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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended June 30, 1998
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
----------------
QUAKER CITY BANCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4444221
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
7021 GREENLEAF AVENUE 90602
WHITTIER, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (562) 907-2200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
[X] Yes [_] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the average bid and asked price of its Common Stock,
$.01 par value, on September 22, 1998, on the Nasdaq National Market System
was approximately $76,499,000.
At September 22, 1998, 5,799,226 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 18, 1998 are incorporated by reference in Part III hereof.
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TABLE OF CONTENTS
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PART I
<C> <S> <C>
ITEM 1. BUSINESS..................................................... 1
General...................................................... 1
Lending Activities........................................... 3
Delinquencies and Classification of Assets................... 11
Nonperforming Assets and Restructured Loans.................. 12
Impaired Loans............................................... 14
Allowances for Loan and Real Estate Losses................... 14
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................................... 24
General..................................................... 24
Activities Restrictions..................................... 24
Deposit Insurance........................................... 25
Regulatory Capital Requirements............................. 26
Prompt Corrective Action Requirements....................... 27
Enforcement................................................. 28
Savings and Loan Holding Company Regulation................. 28
Classification of Assets.................................... 30
Community Reinvestment Act.................................. 31
Federal Home Loan Bank System............................... 32
Required Liquidity.......................................... 32
Federal Reserve System...................................... 32
Year 2000 Compliance........................................ 32
Pending Legislation......................................... 33
ITEM 2. PROPERTIES................................................... 35
ITEM 3. LEGAL PROCEEDINGS............................................ 36
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......... 36
ITEM 4A. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........... 36
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.......................................... 37
ITEM 6. SELECTED FINANCIAL DATA...................................... 38
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................... 40
General...................................................... 40
Results of Operations........................................ 40
Year 2000.................................................... 42
Financial Condition.......................................... 44
Capital Resources and Liquidity.............................. 45
Asset/Liability Management................................... 47
Average Balance Sheet........................................ 50
Impact of Inflation and Changing Prices...................... 52
Impact of New Accounting Standards........................... 52
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK... 54
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................. F-1
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE..................................... II-1
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........... II-1
ITEM 11. EXECUTIVE COMPENSATION....................................... II-1
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................... II-1
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............... II-1
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.................................................. II-2
SIGNATURES................................................... II-6
</TABLE>
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This Annual Report on Form 10-K includes "forward-looking statements" within
the meaning of the Securities Exchange Act of 1934, as amended by the Private
Securities Litigation Reform Act of 1995. All statements, other than
statements of historical facts, included in this report that address results
or developments that Quaker City Bancorp, Inc. (the Company) expects or
anticipates will or may occur in the future, including such things as (i)
business strategy; (ii) economic trends, including the condition of the real
estate market in Southern California, and the direction of interest rates and
prepayment speeds of mortgage loans and mortgage-backed securities; (iii) the
adequacy of the Company's allowances for loan and real estate losses; (iv)
goals; (v) expansion and growth of the Company's business and operations; (vi)
plans, including the ultimate costs, results and effects of its plan regarding
Year 2000 compliance; (vii) risks resulting from failure of third-party
vendors and service providers to be Year 2000 compliant; and (viii) other
matters are forward-looking statements. These statements are based upon
certain assumptions and analyses made by the Company in light of its
experience and its perception of historical trends, current conditions and
expected future developments as well as other factors it believes are
appropriate in the circumstances. These statements are subject to a number of
risks and uncertainties, many of which are beyond the control of the Company,
including general economic, market or business conditions; real estate market
conditions, particularly in California; the opportunities (or lack thereof)
that may be presented to and pursued by the Company; competitive actions by
other companies; changes in law of regulations; and other factors. Actual
results could differ materially from those contemplated by these forward-
looking statements. Consequently, all of the forward-looking statements made
in this report are qualified by these cautionary statements and there can be
no assurance that the actual results or developments anticipated by the
Company will be realized or, even in substantially realized, that they will
have the expected consequences to or effects on the Company and its business
or operations. Forward-looking statements made in this report speak as of the
date hereof. The Company undertakes no obligation to update or revise any
forward-looking statement made in this report.
PART I
ITEM 1. BUSINESS
GENERAL
Quaker City Bancorp, Inc., incorporated in Delaware, is primarily engaged in
the savings and loan business through its wholly owned subsidiary Quaker City
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 (562) 907-2200.
The Association operates ten retail full service branches in the Southern
California communities of Whittier (2), La Habra (2), Brea, Fullerton, La
Mirada, Hacienda Heights, Anaheim Hills and Placentia.
The Company is a savings and loan holding company and as such is subject to
examination and regulation by the Office of Thrift Supervision ("OTS"). The
deposits of the Association are insured by the Savings Association Insurance
Fund ("SAIF") of the Federal Deposit Insurance Corporation (the "FDIC"). The
Association is regulated by the Director of the OTS and the FDIC. The
Association is a member of the Federal Home Loan Bank ("FHLB") of San
Francisco, which is one of the twelve regional banks comprising the Federal
Home Loan Bank System. The Association is also subject to
1
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certain regulations of the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board") with respect to reserves required to be
maintained against deposits and certain other matters. See "--Regulation and
Supervision--General."
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 Company also engages in the sale of insurance and
investment products on an agency basis. See "--Subsidiary Activities." The
Company originates predominantly multifamily loans and one-to-four family
loans within its primary market area and emphasizes multifamily lending in low
and moderate income communities, specifically in the Los Angeles metropolitan
area. In January 1998, the Company announced the hiring of the income property
lending staff of another financial institution in Southern California. This
new lending group within the Company originates primarily commercial and
industrial loans as well as some multifamily loans and the increase in
commercial and industrial lending during the current year is primarily
attributable to this group's production. At June 30, 1998, the Company's gross
mortgage loan portfolio (including loans held for sale) totaled approximately
$712.8 million, of which approximately 39.26% was secured by one-to-four
residential properties, 48.72% was secured by multifamily (five or more units)
properties and 10.92% was secured by commercial properties. See "--Lending
Activities." From June 30, 1997 to June 30, 1998, as a percentage of the gross
mortgage loan portfolio, one-to-four residential property loans decreased by
approximately 6.21%, multifamily loans increased by approximately 2.95% and
commercial loans increased approximately 2.53%. Most of the Company's single-
family loan production during fiscal 1998 was sold to the Federal National
Mortgage Association ("FNMA"), [accounting for most of the reduction in one-
to-four residential property loans as a percentage of the gross mortgage loan
portfolio]. At June 30, 1998, approximately 79.73% of the one-to-four family,
96.39% of the multifamily and 81.09% of the commercial mortgage portfolios
consisted of adjustable rate mortgage ("ARM") loans.
In addition to originating loans to hold in portfolio, the Company also
originates loans for sale. The Company sold $34.3 million of loans in fiscal
1998. The Company also purchases loans for investment and for sale. Loans sold
come from loans held in the Company's portfolio designated as being held for
sale or originated during the most recent period and designated as held for
sale. Historically, the Company has generally retained the servicing rights on
most loans sold, however, some loans are sold servicing released. In addition,
the Company invests in securities issued by the U.S. Government and agencies
thereof, mortgage-backed securities ("MBS") and other permitted investments
under applicable federal laws and regulations. The Company's revenues are
derived principally from interest on its mortgage loans, and to a lesser
extent, mortgage loan servicing activities, and interest and dividends on its
investment securities and MBS.
The Company's primary sources of funds are deposits, borrowings from the
FHLB of San Francisco ("FHLB advances"), securities sold under agreements to
repurchase, principal and interest payments on loans and proceeds from the
sale of loans. At June 30, 1998, the Company had deposits of approximately
$580.9 million, including approximately $82.1 million in certificates of
deposit of $100,000 or more. At that date, the Company's borrowings included
$216.0 million in FHLB advances. See "--Sources of Funds."
On May 21, 1998, the Board of Directors of the Company declared a 25% common
stock dividend paid on June 30, 1998, to shareholders of record on June 12,
1998. The dividend was intended as a distribution of retained earnings to the
Company's shareholders and to enhance both the marketability and liquidity of
the Company's stock. Total stockholders' equity was unchanged by the stock
dividend and all historical earnings per share data herein reflect the
increased number of shares of the Company's stock outstanding after the
dividend. At June 30, 1998, the Company had stockholders' equity of $77.3
million, representing 8.71% of total assets.
2
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For the year ended June 30, 1998, the Company reported net earnings of $6.6
million, $1.14 per share diluted. This compares to net earnings of $2.8
million, $0.49 per share diluted and $3.6 million, $0.59 per share diluted for
the years ended June 30, 1997 and 1996, respectively. The increase in fiscal
1998 earnings over fiscal 1997 was primarily due to an increase in net
interest income and a decrease in the provision for loan losses in fiscal 1998
and the payment of the special assessment by the Association in fiscal 1997 as
part of the recapitalization of the SAIF. The reduction in fiscal 1997
earnings over fiscal 1996 was primarily due to the special assessment paid by
the Association in fiscal 1997 as part of the recapitalization of the SAIF.
During the quarter ended September 30, 1996, the Association accrued $3.1
million in expense for this special assessment and paid this amount during the
second quarter of fiscal 1997. Excluding the impact of the one-time special
assessment, net earnings for the fiscal year ended June 30, 1997, would have
been $4.6 million, $0.80 per share diluted.
Total assets of the Company were $887.5 million at June 30, 1998, an
increase of $86.1 million during the fiscal year. The increase in assets was
primarily in residential loans with loans on multifamily properties increasing
$45.3 million and one-to-four loans decreasing $20.1 million, and with
investment securities and MBS increasing $10.5 million. The asset growth was
funded by an increase in deposits of $27.7 million and $58.3 million of FHLB
advances. At June 30, 1998, the Company had total deposits of $580.9 million
and total borrowings of $216.0 million.
The Southern California economy and real estate market in the Company's
primary lending area have shown improvement during the year. The Company's
level of nonperforming assets declined from June 30, 1997. The Company
includes nonaccrual loans, troubled debt restructured loans and real estate
acquired through foreclosure ("REO") in determining its level of nonperforming
assets. At June 30, 1998, the Company reported $9.8 million in nonperforming
assets compared to $10.5 million and $13.1 million at June 30, 1997 and 1996,
respectively. The Company recorded provisions for loan losses of $1.5 million
for the year ended June 30, 1998 compared to $3.0 million and $2.1 million for
the years ended June 30, 1997 and 1996, respectively. See "--Allowances for
Loan and Real Estate Losses" and "Management's Discussion and Analysis
("MD&A")--Results of Operations."
LENDING ACTIVITIES
General. Since 1982, the Company has emphasized the origination of ARM loans
for retention in its portfolio. This practice has enabled the Company to
reduce its interest rate risk exposure by concentrating its loan portfolio in
assets with either shorter terms or more frequent repricing, or both. The
Company originates fixed rate loans in response to customer demand as well.
The type of loans the Company originates is dependent upon the relative
customer demand for fixed-rate or ARM loans, which in turn is affected by the
current and expected level of interest rates. Historically, the Company has
sold fixed rate loans in the secondary market to FNMA, Federal Home Loan
Mortgage Corporation ("FHLMC") and others. During 1998, the Company retained
certain fixed rate loans in its portfolio. In the third quarter of fiscal
1998, the Company hired the income property lending staff of another financial
institution in Southern California to complement the existing loan department.
Loan and Mortgage-Backed Securities Portfolio Composition. The Company'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, 1998, the Company had gross loans outstanding of $712.8 million, of which
$279.9 million, or 39.26%, were one-to-four family mortgage loans. At the same
date, multifamily mortgage loans totaled $347.3 million, or 48.72% of gross
loans. The remainder of the loan portfolio consists of $77.8 million of
commercial real estate loans, or 10.92% of gross loans, $348,000 of land
loans, or .05% of gross loans, and other loans of $7.5 million, or 1.05% of
gross loans. Included in these amounts at June 30, 1998 were $7.5 million of
loans held for sale, comprising 1.05% of gross loans. At that same date,
79.73% of the Company's one-to-four family, 96.39% of its multifamily and
81.09% of its commercial mortgage loans had adjustable interest rates.
3
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The Company invests in MBS, including securities guaranteed by Government
National Mortgage Association ("GNMA"), FNMA and FHLMC. To a limited extent
the Company also invests in privately issued MBS which typically have received
a "AA" or "AAA" credit rating from at least one nationally recognized rating
service. The Company invests in both adjustable rate and fixed rate MBS. In an
effort to reduce the potential interest rate risk inherent in fixed rate
assets, the Company purchases fixed rate MBS with a variety of coupon rates,
maturities, and prices. Furthermore, the assets are typically purchased with
fixed rate FHLB advances of various terms to maturity primarily ranging from 1
month to 5 years in order to mitigate the Company's exposure to changes in
interest rates. The adjustable rate MBS portfolio typically have life caps
that will prevent the MBS from further upward adjustments in rate should
interest rates rise above the cap limit. Prior to purchase, management
considers the Company's overall tolerance to interest rate risk and invests
accordingly. At June 30, 1998, the Company's MBS portfolio totaled $115.9
million or 13.05% of total assets. MBS are comprised of $71.9 million of
agency securities, $3.6 million issued by other financial institutions and
$39.4 million in collateralized mortgage obligations (CMO's). Of the
$39.4 million in CMO's 91.37% or $36.0 million are agency guaranteed. For all
years presented, the CMO's represent non-equity senior interests in mortgage
pass-through certificates and were of investment grade. At June 30, 1998, $8.3
million in MBS were classified as available for sale.
The following table sets forth the composition of the Company's loan and MBS
portfolios in dollar amounts and percentages of the respective portfolio at
the dates indicated.
4
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<TABLE>
<CAPTION>
AT JUNE 30,
------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------- ------------------- -------------------- -------------------- --------------------
PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- ---------- -------- ---------- -------- ---------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans:
Residential:
One-to-four
units.......... $279,862 39.26% $299,979 45.47% $303,273 48.54% $288,664 51.85% $234,709 49.51%
Multifamily..... 347,285 48.72 301,965 45.77 258,970 41.45 205,731 36.95 177,539 37.46
Commercial........ 77,810 10.92 55,331 8.39 60,822 9.74 60,709 10.91 60,617 12.79
Land.............. 348 0.05 1,352 0.21 1,038 0.17 1,046 0.19 691 0.15
Other............. 7,544 1.05 1,070 0.16 627 0.10 546 0.10 412 0.09
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Loans, gross.... 712,849 100.00% 659,697 100.00% 624,730 100.00% 556,696 100.00% 473,968 100.00%
====== ====== ====== ====== ======
Less:
Undisbursed loan
funds............ 579 441 378 187 183
Unamortized
discounts........ 2,170 2,404 2,864 2,815 1,999
Deferred loan
fees, net........ 3,612 3,493 3,093 2,442 2,184
Allowance for
loan losses...... 7,955 7,772 7,833 12,108 13,660
-------- -------- -------- -------- --------
Loans, net...... 698,533 645,587 610,562 539,144 455,942
Less:
Loans held for
sale:
One-to-four
units.......... 1,043 623 1,455 400 5,415
Multifamily..... 6,464 -- 1,435 1,266 --
-------- -------- -------- -------- --------
Net loans held
for investment. $691,026 $644,964 $607,672 $537,478 $450,527
======== ======== ======== ======== ========
Mortgage-backed
securities:
FNMA.............. $ 11,309 9.84% $ 13,240 17.87% $ 11,129 26.70% $ 11,367 27.77% $ -- -- %
FHLMC............. 8,272 7.20 1,298 1.75 1,697 4.07 2,117 5.17 119 0.80
GNMA.............. 52,306 45.52 33,577 45.32 7,885 18.92 -- -- -- --
Issued by other
financial
institutions..... 3,628 3.16 4,554 6.15 5,781 13.87 11,451 27.97 12,659 84.64
Collateralized
mortgage
obligations...... 39,391 34.28 21,423 28.91 15,185 36.44 16,004 39.09 2,178 14.56
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
114,906 100.00% 74,092 100.00% 41,677 100.00% 40,939 100.00% 14,956 100.00%
====== ====== ====== ====== ======
Plus (Less):
Unamortized
premium
(discount)....... 945 47 (502) (946) (247)
-------- -------- -------- -------- --------
Mortgage-backed
securities,
net............ 115,851 74,139 41,175 39,993 14,709
Less:
Mortgage-backed
securities
available for
sale............. 8,274 -- -- -- 5,997
-------- -------- -------- -------- --------
Net mortgage-
backed
securities held
to maturity.... 107,577 74,139 41,175 39,993 8,712
-------- -------- -------- -------- --------
Total net loans and
mortgage-backed
securities held
for investment or
to maturity....... $798,603 $719,103 $648,847 $577,471 $459,239
======== ======== ======== ======== ========
</TABLE>
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Loan Maturity. The following table shows the contractual maturity of the
Company's gross loans and MBS at June 30, 1998. The table includes loans held
for sale of $7.5 million and MBS available for sale of $8.3 million. The table
does not include estimated principal repayments. Actual principal repayments
on loans totaled $91.8 million, $54.5 million and $48.0 million for the years
ended June 30, 1998, 1997 and 1996, respectively. Principal repayments on MBS
totaled $29.6 million, $7.3 million, and $11.2 million for the years ended
June 30, 1998, 1997, and 1996, respectively.
<TABLE>
<CAPTION>
AT JUNE 30, 1998
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ONE- TOTAL MORTGAGE-
TO-FOUR MULTI- LOANS BACKED
FAMILY FAMILY COMMERCIAL LAND OTHER RECEIVABLE SECURITIES TOTAL
-------- -------- ---------- ---- ------ ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Amounts due:
One year or less....... $ 1,372 $ 4,978 $ 1,097 $-- $ 712 $ 8,159 $ -- $ 8,159
-------- -------- ------- ---- ------ -------- -------- --------
After one year:
More than one year to
three years........... 7,695 2,192 9,823 -- 25 19,735 -- 19,735
More than three years
to five years......... 1,199 15,093 12,601 -- 10 28,903 -- 28,903
More than five years to
10 years.............. 11,963 58,964 19,815 290 305 91,337 1,727 93,064
More than 10 years to
20 years.............. 56,114 213,469 33,564 -- 3,331 306,478 14,050 320,528
More than 20 years..... 201,519 52,589 910 58 3,161 258,237 99,129 357,366
-------- -------- ------- ---- ------ -------- -------- --------
Total due after one
year................. 278,490 342,307 76,713 348 6,832 704,690 114,906 819,596
-------- -------- ------- ---- ------ -------- -------- --------
Total amounts due..... $279,862 $347,285 $77,810 $348 $7,544 $712,849 $114,906 $827,755
======== ======== ======= ==== ====== ======== ======== ========
</TABLE>
The following table sets forth at June 30, 1998, the dollar amount of all
loans due after June 30, 1999, and whether such loans have fixed or adjustable
interest rates.
<TABLE>
<CAPTION>
AT JUNE 30, 1998
---------------------------
FIXED ADJUSTABLE TOTAL
------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Real estate loans:
One-to-four family................................ $55,968 $222,522 $278,490
Multifamily....................................... 9,942 332,365 342,307
Commercial real estate............................ 14,677 62,036 76,713
Land.............................................. -- 348 348
Other loans......................................... 4,598 2,234 6,832
------- -------- --------
Total loans....................................... $85,185 $619,505 $704,690
======= ======== ========
</TABLE>
Origination, Purchase, Sale and Servicing of Loans. The Company's mortgage
lending activities are conducted primarily through its executive and branch
offices. The Company originates both fixed rate and ARM loans. Its ability to
originate ARM loans as opposed to fixed rate loans is dependent upon the
relative customer demand, which is affected by the current and expected future
level of interest rates.
Additionally, the Company purchases or participates in loans originated by
other institutions. The determination to purchase loans is based upon the
Company's investment needs and market opportunities. Subject to regulatory
restrictions applicable to savings associations, the Company's current loan
policies allow all loan types to be purchased. The determination to purchase
specific loans or pools of loans is subject to the Company's underwriting
policies, which require consideration of the financial condition of the
borrower and the appraised value of the property, among other factors. The
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Company has purchased loans from independent parties in various transactions.
During the year ended June 30, 1998, $48.1 million, or 26.05% of the Company's
total new loans were purchased.
At origination or time of purchase, the Company designates loans as held for
investment or held for sale. Historically, loans held for sale have been sold
in the secondary market to FNMA, FHLMC and other investors. The Company
generally retains the servicing rights on most loans sold, however, certain
loans are sold servicing released. The determination to sell a specific loan
or pool of loans is made based upon the Company's investment needs, growth
objectives and market opportunities.
In an attempt to further minimize interest rate risk associated with fixed
rate loans designated as held for sale, the Company may enter into commitments
with FNMA and other investors (known as forward commitments) to sell loans at
a future date at a specified price. The Company will then simultaneously
process and close the loans, thereby attempting to protect the price of loans
in process from interest rate fluctuations that may occur from application to
sale. There is risk involved in this forward commitment activity. In a
declining interest rate environment, borrowers may choose not to close loans,
but the Company would remain obligated to fulfill its forward commitments. The
inability of the Company to originate or acquire loans to fulfill these
commitments may result in the Company being required to pay non-delivery fees.
In an increasing interest rate environment, the Company is subject to interest
rate risk in the event its commitments to make loans to borrowers exceeds its
commitments to sell loans. At June 30, 1998, the Company had $987,000 in
forward commitments with respect to fixed rate loans held for sale. The
Company does not intend to enter into forward commitments on ARM loans.
The Company sells loans and participations in loans with yield rates to the
investors based upon current market rates. Gain or loss is recognized to the
extent that the selling prices differ from the carrying value of the loans
sold based on the estimated relative fair values of the assets sold and any
retained interests, less any liabilities incurred. The assets obtained on sale
are generally loan servicing assets. Liabilities incurred in a sale may
include recourse obligations or servicing liabilities. Historically, the
Company has not established servicing assets or liabilities upon sale of
loans, although the Company has retained the servicing rights on loans sold,
because management has determined that the benefits from the contractually
specified servicing fees and other ancillary sources are offset by the cost
the Company incurs in servicing.
In addition to retaining the servicing rights for originated loans, the
Company may also purchase mortgage servicing rights related to mortgage loans
originated by other institutions. The Company's current loan policies provide
that the aggregate amount of purchased mortgage servicing shall not exceed 75%
of the total loans in the Company's portfolio that are serviced for others. In
December 1997, the Company purchased the rights to service $52.5 million of
loans for FNMA and FHLMC. At June 30, 1998, the Company had purchased mortgage
servicing rights with a book value of $471,000.
7
<PAGE>
The following table sets forth activity in the Company's loan and MBS
portfolios for the periods indicated:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED
JUNE 30,
--------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Gross loans:
Beginning balance................................. $659,697 $624,730 $556,696
Loans originated:
One-to-four family.............................. 36,227 32,092 51,383
Multifamily..................................... 77,703 79,541 70,841
Commercial...................................... 21,208 3,081 122
Other........................................... 1,436 292 --
-------- -------- --------
Total loans originated.......................... 136,574 115,006 122,346
Loans purchased................................. 48,112 12,521 27,789
Loans to facilitate the sale of REO............. 1,365 4,847 5,580
-------- -------- --------
Total.......................................... 186,051 132,374 155,715
Less:
Transfer to REO................................. 6,239 8,313 7,764
Principal repayments............................ 91,846 54,465 48,032
Sales of loans.................................. 34,324 33,870 27,662
Other, net...................................... 490 759 4,223
-------- -------- --------
Ending balance.................................... $712,849 $659,697 $624,730
======== ======== ========
Gross mortgage-backed securities:
Beginning balance................................. $ 74,092 $ 41,677 $ 40,939
Mortgage-backed securities purchased............ 71,767 40,228 13,766
Less:
Principal repayments............................ 29,595 7,305 11,157
Other, net...................................... 1,358 508 1,871
-------- -------- --------
Ending balance.................................... $114,906 $ 74,092 $ 41,677
======== ======== ========
</TABLE>
One-to-Four Family Mortgage Lending. The Company 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 Company'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. Included in one-to-four family
loans are outstanding balances of $15.1 million of adjustable rate home equity
credit lines tied to the Wall Street Prime index. These loans are generally
secured by a first or second trust deed, with maturities up to 25 years.
At June 30, 1998, the Company's gross loans outstanding were $712.8 million,
of which $279.9 million, or 39.26%, were one-to-four family mortgage loans. Of
the one-to-four family mortgage loans outstanding at that date, 20.27% were
fixed-rate loans, and 79.73% were ARM loans. During the year ended June 30,
1998, the Company originated $36.2 million of one-to-four family loans. The
Company'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. In recent years,
declines in the real estate values in the Company's primary lending area have
resulted in increases in the loan-to-value ratio on some one-to-four family
mortgage loans subsequent to origination.
8
<PAGE>
Multifamily Lending. The Company originates multifamily mortgage loans
generally secured by 5-to-36 unit apartment buildings located in the Los
Angeles metropolitan area. In originating a multifamily mortgage loan, the
Company 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 operating income to debt service) and the
ratio of the loan amount to appraised value. Pursuant to the Company'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
Company also generally requires a debt service coverage ratio of at least
110%. Properties securing a loan are appraised by an independent appraiser and
title insurance is required on all loans. The average outstanding loan balance
on multifamily mortgage loans at June 30, 1998 was approximately $332,000,
with the largest loan being $2.6 million. The property collateralizing this
loan is located in Anaheim, California and was not classified at June 30,
1998. In recent years, declines in the real estate values in the Company's
primary lending area have resulted in increases in the loan-to-value ratio on
some multifamily mortgage loans subsequent to origination.
When evaluating the qualifications of the borrower for a multifamily loan,
the Company considers the financial resources and income level of the
borrower, the borrower's experience in owning or managing similar property,
and the Company's lending experience with the borrower. The Company's
underwriting policies require that the borrower be able to demonstrate strong
management skills and the ability to maintain the property with current rental
income. The borrower should also present evidence of the ability to repay the
mortgage and a history of making mortgage payments on a timely basis. In
assessing the creditworthiness of the borrower, the Company generally reviews
the financial statements, employment and credit history of the borrower, as
well as other related documentation. During the year ended June 30, 1998, the
Company originated $77.7 million of multifamily loans. At June 30, 1998, the
multifamily loan portfolio totaled $347.3 million or 48.72% of gross loans as
compared to $302.0 million or 45.77% of gross loans at June 30, 1997. Of the
$347.3 million in multifamily loans, 3.61% were fixed-rate loans and 96.39%
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 prevailed in the Company's
primary lending market area in recent years tend to result in higher vacancy
and reduced rental rates and net operating incomes from multifamily
residential properties. Of the Company's $1.3 million of charge-offs in fiscal
1998, $839,000, or 66.85%, were for multifamily loans. See "--Allowances for
Loan and Real Estate Losses."
Commercial Real Estate Lending. The Company 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 located in the Company's primary market area. At June 30,
1998, the commercial real estate loan portfolio aggregated $77.8 million. Of
the $77.8 million, 18.91% were fixed-rate loans and 81.09% were ARM loans. The
Company originated $21.2 million of commercial real estate loans, which
resulted in an increase of 40.63% in the commercial loan portfolio as compared
to June 30, 1997. The increase in commercial loan originations during the year
is primarily a result of increases in loan production resulting from the
Company's hiring of the income property lending staff of another financial
institution in Southern California. The Company'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 Company's underwriting standards and
procedures are similar to those applicable to its multifamily loans, wherein
the Company considers the net operating income of the property and the
borrower's expertise, credit history and profitability. The Company has
generally required that the
9
<PAGE>
properties securing commercial real estate loans have debt service coverage
ratios of at least 110%. The largest commercial real estate loan in the
Company's portfolio, located in Los Angeles, California, had an outstanding
principal balance at June 30, 1998 of $2.4 million and was not classified.
Commercial real estate loans are generally considered to involve a higher
degree of credit risk and to be more vulnerable to deteriorating economic
conditions than one-to-four family residential mortgage loans. These loans
typically involve higher loan principal amounts and the repayment of such
loans generally depend on the income produced by the operation or sale of the
property being sufficient to cover operating expenses and debt service.
Recessionary economic conditions of the type that prevailed in the Company's
primary lending market area in recent years tend to result in higher vacancy
and reduced rental rates and net operating incomes from commercial properties.
Of the Company's $1.3 million of charge-offs in fiscal 1998, none were for
commercial real estate loans. As the Company has increased its commercial real
estate loan portfolio during the past fiscal year from $55.3 million at June
30, 1997 to $77.8 million at June 30, 1998 (approximately 40.63%), the
Company's past loss experience with respect to its commercial real estate loan
portfolio may not be representative of the risk of loss in such portfolio in
the future. See "--Allowances for Loan and Real Estate Losses."
Certain Loan Terms. The interest rates for the majority of the Company's ARM
loans in portfolio are indexed to the 11th District Cost of Funds Index
("COFI"). The Company currently offers a number of ARM loan programs with
interest rates tied to treasury based and COFI indices 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 Company's ARM
loans. The amount of any shortfall ("negative amortization") is added to the
principal balance of the loan to be repaid through future monthly payments,
which could cause increases in the amount of principal owed to the Company
over that which was originally lent. The Company currently has approximately
$396.8 million in mortgage loans that may be subject to negative amortization.
During the years ended June 30, 1998, 1997 and 1996, the negative amortization
associated with these loans totaled $478,000, $618,000 and $994,000,
respectively. Significant negative amortization can increase the associated
risk of default on loans, particularly for loans originated with relatively
high loan-to-value ratios. Based on historical experience, management does not
believe that the loss experience on the loans that are subject to negative
amortization is materially different from the loss experience on the balance
of its portfolio.
Mortgage loans originated by the Company, generally include due-on-sale
clauses which provide the Company with the contractual right to deem the loan
immediately due and payable in the event the borrower transfers ownership of
the property without the Company's consent. Due-on-sale clauses are an
important means of adjusting the rates on the Company's fixed rate multifamily
and commercial mortgage loan portfolios and the Company has generally
exercised its rights under these clauses.
Loan Approval Procedures and Authority. The Company's Board of Directors has
a standing Loan Committee. The Loan Committee is primarily responsible for
establishing the lending policies of the Company and reviewing properties
offered as security. The Board of Directors has authorized the following
persons to approve loans up to the amounts indicated: mortgage loans in
amounts of $1.0 million and below may be approved by the respective Loan
Division Manager or his designate; mortgage loans in excess of $1.0 million
and up to $1.5 million require the approval of the President or any member of
the Loan Committee; and mortgage loans in excess of $1.5 million requires the
approval of at least two members of the Loan Committee.
10
<PAGE>
For all loans originated by the Company, upon receipt of a completed loan
application from a prospective borrower, a credit report is ordered and
certain other information is verified by an independent credit agency and, if
necessary, additional financial information is required. Appraisals of the
real estate intended to secure proposed loans over $150,000 are required,
which appraisals currently are performed by independent appraisers designated
and approved by the Company. The Company's Board annually approves the
independent appraisers used by the Company and approves the Company's
appraisal policy. The Company's policy is to obtain title and hazard insurance
on all real estate loans. If the original loan amount exceeds 80% of the
underlying property's value on a sale or refinance of a first trust deed loan,
private mortgage insurance is required and the borrower will be required to
make payments to a mortgage impound account from which the Company makes
disbursements for property taxes and mortgage insurance.
DELINQUENCIES AND CLASSIFICATION OF ASSETS
Delinquent Loans. Management performs a monthly review of all delinquent
loans and reports to the Company's Board of Directors regarding the same. The
procedures taken by the Company with respect to delinquencies vary depending
on the nature of the loan and period of delinquency.
