allowance for loan losses................................. 7,833 12,108
-------- -------
610,562 539,144
-------- -------
Less:
Held for sale--residential real estate:
One to four units....................................... 1,455 400
Multifamily............................................. 1,435 1,266
-------- -------
2,890 1,666
-------- -------
Held to maturity............................................ $607,672 537,478
======== =======
The weighted average interest rate of the Company's loan portfolio was 8.06%
and 7.73% at June 30, 1996 and 1995 respectively.
Certain mortgage loans aggregating $216.3 million and $159.6 million at June
30, 1996 and 1995, respectively, are collateral for FHLB advances.
The Association originated loans with an outstanding balance of $5.7 million
at June 30, 1996, under an agreement with the City of Los Angeles to guarantee
up to $10 million of multifamily housing
66
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
revenue bonds primarily for the acquisition and renovation of earthquake-
stricken properties. In conjunction with this guarantee, a standby letter of
credit was issued by the Federal Home Loan Bank. During the fiscal year ended
June 30, 1996, the Association entered into an agreement with the City of Los
Angeles to guarantee up to an additional $5 million of multifamily housing
revenue bonds. At June 30, 1996, no loans were originated under this
agreement. In conjunction with this guarantee, a standby letter of credit was
issued by the Federal Home Loan Bank.
Prior to 1991, the Association sold loans with various recourse provisions.
At June 30, 1996 and 1995, the principal balances outstanding of loans sold
with recourse totaled $1.9 million and $3.3 million, respectively.
At June 30, 1996 and 1995, the Association had accrued interest receivable
on loans of $4.0 million and $3.2 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 $212.6 million, $204.7
million and $221.6 million at June 30, 1996, 1995 and 1994, respectively.
Activity in the allowance for loan losses is summarized as follows:
JUNE 30
-----------------------
1996 1995 1994
------- ------ ------
(IN THOUSANDS)
Accumulated through a charge to earnings:
Balance at beginning of year......................... $10,614 13,458 4,833
Provision for loan losses............................ 2,103 998 10,200
Charge-offs, net..................................... (6,175) (3,842) (1,575)
------- ------ ------
Balance at end of year............................... 6,542 10,614 13,458
------- ------ ------
Valuation allowance for portfolios acquired:
Balance at beginning of year......................... 1,494 202 246
Purchases............................................ 294 1,308 --
Charge-offs.......................................... (471) -- --
Reductions credited.................................. (26) (16) (44)
------- ------ ------
Balance at end of year............................... 1,291 1,494 202
------- ------ ------
Total allowance for loan losses.................... $ 7,833 12,108 13,660
======= ====== ======
Since 1990, the Company has purchased loans from independent parties in
various transactions. In some cases, loans were purchased at a discount from
par with a portion of such discount attributed to credit risk associated with
the purchased loans. In such instances, as part of the acquisition, the
Company has recorded a valuation allowance to reflect credit risk inherent in
the purchased portfolio. Such valuation allowances have been specifically
allocated to the corresponding assets purchased and are accounted for
separately from the valuation allowances that have been accumulated through a
charge to earnings. In addition, any discounts on purchased loans applicable
to credit risk are separate and apart from discounts due to yield adjustments.
Credit Risk and Concentration
At June 30, 1996 and 1995, the principal balances of nonaccrual loans
totaled $12.3 million and $11.5 million, respectively. 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, 1996 and 1995.
67
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The gross amount of interest income on nonaccrual loans that would have been
recorded during the years ended June 30, 1996, 1995 and 1994 if the nonaccrual
loans had been current in accordance with their original terms was $1,100,000,
$920,000 and $1,135,000, respectively. For the years ended June 30, 1996, 1995
and 1994, $565,000, $497,000 and $614,000, respectively, were actually earned
on nonaccrual loans and are included in interest income on loans in the
accompanying consolidated statements of operations.
Effective July 1, 1995, the Company adopted No. 114, "Accounting by
Creditors for Impairment of a Loan." SFAS No. 114 was subsequently amended by
SFAS No. 118, "Accounting by Creditors for Impairment of Loan--Income
Recognition and Disclosure." 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 adoption of SFAS 114 and 118 did not result in additional
charge-offs, provisions for loan losses or changes in previously reported
earnings, primarily because of the Company's historical practice of measuring
loan impairment based upon the fair value of the loan's underlying collateral
property, which is an acceptable methodology under the provisions contained in
SFAS 114 and 118.
At June 30, 1996, the Company had a gross investment in impaired loans of
$8.6 million, including $6.7 million for which allowances of $1.6 million had
been recorded and $1.9 million for which no allowances were required. During
the year ended June 30, 1996, the Company's average investment in impaired
loans was $11.8 million and income recorded on impaired loans totaled
$611,000, substantially all of which was recorded utilizing the cash-basis
method of accounting. Payments received on impaired loans which are performing
under their contractual terms are allocated to principal and interest in
accordance with the terms of the loans. Impaired loans totaling $6.4 million
were not performing in accordance with their contractual terms at June 30,
1996 and have been included in nonaccrual loans at that date.
The Company has reached agreements with certain borrowers that provide for
the restructuring of existing loans secured by income-producing properties.
Restructurings are generally in the form of interest rate adjustments,
extensions of maturities or deferred payments of principal or interest. At
June 30, 1996, the Company had $234,000 of such loans which were modified
prior to the implementation of SFAS 114 and which were performing in
accordance with their modified terms. The Company accounts for such loans
under the provision of SFAS No. 15, "Accounting by Debtors and Creditors for
Troubled Debt Restructuring," as permitted under SFAS 114.
Substantially all of the Company's real estate loans are secured by
properties located in Southern California.