The Company's policies generally provide that delinquent mortgage loans be
reviewed and that 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 Company's policies provide that telephone contact
will be attempted to ascertain the reasons for delinquency and the prospects
of repayment. When contact is made with the borrower at any time prior to
foreclosure, the Company will attempt to obtain full payment or work out a
repayment schedule with the borrower to avoid foreclosure. See also "--
Nonperforming Assets and Restructured Loans."
At June 30, 1998, 1997 and 1996, delinquencies in the Company's loan
portfolio were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------- --------------------------------- ---------------------------------
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One-to-four fami-
ly.............. 5 $ 399 22 $2,514 4 $ 442 25 $3,011 3 $ 246 12 $1,467
Multifamily...... 5 1,377 4 1,691 3 1,045 4 348 5 2,220 11 3,991
Commercial....... 3 1,663 3 249 5 3,648 3 1,054 1 1,087 7 3,155
Other loans...... -- -- -- -- -- -- -- -- -- -- 4 105
--- ------ --- ------ --- ------ --- ------ --- ------ --- ------
Total........... 13 $3,439 29 $4,454 12 $5,135 32 $4,413 9 $3,553 34 $8,718
=== ====== === ====== === ====== === ====== === ====== === ======
Delinquent loans
to
total gross
loans........... 0.48% 0.62% 0.78% 0.67% 0.57% 1.40%
</TABLE>
The loans in the above table have been considered in connection with the
Company's overall assessment of the adequacy of its allowance for loan losses.
However, there can be no assurance that the Company will not have to establish
additional loss provisions for these loans in the future. See "--Allowances
for Loan and Real Estate Losses" and "MD&A--Problem Assets."
Classification of Assets. Federal regulations and the Company's
Classification of Assets Policy require that the Company utilize an internal
asset classification system as a means of reporting problem and potential
problem assets. The Company has incorporated the OTS internal asset
classifications as a part of its credit monitoring system. The Company
currently classifies problem and potential problem assets as "Substandard,"
"Doubtful" or "Loss" assets. An asset is considered "Substandard" if it is
inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. "Substandard" assets include
those characterized by the "distinct possibility" that the insured institution
will sustain "some loss" if the deficiencies are not corrected. Assets
classified as "Doubtful" have all of the
11
<PAGE>
weaknesses inherent in those classified "Substandard" with the added
characteristic that the weaknesses present make "collection or liquidation in
full", on the basis of currently existing facts, conditions, and values,
"highly questionable and improbable." See "--Regulation and Supervision--
Classification of Assets." The Company's Internal Asset Review Committee
monthly reviews and classifies the Company's assets and reports the results of
its review to the Company's Board of Directors.
The following table sets forth information with respect to the classified
assets of the Company at June 30, 1998.
<TABLE>
<CAPTION>
AT JUNE 30, 1998
----------------------------
SUBSTANDARD DOUBTFUL TOTAL
----------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Real estate loans:
One-to-four family.............................. $ 6,099 $-- $ 6,099
Multifamily..................................... 5,775 -- 5,775
Commercial and Land............................. 4,317 -- 4,317
REO............................................... 2,678 -- 2,678
Investment in subsidiaries(1)..................... 108 -- 108
Securities........................................ 46 -- 46
------- ---- -------
Total Classified Assets........................... $19,023 $-- $19,023
======= ==== =======
</TABLE>
- --------
(1) At June 30, 1998, the Company classified as Substandard 26% of the
Company's equity investment in subsidiaries. At such date, QCFC reported
total assets of $1.2 million. See "--Subsidiary Activities."
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 114,
"Accounting by Creditors for Impairment of a Loan", the Company recognizes
impairment on troubled collateral dependent loans by creating a specific
valuation allowance. At June 30, 1998 and 1997, the specific valuation
allowance totaled $1.7 million and $1.6 million, respectively. The loans for
which a specific valuation allowance was established are in the process of
collection. At such time that these loans are deemed uncollectible the
specific valuation allowance will be charged-off.
In addition to adversely classified assets, assets which do not currently
expose the Company to sufficient risk to warrant adverse classification but
possess weaknesses are designated "Special Mention." According to OTS
guidelines, Special Mention assets are not adversely classified and do not
expose an institution to sufficient risk to warrant adverse classification. At
June 30, 1998, $6.2 million of assets were graded as Special Mention, compared
to $10.0 million at June 30, 1997.
These assets have been considered in connection with the Company's overall
assessment of the adequacy of its allowance for loan losses; however, there
can be no assurance that the Company will not establish additional loss
provisions for these assets in the future. See "--Allowances for Loan and Real
Estate Losses" and "MD&A--Problem Assets."
NONPERFORMING ASSETS AND RESTRUCTURED LOANS
After 60 days, the Company ceases the accrual of interest on loans and any
previously accrued interest is reversed. In addition, the Company may
restructure a loan due to the debtor's financial difficulty and grant a
concession which the Company would not have otherwise considered. REO is
recorded at fair value less estimated costs of disposition.
12
<PAGE>
The following table sets forth information regarding nonaccrual loans,
troubled debt restructured loans and REO. There were no accruing loans past
due 60 days or more for any of the periods presented below.
<TABLE>
<CAPTION>
AT JUNE 30,
------------------------------------------
1998 1997 1996 1995 1994
------ ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Real estate loans:
One-to-four family............... $2,779 $ 3,226 $ 1,614 $ 1,269 $ 2,033
Multifamily...................... 2,257 2,387 4,949 3,999 4,429
Commercial and land.............. 1,912 2,926 3,781 2,510 3,359
Other:
Loans secured by savings
deposits........................ -- -- 105 -- 35
------ ------- ------- ------- -------
Total nonaccrual loans(1)........ 6,948 8,539 10,449 7,778 9,856
Troubled debt restructured loans... 223 229 234 3,387 5,352
------ ------- ------- ------- -------
Total nonperforming loans........ 7,171 8,768 10,683 11,165 15,208
Real estate acquired through
foreclosure....................... 2,678 1,720 2,435 2,045 2,154
------ ------- ------- ------- -------
Total nonperforming assets....... $9,849 $10,488 $13,118 $13,210 $17,362
====== ======= ======= ======= =======
Ratios:
Net charge-offs to average loans. 0.18% 0.47% 1.13% 0.75% 0.34%
General Valuation Allowance (GVA)
on loans as a percentage of
total nonaccrual loans(1)....... 89.39 72.81 54.72 99.00 87.13
GVA on loans as a percentage of
gross loans..................... 0.87 0.94 0.92 1.38 1.81
GVA on loans as a percentage of
total nonperforming loans(2).... 86.61 70.91 53.52 68.97 56.47
Total GVA as a percentage of
total nonperforming assets(3)... 64.84 60.95 44.92 59.61 50.13
Total nonaccrual loans as a
percentage of gross loans(1).... 0.98 1.29 1.67 1.40 2.08
Nonperforming loans as a
percentage of gross loans(2).... 1.01 1.33 1.71 2.01 3.21
Nonperforming assets as a
percentage of total assets(4)... 1.11 1.31 1.81 2.06 3.39
</TABLE>
- --------
(1) Nonaccrual loans are net of specific allowances of $945,000, $1.0 million,
$1.8 million, $3.7 million and $4.8 million for the years ended June 30,
1998, 1997, 1996, 1995 and 1994, respectively.
(2) Nonperforming loans include nonaccrual and troubled debt restructured
loans. Gross loans include loans held for sale.
(3) Total GVA includes loan and REO general valuation allowances.
(4) Nonperforming assets include nonperforming loans and REO.
The gross amount of interest income on nonaccrual loans that would have been
recorded during the years ended June 30, 1998, 1997 and 1996 if the nonaccrual
loans had been current in accordance with their original terms was $640,000,
$782,000 and $1.1 million, respectively. For the years ended June 30, 1998,
1997 and 1996, $399,000, $469,000 and $565,000, respectively, was actually
earned on nonaccrual loans and is included in interest income on loans in the
consolidated statements of operations for such years included in this report.
Interest income earned on nonaccrual loans is generally recorded utilizing the
cash-basis method of accounting. See "Financial Statements and Supplementary
Data."
13
<PAGE>
IMPAIRED LOANS
A loan is considered impaired when based on current circumstances and
events, it is probable that a creditor will be unable to collect all amounts
due according to the contractual terms of the loan agreement. Creditors are
required to measure impairment of a loan based on any one of the following:
(i) the present value of expected future cash flows from the loan discounted
at the loan's effective interest rate, (ii) an observable market price or
(iii) the fair value of the loan's underlying collateral. The Company measures
impairment based on the fair value of the loan's underlying collateral
property. Impaired loans exclude large groups of smaller balance homogeneous
loans that are collectively evaluated for impairment. For the Company, loans
collectively reviewed for impairment include all loans with principal balances
of less than $300,000.
Factors considered as part of the periodic loan review process to determine
whether a loan is impaired, as defined under SFAS 114, address both the amount
the Company believes is probable that it will collect and the timing of such
collection. As part of the Company's loan review process the Company considers
such factors as the ability of the borrower to continue to meet the debt
service requirements, assessments of other sources of repayment, the fair
value of any collateral and the Company's prior history in dealing with the
particular type of loan involved. In evaluating whether a loan is considered
impaired, insignificant delays (less than twelve months) in the absence of
other facts and circumstances would not alone lead to the conclusion that a
loan was impaired.
At June 30, 1998 and 1997, the Company had a gross investment in impaired
loans of $8.1 million and $8.0 million, respectively. During the year ended
June 30, 1998 and 1997, the Company's average investment in impaired loans was
$8.2 million and for the years then ended, interest income on such loans
totaled $752,000 and $704,000, respectively. Interest income on impaired loans
which are performing is generally recorded utilizing the cash-basis method of
accounting. Payments received on impaired loans which are performing under
their contractual terms are allocated to principal and interest in accordance
with the terms of the loans. Impaired loans totaling $3.4 million and
$4.3 million were not performing in accordance with their contractual terms at
June 30, 1998 and 1997, and have been included in nonaccrual loans at that
date.
The Company recognizes impairment on troubled collateral dependent loans by
creating a specific valuation allowance. The loans for which a specific
valuation allowance was established are in the process of collection. At such
time that these loans are deemed uncollectible, the specific valuation
allowance is charged-off.
Impaired loans at June 30, 1998 include $6.0 million of loans for which
specific valuation allowances of $1.2 million had been established and $2.1
million of loans for which no specific valuation allowance was considered
necessary. At June 30, 1997, the Company had $5.5 million of impaired loans
for which specific valuation allowances of $1.2 million had been established
and $2.5 million of such loans for which no specific valuation allowance was
considered necessary. All such provisions for losses and related recoveries
are recorded as part of the total allowance for loan losses.
ALLOWANCES FOR LOAN AND REAL ESTATE LOSSES
The Company's allowance for loan losses is comprised of specific valuation
allowances as well as a general valuation allowance (GVA). As discussed above,
specific valuation allowances are generally established to recognize
impairment on troubled collateral dependent loans. The GVA is maintained in an
amount that management believes will be adequate to absorb reasonably
anticipated losses that may be realized on existing loan-related assets and
off-balance sheet items.
The allowance for loan losses is established through a provision for loan
losses based on management's evaluation of the risks inherent in its loan
portfolio. The allowance for loan losses is
14
<PAGE>
maintained at an amount management considers adequate to cover estimated
losses in loans receivable which are deemed probable and estimable. The
allowance is based upon a number of factors, including asset classifications,
economic trends, industry experience and trends, industry and geographic
concentrations, estimated collateral values, management's assessment of the
credit risk inherent in the portfolio, historical loan loss experience, the
Company's underwriting policies and the regulatory environment. As the Company
has increased its commercial real estate loan portfolio during the past fiscal
year from $55.3 million at June 30, 1997 to $77.8 million at June 30, 1998
(approximately 40.63%), the Company's past loss experience with respect to its
commercial real estate loan portfolio may not be representative of the risk of
loss in such portfolio in the future. It is the Company's general policy to
obtain appraisals on the underlying property for loans 90 days or more past
due and over $500,000. If the loan amount is under $500,000, appraisals are
obtained at the time of foreclosure.
The Company's allowance for loan losses amounted to $8.0 million, or 1.12%
of gross loans, at June 30, 1998 compared to $7.8 million, or 1.18% of gross
loans, at June 30, 1997. The allowance for loan losses at June 30, 1998
reflects management's evaluation of the risks inherent in its loan portfolio
and various other factors, including those factors identified in the preceding
paragraph. The Company's ratio of nonperforming loans to gross loans decreased
to 1.01% at June 30, 1998 from 1.33% at June 30, 1997. The Company's ratio of
nonperforming assets to total assets decreased during this period to 1.11% at
June 30, 1998 from 1.31% at June 30, 1997. As of June 30, 1998, the Company's
total GVA to nonperforming assets, was 64.84% as compared to 60.95% at June
30, 1997.
The Company recorded a provision for loan losses of $1.5 million for the
year ended June 30, 1998, compared to $3.0 million, $2.1 million, $998,000 and
$10.2 million for the years ended June 30, 1997, 1996, 1995 and 1994,
respectively. The decrease in the provision for 1998 is primarily a result of
decreased charge-offs and nonaccrual loans during this period. Management
believed that the increases in the provisions for 1997 and 1996 were necessary
to replenish the allowance for loan losses to what management believed was an
adequate level due to charge-offs taken during these years. The decrease in
the provision in 1995 as compared to 1994 was primarily a result of the
reduction in nonperforming assets during 1995. The increase in charge-offs in
1995 and 1996 was primarily a result of acquiring title to or resolving
properties damaged in the January 1994 Northridge earthquake as well as
continued declines in the Southern California economy during those years.
Although the Company believes that the allowance for loan losses at June 30,
1998 is adequate, there can be no assurance that the Company will not have to
establish additional loss provisions based upon future events. The Company
will continue to monitor and modify its allowances for loan losses as
conditions dictate. In addition, the OTS and the FDIC, as an integral part of
their examination process, periodically review the Company's valuation
allowance. These agencies may require the Company to establish additional
allowances, based on their judgments of the information available at the time
of the examination. See "Regulation and Supervision--Classification of
Assets."
It is the policy of the Company to "charge-off" consumer loans when it is
determined that they are no longer collectible. The policy for loans secured
by real estate, which comprise the bulk of the Company's portfolio, is to
establish an allowance for loan losses in accordance with the Company's asset
classification process, based on generally accepted accounting principles
("GAAP"). It has generally been the practice of the Company to "charge-off"
losses after acquiring title to a property securing the loan. Prior to
acquiring title to REO, losses are recognized through the establishment of
valuation allowances. It is the policy of the Company to obtain an appraisal
on all REO upon acquisition by the Company.
15
<PAGE>
REO is initially recorded at fair value at the date of acquisition, less
estimated costs of disposition. Thereafter, if there is a further
deterioration in value, the Company writes down the REO directly for the
diminution in value. Real estate held for investment is carried at the lower
of cost or net realizable value. All costs of anticipated disposition are
considered in the determination of net realizable value.
The following table sets forth activity in the Company's total allowance for
loan losses and allowance for losses on REO.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED JUNE 30,
-------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Accumulated through a charge to
earnings:
Balance at beginning of year... $ 6,496 $ 6,542 $10,614 $13,458 $ 4,833
Provision for loan losses...... 1,450 3,001 2,103 998 10,200
Charge-offs:
One-to-four family........... (416) (699) (968) (160) (57)
Multifamily.................. (839) (2,182) (3,896) (3,252) (1,198)
Commercial and land.......... -- (165) (1,309) (428) (304)
Non-mortgage................. -- (1) (2) (2) (16)
Recoveries..................... -- -- -- -- --
------- ------- ------- ------- -------
Subtotal charge-offs, net..... (1,255) (3,047) (6,175) (3,842) (1,575)
------- ------- ------- ------- -------
Balance at end of year......... 6,691 6,496 6,542 10,614 13,458
Valuation allowance for portfo-
lios acquired:
Balance at beginning of year... 1,276 1,291 1,494 202 246
Purchases...................... -- -- 294 1,308 --
Charge-offs:
Multifamily.................. -- -- (471) -- --
Reductions credited............ (12) (15) (26) (16) (44)
------- ------- ------- ------- -------
Balance at end of year......... 1,264 1,276 1,291 1,494 202
------- ------- ------- ------- -------
Total allowance for loan loss-
es............................ $ 7,955 $ 7,772 $ 7,833 $12,108 $13,660
======= ======= ======= ======= =======
Allowance for REO losses:
Balance at beginning of year... $ 175 $ 175 $ 175 $ 115 $ 95
Additions charged to opera-
tions......................... -- -- -- 60 20
------- ------- ------- ------- -------
Balance at end of year......... $ 175 $ 175 $ 175 $ 175 $ 115
======= ======= ======= ======= =======
</TABLE>
16
<PAGE>
The following table sets forth the Company's allowance for loan losses to
total loans and the percentage of loans to total loans in each of the
categories listed.
<TABLE>
<CAPTION>
AT JUNE 30,
-----------------------------------------------------------------------------------------
1998(1) 1997(1) 1996(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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One-to-four family...... $1,421 17.86% 39.26% $1,709 21.99% 45.47% $1,306 16.67% 48.54%
Multifamily............. 3,556 44.70 48.72 3,318 42.69 45.77 4,744 60.56 41.45
Commercial.............. 1,337 16.81 10.92 1,085 13.96 8.39 1,288 16.44 9.74
Land.................... -- -- 0.05 210 2.70 0.21 199 2.54 0.17
Other................... 38 0.48 1.05 -- -- 0.16 -- -- 0.10
Unallocated............. 1,603 20.15 N/A 1,450 18.66 N/A 296 3.79 N/A
------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance
for loan losses....... $7,955 100.00% 100.00% $7,772 100.00% 100.00% $7,833 100.00% 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30,
-------------------------------------------------------------
1995(1) 1994(1)
------------------------------ ------------------------------
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)
<S> <C> <C> <C> <C> <C> <C>
One-to-four family...... $ 1,338 11.05% 51.85% $ 989 7.24% 49.51%
Multifamily............. 6,499 53.68 36.95 8,613 63.05 37.46
Commercial.............. 2,475 20.44 10.91 2,220 16.25 12.79
Land.................... 344 2.84 0.19 407 2.98 0.15
Other................... -- -- 0.10 2 0.02 0.09
Unallocated............. 1,452 11.99 N/A 1,429 10.46 N/A
------- ------ ------ ------- ------ ------
Total allowance
for loan losses....... $12,108 100.00% 100.00% $13,660 100.00% 100.00%
======= ====== ====== ======= ====== ======
</TABLE>
- --------
(1) In 1998, 1997, 1996, 1995 and 1994, total specific allowances amounted to
$1.7 million, $1.6 million, $2.2 million, $4.3 million and $5.1 million,
respectively.
The increase in the unallocated allowance at June 30, 1997 as compared to
June 30, 1996, is a result of a decrease in the allocated allowance required
on multifamily loans as a result of a decline in multifamily charge-offs and
nonaccrual multifamily loans during the year.
INVESTMENT ACTIVITIES
Federally chartered savings 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
17
<PAGE>
the Company's lending activities. Specifically, the Company's policy generally
limits investments to government and federal agency-backed securities and
other non-government guaranteed securities, including corporate debt
obligations, that are investment-grade. The Company's policy authorizes
investment in marketable equity securities meeting the Company's guidelines.
The policy requires that all investment purchases be ratified by the Board of
Directors of the Company. At June 30, 1998, the Company had federal funds sold
and other short-term investments and investment securities in the aggregate
amount of $33.3 million with a fair value of $33.3 million.
The following table sets forth certain information regarding the amortized
cost and fair values of the Company's federal funds sold and other short-term
investments and investment securities portfolio at the dates indicated:
<TABLE>
<CAPTION>
AT JUNE 30,
-----------------------------------------------------
1998 1997 1996
----------------- ----------------- -----------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
--------- ------- --------- ------- --------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold and
other short-term
investments............. $26,420 $26,420 $12,950 $12,950 $ 6,400 $ 6,400
======= ======= ======= ======= ======= =======
Investment securities:
Held to maturity:
U.S. Government and
Federal agency
obligations.......... $ 4,729 $ 4,741 $36,303 36,142 $37,048 $36,437
Municipal bonds....... 329 329 351 351 371 371
------- ------- ------- ------- ------- -------
Total held to
maturity........... 5,058 5,070 36,654 36,493 37,419 36,808
Available for sale:
Marketable Equity
Securities........... 1,200 1,819 1,200 1,432 -- --
------- ------- ------- ------- ------- -------
Total investment
securities......... $ 6,258 $ 6,889 $37,854 $37,925 $37,419 $36,808
======= ======= ======= ======= ======= =======
</TABLE>
The table below sets forth certain information regarding the amortized cost,
weighted average yields and contractual maturities of the Company's federal
funds sold and other short-term investments and investment securities as of
June 30, 1998.
<TABLE>
<CAPTION>
AT JUNE 30, 1998
-----------------------------------------------------------------------------------------------
MORE THAN ONE MORE THAN FIVE MORE THAN TEN
NO MATURITY ONE YEAR OR LESS YEAR TO FIVE YEARS YEARS TO TEN YEARS YEARS
------------------ ------------------ ------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE
COST YIELD COST YIELD COST YIELD COST YIELD COST YIELD
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal funds sold
and other short-
term investments. $ -- -- % $26,420 5.60% $ -- -- % $-- --% $-- -- %
====== === ======= ==== ====== ==== ==== === ==== ====
Investment
securities:
Held to maturity:
U.S. Government
and Federal
agency
obligations..... $ -- -- % $ 547 6.07% $4,182 6.31% $-- --% $-- -- %
Municipal bonds.. -- -- -- -- -- -- -- -- 329 7.00(1)
------ ------- ------ ---- ----
Total held to
maturity....... -- -- 547 6.07 4,182 6.31 -- -- 329 7.00
Available for
sale:
Marketable Equity
securities...... 1,200 N/A -- -- -- -- -- -- -- --
------ ------- ------ ---- ----
Total investment
securities..... $1,200 N/A $ 547 6.07% $4,182 6.31% $-- --% $329 7.00%
====== ======= ====== ==== ====
<CAPTION>
TOTAL
------------------
WEIGHTED
AMORTIZED AVERAGE
COST YIELD
--------- --------
<S> <C> <C>
Federal funds sold
and other short-
term investments. $26,420 5.60%
========= ========
Investment
securities:
Held to maturity:
U.S. Government
and Federal
agency
obligations..... $ 4,729 6.28%
Municipal bonds.. 329 7.00
---------
Total held to
maturity....... 5,058 6.33
Available for
sale:
Marketable Equity
securities...... 1,200 N/A
---------
Total investment
securities..... $ 6,258 6.33%
=========
</TABLE>
- -------
(1) This rate represents the coupon rate on the investment and has not been
computed on a tax equivalent basis.
18
<PAGE>
SOURCES OF FUNDS
General. Deposits, FHLB advances, securities sold under agreements to
repurchase, loan repayments and prepayments, and proceeds from sales of loans
are the primary sources of the Company's funds for use in lending, investing
and for other general purposes.
Deposits. The Company offers a variety of deposit accounts with a range of
interest rates and terms. The Company's deposits consist of passbook savings,
checking accounts, money market accounts and certificates of deposit. The flow
of deposits is influenced significantly by general economic conditions,
changes in money market rates, prevailing interest rates and competition. The
Company's deposits are obtained predominantly from the areas in which its
branch offices are located. The Company relies primarily on customer service
and long-standing relationships with customers to attract and retain these
deposits; however, market interest rates and rates offered by competing
financial institutions significantly affect the Company's ability to attract
and retain deposits. Certificate of deposit accounts in excess of $100,000 are
not actively solicited by the Company nor does the Company use brokers to
obtain deposits. Management continually monitors the Company's certificate
accounts and historically the Company has retained a large portion of such
accounts upon maturity. See "MD&A--Capital Resources and Liquidity--Sources of
Funds and Liquidity."
The following table presents the deposit activity of the Company for the
periods indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30,
-------------------------------
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Deposits....................................... $ 741,609 $ 651,616 $ 579,878
Withdrawals.................................... (742,092) (636,318) (572,111)
--------- --------- ---------
Net deposits................................... (483) 15,298 7,767
Interest credited on deposits.................. 28,207 25,371 23,592
--------- --------- ---------
Total increase in deposits................... $ 27,724 $ 40,669 $ 31,359
========= ========= =========
</TABLE>
The following table presents the amount and weighted average rate of time
deposits equal to or greater than $100,000 at June 30, 1998:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
JUNE 30, 1998
--------------------
MATURITY PERIOD WEIGHTED
AMOUNT AVERAGE RATE
- --------------- ------- ------------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Three months or less....................................... $22,701 5.49%
Over three through six months.............................. 19,006 5.41
Over six through 12 months................................. 21,762 5.23
Over 12 months............................................. 18,635 6.13
-------
Total...................................................... $82,104 5.55
=======
</TABLE>
19
<PAGE>
The following table sets forth the distribution of the Company's deposit
accounts for the periods indicated and the weighted average interest rates on
each category of deposits presented.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30,
--------------------------------------------------------------------------------------
1998 1997 1996
---------------------------- ---------------------------- ----------------------------
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Money market deposits... $110,990 19.67% 4.52% $ 83,372 15.72% 4.20% $ 75,176 15.12% 3.99%
Passbook deposits....... 17,425 3.09 2.01 17,899 3.38 1.98 21,028 4.23 1.99
NOW and other demand
deposits............... 26,363 4.67 1.27 24,011 4.53 1.16 23,006 4.63 1.20
Non-interest bearing
deposits............... 9,253 1.64 -- 7,718 1.46 -- 6,296 1.46 --
-------- ------ -------- ------ -------- ------
Total.................. 164,031 29.07 133,000 25.09 126,766 25.49
-------- ------ -------- ------ -------- ------
Certificate accounts:
Three months or less.... 111,121 19.69 5.49 99,718 18.81 5.43 86,940 17.49 5.60
Over three through six
months................. 98,605 17.48 5.51 88,175 16.63 5.43 82,662 16.63 5.73
Over six through 12
months................. 114,989 20.38 5.56 110,972 20.93 5.61 121,386 24.40 5.77
Over one to three years. 63,974 11.34 6.00 68,637 12.94 5.76 43,524 8.75 5.89
Over three to five
years.................. 11,494 2.04 5.77 29,683 5.60 6.15 35,961 7.23 6.20
Over five years......... 21 -- 5.39 6 -- 5.23 42 0.01 7.06
-------- ------ -------- ------ -------- ------
Total certificates..... 400,204 70.93 5.60 397,191 74.91 5.59 370,515 74.51 5.78
-------- ------ -------- ------ -------- ------
Total deposits......... $564,235 100.00% 4.99 $530,191 100.00% 4.97 $497,281 100.00% 5.05
======== ====== ======== ====== ======== ======
</TABLE>
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
contractual maturity of the certificate accounts outstanding at June 30, 1998.
<TABLE>
<CAPTION>
CERTIFICATE AMOUNTS MATURING IN THE YEAR ENDING
AT JUNE 30, JUNE 30,
-------------------------- ---------------------------------------------------
2003 AND
1996 1997 1998 1999 2000 2001 2002 THEREAFTER TOTAL
-------- -------- -------- -------- ------- ------- ------ ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts:
0 to 4.00%.............. $ 720 $ 167 $ -- $ -- $ -- $ -- $ -- $ -- $ --
4.001 to 5.00%.......... 59,878 38,622 39,995 38,661 196 61 621 456 39,995
5.001 to 6.00%.......... 249,461 229,085 276,992 253,208 15,090 5,403 1,921 1,370 276,992
6.001 to 7.00%.......... 72,907 97,347 76,599 24,345 41,213 6,671 4,319 51 76,599
7.001 to 8.00%.......... 6,520 35,834 7,527 8 7,514 -- -- 5 7,527
8.001 to 9.00%.......... 57 344 27 27 -- -- -- -- 27
Over 9.001%............. 12 20 -- -- -- -- -- -- --
-------- -------- -------- -------- ------- ------- ------ ------ --------
Total.................. $389,555 $401,419 $401,140 $316,249 $64,013 $12,135 $6,861 $1,882 $401,140
======== ======== ======== ======== ======= ======= ====== ====== ========
</TABLE>
Borrowings. From time to time the Company has obtained advances from the
FHLB and may do so in the future as an alternative to retail deposit funds.
FHLB advances may also be used to acquire certain other assets as may be
deemed appropriate for investment purposes. These advances are collateralized
by the capital stock of the FHLB held by the Company and certain of the
Company's mortgage loans. See "--Regulation and Supervision--Federal Home Loan
Bank System." Such advances are made pursuant to several different credit
programs, each of which has its own interest rate and range of maturities. The
maximum amount that the FHLB will advance to member institutions, including
the Company, for purposes other than meeting withdrawals, fluctuates from time
to time in accordance with the policies of the OTS and the FHLB. During 1998,
the Company periodically borrowed advances to provide needed liquidity and to
supplement retail deposit gathering activity. See "MD&A--Capital Resources and
Liquidity--Sources of Funds and Liquidity." At June 30, 1998, the Company had
$216.0 million in outstanding advances from the FHLB. During fiscal 1998, the
maximum amount of FHLB advances that the Company had outstanding at any month-
end
20
<PAGE>
was $216.0 million. As anticipated by management, the Company's total
borrowing from the FHLB increased in fiscal 1998.
The following table sets forth certain information regarding the Company's
borrowed funds at or for the periods ended on the dates indicated:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED JUNE 30,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FHLB advances:
Average balance outstanding............ $ 185,032 $ 148,312 $ 96,789
Maximum amount outstanding at any
month-end during the period........... $ 216,000 $ 166,600 $ 135,300
Balance outstanding at end of period... $ 216,000 $ 157,700 $ 135,300
Weighted average interest rate during
the period............................ 5.93% 5.77% 5.76%
Weighted average interest rate at end
of period............................. 5.86% 6.10% 5.87%
Securities sold under agreements to
repurchase:
Average balance outstanding............ $ -- $ 72 $ 8,283
Maximum amount outstanding at any
month-end during the period........... $ -- $ 300 $ 17,146
Balance outstanding at end of period... $ -- $ -- $ 300
Weighted average interest rate during
the period............................ N/A 5.56% 5.92%
Weighted average interest rate at end
of period............................. N/A N/A 5.57%
</TABLE>
For information regarding securities sold under agreements to repurchase,
loan repayments and prepayments and proceeds from loan sales as sources of
funds for the Company, see "MD&A--Capital Resources and Liquidity--Sources of
Funds and Liquidity."
SUBSIDIARY ACTIVITIES
QCFC, a wholly owned subsidiary of the 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. QCFC has a limited partner interest in the project,
with a carrying value of $115,000 at June 30, 1998. 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, 1998, and for the year then ended,
QCFC had $1.2 million in total assets and net income of $149,000.
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 Company's lending communities. The
subsidiary complements the Company'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. In fiscal 1997, this short-term note was paid off by
the City of Whittier.
21
<PAGE>
COMPETITION
Savings associations face strong competition both in attracting deposits and
making real estate loans. The Company's most direct competition for deposits
has historically come from other savings associations and from commercial
banks located in its principal market areas of Los Angeles and Orange Counties
in California, including many large financial institutions which have greater
financial and marketing resources available to them. In addition, particularly
during times of high interest rates, the Company has faced significant
competition for investors' funds from short-term money market securities and
other corporate and government securities and mutual funds which invest in
such securities. Periods of low interest rates have made the attraction and
retention of deposits difficult as savers seek higher rates of return in
alternative investments. The ability of the Company to attract and retain
savings deposits depends on its ability to generally provide a rate of return,
liquidity and risk comparable to that offered by competing investment
opportunities. Furthermore, management considers the Company's reputation for
financial strength and quality service provided through its contiguous
branching network to local customers to be a major competitive advantage in
attracting and retaining savings deposits.