68
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(4) MORTGAGE-BACKED SECURITIES
Summarized below are the carrying and estimated fair values of mortgage-
backed securities:
JUNE 30, 1996
-------------------------------------
GROSS GROSS
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
-------- ---------- ---------- ------
(IN THOUSANDS)
Held to maturity:
GNMA, FNMA and FHLMC
securities............... $20,613 14 -- 20,627
Issued by other financial
institutions............. 5,725 58 -- 5,783
Collateralized mortgage
obligations.............. 14,837 314 -- 15,151
------- --- --- ------
Total................... $41,175 386 -- 41,561
======= === === ======
JUNE 30, 1995
-------------------------------------
GROSS GROSS
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
-------- ---------- ---------- ------
(IN THOUSANDS)
Held to maturity:
FNMA and FHLMC securities. $13,264 290 -- 13,554
Issued by other financial
institutions............. 11,194 -- (20) 11,174
Collateralized mortgage
obligations.............. 15,535 368 -- 15,903
------- --- --- ------
Total................... $39,993 658 (20) 40,631
======= === === ======
The remaining contractual principal maturities for mortgage-backed
securities as of June 30, 1996, all held to maturity, are as follows:
REMAINING CONTRACTUAL PRINCIPAL MATURITY
-------------------------------------------------
MATURITY MATURITY 1 MATURITY MATURITY
WITHIN YEAR TO 5 YEARS TO AFTER
TOTAL 1 YEAR 5 YEARS 10 YEARS 10 YEARS
------- ---------- ---------- ---------- -----------
(IN THOUSANDS)
GNMA, FNMA and FHLMC
securities............. $20,613 -- -- 794 19,819
Issued by other
financial institutions. 5,725 2,481 3,244
Collateralized mortgage
obligations............ 14,837 -- 1,133 -- 13,704
------- -------- ---------- ---------- -----------
Total................. $41,175 -- 1,133 3,275 36,767
======= ======== ========== ========== ===========
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.
In November 1995, the FASB issued a Special Report as an aid in
understanding and implementing SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The Special Report included
guidance that allowed the Company to review the appropriateness of the
classifications of all securities held. Any reclassifications would be
accounted for at fair value in accordance with SFAS No. 115. In accordance
with the Special Report, during the second quarter of 1996, the Company
transferred a $1.8 million mortgage-backed security from the held to maturity
portfolio to the available for sale portfolio. This mortgage-backed security
was subsequently sold.
69
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
There were no mortgage-backed securities sold during 1995 and 1994.
The collateralized mortgage obligations held at June 30, 1996 and 1995
represented nonequity interests in mortgage pass-through certificates (Class
A-1) and were of investment grade.
The Company had accrued interest receivable on mortgage-backed securities of
$232,000 and $181,000 at June 30, 1996 and 1995, 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
------------
1996 1995
------ -----
(IN
THOUSANDS)
Acquired through foreclosure.................................. $2,260 1,870
Held for development.......................................... 798 873
------ -----
$3,058 2,743
====== =====
Changes in the valuation allowance on real estate held for sale are
summarized as follows:
JUNE 30
---------------
1996 1995 1994
---- ---- -----
(IN THOUSANDS)
Balance at beginning of year.............................. $175 115 95
Additions charged to operations........................... -- 60 20
---- --- -----
Balance at end of year.................................... $175 175 115
==== === =====
The following table summarizes real estate operations, net:
JUNE 30
---------------
1996 1995 1994
---- ---- -----
(IN THOUSANDS)
Net loss from operations:
Real estate held for development.......................... $ 46 6 72
Losses on sales and operations of foreclosed real estate
owned.................................................... 358 51 534
---- --- -----
404 57 606
Provisions for estimated losses........................... -- 60 20
Write-downs............................................... 252 529 479
---- --- -----
Real estate operations, net............................... $656 646 1,105
==== === =====
(6) FEDERAL HOME LOAN BANK (FHLB) STOCK
As a member of the FHLB System, the Association 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
Association was in compliance with this requirement with an investment in FHLB
of San Francisco stock at June 30, 1996 and 1995 of $8.2 million and $4.7
million, respectively.
70
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(7) OFFICE PREMISES AND EQUIPMENT
The following is a summary of office premises and equipment, net:
JUNE 30
-------------
1996 1995
------ ------
(IN
THOUSANDS)
Land......................................................... $ 720 720
Buildings and leasehold improvements......................... 5,796 5,467
Furniture, fixtures and equipment............................ 4,496 4,227
------ ------
11,012 10,414
Less accumulated depreciation and amortization............... 6,836 6,422
------ ------
$4,176 3,992
====== ======
The Company recorded depreciation and amortization expense on premises,
equipment and leasehold improvements of $675,000, $681,000 and $691,000 during
1996, 1995 and 1994, respectively.
(8) DEPOSITS
The following is a summary of deposits:
JUNE 30, 1996 JUNE 30, 1995
--------------------- --------------------
WEIGHTED WEIGHTED
AVERAGE RATE AMOUNT AVERAGE RATE AMOUNT
------------ -------- ------------ -------
(DOLLARS IN THOUSANDS)
Money market deposits............... 3.39% $ 72,269 4.04% 69,082
Passbook deposits................... 1.99 18,235 2.00 21,789
NOW and other demand deposits....... 1.10 25,059 1.08 22,214
Non-interest bearing demand
deposits........................... -- 7,399 -- 7,331
Certificates of deposit:
3 months or less.................. 5.73 106,440 5.17 102,561
Over 3 through 6 months........... 5.59 106,576 5.82 86,723
Over 6 through 12 months.......... 5.48 109,616 6.10 57,671
Over 12 months.................... 5.96 66,923 6.24 113,787
-------- -------
4.91 $512,517 5.08 481,158
==== ======== ==== =======
The weighted average interest rate is 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 $66.1 million and
$55.4 million of deposits at June 30, 1996 and 1995, respectively.
At June 30, 1996 and 1995, the Company had accrued interest payable on
deposits of $79,000 and $87,000, respectively, which is included in other
liabilities in the accompanying consolidated statements of financial
condition.
71
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deposits at June 30, 1996 mature as follows (in thousands):
Immediately withdrawable........................................ $122,962
Year ending June 30:
1997........................................................... 322,632
1998........................................................... 20,524
1999........................................................... 13,852
2000........................................................... 25,919
2001 and thereafter............................................ 6,628
--------
$512,517
========
Interest expense by type of deposit account is summarized in the following
table for the periods indicated:
YEAR ENDED JUNE 30
---------------------
1996 1995 1994
------- ------ ------
(IN THOUSANDS)
Money market deposits............................... $ 3,000 1,794 1,038
Passbook deposits................................... 418 500 745
NOW and other demand deposits....................... 275 263 323
Certificates of deposit............................. 21,396 17,755 14,772
------- ------ ------
$25,089 20,312 16,878
======= ====== ======
(9) FEDERAL HOME LOAN BANK ADVANCES
Federal Home Loan Bank (FHLB) advances are summarized as follows:
JUNE 30
---------------
1996 1995
-------- ------
(IN THOUSANDS)
FHLB advances, due at various dates through 2003, with
interest rates from 4.66% to 8.21% and a weighted average
rate of 5.87% at June 30, 1996 and from 5.86% to 8.76% and
a weighted average rate of 6.63% at June 30, 1995......... $135,300 63,950
======== ======
These advances are secured by the investment in stock of the FHLB and certain
mortgage loans aggregating $216.3 million and $159.6 million at June 30, 1996
and 1995, respectively. At June 30, 1996, the amount of additional credit
available from the FHLB was $55.6 million.
The maturities of FHLB advances are as follows (in thousands):
Year ending June 30:
1997............................................................ $ 68,600
1998............................................................ 30,500
1999............................................................ 9,200
2000............................................................ 14,200
2001 and thereafter............................................. 12,800
--------
$135,300
========
72
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(10) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase are summarized as follows:
JUNE 30
--------------
1996 1995
------- ------
(IN THOUSANDS)
Balance at year-end, due in September 1996 with an interest
rate of 5.57% and 6.08% at June 30, 1996 and 1995,
respectively $ 300 22,873
Fair value................................................. 300 22,873
Average amount outstanding during the year................. 8,283 11,342
Maximum amount outstanding at any month-end................ 17,146 23,848
======= ======
Securities sold under agreements to repurchase are secured by mortgage-
backed securities and U.S. Government and Federal agency obligations with a
carrying value of $1.5 million and $23.5 million at June 30, 1996 and 1995,
respectively. The securities which are sold under agreements to repurchase do
not remain under the control of the Company.
(11) INCOME TAXES
Income taxes (benefit) for the fiscal years ended June 30, 1996, 1995 and
1994 are comprised of the following:
FEDERAL STATE TOTAL
------- ----- ------
(IN THOUSANDS)
Year ended June 30, 1996:
Current........................................... $ 961 205 1,166
Deferred.......................................... 960 447 1,407
------- ---- ------
$ 1,921 652 2,573
======= ==== ======
Year ended June 30, 1995:
Current........................................... $ 159 (298) (139)
Deferred.......................................... 1,067 339 1,406
------- ---- ------
$ 1,226 41 1,267
======= ==== ======
Year ended June 30, 1994:
Current........................................... $ 298 82 380
Deferred.......................................... (1,517) (476) (1,993)
------- ---- ------
$(1,219) (394) (1,613)
======= ==== ======
A reconciliation from expected Federal income taxes to consolidated
effective income taxes for the periods indicated follows. The statutory
Federal income tax rate for all periods was 34.0%.
YEAR ENDED JUNE 30
---------------------
1996 1995 1994
------ ----- ------
(IN THOUSANDS)
Expected Federal income taxes (benefit)................. $2,088 1,220 (1,341)
Increases (decreases) in computed tax resulting from:
State taxes, net of Federal benefit................... 430 27 (260)
Interest earned on tax-exempt securities.............. (9) (11) (12)
Fair value of ESOP shares over cost................... 88 41 --
Other, net............................................ (24) (10) --
------ ----- ------
$2,573 1,267 (1,613)
====== ===== ======
73
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Savings and loan associations that meet certain tests and other conditions
prescribed by the Internal Revenue Code are allowed to deduct, within
limitations, appropriations to tax bad debt reserves in arriving at Federal
taxable income. Included in retained earnings of the Association at June 30,
1996 is approximately $10.9 million of bad debt deductions for which no
provision for Federal income taxes has been made. The annual bad debt
deduction, which is a preference item subject to minimum tax, was 8% for
calendar years 1996, 1995 and 1994. If in the future these amounts are used
for any purpose other than to absorb losses on bad debts, a tax liability will
be imposed on the Association for these amounts at the then current income tax
rates.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June 30,
1996 and 1995 are presented below:
1996 1995
------- ------
(IN THOUSANDS)
Deferred tax assets:
Loan valuation allowances................................. $ 2,105 2,892
Subsidiaries.............................................. 338 339
State income taxes........................................ 133 --
Deferred compensation..................................... 593 412
Amortization of core deposit.............................. 201 95
Gain on loan sales........................................ 23 23
Other..................................................... 85 229
------- ------
Total gross deferred tax assets......................... 3,478 3,990
------- ------
Deferred tax liabilities:
State income taxes........................................ -- (74)
Accrued interest income................................... (834) (175)
Deferred loan fees........................................ (2,456) (2,263)
FHLB stock dividends...................................... (1,251) (1,123)
Accelerated tax depreciation.............................. (111) (122)
------- ------
Total gross deferred tax liabilities.................... (4,652) (3,757)
------- ------
Net deferred tax asset (liability)...................... $(1,174) 233
======= ======
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 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 that will result from the reversal of existing
taxable temporary differences and (3) future taxable income generated by
future operations. 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, 1996 and 1995.