The Company experiences strong competition for real estate loans principally
from other savings associations, commercial banks and mortgage banking
companies. It competes for loans principally through the interest rates and
loan fees it charges and the efficiency and quality of services it provides
borrowers. Management considers the Company's focus in multifamily and low-
to-moderate income lending in the Los Angeles area to be a competitive
advantage also. Competition may increase as a result of the continuing
reduction in restrictions on the interstate operations of financial
institutions.
Under legislation adopted by Congress in 1994, bank holding companies based
in any state generally are allowed to acquire banks in California and banks
based in any state generally are allowed to acquire by merger banks based in
California. Under OTS regulations, federal savings associations have been
generally able to branch nationwide as long as the association's assets
attributable to each state outside of its home state in which it operates
branches are predominantly housing-related assets. The increased authority of
bank holding companies and banks to engage in interstate banking will allow
them to compete more effectively with savings associations.
PERSONNEL
As of June 30, 1998, the Association had 130 full-time employees and 49
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. Prior to 1996, savings institutions such as the
Association which meet certain definitional tests primarily relating to their
assets and the nature of their business ("qualifying thrifts") were permitted
to establish a reserve for bad debts and to make annual additions thereto,
which additions, within specified formula limits, were deducted in arriving at
their taxable income. The Association's deduction with respect to "qualifying
loans," generally loans secured by certain interests in real property, was
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 had the effect of
reducing the maximum marginal rate of federal
22
<PAGE>
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%.
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 has changed its method of accounting
for bad debts from the reserve method formerly permitted under section 593 of
the Internal Revenue Code of 1986, as amended (the "Code") to the "specific
charge-off" method. Under the specific charge-off method, which is governed by
section 166 of the Code and the regulations thereunder, tax deductions may be
taken for bad debts only if loans become wholly or partially worthless.
Although the Act generally requires that qualifying thrifts recapture (i.e.,
include in taxable income) over a six-year period a portion of their existing
bad debt reserves equal to their "applicable excess reserves," the 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, 1998 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. Since management intends to use the reserve only for the purpose for
which it was intended, a deferred tax liability of approximately $3.7 million
has not been recorded.
Distributions. To the extent that the Association makes "non-dividend
distributions" to stockholders that are considered to result in distributions
from the tax bad debt reserve for losses on qualifying real property, then an
amount based on the amount distributed will be included in the 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 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 amount of additional taxable income created from a distribution from the
tax bad debt reserve is an amount that when reduced by the tax attributable to
the income is equal to the amount of the distribution. The result is to tax
distributions from the tax bad debt reserve at approximately 51%. See "--
Regulation and Supervision--Savings and Loan Holding Company Regulation--
Payment of Dividends and Other Capital Distributions by Association" and
"Market for the Registrant's Common Equity and Related Stockholder Matters"
for limits on the payment of dividends of the 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 Company's last complete Internal Revenue Service (IRS) tax
audit was December, 1985. There is a three-year statute of limitations for
federal tax filings. Tax years 1995 through 1997 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.
23
<PAGE>
STATE AND LOCAL TAXATION
State of California. The California franchise tax rate applicable to the
Company equals the franchise tax rate applicable to corporations generally
plus an "in lieu" rate approximately equal to personal property taxes and
business license taxes paid by such corporations (but not generally paid by
banks or financial corporations such as the Association); however, the total
tax rate currently applicable to the Company cannot exceed 10.84% for the 1998
calendar year. Under California regulations, bad debt deductions are available
in computing California franchise taxes using a three or six year weighted
average loss experience method. The Company and its California subsidiary file
California state franchise tax returns on a combined basis.
The Company is currently under examination by the California Franchise Tax
Board for tax years ending December 1990-1993. At this time the Company has
not received any notices of proposed assessments from the taxing authorities.
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.
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, up
to applicable limits. 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. The
FDIC is no longer 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. The following description of statutory and regulatory provisions
and proposals is qualified in its entirety by reference to the particular
statutory or regulatory provisions or proposals.
ACTIVITIES RESTRICTIONS
Qualified Thrift Lender Test. The qualified thrift lender ("QTL") test
requires that, in at least nine out of every twelve months, at least 65% of a
savings bank's "portfolio assets" must be invested in a
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limited list of "qualified thrift investments," primarily investments related
to housing loans and certain other assets. 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, 1998, approximately 90.11% of the Association's portfolio assets
constituted qualified thrift investments and the Association met the QTL test
each month in fiscal 1998.
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.
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 Association's total assets. At June 30, 1998,
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") required the OTS to prescribe for savings
associations minimum acceptable operational and managerial standards, and
standards for asset quality, earnings, and stock valuation. The standards
cover internal control, loan documentation, credit underwriting, interest rate
exposure, asset growth, and employee compensation. Any institution that fails
to meet the OTS regulations promulgated under the safety and soundness
requirements must submit an acceptable plan for compliance or become subject
to the ability of the OTS, in its discretion, to impose operational
restrictions similar to those that would apply to a failure to meet minimum
capital requirements as discussed below.
Real Estate Lending Standards. The OTS and the other federal banking
agencies have adopted regulations which require institutions to adopt and at
least annually review written real estate lending policies. The lending
policies must include diversification standards, underwriting standards
(including loan-to-value limits), loan administration procedures, and
procedures for monitoring compliance with the policies. The policies must
reflect consideration of guidelines adopted by the banking agencies that
discuss certain loan-to-value and percentage of capital limits.
DEPOSIT INSURANCE
Deposit Insurance Premium Assessments. The FDIC has established a risk-based
system for setting deposit insurance assessments on deposits. Currently, all
of the Association's deposits are
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SAIF-insured. Under the risk-based assessment system, an institution's
insurance assessment will vary depending on the level of capital the
institution holds and the degree to which it is the subject of supervisory
concern to the FDIC. SAIF-assessed deposits are currently subject to insurance
premiums between 0.0% and 0.27%. The Association's assessment rate was 0.0% as
of June 30, 1998.
The Deposit Insurance Funds Act of 1996 altered the obligation to make
interest payments on debt obligations issued by the Financing Corporation
("FICO Debt") so that assessments to collect the necessary funds are imposed
separately from the deposit insurance premium and are now assessed on BIF-
insured deposits, although at a lower rate, as well as on SAIF-insured
deposits. Currently, the Association's FICO Debt assessment rate is 0.0610%.
Until December 31, 1999 or, if earlier, the date on which the last savings
institution ceases to exist, SAIF deposits are assessed to pay interest on the
FICO Debt at five times the rate at which BIF deposits are assessed to pay
such interest. Institutions whose deposits are exclusively or primarily BIF-
insured (such as almost all commercial banks) therefore have certain
competitive advantages over institutions whose deposits are primarily SAIF-
insured. Currently, all of the Association's deposits are SAIF-insured.
See "Business--Federal Taxation" for a discussion of recent changes concerning
bad debt deductions historically available to qualifying thrift institutions.
REGULATORY CAPITAL REQUIREMENTS
The OTS's capital regulations include three separate minimum capital
requirements for the savings institution industry--a "tangible capital
requirement," a "leverage limit" (also referred to as the "core capital
ratio"), and a "risk-based capital requirement." These capital standards must
be no less stringent than the capital standards applicable to national banks.
In addition, institutions whose exposure to interest rate risk is deemed to be
above normal are required to deduct a portion of such exposure in calculating
their risk-based capital requirements. The OTS also has the authority, after
giving the affected institution notice and an opportunity to respond, to
establish individual minimum capital requirements ("IMCR") for a savings
institution which are higher than the industry minimum requirements, upon a
determination that an IMCR is necessary or appropriate in light of the
institution's particular circumstances. Savings institutions that do not meet
their capital requirements are subject to a number of sanctions similar to but
less restrictive than the sanctions under the Prompt Corrective Action system
described below, and to a requirement that the OTS be notified of any changes
in the institution's directors or senior executive officers.
The three industry minimum capital requirements are as follows:
Tangible capital of at least 1.5% of adjusted total assets. Tangible
capital is composed of (1) an institution's common stock, perpetual non-
cumulative preferred stock, and related earnings
or surplus (excluding unrealized gains and losses on securities classified
as available-for-sale), (2) certain nonwithdrawable accounts and pledged
deposits and (3) the amount, if any, of equity investment by others in the
institution's subsidiaries, after deducting (a) the institution's
investments in and extensions of credit to subsidiaries engaged as
principal in activities not permissible for national banks, net of any
reserves established against such investments and (b) certain non-
qualifying intangible assets. Deferred tax assets whose realization depends
on the institution's future taxable income or on the institution's tax
planning strategies must also be deducted from tangible capital to the
extent that such assets exceed the lesser of (1) 10% of core capital, or
(2) the amount of such assets that can be realized within one year, unless
such assets were reportable as of December 31, 1992, in which case no
deduction is required.
In general, adjusted total assets equal the institution's consolidated total
assets, minus any assets that are deducted in calculating the amount of
capital. At June 30, 1998, the Association's ratio of tangible capital to
adjusted total assets was 7.44%.
Core capital of at least 3% of adjusted total assets. Core capital
consists of tangible capital plus (1) qualifying intangibles such as
certain mortgage servicing rights and purchased credit card
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relationships and (2) any core deposit premium in existence on March 4,
1994 whose inclusion in core capital is grandfathered by the OTS. The OTS
and the other banking agencies have proposed to amend the minimum leverage
requirement to be 4% for all but the highest rated savings associations and
banks. At June 30, 1998, the Association's core capital ratio was 7.44%.
Total capital of at least 8% of risk-weighted assets. Total capital
includes both core capital and "supplementary" capital items deemed less
permanent than core capital, such as subordinated debt and general loan
loss allowances (subject to certain limits). At least half of total capital
must consist of core capital. Risk-weighted assets are determined by
multiplying each category of an institution's assets, including certain
assets sold with recourse and other off balance sheet assets, by an
assigned risk weight based on the credit risk associated with those assets,
and adding the resulting sums. The amount of risk-based capital, however,
that may be required to be maintained by the institution for recourse
assets cannot be greater than the total of the recourse liability. The four
risk-weight categories include zero percent for cash and government
securities, 20% for certain high-quality investments, 50% for certain
qualifying one-to-four family and multifamily mortgage loans and 100% for
assets (including past-due loans and real estate owned) that do not qualify
for preferential risk-weighting. At June 30, 1998, the Association's risk-
based capital ratio was 12.97%, and accordingly the Association exceeded
all three of the industry minimum capital requirements.
FDICIA required the OTS and the federal bank regulatory agencies to revise
their risk-based capital standards to ensure that those standards take
adequate account of interest-rate risk, concentration of credit risk, and
risks of nontraditional activities. The regulations of the OTS and the other
federal banking agencies provide that an institution may be required to hold
risk-based capital in excess of regulatory minimums to the extent that it is
determined either that (i) the institution has a high degree of exposure to
interest-rate risk, prepayment risk, credit risk, certain risks arising from
nontraditional activities or similar risks, or a high proportion of off-
balance sheet risk or (ii) the institution is not adequately managing these
risks. For this purpose, however, the agencies have stated that, in view of
the statutory requirements relating to permitted lending and investment
activities of savings institutions, the general concentration by such
institutions in real estate lending activities would not, by itself, be deemed
to constitute an exposure to concentration of credit risk that would require
greater capital levels.
PROMPT CORRECTIVE ACTION REQUIREMENTS
FDICIA required and the OTS has established five capital categories to
implement a "prompt corrective action" system. These categories are:
"well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized."
An institution is treated as well capitalized if its risk-based capital
ratio is at least 10.0%, its ratio of core capital to risk-weighted assets
(the "Tier 1 risk-based capital ratio") is at least 6.0%, its leverage ratio
is at least 5.0%, and it is not subject to any order or directive by the OTS
to meet a specific capital level. At June 30, 1998, the Association had a
risk-based capital ratio of 12.97%, a Tier 1 risk-based capital ratio of
11.84%, and a core capital ratio of 7.44%, 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.
An institution will be adequately capitalized if its risk-based capital
ratio is at least 8.0%, its Tier 1 risk-based capital ratio is at least 4.0%,
and its core capital ratio is at least 4.0% (3.0% if the institution receives
the highest rating on the OTS CAMEL financial institutions rating system). An
institution whose capital does not meet the amounts required in order to be
adequately capitalized will be treated as undercapitalized. If an
undercapitalized institution's capital ratios are less than 6.0%, 3.0%, or
3.0%
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respectively, it will be treated as significantly undercapitalized. Finally,
an institution will be treated as critically undercapitalized if its ratio of
"tangible equity" (core capital plus cumulative preferred stock minus
intangible assets other than supervisory goodwill and purchased mortgage
servicing rights) to adjusted total assets is equal to or less than 2.0%.
An institution that is undercapitalized or lower must submit a capital
restoration plan to the OTS within 45 days after becoming undercapitalized,
and the plan can be accepted only if the institution's performance under the
plan is guaranteed, up to a maximum of 5% of the institution's assets, by
every company that controls the institution. An institution that is
undercapitalized is also subject to mandatory stringent limits on expansion
and on the ability to make capital distributions, and is prohibited from
accepting, renewing or rolling over brokered deposits and certain benefit plan
deposits. In addition, an undercapitalized institution is subject to numerous
other restrictions which the OTS may impose in its discretion, including
restrictions on transactions with affiliates and interest rates, and to the
ability of the OTS to order a sale of the institution, the replacement of
directors and management, and the appointment of a conservator or receiver. A
significantly undercapitalized institution is subject to additional sanctions
and a critically undercapitalized institution generally must be placed into
conservatorship or receivership.
ENFORCEMENT
All depository institutions, including savings associations, and
"institution affiliated parties" such as directors, officers, employees,
agents and controlling stockholders of depository institutions, including
holding companies, are subject to regulatory agency enforcement authority. An
institution or institution-affiliated party may be subject to a three-tier
penalty regime that ranges from a maximum penalty of $5,000 per day for a
simple violation to a maximum penalty of $1 million per day for certain
knowing violations including the failure to submit, or submission of
incomplete, false or misleading, reports. An institution-affiliated party may
also be subject to loss of voting rights with respect to the stock of
depository institutions.
SAVINGS AND LOAN HOLDING COMPANY REGULATION
Activities of the Company. As a savings and loan holding company, the
Company must file periodic reports with the OTS, and is subject to OTS
examination. As a savings and loan holding company that controls only one
savings association, the Company generally is not restricted under 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.
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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 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.
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. If an institution does
not meet its capital requirements, the prior approval of the OTS is necessary
before paying a capital distribution. The OTS retains discretion to subject
institutions that meet their capital requirements to the more stringent
capital distribution rules applicable to institutions with less capital if the
OTS notifies the institution that it is in need of more than normal
supervision. The OTS retains the authority to prohibit any capital
distribution otherwise authorized under its regulations if the OTS determines
that the distribution would constitute an unsafe or unsound practice.
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For institutions such as the Association that meet their capital
requirements, the safe harbor capital distribution 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. The OTS has
proposed an amendment to its capital distribution regulation to replace the
current 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.
In connection with a conversion from mutual to stock form, a savings
institution is required to establish a liquidation account in an amount equal
to the converting institution's net worth as of a practicable date prior to
the conversion. The liquidation account is maintained for the benefit of
certain eligible accountholders maintaining accounts at or prior to the date
of conversion. In the event of a complete liquidation of the converted savings
institution (and only in such event), each such accountholder is entitled to
receive a distribution from the liquidation account equal to the then current
adjusted balance of the holder's savings accounts with the savings
institution. The 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.
Additionally, as of June 30, 1998, the Association had a tax bad debt
reserve balance of approximately $10.9 million. 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 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. Since management
intends to use the reserve only for the purpose for which it was intended, a
deferred tax liability of approximately $3.7 million has not been recorded.
Enforcement. Whenever the OTS has reasonable cause to believe that the
continuation by a savings and loan holding company of any activity or of
ownership or control of any non FDIC-insured subsidiary constitutes a serious
risk to the financial safety, soundness, or stability of a savings and loan
holding company's subsidiary savings institution and is inconsistent with the
sound operation of the savings institution, the OTS may order the holding
company, after notice and opportunity for a hearing, to terminate such
activities or to divest such noninsured subsidiary. FIRREA also empowers the
OTS, in such a situation, to issue a directive without any notice or
opportunity for a hearing, which directive may (i) limit the payment of
dividends by the savings institution, (ii) limit transactions between the
savings institution and its holding company or its affiliates, and (iii) limit
any activity of the association that creates a serious risk that the
liabilities of the holding company and its affiliates may be imposed on the
savings institution.
In addition, FIRREA includes savings and loan holding companies within the
category of person designated as "institution-affiliated parties." An
institution-affiliated party may be subject to significant penalties and/or
loss of voting rights in the event such party took any action for or toward
causing, bringing about, participating in, counseling, or aiding and abetting
a violation of law or unsafe or unsound practice by a savings institution.
CLASSIFICATION OF ASSETS
Savings institutions are required to classify their assets on a regular
basis, to establish appropriate allowances for losses and report the results
of such classification quarterly to the OTS. A savings
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institution is also required to set aside adequate valuation allowances to the
extent that an affiliate possesses assets posing a risk to the institution,
and to establish liabilities for off-balance sheet items, such as letters of
credit, when loss becomes probable and estimable. The OTS has the authority to
review the institution's classification of its assets and to determine whether
and to what extent (a) additional assets must be classified, and (b) the
institution's valuation allowances must be increased.
Troubled assets are classified into one of three categories as follows:
Substandard Assets. An asset is considered "Substandard" if it is
inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. Prudent general valuation
allowances are required to be established for such assets.
Doubtful Assets. Assets classified as "Doubtful" have all of the
weaknesses inherent in those classified "Substandard" with the added
characteristic that the weaknesses present make "collection or liquidation
in full," on the basis of currently existing facts, conditions, and values,
"highly questionable and improbable." Prudent general valuation allowances
are required to be established for such assets.
Loss Assets. Assets classified as "Loss" are those considered
"uncollectible" and of such little value that their continuance as bankable
assets is not warranted.
General valuation allowances for loan and lease losses are included within
regulatory capital for certain purposes and up to certain limits, while
specific allowances and other general allowances are not included at all.
The OTS and the other federal banking agencies have adopted a statement of
policy regarding the appropriate levels of general valuation allowances for
loan and lease losses that institutions should maintain. Under the policy
statement, examiners will generally accept management's evaluation of adequacy
of general valuation allowances for loans and lease losses if the institution
has maintained effective systems and controls for identifying and addressing
asset quality problems, analyzed in a reasonable manner all significant
factors that affect the collectibility of the portfolio, and established an
acceptable process for evaluating the adequacy of general valuation
allowances. However, the policy statement also provides that OTS examiners
will review management's analysis more closely if general valuation allowances
for loan and lease losses do not equal at least the sum of (a) 15% of assets
classified as Substandard, (b) 50% of assets classified as Doubtful, and (c)
for the portfolio of unclassified loans and leases, an estimate of credit
losses over the upcoming twelve months based on the institution's average rate
of net charge-offs over the previous two or three years on similar loans,
adjusted for current trends and conditions.
COMMUNITY REINVESTMENT ACT
The Community Reinvestment Act ("CRA") requires each savings institution, as
well as other lenders, to identify the communities served by the institution's
offices and to identify the types of credit the institution is prepared to
extend within such communities. The CRA also requires the OTS to assess the
performance of the institution in meeting the credit needs of its community
and to take such assessment into consideration in reviewing applications for
mergers, acquisitions, and other transactions. An unsatisfactory CRA rating
may be the basis for denying such an application.
Under the CRA regulations of the OTS and the other federal banking agencies,
an institution's performance in making loans and investments and maintaining
branches and providing services in low- and moderate-income areas within the
communities that it serves is evaluated. In connection with its assessment of
CRA performance, the OTS assigns a rating of "outstanding," "satisfactory,"
"needs to improve," or "substantial noncompliance." Based on the latest
examination conducted by the OTS in 1996, the Association was rated
outstanding.
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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, 1998 the Association was
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. See "--Pending Legislation," below regarding legislation proposing
changes in the operation of the Federal Home Loan Bank system.
REQUIRED LIQUIDITY
OTS regulations require savings institutions to maintain, for each calendar
quarter, an average daily balance of liquid assets (including cash, certain
time deposits, bankers' acceptances and specified United States government,
state and federal agency obligations) equal to at least 4% of the quarter end
balance of its deposits, excluding those with maturities exceeding one year,
plus short-term borrowings. The OTS may change this liquidity requirement from
time to time to an amount within a range of 4% to 10% of such accounts and
borrowings depending upon economic conditions and the deposit flows of member
institutions, and may exclude from the definition of liquid assets any item
other than cash and the balances maintained in satisfaction of FRB reserve
requirements, described below. The Association's average liquidity ratio
exceeded the applicable requirement at all times during fiscal 1998.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board requires savings institutions to maintain reserves
against certain of their transaction accounts (primarily deposit accounts that
may be accessed by writing unlimited checks). For the calculation period
including June 30, 1998, the Association was not required to maintain reserves
with the Federal Reserve Board because it maintains certain levels of cash on
hand at its branches and with the requisite custodian. If balances are
maintained to meet the reserve requirements imposed by the Federal Reserve
Board, they do not earn interest but may be used to satisfy the Association's
liquidity requirements discussed above.
As a creditor and a financial institution, the Association is subject to
certain regulations promulgated by the Federal Reserve Board, including,
without limitation, Regulation B (Equal Credit Opportunity Act), Regulation D
(Reserves), Regulation E (Electronic Funds Transfers Act), Regulation F
(limits on exposure to any one correspondent depository institution),
Regulation Z (Truth in Lending Act), Regulation CC (Expedited Funds
Availability Act), and Regulation DD (Truth in Savings Act). As creditors of
loans secured by real property and as owners of real property, financial
institutions, including the 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.
YEAR 2000 COMPLIANCE
In May 1997, the Federal Financial Institutions Examination Council
("FFIEC") issued an interagency statement to the chief executive officers of
all federally supervised financial institutions regarding Year 2000 project
management awareness. The FFIEC has highly prioritized Year 2000 compliance in
order to avoid major disruptions to the operations of financial institutions
and the country's financial systems. The FFIEC statement provides guidance to
financial institutions, providers of data services, and all examining
personnel of the federal banking agencies regarding the Year 2000 issue. The
federal banking agencies have been conducting Year 2000 compliance
examinations, and
32
<PAGE>
the failure to implement an adequate Year 2000 program can be identified as an
unsafe and unsound banking practice. The OTS has established an examination
procedure which contains three categories of ratings: "Satisfactory", "Needs
Improvement", and "Unsatisfactory". Institutions that receive a Year 2000
rating of Unsatisfactory may be subject to formal enforcement action,
supervisory agreements, cease and desist orders, civil money penalties, or the
appointment of a conservator. In addition, federal banking agencies will be
taking into account Year 2000 compliance programs when reviewing applications
and may deny an application based on Year 2000 related issues.
The FFIEC statement outlined five phases for financial institutions to use
as benchmarks to assess their Year 2000 readiness: (1) awareness, (2)
assessment, (3) renovation, (4) validation and (5) implementation.
In April 1998, FFIEC issued Year 2000 compliance testing guidance. The
following key milestones set forth in such guidance are applicable to the
Company:
<TABLE>
<C> <S>
June 30, 1998..... Institutions should complete the development of their
written testing strategies and plans.
March 31, 1999.... Testing by institutions relying on service providers for
mission-critical systems should be substantially complete.
External testing with material other third parties
(customers, other financial institutions, business
partners, payment system providers, etc.) should have
begun.
June 30, 1999..... Testing of mission-critical systems should be complete and
implementation should be substantially complete.
</TABLE>
For purposes of the FFIEC guidance, an application or system is mission-
critical if it is vital to the successful continuance of a core business
activity. An application also may be mission-critical if it interfaces with a
designated mission-critical system. Products of software vendors also may be
mission-critical.
PENDING LEGISLATION
The current session of Congress has been considering H.R. 10, the Financial
Services Act of 1998, which addresses, inter alia, the affiliations
permissible for insured banks and savings associations. In 1997, this bill was
passed by the House Banking Committee and subsequently, with amendments, by
the House Commerce Committee. The version of H.R. 10 considered by those
committees included as Title III the "Thrift Charter Transition Act of 1997."
That proposal followed up on legislation enacted in 1996 that provides that
the SAIF and BIF would merge on January 1, 1999, if there were no savings
associations, as defined, in existence on that date. The Thrift Charter
Transition Act would eliminate the federal savings association charter,
require all such savings associations to become banks (with limited
grandfathering of nonconforming activities), transfer the OTS to be a division
of the Office of the Comptroller of the Currency (the "OCC"), and conform the
regulation of savings and loan holding companies to this structure with
limited grandfathering.
H.R. 10 was passed by the House of Representatives on May 13, 1998 by a
single vote and contained substantial changes to the savings association
provisions. The entire Thrift Charter Transition Act was deleted, and a new
Title IV was inserted that addressed only savings and loan holding company
issues. Under this Title IV, no company could control a newly chartered
savings association under an application filed after March 31, 1998, unless
that company engaged only in "financial activities" as defined in H.R. 10. Any
company that qualified as a "Unitary" savings and loan holding company
("Unitary Company") (or had an application pending) on that date would
continue to operate under present law, and any company would be able to
acquire such a grandfathered Unitary Company without regard to the activities
in which that acquiring company might engage.
33
<PAGE>
On September 11, 1998, the Senate Banking Committee considered H.R. 10,
adopted an omnibus Managers Amendment that significantly amended, inter alia,
Title IV, and passed this version of the bill by a 16-2 vote. As modified by
the Senate Committee, section 401 of Title IV would significantly revise
Section 10(c) of the Home Owners Loan Act concerning the activities of savings
and loan holding companies.
Activities of Savings and Loan Holding Companies. Revised section 401
provides that any company that was a Unitary Company on September 3, 1998, may
continue to operate under present law as long as the company continues to meet
the two tests for Unitary Company status under present law: it can control
only one savings institution, excluding any institution acquired in a
supervisory acquisition, and each such institution must meet the QTL test. The
Senate Bill further requires that a grandfathered Unitary Company must
continue to control at least one savings association, or a successor
institution, that it controlled on September 3, 1998. Such a grandfathered
Unitary Company may continue to conduct its business as a Unitary Company and
may continue to control or acquire any type of company (except a commercial
bank) including nonfinancial companies.
The Senate Bill terminates the creation of new Unitary Companies by
providing that a company that acquires control of a savings association after
September 3, 1998, must either be a grandfathered Unitary Company or a company
engaged only in financial activities (or nonconforming activities that must be
ceased within two years). Under this provision, a grandfathered Unitary
Company could transfer control of a subsidiary savings association only to
another grandfathered Unitary Company, a bank or financial holding company as
defined in H.R. 10, or a currently unregulated company that could meet the
financial-only test. The OTS is given express authority to prevent evasions of
this limitation on the creation of new Unitary Companies. Corporate
reorganizations involving a savings and loan holding company and a company
under common control with that a grandfathered Unitary Company are expressly
permitted.
Any savings and loan holding company that is not a grandfathered Unitary
Company may engage after that date only in the activities permissible for
financial holding companies under H.R. 10--i.e., "financial activities" as
defined elsewhere in the bill. This provision in effect ends the distinction
in present law between "multiple" savings and loan holding companies and
Unitary Companies going forward. Any savings and loan holding company that is
not a grandfathered Unitary Company will be able to have affiliates engaged in
any financial activity without regard to the number of insured savings
associations that it controls.
Conversion to National Bank. Section 402 of H.R. 10 as added by the Senate
committee authorizes any federal savings association in operation prior to
date of enactment of this legislation to convert to a national bank charter
and retain any branches that it might have, as long as the converting
institution can meet all financial, management, and capital requirements
applicable to a national bank.
Federal Home Loan Bank Amendments. H.R. 10 as amended by the Senate Banking
Committee includes the "Federal Home Loan Bank System Modernization Act of
1998." These provisions would make membership in a FHLB voluntary for savings
associations, not mandatory as under present law. The bill expands the types
of assets that banks with total assets of $500 million or less can pledge as
collateral for FHLB advances to include small business, agricultural, rural
development, and community development loans. Such banks may also use the
proceeds of FHLB advances to fund these four types of loans. The Federal
Housing Finance Board ("FHFB") is empowered to increase certain collateral
standards if necessary on safety and soundness grounds. The bill also removes
a requirement that banks with assets of $500 million or less maintain at least
10 percent of their total assets in residential mortgages. H.R. 10 transfers
from the FHFB to the individual FHLBs responsibility for such operational
matters as director and employee compensation, applications for advances, and
the terms and conditions for advances, including interest rates. Enforcement
powers of the FHFB are clarified. Finally, the bill changes the funding
formula under which the FHLBs contribute to the paying obligations of the
Resolution Funding Corporation. Instead of a flat $300 million annual
contribution from each FHLB, each bank will contribute 20.75% of its annual
net earnings.
34
<PAGE>
The Company and the Association are unable to predict whether H.R. 10 or any
other such legislation will be enacted, what provisions any enacted
legislation may contain, or the extent to which such legislation would effect
their operations.
ITEM 2. PROPERTIES.
At June 30, 1998, the Company conducted its business through an
administrative office located in Whittier and ten retail full service branch
offices. The Company believes that its current facilities are adequate to meet
the present and immediately foreseeable needs of the Company.
<TABLE>
<CAPTION>
NET BOOK VALUE OF
ORIGINAL PROPERTY OR
DATE DATE OF LEASEHOLD
LEASED OR LEASED OR LEASE IMPROVEMENTS AT
LOCATION OWNED ACQUIRED EXPIRATION JUNE 30, 1998
-------- ----------- --------- ---------- -----------------
<S> <C> <C> <C> <C>
7021 Greenleaf Avenue Owned 7/65 None $ 946,013
Whittier, CA 90602
(Administration)
7355 Greenleaf Avenue Owned 8/18/85 None $1,219,686
Whittier, CA 90602
(Main Office)
15335 Whittier Blvd. Owned/Bldg 4/1/70 None $ 120,220
Whittier, CA 90603 Leased/Land 3/31/05
(Branch)
401 E. Whittier Blvd. Owned 12/72 None $ 384,619
La Habra, CA 90631
(Branch)
220 S. State College Blvd. Leased 1/31/92 12/31/12 $ 238,530
Brea, CA 92821
(Branch)
1701 N. Euclid Avenue Owned/Bldg 7/6/76 None $ 109,657
Fullerton, CA 92835 Leased/Land 11/30/07
(Branch)
12333 S. La Mirada Blvd. Leased 1/31/92 None $ 202,016
La Mirada, CA 90638 7/9/06
(Branch)
3160 Colima Road Leased 1/17/92 12/31/99 $ 100,968
Hacienda Heights, CA 91745
(Branch)
1921 W. Imperial Hwy. Leased 12/1/94 11/30/01 $ 33,624
Suite A
La Habra, CA 90631
(Branch)
870 N. Rose Drive Leased 2/10/98 2/28/08 $ 228,000
Placentia, CA 92870
(Branch)
8160 E. Santa Ana Canyon Leased 2/5/98 2/28/03 $ 232,717
Road,
Suite 184
Anaheim Hills, CA 92808
(Branch)
12525 Beverly Blvd. Owned 2/27/86 None $ 150,190
Whittier, CA 90601
(Training Center)
Wardman and Comstock Leased/Land 1/2/70 Month --
Whittier, CA 90602 to
(Parking Lot) Month
</TABLE>
35
<PAGE>
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, 1998.
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, 1998.