74
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(12) REGULATORY CAPITAL
The Financial Institution Reform, Recovery and Enforcement Act of 1989
(FIRREA) and the capital regulations of the Office of Thrift Supervision (OTS)
promulgated thereunder (Capital Regulations) established three capital
requirements--a "leverage limit," a "tangible capital requirement" and a
"risk-based capital requirement."
These capital standards established by FIRREA are required, with certain
exceptions, to be no less stringent than the capital standards applicable to
national banks. The OTS may also establish, on a case-by-case basis,
individual minimum capital requirements for a savings institution which vary
from the requirements that would otherwise apply under the Capital
Regulations. The OTS has not established such individual minimum capital
requirements for the Association.
The leverage limit currently included in the Capital Regulations requires a
savings institution to maintain "core capital" of not less than 3% of adjusted
total assets, which is the minimum limit permitted by FIRREA. "Core capital"
generally includes common stockholders' equity (including retained earnings),
noncumulative perpetual preferred stock, including any related surplus and
minority interests in the equity accounts of fully consolidated subsidiaries.
Intangible assets (not including purchased mortgage servicing rights and
qualifying supervisory goodwill as described below) must be deducted from core
capital.
The tangible capital requirement adopted by the OTS Director requires a
savings institution to maintain "tangible capital" in an amount not less than
1.50% of adjusted total assets. "Tangible capital" means core capital, less
any intangible assets (including supervisory goodwill) plus purchased mortgage
servicing rights, subject to certain limitations.
The risk-based capital requirements provide, among other things, that the
capital ratios applicable to various classes of assets are to be adjusted to
reflect the degree of defined credit risk deemed to be associated with such
assets. In addition, the asset base for computing a savings institution's
risk-based capital requirement includes off-balance sheet items, including
letters of credit, and loans or other assets sold with subordination or
recourse. Generally, the Capital Regulations require savings institutions to
maintain "total capital" equal to 8.00% of risk-weighted assets. "Total
capital" for these purposes consists of "core capital" and supplementary
capital. Supplementary capital includes, among other things, certain types of
preferred stock and subordinated debt and, subject to certain limitations,
loan and lease general valuation allowances. Such general valuation allowances
can generally be included up to 1.25% of risk-weighted assets. At June 30,
1996, $5.7 million of the Association's general valuation allowance was
included in supplementary capital. A savings institution's supplementary
capital may be used to satisfy the risk-based capital requirement only to the
extent of that institution's core capital.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
contains "prompt corrective action" provisions pursuant to which banks and
savings institutions are to be classified into one of five categories based
primarily upon capital adequacy, ranging from "well capitalized" to
"critically undercapitalized" and which require, subject to certain
exceptions, the appropriate Federal banking agency to take prompt corrective
action with respect to an institution which becomes "undercapitalized" and to
take additional actions if the institution becomes "significantly
undercapitalized" or "critically undercapitalized."
These provisions expand the powers and duties of the OTS and the FDIC and
expressly authorize, or in many cases direct, regulatory intervention at an
earlier date than was previously the case.
75
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The OTS regulations implementing the "prompt corrective action" provisions
of FDICIA define the five capital categories as follows: (i) an institution is
"well capitalized" if it has a total risk-based capital ratio of 10% or
greater, has a Tier 1 risk-based capital ratio (Tier 1 capital to total
assets) of 6% or greater, has a core capital ratio of 5% or greater and is not
subject to any written capital order or directive to meet and maintain a
specific capital level or any capital measure; (ii) an institution is
"adequately capitalized" if it has a total risk-based capital ratio of 8% or
greater, has a Tier 1 risk-based capital ratio of 4% or greater and has a core
capital ratio of 4% or greater (3% for certain highly rated institutions);
(iii) an institution is "undercapitalized" if it has a total risk-based
capital ratio of less than 8% or has either a Tier 1 risk-based or a core
capital ratio that is less than 4%; (iv) an institution is "significantly
undercapitalized" if it has a total risk-based capital ratio that is less than
7%, or has either a Tier 1 risk-based or a core capital ratio that is less
than 3%; and (v) an institution is "critically undercapitalized" if its
"tangible equity" (defined in the prompt corrective action regulations to mean
core capital plus cumulative perpetual preferred stock) is equal to or less
than 2% of its total assets. 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 application to the
next lower category, for supervisory concerns. At June 30, 1996, the
Association's regulatory capital was in excess of the amount necessary to be
"well capitalized."
The table below presents the Association's capital ratios as compared to the
requirements under FIRREA at June 30, 1996 (dollars in thousands):
THE ASSOCIATION CAPITAL REQUIREMENTS EXCESS CAPITAL
---------------- -------------------- --------------
Tangible capital...... $54,650 7.67% $10,681 1.50% $43,969
Core capital.......... 54,650 7.67 21,362 3.00 33,288
Risk-based capital.... 60,367 12.74 37,919 8.00 22,448
======== ====== =========== ======== =======
A reconciliation between regulatory capital and GAAP capital for the
Association at June 30, 1996 is presented below:
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
-------- ------- ----------
(IN THOUSANDS)
GAAP capital--originally reported to regulatory
authorities in the Association consolidated
financial statements........................... $55,220 55,220 55,220
Regulatory capital adjustments:
Investments in and advances to nonincludable
subsidiary................................... (271) (271) (271)
Core deposit premium.......................... (299) (299) (299)
General valuation allowances not to exceed
1.25% of risk-weighted assets................ -- -- 5,717
------- ------ ------
Regulatory capital.......................... 54,650 54,650 60,367
Minimum capital requirement..................... 10,681 21,362 37,919
------- ------ ------
Regulatory capital excess................... $43,969 33,288 22,448
======= ====== ======
During the third quarter of fiscal 1996, the Company received approval to
repurchase in the open market up to 5% of the Company's outstanding stock or
197,000 shares. At June 30, 1996, a total of 164,000 shares had been
repurchased at prices ranging from $12.90 to $14.60 per share.