<TABLE>
<CAPTION>
NAME PRINCIPAL OCCUPATION
---------------------------- -------------------------------------------------
<C> <S>
DIRECTORS:
D. W. Ferguson Director Emeritus of the Company and of the
Association
J. L. Thomas Chairman of the Board of the Company and of the
Association
Frederic R. (Rick) McGill President and Chief Executive 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):
J. L. Thomas Chairman of the Board
Frederic R. (Rick) McGill President and Chief Executive Officer
Kathryn M. Hennigan Corporate Secretary and Senior Vice President,
Administrative Services
Hank H. Kadowaki Senior Vice President, Income Property Lending of
the Association
Harold L. Rams Senior Vice President, Single Family 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
</TABLE>
- --------
(1) Unless otherwise noted, the indicated principal occupation of the
executive officers is with the Company and the Association.
36
<PAGE>
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 22, 1998, the Company had
approximately 338 stockholders of record (not including the number of persons
or entities holding stock in nominee or street name through various brokerage
firms) and 5,799,226 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 as adjusted for the 25% stock dividends distributed to stockholders
in May 1997 and June 1998.
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1997
---------------------------------- ----------------------------------
4TH 3RD 2ND 1ST 4TH 3RD 2ND 1ST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- -------- -------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High..... 20 18 19/64 19 21/32 18 13/64 14 3/64 13 1/8 12 5/32 9 19/32
Low...... 17 5/32 15 51/64 15 51/64 14 3/64 11 17/32 11 23/64 9 49/64 8 15/64
</TABLE>
The Company's ability to pay dividends is limited by certain restrictions
generally imposed on Delaware corporations. In general, dividends may be paid
only out of a Delaware corporation's surplus, as defined in the Delaware
General Corporation Law, or net profits for the fiscal year in which the
dividend is declared and/or the preceding fiscal year. "Surplus" is defined
for this purpose as the amount by which a corporation's net assets (total
assets minus total liabilities) exceed the amount designated by the Board of
Directors of the corporation in accordance with Delaware law as the
corporation's capital. The Company may pay dividends out of funds legally
available therefor at such times as the Board of Directors determines that
dividend payments are appropriate, after considering the Company's net income,
capital requirements, financial condition, alternate investment options,
prevailing economic conditions, industry practices and other factors deemed to
be relevant at the time. The Company has not paid cash dividends in the past
and does not presently intend to pay cash dividends.
The Company's principal source of income in fiscal 1998 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 capital requirements, 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."
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."
37
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED JUNE 30,
--------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA:
Total assets........... $887,480 $801,402 $725,085 $641,173 $512,102
Total liabilities...... 810,221 731,159 657,159 574,732 447,464
Loans receivable, net.. 691,026 644,964 607,672 537,478 450,527
Loans receivable held
for sale.............. 7,507 623 2,890 1,666 5,415
Investment
securities(1)......... 6,877 38,086 37,419 24,048 19,413
Mortgage-backed
securities(2)......... 115,851 74,139 41,175 39,993 14,709
Deposits............... 580,910 553,186 512,517 481,158 423,960
Federal Home Loan Bank
(FHLB) advances....... 216,000 157,700 135,300 63,950 13,000
Securities sold under
agreements to
repurchase............ -- -- 300 22,873 7,019
Stockholders' equity... 77,259 70,243 67,926 66,441 64,638
SELECTED OPERATING DATA:
Interest income........ $ 64,870 $ 58,668 $ 52,646 $ 41,042 $ 35,286
Interest expense....... 39,110 34,901 31,151 23,503 17,456
-------- -------- -------- -------- --------
Net interest income
before provision for
loan losses......... 25,760 23,767 21,495 17,539 17,830
Provision for loan
losses................ 1,450 3,001 2,103 998 10,200
-------- -------- -------- -------- --------
Net interest income
after provision for
loan losses......... 24,310 20,766 19,392 16,541 7,630
-------- -------- -------- -------- --------
Other income:
Loan servicing
charges and deposit
fees................ 2,402 1,828 1,629 1,490 1,675
Gain on sale of loans
held for sale....... 175 356 175 86 511
Commissions.......... 735 555 606 420 481
Other................ 16 30 79 84 189
-------- -------- -------- -------- --------
Total other income. 3,328 2,769 2,489 2,080 2,856
-------- -------- -------- -------- --------
Other expense:
Compensation and
employee benefits... 8,375 7,829 7,565 7,371 6,411
Occupancy, net....... 1,945 1,946 1,970 1,894 1,833
Federal Deposit
Insurance premiums.. 517 855 1,254 1,115 1,101
Data Processing...... 730 707 641 561 591
Other general and
administrative
expense............. 3,534 3,036 3,350 3,143 3,086
-------- -------- -------- -------- --------
Total general and
administrative
expense............. 15,101 14,373 14,780 14,084 13,022
Savings Association
Insurance Fund
special assessment.. -- 3,100 -- -- --
Real estate
operations, net..... 595 775 656 646 1,105
Amortization of core
deposit intangible.. 35 264 303 303 303
-------- -------- -------- -------- --------
Total other
expense........... 15,731 18,512 15,739 15,033 14,430
-------- -------- -------- -------- --------
Earnings (loss) before
income taxes.......... 11,907 5,023 6,142 3,588 (3,944)
Income taxes
(benefit)............. 5,297 2,203 2,573 1,267 (1,613)
-------- -------- -------- -------- --------
Net earnings (loss).... $ 6,610 $ 2,820 $ 3,569 $ 2,321 $ (2,331)
======== ======== ======== ======== ========
Basic earnings (loss)
per share............. $ 1.21 $ 0.51 $ 0.62 $ 0.40 $ (0.42)
======== ======== ======== ======== ========
Diluted earnings
(loss) per share...... $ 1.14(3) $ 0.49(3) $ 0.59(3) $ 0.39(3) $ (0.42)(4)
======== ======== ======== ======== ========
</TABLE>
- --------
(1) Includes $1,819,000, $1,432,000, $150,000 and $470,000 of investment
securities available for sale at June 30, 1998, 1997, 1995 and 1994,
respectively. No investment securities were available for sale at June 30,
1996.
(2) Includes $8,274,000 and $5,997,000 of mortgage-backed securities available
for sale at June 30, 1998 and 1994, respectively. No mortgage-backed
securities were available for sale in 1997, 1996 or 1995.
(3) Earnings per share in 1998, 1997, 1996 and 1995 were calculated based on
weighted average shares outstanding of 5,795,480, 5,792,344, 6,048,751 and
6,015,899, respectively. The weighted average shares have been adjusted
for all years presented to reflect the 25% stock dividends paid on May 30,
1997 and June 30, 1998.
(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 6,468,750 shares of common stock of the Company outstanding; the
Company completed its initial public stock offering and commenced
operations on December 30, 1993. The weighted average shares have been
adjusted for all years presented, to reflect the 25% stock dividends paid
on May 30, 1997 and June 30, 1998.
38
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED JUNE 30,
--------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER
DATA:
PERFORMANCE RATIOS:
Return on average assets(1)......... 0.78% 0.37% 0.53% 0.39% (0.46)%
Return on average equity(1)......... 8.96 4.11 5.25 3.53 (4.13)
Average equity to average assets.... 8.67 9.02 10.04 11.18 11.24
Equity to total assets.............. 8.71 8.77 9.37 10.36 12.62
Interest rate spread during the
period(2).......................... 2.61 2.74 2.68 2.56 3.20
Net interest margin(3).............. 3.14 3.22 3.24 3.07 3.66
Average interest-earning assets to
average
interest-bearing liabilities....... 110.97 110.17 111.47 112.31 113.02
General and administrative expense
to average
assets............................. 1.78 1.89 2.18 2.39 2.59
Other expense to average assets(1).. 1.85 2.44 2.32 2.55 2.87
Efficiency ratio(4)................. 52.23 54.90 62.08 72.10 64.55
Dividend pay-out ratio.............. -- -- -- -- --
REGULATORY CAPITAL RATIOS:
Tangible capital.................... 7.44 7.34 7.67 8.11 9.88
Core capital........................ 7.44 7.34 7.67 8.11 9.88
Risk-based capital.................. 12.97 12.64 12.74 14.07 16.09
ASSET QUALITY RATIOS:
Nonperforming loans as a percentage
of gross
loans(5)........................... 1.01 1.33 1.71 2.01 3.21
Nonperforming assets as a percentage
of total assets(6)................. 1.11 1.31 1.81 2.06 3.39
GVA on loans as a percentage of
gross loans........................ 0.87 0.94 0.92 1.38 1.81
GVA on loans as a percentage of
total nonperforming loans.......... 86.61 70.91 53.52 68.97 56.47
Total GVA as a percentage of total
nonperforming assets(7)............ 64.84 60.95 44.92 59.61 50.13
NUMBER OF:
Deposit accounts.................... 41,535 37,603 37,628 38,000 35,298
Mortgage loans in portfolio......... 4,640 4,546 4,485 4,185 3,685
Mortgage loans serviced for others.. 2,102 1,717 1,710 1,661 1,919
Total full-service customer
facilities......................... 10 8 8 8 7
</TABLE>
- --------
(1) Includes one-time special SAIF assessment of $3.1 million in fiscal 1997.
(2) The interest rate spread represents the difference between the weighted-
average rate on interest-earning assets and the weighted-average rate on
interest-bearing liabilities.
(3) The net interest margin represents net interest income as a percentage of
average interest-earning assets.
(4) Efficiency ratio represents general and administrative expense as a
percentage of net interest income plus other income (excluding
nonrecurring items).
(5) Nonperforming loans are net of specific allowances and include nonaccrual
and troubled debt restructured loans. Gross loans include loans held for
sale.
(6) Nonperforming assets include nonperforming loans and REO.
(7) Total GVA includes loan and REO general valuation allowances.
39
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
At June 30, 1998 the Company had total assets of $887.5 million, total
deposits of $580.9 million and stockholders' equity of $77.3 million,
representing 8.71% of total assets. This compares to total assets of $801.4
million, total deposits of $553.2 million and stockholders' equity of $70.2
million at June 30, 1997. This represents a 10.74% increase in total assets
and a 9.99% increase in stockholders' equity during the 1998 fiscal year. All
historical earnings per share data herein reflect a 25% common stock dividend
distributed to stockholders on June 30, 1998.
The Southern California economy and real estate markets in the Company's
primary lending area have continued to show improvement during the year. The
Company's level of nonperforming assets declined from June 30, 1997, both in
total dollar amount and as a percentage of total assets. The Company currently
includes nonaccrual loans 60 or more days past due (less any specific
allowances on these loans), troubled debt restructured loans and REO in
determining its level of nonperforming assets. Although many financial
institutions do not consider a loan nonperforming until it is 90 or more days
past due, the Company ceases to accrue interest after loan payments are
60 days past due in an effort to recognize problem assets sooner. At June 30,
1998, the Company reported $9.8 million in nonperforming assets compared to
$10.5 million and $13.1 million at June 30, 1997 and 1996, respectively. The
Company recorded a provision for loan losses of $1.5 million for the year
ended June 30, 1998 compared to $3.0 million and $2.1 million for the years
ended June 30, 1997 and 1996, respectively. See "Business--Allowances for Loan
and Real Estate Losses."
RESULTS OF OPERATIONS
General. The Company reported net earnings of $6.6 million, $1.14 per share
diluted, for the year ended June 30, 1998, compared to net earnings of $2.8
million, $0.49 per share diluted and $3.6 million, $0.59 per share diluted for
the years ended June 30, 1997 and 1996, respectively. This increase in
earnings for fiscal 1998 compared to fiscal 1997 was primarily attributable to
an increase in net interest income and a decline in the provision for loan
losses in fiscal 1998 and the one-time SAIF special assessment paid by the
Association in fiscal 1997. Excluding the impact of the special SAIF
assessment, net earnings for fiscal 1997 would have been $4.6 million, $0.80
per share diluted. The decrease in earnings in fiscal 1997 over 1996 is
primarily due to the one-time SAIF special assessment partially offset by an
increase in net interest income in fiscal 1997.
Interest Income. Interest income was $64.9 million, $58.7 million and $52.6
million for the years ended June 30, 1998, 1997, and 1996, respectively. The
$6.2 million increase in interest income in 1998 compared to 1997 resulted
from an increase in the average balance of interest-earning assets of $82.1
million while the average yield on interest-earnings assets decreased 0.04% to
7.90% . The $6.1 million increase in interest income in 1997 compared to 1996
resulted from an increase in the average balance of interest-earning assets of
$76.1 million while the average yield on interest earning assets remained
unchanged.
Interest Expense. Interest expense was $39.1 million, $34.9 million, and
$31.2 million for the years ended June 30, 1998, 1997, and 1996, respectively.
The $4.2 million increase in 1998 compared to 1997 resulted from an increase
in the average balance of interest-bearing liabilities of $69.2 million and an
increase in the average cost on interest-bearing liabilities of 0.09% to
5.29%. The $3.7 million increase in 1997 compared to 1996 resulted from an
increase in the average balance of interest-bearing liabilities of
$76.1 million partially offset by a reduction in the average cost on interest-
bearing liabilities of 0.06% to 5.20%.
40
<PAGE>
Net Interest Income Before Provision for Loan Losses. Net interest income
before provision for loan losses was $25.8 million, $23.8 million, and $21.5
million for the years ended June 30, 1998, 1997, and 1996, respectively. The
increase in 1998 compared to 1997 was primarily a result of the increase in
interest-earning assets relative to interest-bearing liabilities during the
year. The increase in 1997 compared to 1996 was also primarily a result of the
increase in interest-earning assets relative to interest-bearing liabilities.
Provision for Loan Losses. During fiscal 1998, 1997, and 1996 the Company
established $1.5 million, $3.0 million and $2.1 million, respectively, of
provisions for losses on loans. The decrease of $1.5 million in 1998 compared
to 1997 was due to decreases in charge-offs and nonaccrual loans during the
year. The increase of $900,000 in 1997 compared to 1996 was necessary in order
to replenish the allowance for loan losses to a level that management believed
to be adequate due to charge-offs taken during those years. Management
considers the level of nonperforming assets, the regional economic conditions
and relevant real estate values and other factors when assessing the adequacy
of the allowance for loan losses. The Southern California economy and real
estate markets in the Company's primary lending area showed improvement during
fiscal 1998, and management considers the level of allowance for loan losses
at June 30, 1998 to be adequate. However, even though the local economy and
real estate markets improved during fiscal 1998, there can be no assurance
that nonperforming assets will not increase and that the Company will not have
to establish additional loss provisions based upon future events.
Other Income. Other income increased by $559,000, or 20.19%, in 1998 to $3.3
million as compared to fiscal 1997. During fiscal 1998, transactional fee
income for deposits and loans increased due to a larger loan and deposit base
and prepayment fees on loans increased due to a higher level of loans paying
off in order to refinance in the lower rate environment during the past year.
In addition, fee income increased as a result of a new checking account
program marketed beginning in the second quarter of fiscal 1998. Commissions
from the sale of noninsured deposit products increased due to improved sales
volumes. Other income increased by $280,000 or 11.25% in 1997 to $2.8 million
as compared to 1996 as a result of fee income for deposits and loans serviced
increasing due to a larger loan and deposit base in fiscal 1997.
Other Expense. Other expense decreased $2.8 million, or 15.02%, from $18.5
million in fiscal 1997 to $15.7 million in fiscal 1998. This decrease is
primarily due to the $3.1 million one-time special SAIF assessment paid by the
Association during fiscal 1997. Compensation and employee benefits increased
$546,000 or 6.97% in 1998 as compared to 1997 due to increases in salaries and
expenses related to the Employees Stock Ownership Plan (ESOP). Companies that
established an ESOP after 1992 are required to account for the expense of the
ESOP at the fair value of the related shares released. Due to the overall
increase in the fair value of the QCBC stock during the past fiscal year, ESOP
expense has shown a corresponding increase. The expense related to the ESOP
was $1.1 million, $715,000, and $583,000 for the fiscal years ended June 30,
1998, 1997, and 1996, respectively. FDIC insurance decreased $338,000 in
fiscal 1998 compared to the previous year due to the reduction in the annual
amount that the Association must pay for deposit insurance that went into
effect January 1997. Advertising expense increased in fiscal 1998 primarily
due to a marketing program initiated in November 1997 intended to attract
checking accounts.
41
<PAGE>
The following is a summary of other general and administrative expenses for
the fiscal years ended:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1998 1997 1996
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Professional fees...................................... $ 260 236 $ 219
Advertising and promotional............................ 924 573 513
Bank service charges................................... 234 270 380
Miscellaneous loan expenses............................ 486 368 630
Consulting fees........................................ 471 437 350
Other.................................................. 1,159 1,152 1,258
------ ------ ------
$3,534 $3,036 $3,350
====== ====== ======
</TABLE>
Income Taxes. Income taxes increased by $3.1 million from $2.2 million in
fiscal 1997 to $5.3 million in fiscal 1998. Income taxes decreased by $370,000
from $2.6 million in fiscal 1996 to $2.2 million in fiscal 1997. The effective
tax rate was 44.49%, 43.86% and 41.89% for the years ended June 30, 1998, 1997
and 1996, respectively. The increase in the effective tax rate in 1998 as
compared to 1997 and 1996 is primarily a result of the increase in the fair
value of QCBC stock over the years. This resulted in the aforementioned
increase in ESOP expense for financial statement purposes relative to the
income tax deduction which is required to be taken at the cost basis of the
shares released.
YEAR 2000
Many existing computer programs use only two digits to identify a year in
the date field with the assumption that the first two digits are always 19.
Systems that calculate, compare or sort using the incorrect date may cause
erroneous results, ranging from system malfunctions to incorrect or incomplete
processing. If not remedied, potential risks include business disruption or
temporary shutdown and financial loss. Pursuant to its information technology
strategy, the Company principally utilizes third-party computer service
providers and third-party software for its information technology needs. As a
result, the Year 2000 compliance of the Company's information technology
assets ("IT assets"), such as computer hardware, software and systems, is
primarily dependent upon the Year 2000 compliance efforts and results of its
third-party vendors. The Year 2000 compliance of the Company's non-IT assets,
which include automated teller machines (ATMs), copiers, fax machines,
coin/currency counters, elevators, microfilmers, HVAC systems and emergency
communications radios, is also primarily dependent upon the Year 2000
compliance efforts and results of third parties.
State of Readiness
In April 1997, the Company developed a plan to address Year 2000 issues and
appointed a Year 2000 Committee comprised of representatives from all
divisions of the Company. The Year 2000 Committee has developed and is
currently implementing a comprehensive initiative to make its IT assets and
non-IT assets Year 2000 compliant. A Year 2000 compliance review and test of
the computer hardware and software used by the Company was conducted in the
Spring of 1998. As a result, the Company determined to replace approximately
one-third of its existing personal computers and monitors and to purchase
network and application software upgrades and related licensing rights. All
personal computers, monitors and software upgrades have been ordered; the
Company has not yet received its new personal computers.
The Company's non-IT assets have also been assessed for Year 2000
compliance. Manufacturers, installers, and/or servicers of each have been
contacted for certification of Year 2000 readiness. Of the Company's non-IT
assets, only ATM hardware was determined to be in need of replacement.
42
<PAGE>
The Year 2000 Committee's initiative to make the Company's IT assets and
non-IT assets Year 2000 compliant is comprised of the following phases:
1. Awareness--Educational initiative on Year 2000 issues and concerns.
This phase has been completed.
2. Assessment--Inventory of IT assets and non-IT assets as well as
identification of third-party vendors and service providers with which the
Company has material relationships. This phase has been completed.
3. Renovation--Review of vendor and service providers responses to the
Company's Year 2000 inquiries and development of a follow-up plan and
timeline. This phase has been completed.
4. Validation--The Year 2000 Committee's readiness initiative is
currently in this phase. This phase consists of testing of IT assets and
non-IT assets as well as testing of third-party vendors and service
providers for Year 2000 issues. The testing of IT assets and non-IT assets
is substantially complete. The testing of third-party vendors and service
providers has begun and will continue through June 30, 1999. Testing of all
mission-critical systems is scheduled to be completed by June 30, 1999.
5. Implementation--This phase has begun with the replacement of ATM
hardware, and will continue as replacements of other IT assets are
received. The Company's Year 2000 initiative provides for its Year 2000
readiness to be completed by mid-1999 consistent with OTS guidelines. See
"Regulation--Year 2000 Compliance". As the Company progresses through the
validation phase, the Company expects to determine necessary remedial
actions and subsequently provide for their implementation, with respect to
any third-party vendors or service providers who are ultimately determined
to not be Year 2000 compliant.
Costs to Address the Year 2000 Issue
The total cost of carrying out the Company's plan to address the Year 2000
issue is currently estimated to be approximately $1.5 million, including
estimates of personnel costs, and is comprised primarily of costs for
equipment and software that will be acquired and depreciated over its useful
life in accordance with Company policy. Any personnel and consulting costs
have been and will continue to be expensed as incurred. These currently
contemplated Year 2000 compliance costs are expected to be funded primarily
through operating cash flow and are not expected to have a material adverse
effect on the Company's business, financial condition or results of
operations. To date, the costs incurred related to Year 2000, excluding
estimates of personnel costs, are approximately $381,000.
Risks Presented by the Year 2000 Issue
Because the Company is substantially dependent upon the proper functioning
of its computer systems and the computer systems and services of third
parties, a failure of those computer systems and services to be Year 2000
compliant could have a material adverse effect on the Company's business,
financial condition or results of operations. The Company relies heavily on
third-party vendors and service providers for its information technology
needs. The Company's primary third-party computer service provider is a
computer service bureau that provides data processing for virtually all of the
Company's savings and checking accounts, real estate lending and real estate
loan servicing, general ledger, fixed assets and accounts payable. This third-
party's data processing services are mission-critical services for the Company
and a failure of this provider's services to be Year 2000 compliant could
cause substantial disruption of the Company's business and could have a
material adverse financial impact on the Company. Testing of this third-party
data processing service bureau is scheduled for September 28 through October
9, 1998.
If this third-party service provider or other third-party providers with
which the Company has material relationships are not Year 2000 compliant, the
following problems could result: (i) in the case
43
<PAGE>
of vendors, important services upon which the Company depends, such as
telecommunications and electrical power, could be interrupted, (ii) in the
case of third-party service providers, the Company could receive inaccurate or
outdated information, which could impair the Company's ability to perform
critical data functions, such as the processing of deposit accounts, loan
servicing and internal accounting, and (iii) in the case of governmental
agencies, such as the FHLB, and correspondent banks, such agencies and
financial institutions could fail to provide funds to the Company, which could
materially impair the Company's liquidity and affect the Company's ability to
fund loans and deposit withdrawals. In addition, whether or not the Company is
Year 2000 compliant, the Company may experience an outflow of deposits if
customers are concerned about the integrity of financial institutions' records
regarding customers' accounts.
Contingency Plans
Where it is possible to do so, the Company has scheduled testing with third-
party vendors and service providers. Where this is not possible, the Company
will rely upon certifications of Year 2000 compliance from vendors and service
providers. Most vendors and service providers have targeted December, 1998 as
their expected compliance completion date. Until that time, the Company is
unable to fully assess its risks from potential Year 2000 non-compliance and
to develop its Year 2000 contingency plans.
There can be no assurance that the Company's Year 2000 initiative will
effectively address the Year 2000 issue, that the Company's estimates of the
timing and costs of completing the initiative will ultimately be accurate or
that the impact of any failure of the Company or its third-party vendors and
service providers to be Year 2000 compliant will not have a material adverse
effect on the Company's business, financial condition or results of
operations.
FINANCIAL CONDITION
The Company's consolidated assets totaled $887.5 million at June 30, 1998,
compared to $801.4 million at June 30, 1997. Stockholders' equity totaled
$77.3 million at June 30, 1998 compared to $70.2 million June 30, 1997. The
increase in assets is primarily attributable to the implementation of the
Company's growth strategies funded by retail deposit promotions and FHLB
advances.
Loans and MBS (including assets held or available for sale) increased to
$814.4 million at June 30, 1998, from $719.7 million at June 30, 1997. Loans
originated and purchased for investment increased to $143.4 million for the
year ended June 30, 1998, compared to $95.9 million for the same period the
previous year. MBS purchased for investment increased to $63.5 million at June
30, 1998, from $40.2 million for the same period the previous year.
At June 30, 1998, the Company's multifamily loan portfolio totaled $347.3
million or 48.72% of total loans, an increase of approximately 6.21% from June
30, 1997, and its commercial loan portfolio totaled $77.8 million or 10.92% of
total loans, an increase of 40.63% from June 30, 1997. Of the Company's $1.3
million of charge-offs in fiscal 1998, $839,000 or 66.85% were for multifamily
loans and none were for commercial real estate loans. As the Company's
commercial loan portfolio increased during the past fiscal year by
approximately 40.63%, the Company's past loss experience with respect to its
commercial loan portfolio may not be representative of the risk of loss in
such portfolio in the future. See "Business--Allowances for Loan and Real
Estate Losses." Multifamily loans are generally considered to involve a higher
degree of credit risk and to be more vulnerable to deteriorating economic
conditions than one-to-four family residential mortgage loans. These loans
typically involve higher loan principal amounts and the repayment of such
loans generally depend on the income produced by the operation or sale of the
property being sufficient to cover operating expenses and debt service. Even
though the Southern California real estate market improved in fiscal 1998,
recessionary economic conditions of the type that have prevailed in recent
years in the
44
<PAGE>
Company's primary lending market area tend to result in higher vacancy and
reduced rental rates and net operating incomes from multifamily properties.
See "Business--Lending Activities--Multifamily Lending."
Loan sales increased to $34.3 million for the year ended June 30, 1998,
compared to $33.9 million for the same period ended June 30, 1997. 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 to $276.4 million at June 30, 1998 from $227.9
million at June 30, 1997 primarily due to a purchase in December 1997 of
servicing rights for $52.5 million of loans and an increase in fixed rate
loans sold servicing retained.
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, 1998. As indicated in the table, the Association's
capital levels exceed all three of the currently applicable minimum capital
requirements.
<TABLE>
<CAPTION>
JUNE 30, 1998
-----------------------------------------
TANGIBLE RISK-BASED
CAPITAL CORE CAPITAL CAPITAL
------------ ------------ -------------
AMOUNT % AMOUNT % AMOUNT %
------- ---- ------- ---- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Regulatory capital................ $65,090 7.44% $65,090 7.44% $71,301 12.97%
Required minimum.................. 13,117 1.50 26,233 3.00 43,994 8.00
------- ---- ------- ---- ------- -----
Excess capital.................... $51,973 5.94% $38,857 4.44% $27,307 4.97%
======= ==== ======= ==== ======= =====
</TABLE>
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-based 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, 1998 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.
<TABLE>
<CAPTION>
JUNE 30, 1998
--------------------------------------------
CORE CAPITAL
TO RISK- RISK-
CORE CAPITAL WEIGHTED ASSETS BASED CAPITAL
------------ --------------- -------------
AMOUNT % AMOUNT % AMOUNT %
------- ---- --------------- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Regulatory capital............. $65,090 7.44% $ 65,090 11.84% $71,301 12.97%
Well capitalized requirement... 43,722 5.00 32,995 6.00 54,992 10.00
------- ---- -------- ------ ------- -----
Excess capital................. $21,368 2.44% $ 32,095 5.84% $16,309 2.97%
======= ==== ======== ====== ======= =====
</TABLE>
45
<PAGE>
During the first quarter of fiscal year 1997, the Company received approval
from the OTS to repurchase in the open market up to 5% of the Company's
outstanding common stock or 295,000 shares. At June 30, 1998, a total of
218,000 shares had been repurchased at prices ranging from $10.72 to $17.90
per share. In 1996, 246,000 shares had been repurchased under a previous
repurchase plan. The Company may complete the repurchase of shares over the
next several months. On June 30, 1998, the Company distributed a 25% common
stock dividend to stockholders. The decrease in the Company's book value per
share reflects the effect of the 25% stock dividend, partially offset by the
reduced number of shares outstanding resulting from the stock repurchase
program and the Company's earnings.
On September 18, 1998, the Company announced that its Board of Directors
approved a stock repurchase program on September 17, 1998 in which the Company
will repurchase up to 300,000 shares or 5.17% of its then outstanding common
stock.
Sources of Funds and Liquidity
Sources of capital and liquidity for the Company on a stand-alone basis
include distributions from the Association and borrowings such as securities
sold under agreements to repurchase. Dividends and other capital distributions
from the Association are subject to regulatory restrictions. 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."
The Association's primary sources of funds in fiscal 1998 were deposits,
FHLB advances, principal and interest payments on loans and proceeds from the
sale of loans. While maturities and scheduled amortization of loans are
predictable sources of funds, deposit flows and mortgage prepayments are
greatly influenced by interest rates, economic conditions, and competition.
The 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 4%. The Association's average
liquidity ratios were 4.12%, 5.18%, and 5.37%, at June 30, 1998, 1997, and
1996, respectively. Management currently attempts to maintain a liquidity
ratio as close to the minimum as possible. Liquidity levels reflect
management's strategy to invest excess liquidity in higher yielding interest-
earning assets such as loans or MBS.
The Company's cash flows are comprised of three primary classifications:
cash flows from operating activities, cash flows used by investing activities
and financing activities. Cash flows from operating activities consisted
primarily of cash flows from the sale of loans held for sale which totaled
$34.3 million, $33.9 million, and $27.7 million for fiscal 1998, 1997, and
1996, respectively. The Company originated loans for sale of $41.3 million,
$31.6 million, and $28.9 million during fiscal years 1998, 1997, and 1996,
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
$143.4 million, $95.9 million, and $121.2 million for fiscal 1998, 1997, and
1996, respectively. Proceeds from principal repayments on loans were $91.8
million, $54.5 million and $48.0 million for fiscal years ended 1998, 1997,
and 1996. Proceeds from maturities and principal payments of investment
securities were $31.6 million, $8.8 million, and $31.6 million for fiscal
years ended 1998, 1997, and 1996, 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 $27.7 million for fiscal 1998, an increase of
$40.7 million
46
<PAGE>
for fiscal 1997, and an increase of $31.4 million for fiscal 1996. The net
proceeds from FHLB advances were $58.3 million, $22.4 million, and $71.4
million for fiscal 1998, 1997, and 1996, respectively.
Due to the Company's growth strategies in fiscal 1998, 1997, and 1996, the
Company's use of FHLB advances increased. At June 30, 1998, the Company had
$216.0 million in advances outstanding from the FHLB. The maximum amount of
advances that the Company had outstanding at any month-end was $216.0 million.
Management anticipates increased borrowing from the FHLB again in fiscal 1999.
See "Business--Sources and Funds--Borrowings."
Liquidity levels were maintained in fiscal 1998 with a higher level of
reliance on short-term borrowings. The Company's most liquid assets are cash
and short-term investments. The levels of these assets are dependent on the
Company's operating, financing, lending and investing activities during any
given period. At June 30, 1998, cash and short-term investments totaled $39.5
million, an increase of 93.84% from $20.4 million at June 30, 1997.
At June 30, 1998, the Company had outstanding commitments to originate loans
of $15.7 million and no commitments to purchase loans. At June 30, 1998, the
Company had $21.5 million of approved undisbursed lines of credit. The Company
anticipates that it will have sufficient funds available to meet its current
loan origination and purchase commitments. Certificates of deposits which have
contractual maturities in one year or less from June 30, 1998, totaled
$316.2 million. If a significant portion of the maturing certificates are not
renewed at maturity, the Company's other sources of liquidity include FHLB
advances, principal and interest payments on loans, proceeds from loan sales
and other borrowings, such as repurchase transactions. The Company could also
choose to pay higher rates to maintain maturing deposits, which could result
in increased cost of funds. Historically, the Company has maintained a
significant portion of maturing deposits. While management anticipates that
there may be some outflow of these deposits upon maturity due to the current
competitive rate environment, these are not expected to have a material impact
on the long-term liquidity position of the Company.
ASSET/LIABILITY MANAGEMENT
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and
by monitoring an institution's interest-rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period
if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of interest-
earning assets maturing or repricing within a specific time period and the
amount of interest-bearing liabilities maturing or repricing within that time
period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. During a
period of falling interest rates therefore, the net earnings of an institution
with a positive gap theoretically may be adversely affected due to its
interest-earning assets repricing to a greater extent than its interest-
bearing liabilities. Conversely, during a period of rising interest rates,
theoretically, the net earnings of an institution with a positive gap position
may increase as it is able to invest in higher yielding interest-earning
assets at a more rapid rate than its interest-bearing liabilities reprice. In
addition, a positive gap may not protect an institution with a large portfolio
of ARM loans from increases in interest rates for extended time periods as
such instruments generally have periodic and lifetime interest rate caps.
Additionally, the Company's ARM loans are predominantly tied to COFI, a
lagging market index, and rapid increases in interest rates could have a
negative impact on the Company's earnings. Accordingly, interest rates and the
resulting cost of funds increases in a rapidly increasing rate environment
could exceed the cap levels on these instruments and negatively impact net
interest income. Declining interest rates have, in general, benefited the
Company primarily due to the effect of the lagging market index which has
resulted in interest income declining at a slower rate than interest expense.
This effect of the lagging index has been partially offset by the increase in
refinancings of portfolio loans to lower yielding loans.
47
<PAGE>
The Company has managed its interest rate risk through the aggressive
marketing and funding of ARM loans, which generally reprice at least semi-
annually. As a result of this strategy, and based upon the assumptions used in
the table set forth below, at June 30, 1998, the Company's total interest-
earning assets maturing or repricing within one year exceeded its total
interest-bearing liabilities maturing or repricing in the same time by $119.7
million, representing a one year cumulative positive gap ratio of 13.48%. This
compares to $147.0 million at June 30, 1997, which represented a positive GAP
ratio of 18.35%. In the third quarter of fiscal 1997, the Company ceased its
origination of COFI ARM multifamily and commercial loan origination. New
multifamily and commercial loan originations are tied to a treasury based
index or are fixed rate for 5 years then adjusted to a new 5 year fixed rate
also based upon a treasury index.
The Company 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 Company's cumulative gap position is at a
level satisfactory to management. There can be no assurances that the Company
will be able to maintain its positive gap position or that its strategies will
not result in a negative gap position in the future. The level of the movement
of interest rates, up or down, is an uncertainty and could have a negative
impact on the earnings of the Company.
The Company does not currently engage in the use of trading activities, high
risk derivatives and synthetic instruments or hedging activities in
controlling its interest rate risk. Such uses are permitted at the
recommendation of the Asset/Liability Committee with the approval of the Board
of Directors, however, the Company does not anticipate engaging in such
practices in the immediate future.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at June 30, 1998, which are
anticipated by the Company, based upon certain assumptions, to reprice or
mature in each of the future time periods shown. Except as stated below, the
amount of assets and liabilities shown which reprice or mature during a
particular period were determined in accordance with the earlier of term to
repricing or the contractual terms of the asset or liability. Additionally,
the Company utilized deposit decay rate assumptions of 12.5% for passbook
accounts, 8.8% for checking accounts and 8% to 100% for money market deposit
accounts in the one year or less category. The range of decay rates for money
market deposit accounts is due to the market rate sensitivity of various money
market checking accounts. These decay rates are based upon the Company's
historical experience, but there is no assurance that the assumed rates will
correspond to future rates. For information regarding the contractual
maturities of the Company's loans, investments and deposits, see "Business--
Lending Activities," "--Investment Activities" and "--Sources of Funds."
48
<PAGE>
<TABLE>
<CAPTION>
AT JUNE 30, 1998
------------------------------------------------------------------------------------------------
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-earning
deposits............... $ 345 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 345
Federal funds sold and
other short-term
investments............ 26,420 -- -- -- -- -- -- -- 26,420
Investment securities,
net(3)................. 1,819 -- 553 4,176 -- -- 329 -- 6,877
Loans
receivable(1)(3)....... 462,719 84,630 20,175 21,795 30,937 38,908 45,935 -- 705,099
Mortgage-backed
securities(3).......... 19,997 7,272 1,433 -- -- 544 86,605 -- 115,851
FHLB stock............. 11,561 -- -- -- -- -- -- -- 11,561
-------- -------- --------- --------- -------- -------- -------- -------- --------
Total interest-
earning assets....... 522,861 91,902 22,161 25,971 30,937 39,452 132,869 -- 866,153
-------- -------- --------- --------- -------- -------- -------- -------- --------
LESS:
Unearned discount and
deferred fees(2)....... 3,490 613 148 173 207 263 888 -- 5,782
Allowance for loan
losses................. -- -- -- -- -- -- -- 7,955 7,955
-------- -------- --------- --------- -------- -------- -------- -------- --------
Net interest-earning
assets................ 519,371 91,289 22,013 25,798 30,730 39,189 131,981 (7,955) 852,416
Non-interest-earning
assets................. -- -- -- -- -- -- -- 35,064 35,064
-------- -------- --------- --------- -------- -------- -------- -------- --------
Total assets......... $519,371 $ 91,289 $ 22,013 $ 25,798 $ 30,730 $ 39,189 $131,981 $ 27,109 $887,480
======== ======== ========= ========= ======== ======== ======== ======== ========
INTEREST-BEARING
LIABILITIES:
Money market deposits.. $ 77,008 $ 1,701 $ 3,401 $ 11,391 $ 7,621 $ 12,475 $ 2,815 $ -- $116,412
Passbook deposits...... 577 577 1,155 4,040 3,027 5,668 3,367 -- 18,411
NOW and other demand
deposits............... 763 763 1,527 5,572 4,590 9,454 12,015 -- 34,684
Certificate
accounts(4)............ 103,242 98,305 114,702 76,148 8,713 -- 30 -- 401,140
FHLB advances(5)....... 75,450 12,050 21,800 69,300 37,400 -- -- -- 216,000
-------- -------- --------- --------- -------- -------- -------- -------- --------
Total interest-
bearing liabilities.. 257,040 113,396 142,585 166,451 61,351 27,597 18,227 -- 786,647
Non-interest bearing
liabilities............ -- -- -- -- -- -- -- 23,574 23,574
Stockholders' Equity... -- -- -- -- -- -- -- 77,259 77,259
-------- -------- --------- --------- -------- -------- -------- -------- --------
Total liabilities and
stockholders' equity. $257,040 $113,396 $ 142,585 $ 166,451 $ 61,351 $ 27,597 $ 18,227 $100,833 $887,480
======== ======== ========= ========= ======== ======== ======== ======== ========
Interest sensitivity
gap(6).................. $262,331 $(22,107) $(120,572) $(140,653) $(30,621) $ 11,592 $113,754 $(73,724) $ --
======== ======== ========= ========= ======== ======== ======== ======== ========
Cumulative interest
sensitivity gap......... $262,331 $240,224 $ 119,652 (21,001) $(51,622) $(40,030) $ 73,724 $ -- $ --
======== ======== ========= ========= ======== ======== ======== ======== ========
Cumulative interest
sensitivity gap as a
percentage of total
assets.................. 29.56% 27.07% 13.48% (2.37%) (5.82%) (4.51%) 8.31%
Cumulative net interest-
earning assets as a
percentage of cumulative
interest-bearing
liabilities............. 202.06% 164.85% 123.32% 96.91% 93.03% 94.79% 109.37%
</TABLE>
- ----
(1) For purposes of the gap analysis, mortgage and other loans are reduced for
nonaccrual loans but are not reduced for the allowance for loan losses.
(2) For purposes of the gap analysis, unearned discount and deferred fees are
pro rated for loans receivable.
(3) Includes assets held or available for sale.
(4) Certain certificate accounts have potential repricing dates which are prior
to the contractual maturity dates. The repricing dates were used for
purposes of the gap analysis.
(5) Certain FHLB Advances have call features which are prior to the contractual
maturity dates. The call dates were used for purposes of the gap analysis.
(6) Interest sensitivity gap represents the difference between net interest-
earning assets and interest-bearing liabilities.
49
<PAGE>
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on
certain types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while interest rates on other types may lag behind
changes in market rates. Additionally, certain assets, such as ARM loans, have
features which restrict changes in interest rates on a short-term basis and
over the life of the asset. Further, in the event of a change in interest
rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed in calculating the table. Finally, the
ability of many borrowers to service their ARM loans may decrease in the event
of an interest rate increase.
AVERAGE BALANCE SHEET
The following table sets forth certain information relating to the Company
for the years ended June 30, 1998, 1997, and 1996. The yields and costs are
derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods shown except where noted otherwise.
Average balances are derived from average month-end balances. Management does
not believe that the use of average monthly balances instead of average daily
balances has caused any material differences in the information presented. The
average balance of loans receivable includes loans on which the Company has
discontinued accruing interest. The yields and costs include fees which are
considered adjustments to yields.
50
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------------------------------------------
AT JUNE 30,
1998 1998 1997 1996
----------- ------------------------- ------------------------- -------------------------
YIELD/ YIELD/ YIELD/
RATE END OF AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
PERIOD BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
----------- -------- -------- ------- -------- -------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning
assets:
Interest-earning
deposits............... 3.76% $ 239 $ 9 3.77% $ 611 $ 20 3.27% $ 3,281 $ 25 0.76%
Federal funds sold and
other short-term
investments............ 5.60 17,691 802 4.53 8,583 505 5.88 10,203 515 5.05
Investment securities,
net(1)................. 6.33 24,186 1,608 6.65 37,819 2,503 6.62 25,314 1,717 6.78
Loans receivable(2).... 8.16 665,328 54,793 8.24 631,157 51,411 8.15 577,613 47,078 8.15
Mortgage-backed
securities, net(1)..... 6.94 102,749 6,995 6.81 51,852 3,661 7.06 40,781 3,030 7.43
FHLB stock............. 5.89 11,001 663 6.03 9,038 568 6.28 5,814 281 4.83
-------- ------- -------- ------- -------- -------
Total interest-earning
assets................ 7.79 821,194 64,870 7.90 739,060 58,668 7.94 663,006 52,646 7.94
Non-interest-earning
assets................. 29,584 21,013 14,724
-------- -------- --------
Total assets.......... $850,778 $760,073 $677,730
======== ======== ========
Liabilities and
Stockholders' equity:
Interest-bearing
liabilities:
Money market deposits.. 4.56 $110,990 5,022 4.52 $ 83,372 3,498 4.20 $ 75,176 3,000 3.99
Passbook deposits...... 2.14 17,425 351 2.01 17,899 355 1.98 21,028 418 1.99
NOW and other demand
deposits............... 1.63 26,363 336 1.27 24,011 278 1.16 23,006 275 1.20
Certificate accounts... 5.53 400,204 22,429 5.60 397,191 22,201 5.59 370,515 21,396 5.78
-------- ------- -------- ------- -------- -------
Total savings accounts. 4.90 554,982 28,138 522,473 26,332 489,725 25,089
FHLB advances.......... 5.86 185,032 10,972 5.93 148,312 8,565 5.77 96,789 5,572 5.76
Securities sold under
agreements
to repurchase.......... -- -- -- -- 72 4 5.56 8,283 490 5.92
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities........... 5.16 740,014 39,110 5.29 670,857 34,901 5.20 594,797 31,151 5.26
Non-interest-bearing
liabilities............ 36,984 20,667 14,921
Stockholders' equity... 73,780 68,549 68,012
-------- -------- --------
Total liabilities and
stockholders' equity... $850,778 $760,073 $677,730
======== ------- ======== ------- ======== -------
Net interest rate
spread(3).............. $25,760 2.61% $23,767 2.74% $21,495 2.68%
======= ====== ======= ====== ======= ======
Net interest margin(4). 3.14% 3.22% 3.24%
====== ====== ======
Ratio of interest-
earning assets to
interest-bearing
liabilities............ 110.97% 110.17% 111.47%
====== ====== ======
</TABLE>
- ----
(1) Amount includes assets available for sale.
(2) Amount is net of deferred loan fees, loan discounts, loans in process and
loan loss allowances, and includes nonaccrual loans and loans held for
sale.
(3) Net interest rate spread represents the difference between the yield on
average interest-earning assets and the cost of average interest-bearing
liabilities.
(4) Net interest margin represents net interest income divided by average
interest-earning assets.
51
<PAGE>
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.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1998 YEAR ENDED JUNE 30, 1997
COMPARED TO COMPARED TO
YEAR ENDED JUNE 30, 1997 YEAR ENDED JUNE 30, 1996
--------------------------- ---------------------------
INCREASE (DECREASE) IN INCREASE (DECREASE) IN
NET NET
INTEREST INCOME INTEREST INCOME
--------------------------- ---------------------------
DUE TO DUE TO
----------------- NET ----------------- NET
VOLUME RATE CHANGE VOLUME RATE CHANGE
-------- ------- -------- -------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-earning
deposits.............. $ (15) $ 4 $ (11) $ 20 $ (25) $ (5)
Federal funds sold and
other short-term
investments........... 379 (82) 297 (90) 80 (10)
Investment securities,
net(2)................ (906) 11 (895) 827 (41) 786
Loans receivable,
net(1), (2)........... 2,809 573 3,382 4,361 (28) 4,333
Mortgage-backed
securities, net(2).... 3,460 (126) 3,334 772 (141) 631
FHLB stock............. 117 (22) 95 186 101 287
-------- ------- -------- -------- ------- --------
Total interest-
earning assets...... 5,844 358 6,202 6,076 (54) 6,022
-------- ------- -------- -------- ------- --------
Interest-bearing
liabilities:
Money market deposits.. 1,232 292 1,524 338 160 498
Passbook deposits...... (10) 6 (4) (62) (1) (63)
NOW and other demand
deposits.............. 29 29 58 11 (8) 3
Certificate accounts... 169 59 228 1,451 (646) 805
FHLB advances.......... 2,171 236 2,407 2,976 17 2,993
Other borrowings....... (4) -- (4) (457) (29) (486)
-------- ------- -------- -------- ------- --------
Total interest-
bearing liabilities. 3,587 622 4,209 4,257 (507) 3,750
-------- ------- -------- -------- ------- --------
Change in net interest
income................. $ 2,257 $ (264) $ 1,993 $ 1,819 $ 453 $ 2,272
======== ======= ======== ======== ======= ========
</TABLE>
- --------
(1) Includes nonaccrual 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 Company's operations. Unlike industrial companies, nearly all of
the assets and liabilities of the Company are monetary in nature. As a result,
interest rates have a greater impact on the Company's performance than do the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or to the same extent as the price of goods and
services. See "Market Risk" and "--Asset/Liability Management."
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". Comprehensive income represents the change in equity of the Company
during a period from transactions and other events and circumstances from non-
owner sources. It includes all changes in equity during a period except those
resulting from investments by owners and distributions to owners. SFAS No. 130
establishes standards for reporting and display of comprehensive income and
its
52
<PAGE>
components in a full set of general purpose financial statements. SFAS No. 130
requires all components of comprehensive income, which are required to be
recognized under accounting standards, be reported in a financial statement
that is displayed in equal prominence with the other financial statements.
SFAS No. 130 does not require a specific presentation format, but will require
the Company to display an amount representing total comprehensive income for
the period in the financial statements. SFAS No. 130 is effective for both
interim and annual periods of fiscal years beginning after December 15, 1997.
Implementation of SFAS No. 130 will not have a material effect on the
Company's financial condition or results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information". SFAS No. 131 establishes standards for
the way public business enterprises are to report information about operating
segments in annual financial statements and requires those enterprises to
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS No. 131 supercedes numerous requirements in a previously issued
statement--SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise"--but retains the requirement to report information about major
customers. SFAS No. 131 is effective for financial statements for periods for
fiscal years beginning after December 15, 1997. Implementation of SFAS No. 131
will not have a material effect on the Company's financial condition or
results of operations.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." SFAS No. 132 addresses
disclosure only. It does not address measurement or recognition. SFAS No. 132
standardizes the disclosure requirements for defined benefit plans and
recommends a parallel format for presenting information about pensions and
other postretirement benefits. SFAS No. 132 is effective for fiscal years
beginning after December 15, 1997. Implementation of SFAS No. 132 will not
have a material effect on the Company's financial condition or results of
operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. It specifies necessary conditions to be met to
designate a derivative as a hedge. SFAS No. 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999. Early
implementation is permitted under this statement and the Company implemented
SFAS No. 133 effective July 1, 1998. Upon implementation, approximately $73.0
million in MBS held to maturity were transferred to available for sale. The
impact on unrealized holding gains as a result of this transfer was
approximately $772,000, net of the related tax effect.
53
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's market risk arises primarily from interest rate risk
inherent in its lending and deposit taking activities. To that end, management
actively monitors and manages its interest rate risk exposure. The Company
does not currently engage in trading activities.
The Company's profitability is affected by fluctuations in interest rates. A
sudden and substantial increase in interest rates may adversely impact the
Company's earnings to the extent that the interest rates borne by assets and
liabilities do not change at the same speed, to the same extent, or on the
same basis. The Company monitors the impact of changes in interest rates on
its net interest income using several tools. One measure of the Company's
exposure to differential changes in interest rates between assets and
liabilities is shown in the Company's Maturity and Rate Sensitivity Analysis
under the caption "MD&A--Asset/Liability Management." Another measure,
required to be performed by OTS-regulated institutions, is the test specified
by OTS Thrift Bulletin No. 13, "Interest Rate Risk Management." This test
measures the impact on net interest income and on net portfolio value of an
immediate change in interest rates in 100 basis point increments. Net
portfolio value is defined as the net present value of assets, liabilities,
and off-balance sheet contracts. Following are the estimated impacts of
immediate changes in interest rates at the specified levels at June 30, 1998,
calculated in compliance with Thrift Bulletin No. 13a:
<TABLE>
<CAPTION>
PERCENTAGE CHANGE IN:
---------------------------------------------
CHANGE IN INTEREST RATES
(IN BASIS POINTS) NET INTEREST INCOME(1) NET PORTFOLIO VALUE(2)
------------------------ ---------------------- ----------------------
<S> <C> <C>
+400...................... -7% -47%
+300...................... -4 -31
+200...................... -2 -13
+100...................... 0 -3
-100...................... 1 2
-200...................... 1 6
-300...................... 0 6
-400...................... -3 2
</TABLE>
- --------
(1) The percentage change in this column represents net interest income for 12
months in a stable interest rate environment versus the net interest
income in the various rate scenarios.
(2) The percentage change in this column represents net portfolio value of the
Association in a stable interest rate environment versus the net portfolio
value in the various rate scenarios.
The Company's primary objective in managing interest rate risk is to
minimize the adverse impact of changes in interest rates on the Company's net
interest income and capital, while structuring the Company's asset-liability
structure to obtain the maximum yield-cost spread on that structure. The
Company relies primarily on its asset-liability structure to control interest
rate risk.
The Company continually evaluates interest rate risk management
opportunities, including the use of derivative financial instruments.
Management has focused its efforts on increasing the Company's yield-cost
spread through wholesale and retail growth opportunities.
54
<PAGE>
The following table shows the Company's financial instruments that are
sensitive to changes in interest rates, categorized by expected maturity, and
the total balance of expected maturities and principal repayments and the
instruments' fair values at June 30, 1998. Market risk sensitive instruments
are generally defined as on- and off-balance sheet derivatives and other
financial instruments.
<TABLE>
<CAPTION>
JUNE 30, 1998
-----------------------------------------------------------------------
WEIGHTED
AVERAGE EXPECTED MATURITY/PRINCIPAL REPAYMENT
RATE END -----------------------------------------------------------------------
OF TOTAL FAIR
PERIOD 1999 2000 2001 2002 2003 THEREAFTER BALANCE(1) VALUE(1)
-------- -------- ------- ------- ------- ------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Sensitive
Assets:
Fed funds sold and
other short-term
investments........... 5.60% $ 26,420 $ -- $ -- $ -- $ -- $ -- $ 26,420 $ 26,420
Loans Receivable:
One-to-four family... 7.88 65,785 56,254 49,094 43,478 38,891 23,581 277,083 278,576
Multifamily and Non-
Residential......... 8.31 100,067 85,569 74,678 66,134 59,159 35,444 421,051 424,050
Other................ 9.91 1,853 1,584 1,382 1,224 1,096 405 7,544 7,644
Mortgage-Backed
Securities............ 6.94 17,605 15,055 13,140 11,636 10,408 48,007 115,851 116,979
Investment Securities.. 6.33 2,369 754 281 174 108 3,191 6,877 6,889
FHLB stock............. 5.89 11,561 -- -- -- -- -- 11,561 11,561
Interest-Sensitive
Liabilities:
Deposits
Money Market
Deposits............ 4.56 82,110 5,695 5,695 3,811 9,483 9,618 116,412 116,412
Passbook Deposits.... 2.14 2,309 2,020 2,020 1,513 1,513 9,036 18,411 18,411
NOW and other demand
deposits............ 1.63 3,053 2,786 2,786 2,295 2,295 21,469 34,684 34,684
Certificate Accounts. 5.53 316,250 37,833 37,833 4,612 4,612 -- 401,140 401,983
FHLB Advances.......... 5.86 87,000 28,700 24,400 19,800 41,100 15,000 216,000 216,262
Interest-Sensitive Off-
balance sheet items:(2)
Commitments to extend
credit................ 7.97 15,658 99
Loans sold with
recourse (including
bond loans)........... 6.50 10,347 (436)
Unused lines of
credit................ 8.50 21,503 921
</TABLE>
- --------
(1) Loans are reduced for nonaccrual loans but are not reduced for the
allowance for loan losses.
(2) Total balance equals the notional amount of off-balance sheet items and
interest rates are the weighted average interest rates of the underlying
loans.
Expected maturities are contractual maturities adjusted for prepayments of
principal. The Company uses certain assumptions to estimate fair values and
expected maturities. For assets, expected maturities are based upon
contractual maturity, projected repayments and prepayments of principal. The
prepayment experience reflected herein is based on the Company's historical
experience. The Company's average Constant Prepayment Rate ("CPR") on its
total fixed-rate portfolio ranges from 15% to 25% and on its adjustable rate
portfolio from 15% to 20% for interest-earning assets (excluding investment
securities, which do not have prepayment features). For deposit liabilities,
in accordance with standard industry practice and the Company's own historical
experience, "decay factors," used to estimate deposit runoff of 12.5%, 8.8%,
and between 8% and 100% for passbook, checking and money market deposit
accounts, respectively. The actual maturities of these instruments could vary
substantially if future prepayments differ from the Company's historical
experience.
55
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report............................................... F-2
Consolidated Statements of Financial Condition as of June 30, 1998 and
1997...................................................................... F-3
Consolidated Statements of Earnings for Each of the Years in the Three-Year
Period Ended June 30, 1998................................................ F-4
Consolidated Statements of Stockholders' Equity for Each of the Years in
the Three-Year Period Ended June 30, 1998................................. F-5
Consolidated Statements of Cash Flows for Each of the Years in the Three-
Year Period Ended June 30, 1998........................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
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, 1998 and 1997 and the related consolidated statements of earnings,
stockholders' equity and cash flows for each of the years in the three-year
period ended June 30, 1998. 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, 1998 and 1997 and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 1998 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
July 24, 1998
Los Angeles, California
F-2
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1998 1997
ASSETS -------- -------
<S> <C> <C>
Cash and due from banks.................................... $ 12,687 7,067
Interest-bearing deposits.................................. 345 336
Federal funds sold and other short-term investments........ 26,420 12,950
Investment securities held to maturity (fair value of
$5,070 at June 30, 1998 and $36,493 at June 30, 1997)
(note 2).................................................. 5,058 36,654
Investment securities available for sale, at fair value
(note 2).................................................. 1,819 1,432
Loans receivable, net (notes 3 and 9)...................... 691,026 644,964
Loans receivable held for sale (fair value of $7,507 at
June 30, 1998 and $623 at June 30, 1997) (notes 3 and 15). 7,507 623
Mortgage-backed securities held to maturity (fair value of
$108,705 at June 30, 1998 and $74,596 at June 30, 1997)
(notes 4 and 9)........................................... 107,577 74,139
Mortgage-backed securities available for sale, at fair
value (notes 4 and 9)..................................... 8,274 --
Real estate held for sale (note 5)......................... 3,334 2,314
Federal Home Loan Bank stock, at cost (notes 6 and 9)...... 11,561 9,718
Office premises and equipment, net (note 7)................ 5,289 4,217
Accrued interest receivable and other assets (notes 2, 3, 4
and 12)................................................... 6,583 6,988
-------- -------
$887,480 801,402
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (note 8)........................................ $580,910 553,186
Federal Home Loan Bank advances (notes 3, 6 and 9)....... 216,000 157,700
Deferred tax liability (note 10)......................... 2,505 1,413
Accounts payable and accrued expenses ................... 3,864 3,543
Other liabilities (notes 8 and 10)....................... 6,942 15,317
-------- -------
Total liabilities...................................... 810,221 731,159
-------- -------
Stockholders' Equity (note 11):
Common stock, $.01 par value. Authorized 10,000,000
shares; issued and outstanding 5,826,883 shares and
4,703,102 shares at June 30, 1998 and 1997,
respectively............................................ 58 47
Additional paid-in capital............................... 73,720 44,051
Unrealized gain on securities available for sale, net of
tax (notes 2 and 4)..................................... 390 136
Retained earnings, substantially restricted (note 10).... 4,779 28,122
Deferred compensation (notes 12 and 13).................. (1,688) (2,113)
-------- -------
Total stockholders' equity............................. 77,259 70,243
Commitments and contingent liabilities (notes 3 and 14)
-------- -------
$887,480 801,402
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Interest income:
Loans receivable............................... $ 54,793 51,411 47,078
Mortgage-backed securities..................... 6,995 3,661 3,030
Investment securities.......................... 1,608 2,503 1,717
Other.......................................... 1,474 1,093 821
--------- --------- ---------
Total interest income........................ 64,870 58,668 52,646
--------- --------- ---------
Interest expense:
Deposits (note 8).............................. 28,138 26,332 25,089
Federal Home Loan Bank advances and other
borrowings.................................... 10,972 8,569 6,062
--------- --------- ---------
Total interest expense....................... 39,110 34,901 31,151
--------- --------- ---------
Net interest income before provision for loan
losses...................................... 25,760 23,767 21,495
Provision for loan losses (note 3)............... 1,450 3,001 2,103
--------- --------- ---------
Net interest income after provision for loan
losses...................................... 24,310 20,766 19,392
--------- --------- ---------
Other income:
Loan servicing charges and deposit fees........ 2,402 1,828 1,629
Gain on sale of loans held for sale............ 175 356 175
Commissions.................................... 735 555 606
Other.......................................... 16 30 79
--------- --------- ---------
3,328 2,769 2,489
--------- --------- ---------
Other expense:
Compensation and employee benefits (notes 12
and 13)....................................... 8,375 7,829 7,565
Occupancy, net................................. 1,945 1,946 1,970
Federal deposit insurance premiums............. 517 855 1,254
Data processing................................ 730 707 641
Other general and administrative expense....... 3,534 3,036 3,350
--------- --------- ---------
Total general and administrative expense..... 15,101 14,373 14,780
Savings Association Insurance Fund special
assessment.................................... -- 3,100 --
Real estate operations, net (note 5)........... 595 775 656
Amortization of core deposit intangible........ 35 264 303
--------- --------- ---------
Total other expense.......................... 15,731 18,512 15,739
--------- --------- ---------
Earnings before income taxes................. 11,907 5,023 6,142
Income taxes (note 10)........................... 5,297 2,203 2,573
--------- --------- ---------
Net earnings................................. $ 6,610 2,820 3,569
========= ========= =========
Basic earnings per share (note 11)............... $ 1.21 0.51 0.62
========= ========= =========
Diluted earnings per share (note 11)............. $ 1.14 0.49 0.59
========= ========= =========
Weighted average basic shares outstanding........ 5,469,646 5,509,836 5,778,963
Weighted average diluted shares outstanding...... 5,795,480 5,792,344 6,048,751
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
GAIN ON RETAINED
ADDITIONAL SECURITIES EARNINGS,
COMMON PAID-IN AVAILABLE SUBSTANTIALLY DEFERRED
SHARES STOCK CAPITAL FOR SALE RESTRICTED COMPENSATION TOTAL
------ ------ ---------- ---------- ------------- ------------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
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)
Exercise of stock op-
tions.................. 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
Net earnings............ -- -- -- -- 2,820 -- 2,820
Shares issued in
connection with stock
dividend............... 946 9 17,012 -- (17,021) -- --
Repurchase and
retirement of stock.... (134) (1) (959) -- (1,310) -- (2,270)
Exercise of stock op-
tions.................. 77 1 576 -- 118 -- 695
Unrealized gain on
securities available
for sale, net of tax... -- -- -- 136 -- -- 136
Deferred compensation
amortized to expense... -- -- 405 -- -- 531 936
----- --- ------ --- ------- ------ ------
Balance, June 30, 1997.. 4,703 47 44,051 136 28,122 (2,113) 70,243
Net earnings............ -- -- -- -- 6,610 -- 6,610
Shares issued in
connection with stock
dividend............... 1,165 12 29,120 -- (29,132) -- --
Repurchase and
retirement of stock.... (56) (1) (335) -- (821) -- (1,157)
Exercise of stock
options................ 15 -- 87 -- -- -- 87
Unrealized gain on
securities available
for sale, net of tax... -- -- -- 254 -- -- 254
Deferred compensation
amortized to expense... -- -- 797 -- -- 425 1,222
----- --- ------ --- ------- ------ ------
Balance, June 30, 1998 . 5,827 $58 73,720 390 4,779 (1,688) 77,259
===== === ====== === ======= ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
-------- --------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings................................... $ 6,610 2,820 3,569
-------- --------- --------
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization................ 293 (14) (634)
Provision for loan losses.................... 1,450 3,001 2,103
Write-downs and provision for losses on real
estate held for sale........................ 251 491 252
Provision for deferred income taxes.......... 913 143 1,407
Gain on sale of real estate held for sale.... (176) (385) (339)
Gain on sale of loans held for sale.......... (175) (356) (175)
Loans originated for sale.................... (41,321) (31,598) (28,922)
Sale of loans held for sale.................. 34,324 33,870 27,662
Federal Home Loan Bank (FHLB) stock dividend
received.................................... (633) (513) (263)
(Increase) decrease in accrued interest
receivable and other assets................. 370 (223) (343)
Increase (decrease) in other liabilities..... (8,375) 10,319 1,666
Increase (decrease) in accounts payable and
accrued expenses............................ 321 673 (549)
Other........................................ 1,962 529 1,841
-------- --------- --------
Total adjustments.......................... (10,796) 15,937 3,706
-------- --------- --------
Net cash provided (used) by operating
activities................................ (4,186) 18,757 7,275
-------- --------- --------
Cash flows from investing activities:
Loans originated for investment................ (95,253) (83,408) (93,424)
Loans purchased for investment................. (48,112) (12,521) (27,789)
Principal repayments on loans.................. 91,846 54,465 48,032
Sale of investment securities available for
sale.......................................... -- -- 2,550
Purchases of investment securities available
for sale...................................... -- (1,199) (2,400)
Purchases of investment securities held to
maturity...................................... -- (7,996) (45,149)
Maturities and principal repayments of
investment securities held to maturity........ 31,610 8,784 31,638
Sale of MBS available for sale................. -- -- 1,754
Purchases of MBS available for sale............ (8,237) -- --
Purchases of MBS held to maturity.............. (63,530) (40,228) (13,766)
Principal repayments on MBS ................... 29,595 7,305 11,157
Sale of real estate held for sale.............. 3,545 3,653 1,393
Purchase of FHLB stock......................... (1,210) (1,054) (3,152)
Investment in office premises and equipment.... (1,923) (849) (1,041)
-------- --------- --------
Net cash used by investing activities...... (61,669) (73,048) (90,197)
-------- --------- --------
Cash flows from financing activities:
Increase in deposits........................... 27,724 40,669 31,359
Proceeds from funding of FHLB advances......... 382,700 370,000 363,780
Repayments of FHLB advances.................... (324,400) (347,600) (292,430)
Proceeds from securities sold under agreement
to repurchase................................. -- -- 74,078
Repayments of securities sold under agreement
to repurchase................................. -- (300) (96,651)
Repurchase of stock............................ (1,157) (2,270) (3,249)
Common stock options exercised................. 87 577 255
-------- --------- --------
Net cash provided by financing activities.. 84,954 61,076 77,142
-------- --------- --------
Increase (decrease) in cash and cash
equivalents............................... 19,099 6,785 (5,780)
Cash and cash equivalents at beginning of year.. 20,353 13,568 19,348
-------- --------- --------
Cash and cash equivalents at end of year........ $ 39,452 20,353 13,568
======== ========= ========
Supplemental disclosures of cash flow
information:
Interest paid (including interest credited).... $ 38,604 34,454 30,987
Cash paid for income taxes..................... 5,295 621 1,155
======== ========= ========
Supplemental schedule of noncash investing and
financing activities:
Additions to loans resulting from the sale of
real estate acquired through foreclosure $ 1,365 4,847 5,580
Additions to real estate acquired through
foreclosure................................... 6,239 8,313 7,764
======== ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
(1) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Quaker City Bancorp, Inc., incorporated in Delaware, is primarily engaged in
the savings and loan business through its wholly owned subsidiary, Quaker City
Savings and Loan Association (the Association). At June 30, 1998, the
Association operated ten retail banking offices in Southern California. The
Association is subject to significant competition from other financial
institutions, and is also subject to the regulations of various government
agencies and undergoes periodic examinations by those regulatory authorities.