76
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For the twelve months ended December 31, 1995, a total of 206,400 shares had
been repurchased under a previous repurchase plan.
(13) RETIREMENT PLANS
Defined Benefit Plan
The Association maintains a noncontributory defined benefit pension plan
(the Plan). Any employee becomes 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 years of
service and the three consecutive years of employment during which the
participant earned the highest compensation. Contributions are 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 such that benefit calculations from January 1, 1994 forward
are based on compensation only.
The following table sets forth the Plan's funded status and amounts
recognized in the Associations consolidated statements of financial condition:
JUNE 30
---------------
1996 1995
------- ------
(IN THOUSANDS)
Actuarial present value of benefit obligations:
Vested benefit obligation............................... $ 2,342 2,555
Nonvested benefit obligation............................ 107 176
------- ------
Accumulated benefit obligations....................... $ 2,449 2,731
======= ======
Projected benefit obligation for service rendered to date. $(2,941) (3,219)
Plan assets, at fair value................................ 2,824 2,813
------- ------
Excess of projected benefit obligation over Plan
assets............................................... (117) (406)
Items not yet recognized in earnings:
Unrecognized net loss from past experience different
from that assumed and effects of changes in
assumptions............................................ 437 669
Unrecognized prior service cost being recognized........ (196) (230)
Unrecognized net transition asset at June 30, 1996 and
1995 being amortized over approximately 15 years....... (8) (10)
Prepaid pension cost.................................. $ 116 23
======= ======
Net pension cost includes the following components:
JUNE 30
------------
1996 1995
----- -----
(IN
THOUSANDS)
Service cost--benefits earned during the period................ $ -- --
Interest cost on projected benefit obligation.................. 224 231
Actual return on Plan assets................................... (217) (240)
Net amortization and deferral.................................. (16) 62
----- -----
Net periodic pension cost.................................. $ (9) 53
===== =====
77
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The discount rate used in determining the actuarial present value of the
benefit obligations was 7.75% and 7.50% as of June 30, 1996 and 1995,
respectively. The rate used to determine the expected long-term rate of return
on assets and the benefit obligations for the net pension cost was 7.5% and
7.0% at June 30, 1996 and 1995, respectively.
Supplemental Executive Retirement Plan
The Association 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. During 1996, 1995 and
1994, the expense for this plan totaled $105,000, $162,000 and $103,000,
respectively.
Employee Stock Ownership Plan (ESOP)
In December 1993, an ESOP was established for all employees who are age 21
or older and have completed one year of service with the Association 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 414,000
shares of the common stock of Quaker City Bancorp, Inc. issued in the
conversion. The loan will be repaid principally from the Associations
discretionary contributions to the ESOP over a period of 10 years. At June 30,
1996 and 1995, the outstanding balance on the loan was $2.3 million and $2.6
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 credited service. Vesting will accelerate upon retirement, death
or disability of the participant or in the event of a change in control of the
Association 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 expense related to the ESOP
totaled $583,000, $470,000 and $179,000 for the fiscal years ended June 30,
1996, 1995 and 1994, respectively. At June 30, 1996 and 1995, unearned
compensation related to the ESOP approximated $2.3 million and $2.6 million,
respectively, and is shown as a reduction of stockholders equity in the
accompanying consolidated statements of financial condition.
The table below reflects ESOP activity for the periods indicated:
YEAR ENDED JUNE
30
----------------
1996 1995
------- -------
Unallocated shares at beginning of period.................. 343,416 414,000
Purchased shares........................................... -- --
Allocated.................................................. (43,266) (70,584)
------- -------
Unallocated shares at end of period........................ 300,150 343,416
======= =======
The fair value of unallocated ESOP shares totaled $4.1 million and $3.8
million at June 30, 1996 and 1995, respectively.
78
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(14) INCENTIVE PLANS
Recognition and Retention Plan (RRP)
As part of the conversion, the Association adopted the RRP as a method of
providing officers, employees and nonemployee directors of the Association
with a proprietary interest in the Company in a manner designed to encourage
such persons to remain with the Association. The Association contributed funds
to the RRP to enable the trust to acquire, in the aggregate, 4% or 165,600 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 Association. In the event that before reaching normal
retirement, an officer, employee or director terminates service with the
Company or the Association, that persons nonvested awards are forfeited.
The expense related to the RRPs for the fiscal years ended June 30, 1996,
1995 and 1994 was approximately $327,000, $343,000 and $179,000, respectively.
At June 30, 1996 and 1995, unearned compensation related to the RRPs was
approximately $393,000 and $720,000, respectively, and is shown as a reduction
to stockholders equity in the accompanying consolidated statements of
financial condition.
The table below reflects RRP activity for the periods indicated:
YEAR ENDED JUNE
30
---------------
1996 1995
------- -------
Balance at beginning of period............................ 118,557 165,600
Granted................................................... -- --
Exercised................................................. 43,242 47,043
------- -------
Balance at end of period.................................. 75,315 118,557
======= =======
Stock Option Plans
In 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). Both plans provide for
the grant of options at an exercise price equal to the fair market value on
the date of grant. The Stock Plan and the Directors Plan 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 Stock Plan may include incentive stock
options, nonstatutory options and limited rights which are exercisable only
upon a change in control of the Association or the Company. Awards under the
Directors Plan are nonstatutory options.
The Directors Plan authorizes the granting of stock options for a total of
103,500 shares of common stock or 2.5% of the shares issued in the conversion.
The Stock Plan authorizes the granting of stock options for a total of 310,500
shares of common stock or 7.5% of the shares issued in the conversion. All
options granted under both plans in connection with the conversion were
granted at an exercise price of $7.50 per share, which was the offering price
of the common stock on the conversion date.
79
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
All options granted under the Directors Plan became exercisable January 1,
1995; options granted to a subsequently elected outside director will become
exercisable on the first business day of January following that date on which
such subsequent outside director is qualified and first begins to serve as a
director, provided, however, that in the event of death, disability,
retirement or upon a change in control of the Company or the Association, all
options previously granted would automatically become exercisable. 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. All options will be exercisable in the event of
the optionees death, disability, retirement or upon a change in control of the
Company or the Association. Each option granted under the Stock Plan may be
exercisable for three months following the date on which the employee ceases
to perform services for the Association or the Company, except that in the
event of death, disability, retirement or upon a change in control of the
Company or the Association, options may be exercisable for up to one year
thereafter or such longer period as determined by the Company.
The table below reflects option activity for the periods indicated:
YEAR ENDED JUNE
30
----------------
1996 1995
------- -------
Balance at beginning of period.......................... 398,825 408,825
Granted................................................. -- --
Exercised............................................... (34,000) (10,000)
------- -------
Balance at end of period................................ 364,825 398,825
======= =======
Options exercisable..................................... 261,325 191,825
======= =======
Remaining shares available for grant.................... 5,175 5,175
======= =======
(15) COMMITMENTS AND CONTINGENCIES
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 $501,000 $473,000 and $355,000 in 1996, 1995 and
1994, respectively. Annual minimum lease commitments attributable to long-term
leases at June 30, 1995 were (in thousands):
Year ending June 30:
1997............................................... $ 355
1998............................................... 227
1999............................................... 194
2000............................................... 170
2001............................................... 155
Thereafter through 2005............................ 290
------
$1,391
======
At June 30, 1996 and 1995, the Company had approved commitments to originate
loans of approximately $26.7 million and $29.9 million, respectively,
substantially all of which were for adjustable rate one to four unit
residential loans and multifamily residential loans. Commitments to
80
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. At June 30, 1996, the commitments to extend credit
approximate fair value. The amount of collateral, if any, is based on a credit
evaluation of the borrower and generally involves residential real estate.
At June 30, 1996 and 1995, the Company had commitments to sell loans of $2.9
million and $723,000, respectively, which are included in loans held for sale.
There were commitments to purchase loans of $292,000 at June 30, 1996. There
were no commitments to purchase loans at June 30, 1995. The Company had no
commitments to sell investment securities or mortgage-backed securities at
June 30, 1996 and 1995. There were commitments to purchase investment
securities of $1.4 million at June 30, 1996.
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.
(16) LOAN SERVICING AND SALE ACTIVITIES
Loan servicing and sale activities are summarized as follows:
AT OR FOR THE YEAR ENDED
JUNE 30
--------------------------
1996 1995 1994
-------- ------- -------
(IN THOUSANDS)
Statement of financial condition information--
loans receivable held for sale................ $ 2,890 1,666 5,415
======== ======= =======
Statement of operations information:
Loan servicing fees.......................... $ 715 696 745
Gain on sale of loans held for sale.......... 175 86 511
======== ======= =======
Statement of cash flows information:
Loans originated for sale.................... $(28,922) (12,214) (47,554)
Sale of loans held for sale.................. 27,662 10,321 54,869
======== ======= =======
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.
81
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(17) CONVERSION TO CAPITAL STOCK FORM OF OWNERSHIP
Quaker City Bancorp, Inc. was incorporated under Delaware law in September
1993 for the purpose of acquiring and holding all of the outstanding capital
stock of Quaker City Federal Savings and Loan Association as part of the
Association's conversion from a Federally chartered mutual savings association
to a Federally chartered stock savings association. On December 30, 1993, the
Association became a wholly owned subsidiary of the Company. In connection
with the conversion, Quaker City Bancorp, Inc. issued and sold to the public
4,140,000 shares of its common stock (par value $.01 per share) at a price of
$7.50 per share. The proceeds, net of $1.9 million in conversion costs,
received by the Company from the conversion (before deduction of $4.3 million
to fund employee benefit plans) amounted to $29.1 million. The Company
retained 65% of the net proceeds and used the remaining net proceeds to
purchase the capital stock of the Association. The financial position of
Quaker City Bancorp, Inc. (parent company only) as of June 30, 1996 and 1995
and the results of its operations from the date of conversion to June 30, 1996
are presented in note 18. Earnings per share data as presented in the
consolidated statements of operations are based on actual operating results
from the date of conversion to June 30, 1996. Shares purchased on behalf of
the RRP are considered outstanding in the calculation of earnings per share.
Shares purchased on behalf of the ESOP are considered outstanding as they are
committed to be released. Prior to the completion of the conversion, Quaker
City Bancorp, Inc. had no assets or liabilities and did not conduct any
business other than of an organizational nature.
At the time of the conversion, the Association established a liquidation
account in the amount of $41,837,000 which was equal to its total retained
earnings as of September 30, 1993. The liquidation account will be maintained
for the benefit of eligible account holders who continue to maintain their
accounts at the Association after the conversion. The liquidation account will
be reduced annually to the extent that eligible account holders have reduced
their qualifying deposits. Subsequent increases will not restore an eligible
account holder's interest in the liquidation account. In the event of a
complete liquidation, each eligible account holder will be entitled to receive
a distribution from the liquidation account in an amount proportionate to the
current adjusted qualifying balances for accounts then held.