The following accounting policies, together with those disclosed elsewhere
in the consolidated financial statements, represent the significant accounting
policies of the Company.
Principles of Consolidation and Presentation
The consolidated financial statements include the accounts of Quaker City
Bancorp, Inc., Quaker City Neighborhood Development, Inc., Quaker City 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.
These consolidated financial statements have been prepared in conformity
with generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of
the statement of financial condition, and revenues and expenses for the
periods. The most significant estimate for the Company relates to the
allowance for loan losses. Actual results could differ from those estimates.
Financial Instruments
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 are
financial instruments as defined under SFAS No. 107. Fair values, estimates
and assumptions are set forth in note 18, Fair Value of Financial Instruments.
Risks Associated with Financial Instruments
The credit risk of a financial instrument is the possibility that a loss may
result from the failure of another party to perform in accordance with the
terms of the contract. The most significant credit risk associated with the
Company's financial instruments is concentrated in its loans receivable.
Additionally, the Company is subject to credit risk on certain loans sold with
recourse. The Company has established a system for monitoring the level of
credit risk in its loan portfolio and for loans sold with recourse.
Concentrations of credit risk would exist for groups of borrowers when they
have similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic or
other conditions. The ability of the Company's borrowers to repay their
F-7
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
commitments is contingent on several factors, including the economic
conditions in the borrowers' geographic area and the individual financial
condition of the borrowers. The Company generally requires collateral or other
security to support borrower commitments on loans receivable. This collateral
may take several forms. Generally, on the Company's mortgage loans, the
collateral will be the underlying mortgaged property. The Company's lending
activities are primarily concentrated in Southern California.
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's market risk arises primarily from interest rate risk
inherent in its lending and deposit taking activities. To that end, management
actively monitors and manages its interest rate risk exposure. The Company
does not currently engage in trading activities. The Company is subject to
interest rate risk to the degree that its interest-earning assets reprice on a
different frequency or schedule than its interest-bearing liabilities. A
majority of the Company's loans receivable and mortgage-backed securities
reprice based on the Eleventh District Cost of Funds Index (COFI). The
repricing of COFI tends to lag other interest rate indices. The Company
closely monitors the pricing sensitivity of its financial instruments.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks, interest-bearing deposits and Federal funds sold and other
short-term investments. Generally, Federal funds sold and short-term
investments are held for one-day periods. The amounts included in cash and
cash equivalents and qualifying investment securities generally constitute the
Company's liquidity portfolio. The Company maintains liquidity to satisfy
regulatory requirements. The liquidity portfolio is managed in a manner
intended to maximize flexibility and yield, while minimizing interest rate
risk, credit risk and the cost of the capital required to be maintained for
such assets.
Assets Held or Available for Sale
The Company identifies those loans, mortgage-backed securities (MBS) and
investment securities for which it does not have the positive intent and
ability to hold to maturity. If management has the positive intent and the
Company has the ability to hold such assets until maturity, they are
classified as held to maturity and are carried at amortized historical cost.
Securities that are to be held for indefinite periods of time and not intended
to be held to maturity are generally classified as available for sale and are
carried at fair value, with unrealized gains and losses excluded from earnings
and reported as a separate component of stockholders' equity, net of income
tax effect. However, if a decline in fair value is determined to be other than
temporary, the cost basis of the individual security is written down to fair
value as a new cost basis, and the amount of the writedown is included in
earnings. Gains and losses from the sales of MBS and investment securities
available for sale are recognized at the time of sale and are determined by
the specific-identification method. Premiums and discounts on securities
available for sale are amortized utilizing the interest method over the
contractual terms of the assets. Loans held for sale are carried at the lower
of amortized historical cost or fair value as determined on an aggregate
basis. Assets held for indefinite periods of time include assets that
management intends to use as part of its asset/liability management strategy
and that may be sold in response to changes in interest rates, resultant
prepayment risk and other factors.
Assets Held to Maturity
Loans, MBS and investment securities, excluding those held or available for
sale, are carried at amortized historical cost, adjusted for amortization of
premiums and discounts utilizing the interest method over the contractual
terms of the assets. The carrying value of these assets is not adjusted for
F-8
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
temporary declines in fair value since the Company has the positive intent and
ability to hold them to maturity. If a decline in the fair value of securities
is determined to be other than temporary, the cost basis of the individual
security is written down to fair value as a new cost basis and the amount of
the writedown is included in earnings.
Interest Income on Loans Receivable
Interest income on loans receivable is accrued as it is earned. The Company
defers and amortizes both loan origination fees and the incremental direct
costs relating to the origination of loans held to maturity. Loan origination
fees and incremental direct loan origination costs on loans held for sale are
deferred and included in the computation of gain or loss upon sale of the
loans. The deferred origination fees and costs on loans held to maturity are
amortized into interest income utilizing the interest method over the lives of
the related loans. Loans are placed on nonaccrual status after being
delinquent 60 days, or earlier if the ultimate collectibility of the accrual
is in doubt. Whenever the accrual of interest is stopped, previously accrued
but uncollected interest income is reversed. Thereafter, interest is
recognized only as cash is received until the loan is reinstated. Accretion of
discounts and deferred loan fees is discontinued when loans are placed on
nonaccrual status.
Allowance for Loan Losses
The allowance for loan losses is maintained at an amount management
considers adequate to cover estimated losses on loans receivable which are
deemed probable and estimable. The allowance is based upon a number of
factors, including asset classifications, economic trends, industry experience
and trends, industry and geographic concentrations, estimated collateral
values, management's assessment of credit risk inherent in the portfolio,
historical loss experience and the Company's underwriting practices. As a
result of weaknesses in certain real estate markets, increases in the
allowance for loan losses may be required in future periods. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the 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.
Impaired Loans
A loan is considered impaired when based on current circumstances and
events, it is probable that a creditor will be unable to collect all amounts
due according to the contractual terms of the loan agreement. Creditors are
required to measure impairment of a loan based on any one of the following:
(i) the present value of expected future cash flows from the loan discounted
at the loan's effective interest rate, (ii) an observable market price or
(iii) the fair value of the loan's underlying collateral. The Company measures
impairment based on the fair value of the loan's underlying collateral
property. Impaired loans exclude large groups of smaller balance homogeneous
loans that are collectively evaluated for impairment. For the Company, loans
collectively reviewed for impairment include all loans with principal balances
of less than $300,000.
Factors considered as part of the periodic loan review process to determine
whether a loan is impaired address both the amount the Company believes is
probable that it will collect and the timing of such collection. As part of
the Company's loan review process, the Company will consider such factors as
the ability of the borrower to continue to meet the debt service requirements,
assessments of other sources of repayment, the fair value of any collateral
and the creditor's prior history in dealing with these types of credits. In
evaluating whether a loan is considered impaired, insignificant delays (less
than 12 months) in the absence of other facts and circumstances would not
alone lead to the conclusion that a loan was impaired.
F-9
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company recognizes impairment on troubled collateral dependent loans by
creating a valuation allowance. The valuation allowance is maintained while
the loans are still in process of collection. At such time that the assets are
deemed uncollectible, the valuation allowance is charged off.
Loan Sales and Servicing
The Company sells loans and participations in loans with yield rates to the
investors based upon current market rates. Gain or loss on the sale of loans
is recognized to the extent that the selling prices differ from the carrying
value of the loans sold based on the estimated relative fair values of the
assets sold and any retained interests, less any liabilities incurred. The
assets obtained on sale are generally loan servicing assets. Liabilities
incurred in a sale may include recourse obligations or servicing liabilities.
Historically, the Company has not established servicing assets or liabilities
upon sale of loans, although the Company retained the servicing rights on
loans sold, because management has determined that the benefits from the
contractually specified servicing fees and other ancillary sources equate
approximately to what a substitute servicer would be compensated for such
services.
The Company may also purchase mortgage servicing rights related to mortgage
loans originated by other institutions. These mortgage servicing rights are
measured initially at fair value, presumptively the price paid. The servicing
asset is amortized in proportion to and over the period of estimated net
servicing income and is assessed for impairment or increased obligation based
on its fair value.
Real Estate Held for Sale
Real estate acquired through foreclosure (REO) is initially recorded at fair
value at the date of foreclosure, less costs of disposition. Fair value is
determined by an appraisal obtained at the time of foreclosure. Thereafter, if
there is a further deterioration in value, the Company writes down the REO
directly and charges operations for the diminution in value.
Real estate held for development is carried at the lower of cost or net
realizable value. All costs of anticipated disposition are considered in the
determination of net realizable value.
Revenue recognition on the disposition of real estate is dependent upon the
transaction meeting certain criteria relating to the nature of the property
sold and the terms of sale.
Depreciation and Amortization
Depreciation is computed utilizing the straight-line method over the
estimated lives of the assets. Amortization of leasehold improvements is
computed utilizing the straight-line method over the shorter of the estimated
useful life of the assets or the terms of the respective leases.
Earnings per Share
Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings Per
Share." Under SFAS No. 128, the Company is required to report both basic and
diluted earnings per share. Basic earnings per share is determined by dividing
net income by the average number of shares of common stock outstanding, while
diluted earnings per share is determined by dividing net income by the average
number of shares of common stock outstanding adjusted for the dilutive effect
of common stock equivalents. Earnings per share for 1997 and 1996 have been
restated to conform with the provisions of SFAS No. 128. Earnings per share
have been adjusted to reflect the 25% stock dividends distributed to
stockholders in May 1997 and June 1998.
F-10
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes
A deferred tax liability is recognized for taxable temporary differences
(differences between the tax bases of assets and liabilities and their
reported amounts in the financial statements that will result in future
taxable amounts). A deferred tax asset is recognized for all deductible
temporary differences (differences between the tax bases of assets and
liabilities and their reported amounts in the financial statements that will
result in deductible amounts in future years when the financial statement
carrying amounts of the assets and liabilities are recovered and settled) and
operating loss and tax credit carryforwards. The likelihood of realizing the
tax benefits related to a potential deferred tax asset is evaluated and a
valuation allowance is recognized to reduce that deferred tax asset if it is
more likely than not that all or some portion of the deferred tax asset will
not be realized. Deferred tax assets and liabilities are calculated at the
beginning and end of the year; the change in the sum of the deferred tax
asset, valuation allowance and deferred tax liability during the year
generally is recognized as deferred tax expense or benefit. The effect on
deferred taxes of a change in tax rates is recognized in income in the period
for which the change becomes effective.
Stock Option Plans
Prior to July 1, 1996, the Company accounted for its stock option plans in
accordance with the provisions of Accounting Principles Board Opinion No. 25
(APB No. 25), "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense was recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. Effective July 1, 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation," which permits entities to recognize
as expense over the vesting period the fair value of all stock-based
compensation awards on the date of grant. Alternatively, SFAS No. 123 also
allows entities to continue to apply the provisions of APB No. 25 and provide
pro forma net income and pro forma earnings per share disclosures for employee
stock options grants made in 1995 and future years as if the fair-value-based
method defined in SFAS No. 123 had been applied. The Company has elected to
continue to apply the provisions of APB No. 25 and to provide the pro forma
disclosure provisions of SFAS No. 123.
Other Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." Comprehensive income represents the change in equity of the Company
during a period from transactions and other events and circumstances from
nonowner sources. It includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners. SFAS
No. 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial
statements. SFAS No. 130 requires all components of comprehensive income,
which are required to be recognized under accounting standards, to be reported
in a financial statement that is displayed in equal prominence with the other
financial statements. SFAS No. 130 does not require a specific presentation
format, but will require the Company to display an amount representing total
comprehensive income for the periods in the financial statements. SFAS No. 130
is effective for both interim and annual periods of fiscal years beginning
after December 15, 1997. Implementation of SFAS No. 130 will not have a
material effect on the Company's financial condition or results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the way public business enterprises are to report information about operating
segments in annual financial statements and requires those
F-11
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
enterprises to report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. SFAS No. 131 supersedes numerous requirements in a previously
issued statement SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise" but retains the requirement to report information about major
customers. SFAS No. 131 is effective for financial statements for fiscal years
beginning after December 15, 1997. Implementation of SFAS No. 131 will not
have a material effect on the Company's financial condition or results of
operations.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." SFAS No. 132 addresses
disclosure only. It does not address measurement or recognition. SFAS No. 132
standardizes the disclosure requirements for defined benefit plans and
recommends a parallel format for presenting information about pensions and
other postretirement benefits. SFAS No. 132 is effective for fiscal years
beginning after December 15, 1997. Implementation of SFAS No. 132 will not
have a material effect on the Company's financial condition or results of
operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. It specifies necessary conditions to be met to
designate a derivative as a hedge. SFAS No. 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999. Early
implementation is permitted under this statement and the Company implemented
SFAS No. 133 effective July 1, 1998. Upon implementation, approximately $73.0
million in MBS were transferred to available for sale.
F-12
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) INVESTMENT SECURITIES
The following table provides a summary of investment securities with a
comparison of amortized cost and fair values:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
June 30, 1998:
Held to maturity:
U.S. Government and Federal
agency obligations............. $ 4,729 12 -- 4,741
Municipal bonds................. 329 -- -- 329
------- --- ---- ------
$ 5,058 12 -- 5,070
Available for sale--marketable
equity securities................ 1,200 619 -- 1,819
------- --- ---- ------
Total......................... $ 6,258 631 -- 6,889
======= === ==== ======
June 30, 1997:
Held to maturity:
U.S. Government and Federal
agency obligations............. $36,303 -- (161) 36,142
Municipal bonds................. 351 -- -- 351
------- --- ---- ------
36,654 -- (161) 36,493
Available for sale--marketable
equity securities................ 1,200 232 -- 1,432
------- --- ---- ------
Total......................... $37,854 232 (161) 37,925
======= === ==== ======
</TABLE>
At June 30, 1998 and 1997, the Company had accrued interest receivable on
investment securities of $94,000 and $362,000, 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 during 1996. There were no sales of investment securities available for
sale in 1998 and 1997. There were no gross gains or losses realized during
1998, 1997 and 1996.
The contractual principal maturities for investment securities held to
maturity as of June 30, 1998 are as follows:
<TABLE>
<CAPTION>
CONTRACTUAL PRINCIPAL MATURITY
--------------------------------------------
MATURING
MATURING 1 YEAR MATURING MATURING
WITHIN TO 5 5 YEARS TO AFTER
TOTAL 1 YEAR YEARS 10 YEARS 10 YEARS
------ -------- -------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
U.S. Government and Federal
agency obligations........... $4,729 547 4,182 -- --
Municipal bonds............... 329 -- -- -- 329
------ --- ----- --- ---
Total................... $5,058 547 4,182 -- 329
====== === ===== === ===
</TABLE>
F-13
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(3) LOANS RECEIVABLE, NET
The following table presents carrying values of loans receivable at the
dates indicated:
<TABLE>
<CAPTION>
JUNE 30
----------------
1998 1997
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Real estate:
Residential:
One to four units....................................... $279,862 299,979
Multifamily............................................. 347,285 301,965
Commercial and land....................................... 78,158 56,683
-------- -------
705,305 658,627
Other....................................................... 7,544 1,070
-------- -------
712,849 659,697
Less:
Undisbursed loan funds.................................... 579 441
Unamortized discounts..................................... 2,170 2,404
Deferred loan fees, net................................... 3,612 3,493
Allowance for loan losses................................. 7,955 7,772
-------- -------
698,533 645,587
-------- -------
Less:
Held for sale--residential real estate:
One to four units....................................... 1,043 623
Multifamily............................................. 6,464 --
-------- -------
7,507 623
-------- -------
Held to maturity...................................... $691,026 644,964
======== =======
</TABLE>
The weighted average interest rate on the Company's loan portfolio was 8.16%
and 7.96% at June 30, 1998 and 1997, respectively.
Certain mortgage loans aggregating $198.4 million and $234.7 million at June
30, 1998 and 1997, respectively, are collateral for FHLB advances.
At June 30, 1998 and 1997, the Association had loans with an outstanding
balance of $10.5 million and $9.4 million, respectively under two separate
agreements with the City of Los Angeles to guarantee up to a total of $15
million of multifamily housing revenue bonds primarily for the acquisition and
renovation of earthquake-stricken properties. In conjunction with these
guarantees, standby letters of credit were issued by the Federal Home Loan
Bank. Additionally, the principal balances of other loans sold with recourse
totaled $509,000 and $1.5 million at June 30, 1998 and 1997, respectively.
At June 30, 1998 and 1997, the Association had accrued interest receivable
on loans of $4.3 million and $4.0 million, respectively, which is included in
accrued interest receivable and other assets in the accompanying consolidated
statements of financial condition.
The Company serviced loans for investors totaling $276.4 million, $227.9
million and $212.6 million at June 30, 1998, 1997 and 1996, respectively.
F-14
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
JUNE 30
-----------------------
1998 1997 1996
------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Accumulated through a charge to earnings:
Balance at beginning of year...................... $ 6,496 6,542 10,614
Provision for loan losses......................... 1,450 3,001 2,103
Charge-offs, net.................................. (1,255) (3,047) (6,175)
------- ------ ------
Balance at end of year............................ 6,691 6,496 6,542
------- ------ ------
Valuation allowance for portfolios acquired:
Balance at beginning of year...................... 1,276 1,291 1,494
Purchases......................................... -- -- 294
Charge-offs....................................... -- -- (471)
Reductions credited............................... (12) (15) (26)
------- ------ ------
Balance at end of year............................ 1,264 1,276 1,291
------- ------ ------
Total allowance for loan losses................. $ 7,955 7,772 7,833
======= ====== ======
</TABLE>
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 accounted for separate and apart from discounts due to
yield adjustments.
Credit Risk and Concentration
At June 30, 1998 and 1997, the balances of nonaccrual loans totaled $6.9
million and $8.5 million, respectively, net of specific allowances of $945,000
and $1.0 million. 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, 1998 and 1997.
The gross amount of interest income on nonaccrual loans that would have been
recorded during the years ended June 30, 1998, 1997 and 1996 if the nonaccrual
loans had been current in accordance with their original terms was $640,000,
$782,000 and $1,100,000, respectively. For the years ended June 30, 1998, 1997
and 1996, $399,000, $469,000 and $565,000, respectively, were actually earned
on nonaccrual loans and are included in interest income on loans in the
accompanying consolidated statements of earnings. Interest income earned on
nonaccrual loans is generally recorded utilizing the cash-basis method of
accounting.
Substantially all of the Company's real estate loans are secured by
properties located in Southern California.
F-15
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Impaired Loans
At June 30, 1998 and 1997, the Company had a gross investment in impaired
loans of $8.1 million and $8.0 million, respectively. During the year ended
June 30, 1998, 1997 and 1996, the Company's average investment in impaired
loans was $8.2 million, $8.2 million and $11.8 million, respectively, and for
the years then ended, interest income on such loans totaled $752,000, $704,000
and $611,000, respectively. Interest income on impaired loans which are
performing is generally recorded utilizing the cash-basis method of
accounting. Payments received on impaired loans which are performing under
their contractual terms are allocated to principal and interest in accordance
with the terms of the loans. Impaired loans totaling $3.4 million and $4.3
million were not performing in accordance with their contractual terms at
June 30, 1998 and 1997 and have been included in nonaccrual loans at that
date.
Impaired loans at June 30, 1998 included $6.0 million of loans for which
specific valuation allowances of $1.2 million had been established and $2.1
million of loans for which no specific valuation allowance was considered
necessary. At June 30, 1997, the Company had $5.5 million of impaired loans
for which specific valuation allowances of $1.2 million had been established
and $2.5 million of such loans for which no specific valuation allowance was
considered necessary. All such provisions for losses and any related
recoveries are recorded as part of the total allowance for loan losses.
(4) MORTGAGE-BACKED SECURITIES
Summarized below are the amortized cost and estimated fair values of MBS:
<TABLE>
<CAPTION>
JUNE 30, 1998
---------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Held to maturity:
GNMA, FNMA and FHLMC securities... $ 72,991 732 -- 73,723
Issued by other financial
institutions..................... 3,583 3 -- 3,586
Collateralized mortgage
obligations...................... 31,003 393 -- 31,396
-------- ----- --- -------
$107,577 1,128 -- 108,705
Available for sale--collateralized
mortgage obligations............... 8,228 46 -- 8,274
-------- ----- --- -------
Total........................... $115,805 1,174 -- 116,979
======== ===== === =======
<CAPTION>
JUNE 30, 1997
---------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Held to maturity:
GNMA, FNMA and FHLMC securities... $ 48,557 129 -- 48,686
Issued by other financial
institutions..................... 4,501 2 -- 4,503
Collateralized mortgage
obligations...................... 21,081 326 -- 21,407
-------- ----- --- -------
Total........................... $ 74,139 457 -- 74,596
======== ===== === =======
</TABLE>
F-16
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The contractual principal maturities for MBS held to maturity as of June 30,
1998, are as follows:
<TABLE>
<CAPTION>
CONTRACTUAL PRINCIPAL MATURITY
-----------------------------------------------
MATURITY MATURITY MATURITY MATURITY
WITHIN 1 YEAR TO 5 YEARS TO AFTER
TOTAL 1 YEAR 5 YEARS 10 YEARS 10 YEARS
-------- -------- --------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
GNMA, FNMA and FHLMC
securities................. $ 72,991 -- -- 543 72,448
Issued by other financial
institutions............... 3,583 -- -- 1,184 2,399
Collateralized mortgage
obligations................ 31,003 -- -- -- 31,003
-------- --- --- ----- -------
Total..................... $107,577 -- -- 1,727 105,850
======== === === ===== =======
</TABLE>
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 during 1996 with a realized gain of $41,000. There were
no mortgage-backed securities sold during 1998 and 1997.
The collateralized mortgage obligations held at June 30, 1998 and 1997
represented nonequity interests in mortgage pass-through certificates (Class
A-1 Senior Certificates) and were of investment grade.
The Company had accrued interest receivable on mortgage-backed securities of
$673,000 and $382,000 at June 30, 1998 and 1997, respectively, which is
included in accrued interest receivable and other assets in the accompanying
consolidated statements of financial condition.
F-17
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) REAL ESTATE HELD FOR SALE
The following is a summary of real estate held for sale, net of valuation
allowances:
<TABLE>
<CAPTION>
JUNE 30
-------------
1998 1997
------ -----
(IN
THOUSANDS)
<S> <C> <C>
Acquired through foreclosure.................................. $2,678 1,720
Held for development.......................................... 831 769
Valuation allowances.......................................... (175) (175)
------ -----
$3,334 2,314
====== =====
</TABLE>
Changes in the valuation allowance on real estate held for sale are
summarized as follows:
<TABLE>
<CAPTION>
JUNE 30
--------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year.................................. $175 175 175
Provision for losses.......................................... -- -- --
---- --- ---
Balance at end of year........................................ $175 175 175
==== === ===
</TABLE>
The following table summarizes real estate operations, net:
<TABLE>
<CAPTION>
JUNE 30
----------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Net (income) loss from operations:
Real estate held for development......................... $(50) 8 46
Gain on sale of foreclosed real estate owned............. (176) (385) (339)
Losses on operations of foreclosed real estate owned..... 570 661 697
---- ---- ----
344 284 404
Write-downs................................................ 251 491 252
---- ---- ----
Real estate operations, net............................ $595 775 656
==== ==== ====
</TABLE>
(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, 1998 and 1997 of $11.6 million and $9.7
million, respectively. FHLB stock is recorded at historical cost.
F-18
<PAGE>
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:
<TABLE>
<CAPTION>
JUNE 30
-------------
1998 1997
------ ------
(IN
THOUSANDS)
<S> <C> <C>
Land........................................................... $ 720 720
Buildings and leasehold improvements........................... 6,933 6,282
Furniture, fixtures and equipment.............................. 5,451 4,718
------ ------
13,104 11,720
Less accumulated depreciation and amortization................. 7,815 7,503
------ ------
$5,289 4,217
====== ======
</TABLE>
The Company recorded depreciation and amortization expense on premises,
equipment and leasehold improvements of $846,000, $805,000 and $675,000 during
1998, 1997 and 1996, respectively.
(8) DEPOSITS
The following is a summary of deposits:
<TABLE>
<CAPTION>
JUNE 30, 1998 JUNE 30, 1997
----------------- -----------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
RATE AMOUNT RATE AMOUNT
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Money market deposits.................... 4.56% $116,412 4.72% $102,607
Passbook deposits........................ 2.14 18,411 2.02 17,762
NOW and other demand deposits............ 1.63 34,684 1.19 22,459
Non-interest bearing demand deposits..... -- 10,263 -- 8,939
Certificates of deposit:
3 months or less....................... 5.41 103,242 5.45 82,054
Over 3 through 6 months................ 5.37 97,379 5.51 98,861
Over 6 through 12 months............... 5.45 115,628 5.74 120,324
Over 12 months......................... 5.98 84,891 5.96 100,180
-------- --------
4.90 $580,910 5.11 $553,186
==== ======== ==== ========
</TABLE>
The weighted average interest rates are based upon stated interest rates
without giving consideration to daily compounding of interest or forfeiture of
interest because of premature withdrawal.
Certificates of deposit of $100,000 or more accounted for $82.1 million and
$78.3 million of deposits at June 30, 1998 and 1997, respectively.
At June 30, 1998 and 1997, the Company had accrued interest payable on
deposits of $184,000 and $150,000, respectively, which is included in other
liabilities in the accompanying consolidated statements of financial
condition.
F-19
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deposits at June 30, 1998 mature as follows (in thousands):
<TABLE>
<S> <C>
Immediately withdrawable........................................... $179,770
Year ending June 30:
1999............................................................. 316,249
2000............................................................. 64,013
2001............................................................. 12,135
2002............................................................. 6,861
2003............................................................. 1,882
--------
$580,910
========
</TABLE>
Interest expense by type of deposit account is summarized in the following
table for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
---------------------
1998 1997 1996
------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Money market deposits.................................. $ 5,022 3,498 3,000
Passbook deposits...................................... 351 355 418
NOW and other demand deposits.......................... 336 278 275
Certificates of deposit................................ 22,429 22,201 21,396
------- ------ ------
$28,138 26,332 25,089
======= ====== ======
</TABLE>
(9) FEDERAL HOME LOAN BANK ADVANCES
Federal Home Loan Bank (FHLB) advances are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30
-----------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
FHLB advances, due at various dates through 2008, with
interest rates from 5.36% to 6.62% and a weighted
average rate of 5.86% at June 30, 1998 and from 5.47%
to 7.10% and a weighted average rate of 6.10% at June
30, 1997............................................. $216,000 157,700
======== ========
</TABLE>
These advances are secured by the Association's stock in the FHLB, certain
MBS and certain mortgage loans aggregating $198.4 million and $234.7 million at
June 30, 1998 and 1997, respectively. At June 30, 1998, the amount of
additional credit available from the FHLB was $51.5 million.
The maturities of FHLB advances are as follows (in thousands):
<TABLE>
<S> <C>
Year ending June 30:
1999.............................. $ 87,000
2000.............................. 28,700
2001.............................. 24,400
2002.............................. 19,800
2003 and thereafter............... 56,100
--------
$216,000
========
</TABLE>
F-20
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(10) INCOME TAXES
Income taxes for the fiscal years ended June 30, 1998, 1997 and 1996 are
comprised of the following:
<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
------- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Year ended June 30, 1998:
Current............................................... $3,606 778 4,384
Deferred.............................................. 209 704 913
------ ----- -----
$3,815 1,482 5,297
====== ===== =====
Year ended June 30, 1997:
Current............................................... $1,551 509 2,060
Deferred.............................................. 74 69 143
------ ----- -----
$1,625 578 2,203
====== ===== =====
Year ended June 30, 1996:
Current............................................... $ 961 205 1,166
Deferred.............................................. 960 447 1,407
------ ----- -----
$1,921 652 2,573
====== ===== =====
</TABLE>
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%.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
--------------------
1998 1997 1996
------ ----- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Expected Federal income taxes......................... $4,048 1,708 2,088
Increases (decreases) in computed tax resulting from:
State taxes, net of Federal benefit................. 978 381 430
Interest earned on tax-exempt securities............ (8) (29) (9)
Fair value of ESOP shares over cost................. 271 138 88
Other, net.......................................... 8 5 (24)
------ ----- -----
$5,297 2,203 2,573
====== ===== =====
</TABLE>
On August 20, 1996, the President signed the Small Business Job Protection
Act (the Act) into law. The Act repeals the reserve method of accounting for
bad debts for savings institutions, effective for taxable years beginning
after December 31, 1995. The Company, therefore, will be required to use the
specific charge-off method on its 1996 and subsequent Federal income tax
returns. Prior to 1996, savings institutions that met certain definitional
tests and other conditions prescribed by the Internal Revenue Code were
allowed to deduct, within limitations, a bad debt deduction. The deduction
percentage was 8% for the years ended December 31, 1995 and 1994.
Alternatively, a qualified savings institution could compute its bad debt
deduction based upon actual loan loss experience (the Experience Method). The
Company computed its bad debt deduction utilizing the Experience Method in the
calendar years 1995 and 1994. The Association's tax bad debt reserve balance
of approximately $10.9 million as of June 30, 1998, 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 profit, a redemption of shares or upon a
partial or complete
F-21
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. Since management intends to use the reserve only for the
purpose for which it was intended, a deferred tax liability of approximately
$3.7 million has not been recorded.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June 30,
1998 and 1997 are presented below:
<TABLE>
<CAPTION>
1998 1997
------- ------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Loan valuation allowances................................. $ 1,794 2,321
State income taxes........................................ 593 274
Deferred compensation..................................... 786 712
Amortization of core deposit.............................. 379 382
Accelerated depreciation.................................. 61 --
Other..................................................... -- 282
------- ------
Total gross deferred tax assets......................... 3,613 3,971
------- ------
Deferred tax liabilities:
Accrued interest income................................... (1,074) (959)
Deferred loan fees........................................ (2,938) (2,733)
FHLB stock dividends...................................... (1,804) (1,504)
Accelerated tax depreciation.............................. -- (92)
Unrealized gains on securities available for sale......... (302) (96)
------- ------
Total gross deferred tax liabilities.................... (6,118) (5,384)
------- ------
Net deferred tax liability.............................. $(2,505) (1,413)
======= ======
</TABLE>
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, exclusive of the reversal of existing temporary
differences, that will result from the reversal of existing taxable temporary
differences and (3) future taxable income generated by future operations. In
addition, tax planning strategies may be available to accelerate taxable
income or deductions, change the character of taxable income or deductions, or
switch from tax-exempt to taxable investments so that there will be sufficient
taxable income of an appropriate character and in the appropriate periods to
allow for realization of the tax benefits. Management believes that the above-
described deferred tax assets are more likely than not to be realized and,
accordingly, has not established a valuation allowance for the years ended
June 30, 1998 and 1997.