The Association may not declare or pay cash dividends on or repurchase any
of its shares of common stock, if the effect would cause stockholder's equity
to be reduced below applicable regulatory capital maintenance requirements or
if such declaration and payment would otherwise violate regulatory
requirements.
82
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(18) 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,
1996 and 1995 and for the partial year beginning December 30, 1993 (date of
conversion) to June 30, 1994.
STATEMENTS OF FINANCIAL CONDITION
JUNE 30
--------------
1996 1995
------- ------
(IN THOUSANDS)
ASSETS
Cash............................................................. $ 187 71
Other short-term investments..................................... 1,300 --
Investment securities held to maturity........................... 8,395 6,365
Investment securities available for sale......................... -- 150
Mortgage-backed securities held to maturity...................... 496 5,491
Investment in subsidiaries....................................... 57,609 54,203
Other assets..................................................... 109 220
------- ------
$68,096 66,500
======= ======
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities--other liabilities................................... $ 170 59
Stockholders' equity............................................. 67,926 66,441
------- ------
$68,096 66,500
======= ======
STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30 DECEMBER 30,
------------------- 1993 TO
1996 1995 JUNE 30, 1994
--------- ----------------------
(IN THOUSANDS)
Interest income............................... $ 962 981 360
Interest expense.............................. -- 71 11
Other income.................................. 41 15 --
Other expense................................. 284 310 157
Income taxes.................................. 297 253 109
--------- -------- ------
Earnings before equity in earnings of
subsidiaries............................... 422 362 83
Equity in earnings (loss) of subsidiaries..... 3,147 1,959 (2,828)
--------- -------- ------
Net earnings (loss)......................... $ 3,569 2,321 (2,745)
========= ======== ======
83
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE
30 DECEMBER 30,
---------------- 1993 TO
1996 1995 JUNE 30, 1994
------- ------- -------------
(IN THOUSANDS)
Cash flows from operating activities:
Net earnings (loss).......................... $ 3,569 2,321 (2,745)
------- ------- -------
Adjustments to reconcile net earnings (loss)
to cash provided by operating activities:
Equity in (earnings) loss of subsidiaries.. (3,147) (1,959) 2,828
Amortization............................... 192 53 30
(Increase) decrease in other assets........ 111 396 (616)
Increase (decrease) in other liabilities... 111 (67) 126
Other...................................... 267 677 412
------- ------- -------
Total adjustments........................ (2,466) (900) 2,780
------- ------- -------
Net cash provided by operating
activities.............................. 1,103 1,421 35
------- ------- -------
Cash flows from investing activities:
Purchases of investment securities held to
maturity.................................... (11,998) (1,879) (14,564)
Proceeds from maturity of investment
securities held to maturity................. 9,965 8,000 2,000
Principal payments on MBS held to maturity... 5,190 522 --
Purchases of investment securities available
for sale.................................... (2,400) (5,580) (6,920)
Sale of investment securities available for
sale........................................ 2,550 5,900 6,450
Purchases of MBS available for sale.......... -- -- (6,056)
Purchase of outstanding stock of
subsidiaries................................ -- -- (12,704)
------- ------- -------
Net cash provided (used) by investing
activities.............................. 3,307 6,963 (31,794)
------- ------- -------
Cash flows from financing activities:
Net proceeds from the issuance of common
stock....................................... -- -- 24,777
Proceeds from other borrowings............... -- 20,118 7,019
Repayment of other borrowings................ -- (27,137) --
Repurchase of stock.......................... (3,249) (1,406) --
Proceeds from exercise of stock options...... 255 75 --
------- ------- -------
Net cash provided (used) by financing
activities.............................. (2,994) (8,350) 31,796
------- ------- -------
Net increase in cash and cash
equivalents............................. 1,416 34 37
Cash and cash equivalents, beginning of period. 71 37 --
------- ------- -------
Cash and cash equivalents, end of period....... $ 1,487 71 37
======= ======= =======
84
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(19) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED
----------------------------------------------
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
1996 1996 1995 1995
-------- --------- ------------ -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net interest income.............. $ 5,858 5,520 5,265 4,852
Provision for loan losses........ 802 600 500 201
Other income..................... 733 666 591 499
Other expense.................... 3,996 3,998 3,936 3,809
------- ------ ----- -----
Earnings before income taxes... 1,793 1,588 1,420 1,341
Income taxes..................... 763 655 589 566
------- ------ ----- -----
Net earnings................... $ 1,030 933 831 775
======= ====== ===== =====
Net earnings per share........... $ .27 .24 .21 .20
======= ====== ===== =====
THREE MONTHS ENDED
----------------------------------------------
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
1995 1995 1994 1994
-------- --------- ------------ -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net interest income.............. $ 4,608 4,363 4,263 4,305
Provision for loan losses........ 203 -- 400 395
Other income..................... 574 459 472 575
Other expense.................... 3,707 3,995 3,692 3,639
------- ------ ----- -----
Earnings before income taxes... 1,272 827 643 846
Income taxes..................... 516 264 124 363
------- ------ ----- -----
Net earnings................... $ 756 563 519 483
======= ====== ===== =====
Net earnings per share........... $ .19 .15 .14 .12
======= ====== ===== =====
THREE MONTHS ENDED
----------------------------------------------
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
1994 1994 1993 1993
-------- --------- ------------ -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net interest income.............. $ 4,697 4,519 4,233 4,381
Provision for loan losses........ 4,000 3,501 1,007 1,692
Other income..................... 734 649 736 737
Other expense.................... 3,992 3,748 3,264 3,426
------- ------ ----- -----
Earnings (loss) before income
taxes......................... (2,561) (2,081) 698 --
Income taxes (benefit)........... (1,056) (839) (285) (3)
------- ------ ----- -----
Net earnings (loss)............ $(1,505) (1,242) 413 3
======= ====== ===== =====
Net earnings (loss) per share.... $ (.36) (.30) N/A N/A
======= ====== ===== =====
85
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(20) FAIR VALUE OF FINANCIAL INSTRUMENTS
Pursuant to the requirements of SFAS No. 107, "Disclosure about Fair Value
of Financial Instruments," as amended by SFAS No. 119, "Disclosure about
Derivative Financial Instruments," 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 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 discounting of cash flows.