Included in Other Liabilities are current taxes payable of $716,000 and $1.7
million at June 30, 1998 and 1997, respectively.
F-22
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(11) REGULATORY CAPITAL AND EARNINGS PER SHARE
The Association is required to maintain certain minimum levels of regulatory
capital as set forth by the OTS in capital standards applicable to all
thrifts. These capital standards include a core capital requirement, a
tangible capital requirement and a risk-based capital requirement. The
Association exceeds all capital requirements at June 30, 1998, as shown in the
following table:
<TABLE>
<CAPTION>
TANGIBLE RISK-BASED
CAPITAL CORE CAPITAL CAPITAL
--------------- --------------- ---------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Actual....................... $65,090 7.44% $65,090 7.44% $71,301 12.97%
Required..................... 13,117 1.50 26,233 3.00 43,994 8.00
------- ---- ------- ---- ------- -----
Excess....................... $51,973 5.94% $38,857 4.44% $27,307 4.97%
======= ==== ======= ==== ======= =====
</TABLE>
The Federal Deposit Corporation Improvement Act of 1991 contains prompt
corrective action (PCA) provisions pursuant to which banks and savings
institutions are to be classified into one of five categories, based primarily
upon capital adequacy, and which require specific supervisory actions as
capital levels decrease. The OTS regulations implementing the PCA provisions
define the five capital categories. The following table sets forth the
definitions of the categories and the Association's ratios as of June 30, 1998
and 1997:
<TABLE>
<CAPTION>
TANGIBLE TOTAL RISK- TIER 1 RISK- TIER 1
CAPITAL CATEGORY CAPITAL RATIO BASED RATIO BASED RATIO LEVERAGE RATIO
---------------- ------------- ----------- ------------ --------------
<S> <C> <C> <C> <C>
Well-capitalized........ N/A greater than greater than greater than
or equal to 10% or equal to 6% or equal to 5%
Adequately capitalized.. N/A greater than greater than greater than
or equal to 8% or equal to 4% or equal to 4%
Undercapitalized........ N/A less than 8% less than 4% less than 4%
Significantly
undercapitalized....... N/A less than 6% less than 3% less than 3%
Critically
undercapitalized....... less than N/A N/A N/A
or equal to 2%
Association at June 30,
1998................... 7.44% 12.97% 11.84% 7.44%
==== ===== ===== ====
Association at June 30,
1997................... 7.34% 12.64% 11.42% 7.34%
==== ===== ===== ====
</TABLE>
The OTS also has authority, after an opportunity for a hearing, to downgrade
an institution from well-capitalized to adequately capitalized, or to subject
an adequately capitalized or undercapitalized institution to the supervisory
actions applicable to the next lower category, for supervisory concerns. At
June 30, 1998 and 1997, the Association was a well-capitalized institution.
Dividends
Savings association subsidiaries of holding companies generally are required
to provide their OTS District Director not less than 30 days' advance notice
of any proposed declaration of a dividend on the association's stock. Under
regulations adopted by the OTS, the insured institution's ability to declare
and pay a dividend to its holding company is subject to certain limitations.
The regulation establishes a three-tiered system of regulation, with the
greatest flexibility being afforded to well-capitalized associations. The
Association is considered a well-capitalized institution for purposes of
dividend declarations. No dividends were declared or paid by the Association
in 1998 or 1997.
F-23
<PAGE>
Earnings Per Share
The following is the reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations for the years as indicated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1996
--------------------------------- -------------------------------- --------------------------------
PER- PER- PER-
INCOME SHARES SHARE INCOME SHARES SHARE INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) ACCOUNT (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------- ----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net income.......... $6,610,000 $2,820,000 $3,569,000
---------- ---------- ----------
BASIC EPS
Income available to
common
stockholders....... $6,610,000 5,469,646 $1.21 $2,820,000 5,509,836 $0.51 $3,569,000 5,778,963 $0.62
---------- --------- ----- ---------- --------- ----- ---------- --------- -----
EFFECT OF DILUTIVE
SECURITIES
Options--common
stock equivalent... 325,834 282,508 269,788
--------- --------- ---------
DILUTED EPS
Income available to
common stockholders
plus assumed
conversions........ $6,610,000 5,795,480 $1.14 $2,820,000 5,792,344 $0.49 $3,569,000 6,048,751 $0.59
========== ========= ===== ========== ========= ===== ========== ========= =====
</TABLE>
F-24
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(12) RETIREMENT PLANS
Defined Benefit Plan
The Association maintains a noncontributory defined benefit pension plan
(the Plan). Employees become eligible to participate in the Plan upon
attaining the age of 21 and completing one year of service during which they
have served a minimum of 1,000 hours. 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 for benefit service accrued, and employees hired after
November 30, 1992 do not participate in the Plan. Benefits after December 31,
1993 may still increase due to increases in compensation.
Plan assets, at fair value, are primarily comprised of government
obligations and short-term investments.
The following table sets forth the Plan's funded status and amounts
recognized in the Association's consolidated statements of financial
condition:
<TABLE>
<CAPTION>
JUNE 30
---------------
1998 1997
------- ------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation................................ $(3,335) (2,444)
Nonvested benefit obligation............................. (44) (47)
------- ------
Accumulated benefit obligations........................ $(3,379) (2,491)
======= ======
Projected benefit obligation for service rendered to date.. $(3,796) (2,829)
Plan assets, at fair value................................. 3,402 2,703
------- ------
Excess of projected benefit obligation over Plan
assets................................................ (394) (126)
Items not yet recognized in earnings:
Unrecognized net loss from past experience different from
that assumed and effects of changes in assumptions...... 700 410
Unrecognized prior service cost being recognized......... (128) (162)
Unrecognized net transition asset at June 30, 1998 and
1997 being amortized over approximately 15 years........ (6) (8)
------- ------
Prepaid pension cost................................... $ 172 114
======= ======
</TABLE>
Net pension cost includes the following components:
<TABLE>
<CAPTION>
JUNE 30
----------------
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Interest cost on projected benefit obligation............... $ 209 224
Actual return on Plan assets................................ (721) (152)
Net amortization and deferral............................... 553 (20)
------- ------
Net periodic pension cost................................. $ 41 52
======= ======
</TABLE>
The discount rate used in determining the actuarial present value of the
benefit obligations was 5.50% and 7.50% as of June 30, 1998 and 1997,
respectively. The rate used to determine the expected long-term rate of return
on assets for the net pension cost was 7.00% at June 30, 1998 and 1997.
F-25
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
The following table sets forth the Plan's funded status and amounts
recognized in the Association's consolidated statements of financial
condition:
<TABLE>
<CAPTION>
JUNE 30
-----------
1998 1997
----- ----
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation.................................... $(290) (258)
Nonvested benefit obligation................................. (10) (16)
----- ----
Accumulated benefit obligations............................ $(300) (274)
===== ====
Projected benefit obligation for service rendered to date...... $(743) (491)
Plan assets, at fair value..................................... -- --
----- ----
Excess of projected benefit obligation over Plan assets.... (743) (491)
Items not yet recognized in earnings:
Unrecognized net gain from past experience different from
that assumed and effects of changes in assumptions.......... (280) (472)
Unrecognized prior service cost being recognized............. 304 352
----- ----
Accrued pension cost....................................... $(719) (611)
===== ====
</TABLE>
Net pension cost includes the following components:
<TABLE>
<CAPTION>
JUNE 30
---------------
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Service cost--benefits earned during the period.............. $ 51 50
Interest cost on projected benefit obligation................ 37 32
Net amortization and deferral................................ 20 19
------- ------
Net periodic pension cost.................................. $ 108 101
======= ======
</TABLE>
The discount rate used in determining the actuarial present value of the
benefit obligations was 6.50% and 7.50% as of June 30, 1998 and 1997,
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 10% of the
outstanding shares of the common stock of Quaker City Bancorp, Inc. issued in
the conversion. The loan will be repaid principally from the Association's
discretionary contributions to the ESOP over a period of 10 years. At June 30,
1998 and 1997, the outstanding balance on the loan was $1.6 million and $1.9
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
F-26
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 Company accounts for its ESOP
in accordance with Statement of Position 93-6. Accordingly, the Company
reports compensation expense equal to the fair value of the shares allocated,
and the allocated shares are considered outstanding for the computation of
earnings per share. The expense related to the ESOP totaled $1.1 million,
$715,000 and $583,000 for the fiscal years ended June 30, 1998, 1997 and 1996,
respectively. At June 30, 1998 and 1997, unearned compensation related to the
ESOP approximated $1.6 million and $1.9 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:
<TABLE>
<CAPTION>
YEAR ENDED JUNE
30
----------------
1998 1997
------- -------
<S> <C> <C>
Unallocated shares at beginning of period.................. 323,438 300,150
Stock dividend............................................. 67,921 67,275
Allocated.................................................. (51,750) (43,987)
------- -------
Unallocated shares at end of period........................ 339,609 323,438
======= =======
</TABLE>
The fair value of unallocated ESOP shares totaled $6.2 million and $5.7
million at June 30, 1998 and 1997, respectively.
(13) INCENTIVE PLANS
Recognition and Retention Plan (RRP)
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% 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 or employee
terminates service with the Company or the Association, that person's
nonvested awards are forfeited.
The expense related to the RRP for the fiscal years ended June 30, 1998,
1997 and 1996 was approximately $115,000, $221,000 and $327,000, respectively.
At June 30, 1998 and 1997, unearned compensation related to the RRPs was
approximately $57,000 and $172,000, respectively, and is shown as a reduction
to stockholders' equity in the accompanying consolidated statements of
financial condition.
F-27
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The table below reflects RRP activity for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED JUNE
30
----------------
1998 1997
------- -------
<S> <C> <C>
Balance at beginning of period............................. 40,087 75,315
Stock dividend............................................. 5,235 8,018
Distributed................................................ (19,147) (43,246)
------- -------
Balance at end of period................................... 26,175 40,087
======= =======
</TABLE>
Stock Option and Incentive 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). In 1998, the
stockholders of the Company ratified a stock incentive plan, the 1997 Stock
Incentive Plan (the 1997 Stock Plan). All Plans provide for the grant of
options at an exercise price equal to the fair market value on the date of
grant. The Plans are intended to promote stock ownership by directors and
selected officers and employees of the Company to increase their proprietary
interest in the success of the Company and to encourage them to remain in the
employ of the Company or its subsidiaries. Awards granted under the Plans may
include incentive stock options, nonstatutory options, limited rights which
are exercisable only upon a change in control of the Association or the
Company, restricted stock, stock appreciation rights and other stock-based
benefits.
The Company applies APB Opinion No. 25 and related interpretations for its
plans, all of which are fixed stock option plans. Accordingly, the Company did
not recognize compensation expense in connection with awards of stock options
because the exercise price and the fair market price were the same at the
dates of award. Had compensation cost for the Company Plans been recognized
based upon the fair value of the options at the grant date consistent with the
methodology specified in SFAS No. 123, the Company's net earnings and net
earnings per share at June 30, 1998 would have been reduced to the pro forma
amounts indicated below (in thousands, except per share amounts):
<TABLE>
<S> <C>
Net earnings as reported............................................. $6,610
Net earnings pro forma............................................... 6,404
Basic earnings per share as reported................................. 1.21
Basic earnings per share pro forma................................... 1.17
Diluted earnings per share as reported............................... 1.14
Diluted earnings per share pro forma................................. 1.10
</TABLE>
Pro forma disclosures are not required as of June 30, 1997 and 1996 as no
options were granted in these years. The per share weighted-average fair value
of stock options granted during 1998 was $8.42 on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: volatility of 25.27%, no expected dividends, risk-free interest
rate of 5.66% and an expected life of 10 years. During the initial phase-in
period, the effects of applying SFAS No. 123 for these pro forma disclosures
are not likely to be representative of the effects on reported income for
future years as options vest over several years and additional awards may be
made each year.
The Directors' Plan authorizes the granting of stock options for a total of
161,719 shares of common stock. The Stock Plan authorizes the granting of
stock options for a total of 485,156 shares of common stock. All options
granted under both plans were granted at an exercise price of $4.80 per share.
The aggregate number of shares of common stock outstanding and available for
issuance
F-28
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
pursuant to the 1997 Stock Plan is 291,250 shares. Options covering a total of
181,250 shares were granted in fiscal 1998 at a weighted average exercise
price of $16.50 per share, which was the fair market value on the grant date.
All share and per share information have been adjusted to reflect the 25%
stock dividends that were distributed in May 1997 and June 1998.
All options granted under the Directors' Plan became fully exercisable
January 1, 1995. Each option granted under the Directors' Plan expires upon
the earlier of ten years following the date of grant or one year following the
date the optionee ceases to be a director. All options granted under the Stock
Plan are exercisable in three equal annual installments commencing January 1,
1995 and continuing on each anniversary date thereafter. Each option granted
under the Stock Plan expires upon the earlier of ten years following the date
of grant or three months following the date on which 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. All options granted under the
1997 Stock Plan are exercisable in three equal annual installments. Each
option granted under the 1997 Stock Plan expires upon the earlier of ten years
following the date of grant or 30 days following the date on which the
employee ceases to perform services for the 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 six
months thereafter or such longer period as determined by the Company.
The table below reflects option activity for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
---------------------------------------------------------
1998 1997 1996
------------------ ------------------- ------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- --------- -------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of
period................. 449,923 $ 4.80 570,039 $4.80 623,164 $4.80
Granted................. 181,250 16.50 -- - - -
Exercised............... (18,134) 4.80 (120,116) 4.80 (53,125) 4.80
------- -------- -------
Balance at end of
period................. 613,039 8.26 449,923 4.80 570,039 4.80
======= ======== =======
Options exercisable..... 431,789 449,923 408,320
======= ======== =======
Remaining shares
available for grant.... 118,085 8,085 8,085
======= ======== =======
</TABLE>
The following table summarizes information about stock options outstanding
at June 30, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- ---------------------
NUMBER WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING WEIGHTED-AVERAGE AVERAGE EXERCISABLE AVERAGE
AT JUNE 30, REMAINING EXERCISE AT JUNE 30, EXERCISE
RANGE OF EXERCISE PRICES 1998 CONTRACTUAL LIFE PRICE 1998 PRICE
------------------------ ----------- ---------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 4.80.................. 431,789 5.5 years $ 4.80 431,789 $4.80
$16.40 to 17.85......... 181,250 9.1 16.50 -- --
</TABLE>
F-29
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(14) COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases certain premises and equipment on a long-term basis. Some
of these leases require the Company to pay property taxes and insurance. Lease
expense was approximately $430,000, $430,000 and $501,000 in 1998, 1997 and
1996, respectively. Annual minimum lease commitments attributable to long-term
operating leases at June 30, 1998 were (in thousands):
<TABLE>
<S> <C>
Year ending June 30:
1999................................................................ $ 498
2000................................................................ 483
2001................................................................ 469
2002................................................................ 417
2003................................................................ 364
Thereafter through 2013............................................. 1,552
------
$3,783
======
</TABLE>
At June 30, 1998 and 1997, the Company had approved commitments to originate
loans of approximately $15.7 million and $9.9 million, respectively,
substantially all of which were for adjustable rate one to four unit
residential loans and multifamily residential loans. Commitments to extend
credit are agreements to lend to a customer as long as there is no violation
of any condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a
fee. Since certain of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Company minimizes its exposure to loss under these
commitments by requiring that customers meet certain conditions prior to
disbursing funds. The amount of collateral, if any, is based on a credit
evaluation of the borrower and generally involves residential real estate.
At June 30, 1998 and 1997, the Company had $21.5 million and $18.9 million
of approved undisbursed lines of credit, respectively.
At June 30, 1998 and 1997, the Company had commitments to sell loans of $7.5
million and $623,000, respectively, which are included in loans held for sale.
There were no commitments to purchase loans at June 30, 1998 and commitments
to purchase $15.0 million of loans at June 30, 1997. The Company had no
commitments to sell investment securities or MBS at June 30, 1998 and 1997.
There were no commitments to purchase investment securities at June 30, 1998
and 1997.
The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings in the aggregate are believed by management to be
immaterial to the Company's financial condition and results of operations.
F-30
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(15) LOAN SERVICING AND SALE ACTIVITIES
Loan servicing and sale activities are summarized as follows:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED
JUNE 30
--------------------------
1998 1997 1996
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Statement of financial condition information:
Loans receivable held for sale................... $ 7,507 623 2,890
Purchased mortgage servicing rights.............. 471 -- --
======== ======= =======
Statement of operations information:
Loan servicing fees.............................. $ 870 791 715
Gain on sale of loans held for sale.............. 175 356 175
======== ======= =======
Statement of cash flows information:
Loans originated for sale........................ $(41,321) (31,598) (28,922)
Sale of loans held for sale...................... 34,324 33,870 27,662
======== ======= =======
</TABLE>
The Company originates mortgage loans, which depending upon whether the
loans meet the Company's investment objectives, may be sold in the secondary
market or to other private investors. The servicing of these loans may or may
not be retained by the Company. Direct origination and servicing costs for
loan servicing and sale activities cannot be presented as these operations are
integrated with and not separable from the origination and servicing of
portfolio loans and, as a result, cannot be accurately estimated.
In addition to retaining the servicing rights for originated loans, the
Company may also purchase mortgage servicing rights related to mortgage loans
originated by other institutions. In December 1997, the Company purchased the
rights to service $52.5 million of loans for FNMA and FHLMC. At June 30, 1998,
the Company had purchased mortgage servicing rights with a book value of
$471,000.
(16) PARENT COMPANY CONDENSED FINANCIAL INFORMATION
This information should be read in conjunction with the other notes to the
consolidated financial statements. The following are the condensed financial
statements for Quaker City Bancorp, Inc. (parent company only) as of June 30,
1998 and 1997 and for the years ended June 30, 1998, 1997 and 1996:
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
JUNE 30
--------------
1998 1997
ASSETS ------- ------
(IN THOUSANDS)
<S> <C> <C>
Cash......................................................... $ 64 237
Short-term investments....................................... 10,220 6,450
Investment securities held to maturity....................... -- 5,000
Investment securities available for sale..................... 1,819 1,432
Mortgage-backed securities held to maturity.................. -- 109
Investment in subsidiaries................................... 67,906 60,611
Other assets................................................. 37 28
------- ------
$80,046 73,867
======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities--other liabilities............................... $ 2,787 3,624
Stockholders' equity......................................... 77,259 70,243
------- ------
$80,046 73,867
======= ======
</TABLE>
F-31
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
--------------------
1998 1997 1996
------ ----- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Interest income........................................ $ 660 709 962
Other income........................................... -- 13 41
Other expense.......................................... (373) (290) (284)
Income taxes........................................... (148) (210) (297)
------ ----- -----
Earnings before equity in earnings of subsidiaries. 139 222 422
Equity in earnings of subsidiaries..................... 6,471 2,598 3,147
------ ----- -----
Net earnings........................................... $6,610 2,820 3,569
====== ===== =====
</TABLE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
-------------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings...................................... $ 6,610 2,820 3,569
Adjustments to reconcile net earnings to cash
provided by operating activities:
Equity in earnings of subsidiaries.............. (6,471) (2,598) (3,147)
Amortization.................................... 1 (1) 192
Decrease (increase) in other assets............. (9) 81 111
Increase (decrease) in other liabilities........ (837) 3,454 111
Other........................................... 265 553 267
------- ------- -------
Total adjustments............................. (7,051) 1,489 (2,466)
Net cash provided (used) by operating
activities................................... (441) 4,309 1,103
------- ------- -------
Cash flows from investing activities:
Purchases of investment securities held to
maturity......................................... -- -- (11,998)
Proceeds from maturity of investment securities
held to maturity................................. 5,000 3,400 9,965
Principal payments on MBS held to maturity........ 108 383 5,190
Purchases of investment securities available for
sale............................................. -- (1,199) (2,400)
Sale of investment securities available for sale.. -- -- 2,550
------- ------- -------
Net cash provided by investing activities..... 5,108 2,584 3,307
------- ------- -------
Cash flows from financing activities:
Repurchase of stock............................... (1,157) (2,270) (3,249)
Proceeds from exercise of stock options........... 87 577 255
------- ------- -------
Net cash used by financing activities......... (1,070) (1,693) (2,994)
------- ------- -------
Net increase in cash and cash equivalents..... 3,597 5,200 1,416
Cash and cash equivalents, beginning of year...... 6,687 1,487 71
------- ------- -------
Cash and cash equivalents, end of year............ $10,284 6,687 1,487
======= ======= =======
</TABLE>
F-32
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(17) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------
JUNE
30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
1998 1998 1997 1997
------- --------- ------------ -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Interest income............... $16,484 16,417 16,242 15,727
Interest expense.............. 9,740 9,692 10,010 9,668
------- ------ ------ ------
Net interest income......... 6,744 6,725 6,232 6,059
Provision for loan losses..... 400 400 400 250
Other income.................. 997 878 762 691
Other expense................. 4,096 4,111 3,781 3,743
------- ------ ------ ------
Earnings before income
taxes...................... 3,245 3,092 2,813 2,757
Income taxes.................. 1,442 1,374 1,254 1,227
------- ------ ------ ------
Net earnings................ $ 1,803 1,718 1,559 1,530
======= ====== ====== ======
Basic earnings per share...... $ 0.33 0.31 0.29 0.28
======= ====== ====== ======
Diluted earnings per share.... $ 0.31 0.30 0.27 0.27
======= ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
1997 1997 1996 1996
-------- --------- ------------ -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Interest income............... $15,282 14,838 14,481 14,067
Interest expense.............. 9,215 8,844 8,561 8,281
------- ------ ------ ------
Net interest income......... 6,067 5,994 5,920 5,786
Provision for loan losses..... 500 500 501 1,500
Other income.................. 861 640 659 610
Other expense................. 3,786 3,794 3,887 7,046
------- ------ ------ ------
Earnings (loss) before
income taxes (benefit)..... 2,642 2,340 2,191 (2,150)
Income taxes (benefit)........ 1,153 1,001 932 (883)
------- ------ ------ ------
Net earnings (loss)......... $ 1,489 1,339 1,259 (1,267)
======= ====== ====== ======
Basic earnings (loss) per
share........................ $ 0.27 0.24 0.22 (0.22)
======= ====== ====== ======
Diluted earnings (loss) per
share........................ $ 0.26 0.23 0.21 (0.22)
======= ====== ====== ======
</TABLE>
The greater amount of other expense for the three months ended September 30,
1996, relative to the other quarters presented is due to the $3.1 million
accrual for the SAIF special assessment.
The larger provision for loan losses for the three months ended September
30, 1996, relative to the other quarters presented, is a result of
management's decision to increase the general valuation allowance to keep pace
with the growth in the loan portfolio and an increase in performing loans
which demonstrated some weakness during the quarter.
F-33
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(18) FAIR VALUE OF FINANCIAL INSTRUMENTS
Pursuant to requirements under generally accepted accounting principles, the
Company has included information about the fair values of the Company's
financial instruments, whether or not such instruments are recognized in the
accompanying consolidated statements of financial condition. In cases where
quoted market prices are not available, fair values are estimated based upon
discounted cash flows. Those techniques are significantly affected by the
assumptions utilized, including the assumed discount rates and estimates of
future cash flows. In this regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could
not be realized in an immediate sale or other disposition of the instrument.
SFAS No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. All components of cash and cash
equivalents and accrued interest receivable and payable are presumed to have
approximately equal book and fair values because the periods over which such
amounts are realized are relatively short. As a result of the assumptions
utilized, the aggregate fair value estimates presented herein do not
necessarily represent the Company's aggregate underlying fair value.
The fair values of investment securities and MBS are generally obtained from
market bids for similar or identical securities, or are obtained from quotes
from independent security brokers or dealers.
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as one to four units,
multifamily, commercial real estate and other. Each loan category is further
segmented into fixed and adjustable rate interest terms and by performing and
nonperforming categories. The fair value of performing loans is calculated by
discounting scheduled cash flows through the estimated maturity using
estimated market discount rates that reflect the credit and interest rate risk
inherent in the loan. The estimate of maturity is based on the contractual
term of the loans to maturity, adjusted for estimated prepayments. Fair value
for nonperforming loans is based on management's evaluation of fair value as
determined by specific borrower information and, if appropriate, the fair
value of the underlying collateral.
The fair values of deposits are estimated based upon the type of deposit
product. Demand and money market deposits are presumed to have equal book and
fair values. The estimated fair values of time deposits are determined by
discounting the cash flows of segments of deposits having similar maturities
and rates, utilizing a yield curve that approximated the rates offered as of
the reporting date. No value has been estimated for the Company's long-term
relationships with depositors (commonly known as the core deposit premium)
since such intangible asset is not a financial instrument pursuant to the
definitions contained in SFAS No. 107.
The fair values of borrowings were estimated using current market rates of
interest for similar borrowings.
The fair values of off-balance sheet items are based on rates for similar
transactions as of the reporting date.
F-34
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table presents the carrying values and fair values of the
Company's financial instruments at the dates indicated:
<TABLE>
<CAPTION>
JUNE 30
------------------------------------
1998 1997
----------------- -----------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- ------- -------- -------
ASSETS:
<S> <C> <C> <C> <C>
Cash and due from banks................ $ 12,687 12,687 7,067 7,067
Interest-bearing deposits.............. 345 345 336 336
Federal funds sold and other short-term
investments........................... 26,420 26,420 12,950 12,950
Investment securities.................. 5,058 5,070 36,654 36,493
Investment securities available for
sale.................................. 1,819 1,819 1,432 1,432
Loans receivable, net.................. 691,026 702,763 644,964 655,310
Loans receivable held for sale......... 7,507 7,507 623 623
Mortgage-backed securities held to
maturity.............................. 107,577 108,705 74,139 74,596
Mortgage-backed securities available
for sale.............................. 8,274 8,274 -- --
Federal Home Loan Bank stock........... 11,561 11,561 9,718 9,718
Purchased mortgage servicing rights.... 471 471 -- --
<CAPTION>
LIABILITIES:
<S> <C> <C> <C> <C>
Deposits............................... 580,910 581,753 553,186 551,296
Federal Home Loan Bank advances........ 216,000 216,262 157,700 157,659
OFF-BALANCE SHEET:
Commitments to extend credit......... -- 99 -- 89
Commitments to purchase loans........ -- -- -- 94
Unused lines of credit............... -- 921 -- 250
Loans sold with recourse (including
bond loans)......................... (436) (436) (222) (222)
======== ======= ======= =======
</TABLE>
F-35
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by this reference is the information set forth in the
sections entitled "DIRECTORS AND EXECUTIVE OFFICERS--Directors" and "--
Executive Officers" and SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING
COMPLIANCE contained in the Company's Proxy Statement for its 1998 Annual
Meeting of Stockholders (the "1998 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 1998 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 1998 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 1998 Proxy
Statement.
II-1
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
DESCRIPTION NO.
----------- ----
<S> <C>
Independent Auditor's Report.............................................. F-1
Consolidated Statements of Financial Condition at June 30, 1998 and 1997.. F-2
Consolidated Statements of Earnings for Each of the Years in the Three-
Year Period Ended June 30, 1998.......................................... F-3
Consolidated Statements of Stockholders' Equity for Each of the Years in
the Three-Year Period Ended June 30, 1998................................ F-4
Consolidated Statements of Cash Flows for Each of the Years in the Three-
Year Period Ended June 30, 1998.......................................... F-5
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
(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
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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)
10.2 Quaker City Bancorp, Inc. 1993 Stock Option Plan for Outside
Directors.*(1)
10.3 Quaker City Federal Savings and Loan Association Recognition and
Retention Plan for Officers and Employees.*(1)
10.4 Quaker City Federal Savings and Loan Association Recognition and
Retention Plan for Outside Directors.*(1)
10.5 Employment Agreements between Quaker City Bancorp, Inc. and Quaker
City Federal Savings and Loan Association, respectively, and J.L.
Thomas as of January 1, 1994 and as amended to September 27, 1994,
respectively.*(1)
10.5.1 Quaker City Federal Savings and Loan Association Three Year Employment
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and J.L. Thomas dated June 23,
1995.*(2)
10.5.2 Employment Agreements between Quaker City Bancorp, Inc. and Quaker
City Federal Savings and Loan Association, respectively, and J.L.
Thomas as of July 1, 1996.*(3)
10.5.3 Quaker City Federal Savings and Loan Association Three Year Employment
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and J.L. Thomas dated July 1,
1997.*(4)
10.5.4 Quaker City Federal Savings and Loan Association Three Year Employment
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and J. L. Thomas dated July 1,
1998.*
10.6 Employment Agreements between Quaker City Bancorp, Inc. and Quaker
City Federal Savings and Loan Association, respectively, and Frederic
R. (Rick) McGill as of January 1, 1994 and as amended to September 27,
1994, respectively.*(1)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.6.1 Quaker City Federal Savings and Loan Association Two Year Employment
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Frederic R (Rick) McGill
dated June 23, 1995.*(2)
10.6.2 Employment Agreements between Quaker City Bancorp, Inc. and Quaker
City Federal Savings and Loan Association, respectively, and Frederic
R. (Rick) McGill as of July 1, 1996.*(3)
10.6.3 Quaker City Federal Savings and Loan Association Three Year Employment
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Frederic R. McGill dated July
1, 1997.*(4)
10.6.4 Quaker City Federal Savings and Loan Association Three Year Employment
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Frederic R. McGill dated July
1, 1998.*
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.*(3)
10.7.3 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Dwight L. Wilson dated July
1, 1997.*(4)
10.7.4 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Dwight L. Wilson dated July
1, 1998.*
10.8 Change-in-Control Agreements between Quaker City Bancorp, Inc. and
Quaker City Federal Savings and Loan Association, respectively, and
Harold L. Rams as of January 1, 1994 and as amended to September 27,
1994, respectively.*(1)
10.8.1 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Harold Rams dated July 1,
1995.*(2)
10.8.2 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Harold Rams dated July 1,
1996.*(3)
10.8.3 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Harold Rams dated July 1,
1997.*(4)
10.8.4 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Harold Rams dated July 1,
1998.*
10.9 Change-in-Control Agreements between Quaker City Bancorp, Inc. and
Quaker City Federal Savings and Loan Association, respectively, and
Kathryn M. Hennigan as of January 1, 1994 and as amended September 27,
1994, respectively.*(1)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.9.1 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Kathryn M. Hennigan dated
July 1, 1995.*(2)
10.9.2 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Kathryn M. Hennigan dated
July 1, 1996.*(3)
10.9.3 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Kathryn M. Hennigan dated
July 1, 1997.*(4)
10.9.4 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Kathryn M. Hennigan dated
July 1, 1998.*
10.10 Change-in-Control Agreements between Quaker City Bancorp, Inc. and
Quaker City Federal Savings and Loan Association, respectively, and
Karen A. Tannheimer as of January 1, 1994 and as amended to September
27, 1994, respectively.*(1)
10.10.1 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Karen A. Tannheimer dated
June 23, 1995.*(2)
10.10.2 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Karen A. Tannheimer dated
July 1, 1996.*(3)
10.10.3 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Karen A. Tannheimer dated
July 1, 1997.*(4)
10.10.4 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Karen A. Tannheimer dated
July 1, 1998.*
10.11 Change-in-Control Agreements between Quaker City Bancorp, Inc. and
Quaker City Federal Savings and Loan Association, respectively, and
Robert C. Teeling as of January 1, 1994 and as amended to September
27, 1994, respectively.*(1)
10.11.1 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Robert C. Teeling dated July
1, 1995.*(2)
10.11.2 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Robert C. Teeling dated July
1, 1996.*(3)
10.11.3 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Robert C. Teeling dated July
1, 1997.*(4)
10.11.4 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Robert C. Teeling dated July
1, 1998.*
10.12 The Quaker City Federal Savings and Loan Association Supplemental
Executive Retirement Plan.*(1)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.13 Quaker City Federal Savings Association Employee Stock Ownership
Trust Loan and Security Agreement between California Central Trust
Bank, as trustee (the "Trustee") and Quaker City Bancorp, Inc. dated
as of December 30, 1993 and related Promissory Note and Security
Agreement Re Instruments or Negotiable Documents to be Deposited
of the Trustee dated December 30, 1993.*(1)
10.14 Quaker City Bancorp, Inc. 1997 Stock Incentive Plan.*(4)
10.15 Change in Control Agreements between Quaker City Bancorp, Inc. and
Quaker City Federal Savings and Loan Association, respectively, and
Hank H. Kadowaki as of April 1, 1998.*
10.15.1 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Hank H. Kadowaki dated July
1, 1998.*
**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.
27.1 Restated Financial Data Schedule.
27.2 Restated Financial Data Schedule.
</TABLE>
- --------
* 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.