Estimated cash flows are discounted using a rate commensurate with the risk
associated with the estimated cash flows. Assumptions regarding credit risk,
cash flows and discount rates are judgmentally determined using available
market information and specific borrower information.
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 Companys 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 commitments to extend credit are based on rates for
similar transactions as of the reporting date.
86
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table presents the carrying amounts and fair values of the
Company's financial instruments at the dates indicated. See note 1 to the
consolidated financial statements for a discussion of the accounting policies
followed in determining fair value information:
JUNE 30
---------------------------------
1996 1995
---------------- ----------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- ------- -------- -------
(IN THOUSANDS)
Assets:
Cash and due from banks.................... $ 2,184 2,184 2,430 2,430
Interest-bearing deposits.................. 4,984 4,984 7,468 7,468
Federal funds sold and other short-term
investments 6,400 6,400 9,450 9,450
Investment securities...................... 37,419 36,808 23,898 23,920
Investment securities available for sale... -- -- 150 150
Loans receivable, net...................... 607,672 603,340 537,478 552,425
Loans receivable held for sale............. 2,890 2,890 1,666 1,671
Mortgage-backed securities................. 41,175 41,561 39,993 40,631
Federal Home Loan Bank stock............... 8,151 8,151 4,736 4,736
JUNE 30
---------------------------------
1996 1995
---------------- ----------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- ------- -------- -------
(IN THOUSANDS)
Liabilities:
Deposits................................... $512,517 513,460 481,158 485,380
Federal Home Loan Bank advances............ 135,300 134,599 63,950 64,083
Securities sold under agreements to
repurchase................................ 300 300 22,873 22,873
Off-balance sheet:
Commitments to extend credit............... -- 26,704 -- 29,938
Loans sold with recourse (including bond
loans).................................... -- 6,965 -- 3,270
======== ======= ======= =======
87
ITEM 9. CHANGE 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 1996 Annual
Meeting of Stockholders (the "1996 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 1996 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 1996 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 1996 Proxy
Statement.
88
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS
PAGE
DESCRIPTION NO.
----------- ----
Independent Auditors' Report........................................... 54
Consolidated Statements of Financial Condition at June 30, 1996 and
1995.................................................................. 55
Consolidated Statements of Operations for Each of the Years in the
Three-Year Period Ended June 30, 1996................................. 56
Consolidated Statements of Stockholders' Equity for Each of the Years
in the Three-Year Period Ended June 30, 1996.......................... 57
Consolidated Statements of Cash Flows for Each of the Years in the
Three-Year Period Ended June 30, 1996................................. 58
Notes to Consolidated Financial Statements............................. 60
(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.
(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*
10.6 Employment Agreements between Quaker City Bancorp, Inc. and Quaker
City Federal Savings and Loan Association, respectively, and
Frederic R. 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 Frederick R. 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. McGill as of July 1, 1996*
89
EXHIBIT
NUMBER DESCRIPTION
------- -----------
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)
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*
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*
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 to
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*
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*
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*
90
EXHIBIT
NUMBER DESCRIPTION
------- -----------
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)
**11.1 Statement Regarding Computation of Earnings Per Share
**21 Subsidiaries of Quaker City Bancorp, Inc.
23 Consent of KPMG Peat Marwick 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.
** Reproduced herein for the reader's convenience.
(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.
(B) REPORTS ON FORM 8-K
None.
91
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
By: /s/ Frederic R. McGill
___________________________________
Frederic R. McGill
President and Chief Executive
Officer
DATE: September 27, 1996
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 September 27, 1996
----------------------------------
J. L. Thomas Chairman of the Board
/s/ Frederic R. McGill September 27, 1996
----------------------------------
Frederic R. McGill Director, President and
Chief Executive Officer
(Principal Executive
Officer)
/s/ Dwight L. Wilson September 27, 1996
----------------------------------
Dwight L. Wilson Senior Vice President,
Treasurer and
Chief Financial Officer
(Principal Financial
Officer)
(Principal Accounting
Officer)
/s/ David T. Cannon September 27, 1996
----------------------------------
David T. Cannon Director
/s/ Wayne L. Harvey September 27, 1996
----------------------------------
Wayne L. Harvey Director
/s/ Edward L. Miller September 27, 1996
----------------------------------
Edward L. Miller Director
/s/ David K. Leichtfuss September 27, 1996
----------------------------------
David K. Leichtfuss Director
/s/ Alfred J. Gobar September 27, 1996
----------------------------------
Alfred J. Gobar Director
92
EXHIBIT INDEX
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*
10.6 Employment Agreements between Quaker City Bancorp, Inc. and Quaker
City Federal Savings and Loan Association, respectively, and
Frederic R. 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 Frederick R.
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. McGill as of July 1, 1996*
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)
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*
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*
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
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 to
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*
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*
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*
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)
11.1 Statement Regarding Computation of Earnings Per Share
21 Subsidiaries of Quaker City Bancorp, Inc.
23 Consent of KPMG Peat Marwick 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.