(3) Incorporated by reference to the corresponding exhibit to the Registrant's
Form 10-K as filed with the Securities and Exchange Commission for the
fiscal year ended June 30, 1996.
(4) Incorporated by reference to the corresponding exhibit to the Registrant's
Form 10-K as filed with the Securities and Exchange Commission for the
fiscal year ended June 30, 1997.
(b) REPORTS ON FORM 8-K
None.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
QUAKER CITY BANCORP, INC.,
a Delaware corporation
/s/ Frederic R. (Rick) McGill
By: _________________________________
Frederic R. (Rick) McGill
President and Chief Executive
Officer
DATE: September 25, 1998
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ J. L. Thomas Chairman of the Board September 25, 1998
____________________________________
J. L. Thomas
/s/ Frederic R. (Rick) McGill Director, President and September 25, 1998
____________________________________ Chief Executive Officer
Frederic R. (Rick) McGill (Principal Executive
Officer)
/s/ Dwight L. Wilson Senior Vice President, September 25, 1998
____________________________________ Treasurer and
Dwight L. Wilson Chief Financial Officer
(Principal Financial
Officer)
(Principal Accounting
Officer)
/s/ David T. Cannon Director September 25, 1998
____________________________________
David T. Cannon
/s/ Wayne L. Harvey Director September 25, 1998
____________________________________
Wayne L. Harvey
/s/ Edward L. Miller Director September 25, 1998
____________________________________
Edward L. Miller
/s/ David K. Leichtfuss Director September 25, 1998
____________________________________
David K. Leichtfuss
/s/ Alfred J. Gobar Director September 25, 1998
____________________________________
Alfred J. Gobar
</TABLE>
II-6
<PAGE>
EXHIBIT 10.5.4 QUAKER CITY FEDERAL SAVINGS AND LOAN ASSOCIATION THREE YEAR
EMPLOYMENT AGREEMENT RENEWAL AND EXTENSION ACKNOWLEDGMENT
BETWEEN QUAKER CITY FEDERAL SAVINGS AND LOAN ASSOCIATION AND J.
L. THOMAS DATED JULY 1, 1998.
QUAKER CITY FEDERAL SAVINGS AND LOAN ASSOCIATION
THREE YEAR EMPLOYMENT AGREEMENT
RENEWAL AND EXTENSION ACKNOWLEDGMENT
Name of Executive: J. L. Thomas
----------------
The undersigned executive does hereby acknowledge that, at their regularly
scheduled meeting on June 25, 1998, the Board of Directors of Quaker City
Federal Savings and Loan Association acted to renew and extend the Quaker City
Federal Savings and Loan Association Three Year Employment Agreement with the
undersigned executive to September 25, 2000, his sixty-fifth birthday, as
specified in the Employment Agreement document.
Dated this 1st day of July, A.D., 1998.
QUAKER CITY FEDERAL SAVINGS AND
LOAN ASSOCIATION
/s/ Jerome L. Thomas By: /s/ Frederic R. McGill
--------------------------- --------------------------
Executive President
<PAGE>
EXHIBIT 10.6.4 QUAKER CITY FEDERAL SAVINGS AND LOAN ASSOCIATION THREE YEAR
EMPLOYMENT AGREEMENT RENEWAL AND EXTENSION ACKNOWLEDGMENT
BETWEEN QUAKER CITY FEDERAL SAVINGS AND LOAN ASSOCIATION AND
FREDERIC R. MCGILL DATED JULY 1, 1998.
QUAKER CITY FEDERAL SAVINGS AND LOAN ASSOCIATION
THREE YEAR EMPLOYMENT AGREEMENT
RENEWAL AND EXTENSION ACKNOWLEDGMENT
Name of Executive: Frederic R. (Rick) McGill
--------------------------------
The undersigned executive does hereby acknowledge that, at their regularly
scheduled meeting on June 25, 1998, the Board of Directors of Quaker City
Federal Savings and Loan Association acted to renew and extend the Quaker City
Federal Savings and Loan Association Three Year Employment Agreement with the
undersigned executive to a full thirty-six (36) month term, until June 30, 2001.
Dated this 1st day of July, A.D., 1998.
QUAKER CITY FEDERAL SAVINGS AND
LOAN ASSOCIATION
/s/ Frederic R. McGill By: /s/ Jerome L. Thomas
---------------------------- -------------------------------
Executive Chairman of the Board
<PAGE>
EXHIBIT 10.7.4 QUAKER CITY FEDERAL SAVINGS AND LOAN ASSOCIATION CHANGE IN
CONTROL AGREEMENT RENEWAL AND EXTENSION ACKNOWLEDGMENT
BETWEEN QUAKER CITY FEDERAL SAVINGS AND LOAN ASSOCIATION AND
DWIGHT L. WILSON DATED JULY 1, 1998.
QUAKER CITY FEDERAL SAVINGS AND LOAN ASSOCIATION
CHANGE IN CONTROL AGREEMENT
RENEWAL AND EXTENSION ACKNOWLEDGMENT
Name of Participant: Dwight L. Wilson
----------------------------
The undersigned participant does hereby acknowledge that, at their regularly
scheduled meeting on June 25, 1998, the Board of Directors of Quaker City
Federal Savings and Loan Association acted to renew and extend the Quaker City
Federal Savings and Loan Association Change in Control Agreement with the
undersigned participant to a full twenty-four (24) month term, until June 30,
2000.
Dated this 1st day of July, A.D., 1998.
QUAKER CITY FEDERAL SAVINGS AND LOAN
ASSOCIATION
/s/ Dwight L. Wilson By: /s/ Frederic R. McGill
- ------------------------ --------------------------
Participant President
<PAGE>
EXHIBIT 10.8.4 QUAKER CITY FEDERAL SAVINGS AND LOAN ASSOCIATION CHANGE IN
CONTROL AGREEMENT RENEWAL AND EXTENSION ACKNOWLEDGMENT BETWEEN
QUAKER CITY FEDERAL SAVINGS AND LOAN ASSOCIATION AND HAROLD
RAMS DATED JULY 1, 1998.
QUAKER CITY FEDERAL SAVINGS AND LOAN ASSOCIATION
CHANGE IN CONTROL AGREEMENT
RENEWAL AND EXTENSION ACKNOWLEDGMENT
Name of Participant: Harold Rams
------------------
The undersigned participant does hereby acknowledge that, at their regularly
scheduled meeting on June 25, 1998, the Board of Directors of Quaker City
Federal Savings and Loan Association acted to renew and extend the Quaker City
Federal Savings and Loan Association Change in Control Agreement with the
undersigned participant to a full twenty-four (24) month term, until June 30,
2000.
Dated this 1st day of July, A.D., 1998.
QUAKER CITY FEDERAL SAVINGS AND LOAN
ASSOCIATION
/s/ Harold Rams By: /s/ Frederic R. McGill
- ------------------- --------------------------
Participant President
<PAGE>
EXHIBIT 10.9.4 QUAKER CITY FEDERAL SAVINGS AND LOAN ASSOCIATION CHANGE IN
CONTROL AGREEMENT RENEWAL AND EXTENSION ACKNOWLEDGMENT BETWEEN
QUAKER CITY FEDERAL SAVINGS AND LOAN ASSOCIATION AND KATHRYN
M. HENNIGAN DATED JULY 1, 1998.
QUAKER CITY FEDERAL SAVINGS AND LOAN ASSOCIATION
CHANGE IN CONTROL AGREEMENT
RENEWAL AND EXTENSION ACKNOWLEDGMENT
Name of Participant: Kathryn M. Hennigan
--------------------------------
The undersigned participant does hereby acknowledge that, at their regularly
scheduled meeting on June 25, 1998, the Board of Directors of Quaker City
Federal Savings and Loan Association acted to renew and extend the Quaker City
Federal Savings and Loan Association Change in Control Agreement with the
undersigned participant to a full twenty-four (24) month term, until June 30,
2000.
Dated this 1st day of July, A.D., 1998.
QUAKER CITY FEDERAL SAVINGS AND LOAN
ASSOCIATION
/s/ Kathryn M. Hennigan By: /s/ Frederic R. McGill
- --------------------------- --------------------------
Participant President
<PAGE>
EXHIBIT 10.10.4 QUAKER CITY FEDERAL SAVINGS AND LOAN ASSOCIATION CHANGE IN
CONTROL AGREEMENT RENEWAL AND EXTENSION ACKNOWLEDGMENT
BETWEEN QUAKER CITY FEDERAL SAVINGS AND LOAN ASSOCIATION AND
KAREN A. TANNHEIMER DATED JULY 1, 1998.
QUAKER CITY FEDERAL SAVINGS AND LOAN ASSOCIATION
CHANGE IN CONTROL AGREEMENT
RENEWAL AND EXTENSION ACKNOWLEDGMENT
Name of Participant: Karen A. Tannheimer
-------------------------
The undersigned participant does hereby acknowledge that, at their regularly
scheduled meeting on June 25, 1998, the Board of Directors of Quaker City
Federal Savings and Loan Association acted to renew and extend the Quaker City
Federal Savings and Loan Association Change in Control Agreement with the
undersigned participant to a full twenty-four (24) month term, until June 30,
2000.
Dated this 1st day of July, A.D., 1998.
QUAKER CITY FEDERAL SAVINGS AND LOAN
ASSOCIATION
/s/ Karen A. Tannheimer By: /s/ Frederic R. McGill
- --------------------------- --------------------------
Participant President
<PAGE>
EXHIBIT 10.11.4 QUAKER CITY FEDERAL SAVINGS AND LOAN ASSOCIATION CHANGE IN
CONTROL AGREEMENT RENEWAL AND EXTENSION ACKNOWLEDGMENT
BETWEEN QUAKER CITY FEDERAL SAVINGS AND LOAN ASSOCIATION AND
ROBERT C. TEELING DATED JULY 1, 1998.
QUAKER CITY FEDERAL SAVINGS AND LOAN ASSOCIATION
CHANGE IN CONTROL AGREEMENT
RENEWAL AND EXTENSION ACKNOWLEDGMENT
Name of Participant: Robert C. Teeling
-------------------------
The undersigned participant does hereby acknowledge that, at their regularly
scheduled meeting on June 25, 1998, the Board of Directors of Quaker City
Federal Savings and Loan Association acted to renew and extend the Quaker City
Federal Savings and Loan Association Change in Control Agreement with the
undersigned participant to a full twenty-four (24) month term, until June 30,
2000.
Dated this 1st day of July, A.D., 1998.
QUAKER CITY FEDERAL SAVINGS AND LOAN
ASSOCIATION
/s/ Robert C. Teeling By: /s/ Frederic R. McGill
- ------------------------- --------------------------
Participant President
<PAGE>
EXHIBIT 10.15 CHANGE IN CONTROL AGREEMENTS BETWEEN QUAKER CITY BANCORP,
INC. AND QUAKER CITY FEDERAL SAVINGS AND LOAN ASSOCIATION,
RESPECTIVELY, AND HANK H. KADOWAKI AS OF APRIL 1, 1998.
FORM OF QUAKER CITY BANCORP, INC.
CHANGE IN CONTROL AGREEMENT
This AGREEMENT is made effective as of April 1, 1998, by and between Quaker
City Bancorp, Inc. (the "Company"), a corporation organized under the laws of
the State of Delaware, with its office at 7021 Greenleaf Avenue, Whittier,
California, and Hank Kadowaki ("Executive"). The term "Association" refers to
Quaker City Federal Savings and Loan Association, the wholly-owned subsidiary of
the Company or any successor thereto.
WHEREAS, the Company recognizes the substantial contribution Executive has
made to the Company and wishes to protect his position therewith for the period
provided in this Agreement; and
WHEREAS, Executive has been elected to, and has agreed to serve in the
employ of the Company or an affiliate thereof;
NOW, THEREFORE, in consideration of the contribution and responsibilities
of Executive, and upon the other terms and conditions hereinafter provided, the
parties hereto agree as follows:
1. TERM OF AGREEMENT.
-----------------
The term of this Agreement shall be deemed to have commenced as of the date
first above written and shall continue for twenty-four (24) full calendar
months. Commencing on the date of execution of this Agreement, the term of this
Agreement shall be extended for one day each day until such time as the Board of
Directors of the Company (the "Board") or Executive elects not to extend the
term of the Agreement by giving written notice to the other party in accordance
with Section 4 of this Agreement, in which case the term of this Agreement shall
be fixed and shall end on the second anniversary of the date of such written
notice.
2. PAYMENTS TO EXECUTIVE UPON CHANGE IN CONTROL.
--------------------------------------------
(a) Upon the occurrence of a Change in Control of the Company (as herein
defined) followed at any time during the term of this Agreement by the voluntary
or involuntary termination of Executive's employment, other than for Cause, as
defined in Section 2(c) hereof, the provisions of Section 3 shall apply. Upon
the occurrence of a Change in Control, Executive shall have the right to elect
to voluntarily terminate his employment at any time during the term of this
Agreement following any demotion, loss of title, office or significant
authority, reduction in his annual compensation or benefits, or relocation of
his principal place of employment by more than 30 miles from its location
immediately prior to the Change in Control.
<PAGE>
(b) For purposes of this Plan, a "Change in Control" of the Association or
Company shall mean an event of a nature that: (i) would be required to be
reported in response to Item 1(a) of the current report on Form 8-K, as in
effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a Change in
Control of the Association or the Company within the meaning of the Home Owners'
Loan Act of 1933 and the Rules and Regulations promulgated by the Office of
Thrift Supervision (or its predecessor agency), as in effect on the date hereof
(provided, that in applying the definition of change in control as set forth
under the rules and regulations of the OTS, the Board shall substitute its
judgment for that of the OTS); or (iii) without limitation such a Change in
Control shall be deemed to have occurred at such time as (A) any "person" (as
the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Association or the Company
representing 20% or more of the Association's or the Company's outstanding
securities except for any securities of the Association purchased by the Company
in connection with the conversion of the Association to the stock form and any
securities purchased by any employee benefit plan of the Association or the
Company, or (B) individuals who constitute the Board on the date hereof (the
"Incumbent Board") cease for any reason to constitute at least a majority
thereof, provided that any person becoming a director subsequent to the date
hereof whose election was approved by a vote of at least three-quarters of the
directors comprising the Incumbent Board, or whose nomination for election by
the Company's stockholders was approved by the same Nominating Committee serving
under an Incumbent Board, shall be, for purposes of this clause (B), considered
as though he were a member of the Incumbent Board, or (C) a plan of
reorganization, merger, consolidation, sale of all or substantially all the
assets of the Association or the Company or similar transaction occurs in which
the Association or Company is not the resulting entity, or (D) a proxy statement
shall be distributed soliciting proxies from stockholders of the Company, by
someone other than the current management of the Company, seeking stockholder
approval of a plan of reorganization, merger or consolidation of the Company or
Association with one or more corporations as a result of which the outstanding
shares of the class of securities then subject to such plan or transaction are
exchanged for or converted into cash or property or securities not issued by the
Association or the Company shall be distributed, or (E) a tender offer is made
for 20% or more of the voting securities of the Association or Company then
outstanding.
(c) Executive shall not have the right to receive termination benefits
pursuant to Section 3 hereof upon Termination for Cause. The term "Termination
for Cause" shall mean termination because of a material loss to the Company or
one of its affiliates caused by the Executive's intentional failure to perform
stated duties, personal dishonesty, incompetence, willful violation of any law,
rule, regulation (other than traffic violations or similar offenses) or final
cease and desist order, or any material breach of this Agreement. For purposes
of this Section, no act, or the failure to act, on Executive's part shall be
"willful" unless done, or omitted to be done, not in good faith and without
reasonable belief that the action or omission was in the best interest of the
Company or its affiliates. Notwithstanding the foregoing, Executive shall not
be deemed to have been terminated for Cause unless and until there shall have
been delivered to him a copy of a resolution duly adopted by the affirmative
vote of not less than three-fourths of the members of the Board at a meeting of
the Board called and held for that purpose (after reasonable notice to Executive
and an opportunity for him, together with counsel, to be heard before the
Board), finding that in the good faith opinion
<PAGE>
of the Board, Executive was guilty of conduct justifying Termination for Cause
and specifying the particulars thereof in detail. The Executive shall not have
the right to receive compensation or other benefits for any period after
Termination for Cause.
3. TERMINATION BENEFITS.
--------------------
(a) Upon the occurrence of a Change in Control, followed at any time
during the term of this Agreement by the voluntary or involuntary termination of
Executive's employment due to (1) Executive's dismissal or (2) Executive's
voluntary termination pursuant to Section 2(a), unless such termination is due
to Termination for Cause, the Company shall be obligated to pay Executive, or in
the event of his subsequent death, his beneficiary or beneficiaries, or his
estate, as the case may be, as severance pay or liquidated damages, or both, a
sum equal to two (2) times Executive's average annual compensation for the two
most recent taxable years that Executive has been employed by the Association or
such lesser number of years in the event that Executive shall have been employed
by the Association for less than two years, such average annual compensation
shall include any bonuses or other cash compensation paid or to be paid to the
Executive in any such year, any director or committee fees paid or to be paid in
any such year, any benefits paid or accrued to the Executive pursuant to any
employee benefit plan maintained by the Company or Association in any such year
and any contributions made on behalf of the Executive to any employee benefit
plan maintained by the Company or Association in any such year; provided
--------
however, that if the Association is not in compliance with its minimum capital
- -------
requirements or if such payments would cause the Association's capital to be
reduced below its minimum regulatory capital requirements, such payments shall
be deferred until such time as the Association or successor thereto is in
capital compliance. At the election of the Executive such payment may be made
in a lump sum or paid in equal monthly installments during the twenty-four (24)
months following the Executive's termination. In the event that no election is
made, payment to the Executive will be made on a monthly basis during the
remaining term of this Agreement.
(b) Upon the occurrence of a Change in Control of the Association or the
Company followed at any time during the term of this Agreement by the
Executive's voluntary or involuntary termination of employment, other than for
Termination for Cause, the Company shall cause to be continued life, medical,
dental and disability coverage substantially identical to the coverage
maintained by the Association or Company for the Executive prior to his
severance, except to the extent such coverage may be changed in its application
to all Association or Company employees. Such coverage and payments shall cease
upon expiration of twenty-four (24) full calendar months following the Date of
Termination.
(c) Upon the occurrence of a Change in Control, Executive will be entitled
to receive benefits due to him under or contributed by the Association or
Company on his behalf pursuant to any retirement, incentive, profit sharing,
bonus, performance, disability or other employee benefit plan maintained by the
Association or Company on Executive's behalf.
(d) As of the effective date of this Agreement, and annually as of the
first business day of January or soon thereafter, Executive shall make the
election referred to in Section 3(a) hereof with
<PAGE>
respect to whether the amounts payable under said Section 3(a) shall be paid in
a lump sum or on a monthly basis. Such election shall be irrevocable for the
year for which such election is made and shall continue in effect until the
Executive has made his next annual election.
(e) Notwithstanding the preceding paragraphs of this Section 3, in no
event shall the aggregate payments or benefits to be made or afforded to
Executive under said paragraphs (the "Termination Benefits") constitute an
"excess parachute payment" under Section 280G of the Code or any successor
thereto, and in order to avoid such a result Termination Benefits will be
reduced, if necessary, to an amount (the "Non-Triggering Amount"), the value of
which is one dollar ($1.00) less than an amount equal to three (3) times
Executive's "base amount", as determined in accordance with said Section 280G.
The allocation of the reduction required hereby among the Termination Benefits
provided by the preceding paragraphs of this Section 3 shall be determined by
the Executive.
4. NOTICE OF TERMINATION.
---------------------
(a) Any purported termination by the Company, or by the Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in detail the facts and circumstances claimed to provide a
basis for termination of the Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean the date specified in the Notice of
Termination (which, in the instance of Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, the Date of Termination shall be the
date on which the dispute is finally determined, either by mutual written
agreement of the parties, by a binding arbitration award, or by a final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected) and
provided further that the Date of Termination shall be extended by a notice of
dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the Association will continue
to pay Executive his full compensation in effect when the notice giving rise to
the dispute was given (including, but not limited to his annual salary) and
continue him as a participant in all compensation, benefit and insurance plans
in which he was participating when the notice of dispute was given, until the
dispute is finally resolved in accordance with this Agreement.
5. SOURCE OF PAYMENTS.
------------------
It is intended by the parties hereto that all payments provided in this
Agreement shall be paid in cash or check from the general funds of the
Association. The Company, however, guarantees
<PAGE>
payment and provision of all amounts and benefits due hereunder to the Executive
and, if such amount and benefits due from the Association are not timely paid or
provided by the Association, such amounts and benefits shall be paid and
provided by the Company.
6. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS.
-----------------------------------------------------
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior agreement between the Company and Executive, except
that this Agreement shall not affect or operate to reduce any benefit or
compensation inuring to Executive of a kind elsewhere provided. No provision of
this Agreement shall be interpreted to mean that Executive is subject to
receiving fewer benefits than those available to him without reference to this
Agreement.
Nothing in this Agreement shall confer upon the Executive the right to
continue in the employ of the Company or shall impose on the Company any
obligation to employ or retain the Executive in its employ for any period.
7. NO ATTACHMENT.
-------------
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive, the Company and their respective successors and assigns.
8. MODIFICATION AND WAIVER.
-----------------------
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future or as to any act other than that
specifically waived.
9. REINSTATEMENT OF BENEFITS UNDER ASSOCIATION AGREEMENT.
-----------------------------------------------------
In the event Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Association's affairs by a notice described
in Section 9(b) of the Change-in-Control Agreement between Executive and the
Association dated January 1, 1994 (the "Association
<PAGE>
Agreement") during the term of this Agreement and a Change in Control, as
defined herein, occurs the Company will assume its obligation to pay and the
Executive will be entitled to receive all of the termination benefits provided
for under Section 3 of the Association Agreement upon the notification of the
Company of the Association's receipt of a dismissal of charges in the Notice.
10. EFFECT OF ACTION UNDER ASSOCIATION AGREEMENT.
---------------------------------------------
Notwithstanding any provision herein to the contrary, to the extent that
payments and benefits are paid to or received by Executive under the Association
Agreement between Executive and Association, the amount of such payments and
benefits paid by the Association will be subtracted from any amount due
simultaneously to Executive under similar provisions of this Agreement.
11. SEVERABILITY.
-------------
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
12. HEADINGS FOR REFERENCE ONLY.
---------------------------
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
13. GOVERNING LAW.
-------------
The validity, interpretation, performance, and enforcement of this
Agreement shall be governed by the laws of the State of Delaware.
14. ARBITRATION.
-----------
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the Executive within
fifty (50) miles from the location of the Company, in accordance with the rules
of the American Arbitration Association then in effect. Judgment may be entered
on the arbitrator's award in any court having jurisdiction; provided, however,
that Executive shall be entitled to seek specific performance of his right to be
paid until the Date of Termination during the pendency of any dispute or
controversy arising under or in connection with this Agreement.
<PAGE>
15. PAYMENT OF LEGAL FEES.
---------------------
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Company if Executive is successful pursuant to a legal
judgment, arbitration or settlement.
16. INDEMNIFICATION.
---------------
The Company shall provide the Executive (including his heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense, or in lieu thereof, shall indemnify
the Executive (and his heirs, executors and administrators) to the fullest
extent permitted under Delaware law and as provided in the Company's certificate
of incorporation against all expenses and liabilities reasonably incurred by him
in connection with or arising out of any action, suit or proceeding in which he
may be involved by reason of his having been a director or officer of the
Company (whether or not he continues to be a director or officer at the time of
incurring such expenses or liabilities), such expenses and liabilities to
include, but not be limited to, judgments, court costs and attorneys' fees and
the cost of reasonable settlements.
17. SUCCESSOR TO THE HOLDING COMPANY.
--------------------------------
The Company shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Association or the Company,
expressly and unconditionally to assume and agree to perform the Company's
obligations under this Agreement, in the same manner and to the same extent that
the Company would be required to perform if no such succession or assignment had
taken place.
<PAGE>
18. SIGNATURES.
----------
IN WITNESS WHEREOF, Quaker City Bancorp, Inc. has caused this Agreement to
be executed by its duly authorized officer, and Executive has signed this
Agreement, on the 24th day of April, 1998.
ATTEST: QUAKER CITY BANCORP, INC.
/s/ Kathryn M. Hennigan By: /s/ Frederic R. McGill
- ----------------------- -----------------------
Secretary
WITNESS:
/s/ Sharon Thomson /s/ Hank Kadowaki
- ------------------------ -------------------------
Hank Kadowaki
Executive
Seal
<PAGE>
FORM OF
QUAKER CITY FEDERAL SAVINGS AND LOAN ASSOCIATION
CHANGE IN CONTROL AGREEMENT
This AGREEMENT is made effective as of April 1, 1998 by and between Quaker
City Federal Savings and Loan Association (the "Association"), a federally
chartered savings institution, with its principal administrative office at 7021
Greenleaf Avenue, Whittier, California, and Hank Kadowaki (the "Executive") and
Quaker City Bancorp, Inc. (the "Company"), a corporation organized under the
laws of the State of Delaware which is the holding company of the Association.
WHEREAS, the Association recognizes the substantial contribution Executive
has made to the Association and wishes to protect Executive's position therewith
for the period provided in this Agreement; and
WHEREAS, Executive has agreed to serve in the employ of the Association.
NOW, THEREFORE, in consideration of the contribution and responsibilities
of Executive, and upon the other terms and conditions hereinafter provided, the
parties hereto agree as follows:
1. TERM OF AGREEMENT.
-----------------
The term of this Agreement shall be deemed to have commenced as of the date
first above written and shall continue for an initial period of three (3) full
calendar months. Commencing on July 1, 1998, this agreement shall be renewed
for twenty-four (24) full calendar months, and continuing at each anniversary
date thereafter, the Board of Directors of the Association ("Board") may extend
this Agreement for an additional year. The Board will review the Agreement and
the Executive's performance annually for purposes of determining whether to
extend the Agreement, and the results thereof shall be included in the minutes
of the Board's meeting.
2. PAYMENTS TO EXECUTIVE UPON CHANGE IN CONTROL.
--------------------------------------------
(a) Upon the occurrence of a Change in Control of the Association or the
Company (as herein defined) followed at any time during the term of this
Agreement by the voluntary or involuntary termination of Executive's employment,
other than for Cause, as defined in Section 2(c) hereof, the provisions of
Section 3 shall apply. Upon the occurrence of a Change in Control, Executive
shall have the right to elect to voluntarily terminate his employment at any
time during the term of this Agreement following any demotion, loss of title,
office or significant authority, reduction in his annual compensation or
benefits, or relocation of his principal place of employment by more than 30
miles from its location immediately prior to the Change in Control.
(b) For purposes of this Plan, a "Change in Control" of the Association or
Company shall mean an event of a nature that: (i) would be required to be
reported in response to Item 1(a) of the
<PAGE>
current report on Form 8-K, as in effect on the date hereof, pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"); or (ii)
results in a Change in Control of the Association or the Company within the
meaning of the Home Owners' Loan Act of 1933 and the Rules and Regulations
promulgated by the Office of Thrift Supervision (or its predecessor agency), as
in effect on the date hereof (provided, that in applying the definition of
change in control as set forth under the rules and regulations of the OTS, the
Board shall substitute its judgment for that of the OTS); or (iii) without
limitation such a Change in Control shall be deemed to have occurred at such
time as (A) any "person" (as the term is used in Sections 13(d) and 14(d) of the
Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the
Association or the Company representing 20% or more of the Association's or the
Company's outstanding securities except for any securities of the Association
purchased by the Company in connection with the conversion of the Association to
the stock form and any securities purchased by any employee benefit plan of the
Association, or (B) individuals who constitute the Board on the date hereof (the
"Incumbent Board") cease for any reason to constitute at least a majority
thereof, provided that any person becoming a director subsequent to the date
hereof whose election was approved by a vote of at least three-quarters of the
directors comprising the Incumbent Board, or whose nomination for election by
the Company's stockholders was approved by the same Nominating Committee serving
under an Incumbent Board, shall be, for purposes of this clause (B), considered
as though he were a member of the Incumbent Board, or (C) a plan of
reorganization, merger, consolidation, sale of all or substantially all the
assets of the Association or the Company or similar transaction occurs in which
the Association or Company is not the resulting entity.
(c) Executive shall not have the right to receive termination benefits
pursuant to Section 3 hereof upon Termination for Cause. The term "Termination
for Cause" shall mean termination because of the Executive's personal
dishonesty, incompetence, willful misconduct, any breach of fiduciary duty
involving personal profit, intentional failure to perform stated duties, willful
violation of any law, rule, or regulation (other than traffic violations or
similar offenses) or final cease-and-desist order, or material breach of any
material provision of this Agreement. In determining incompetence, the acts or
omissions shall be measured against standards generally prevailing in the
savings institutions industry. Notwithstanding the foregoing, Executive shall
not be deemed to have been Terminated for Cause unless and until there shall
have been delivered to him a copy of a resolution duly adopted by the
affirmative vote of not less than a majority of the Board of Directors of the
Association at a meeting of the Board called and held for that purpose (after
reasonable notice to the Executive and an opportunity for him, together with
counsel, to be heard before the Board at such meeting and which such meeting
shall be held not more than 30 days from the date of notice during which period
Executive may be suspended with pay), finding that in the good faith opinion of
the Board, the Executive was guilty of conduct justifying Termination for Cause
and specifying the particulars thereof in detail. The Executive shall not have
the right to receive compensation or other benefits for any period after
Termination for Cause. Any stock options or limited rights granted to Executive
under any stock option plan of the Association, the Company or any subsidiary or
affiliate thereof, shall become null and void effective upon Executive's receipt
of Notice of Termination for Cause and shall not be exercisable by Executive at
any time subsequent to such Termination for Cause.
<PAGE>
3. TERMINATION BENEFITS.
--------------------
(a) Upon the occurrence of a Change in Control, followed at any time during
the term of this Agreement by the termination of the Executive's employment due
to (1) Executive's dismissal or (2) Executive's voluntary termination pursuant
to Section 2(a), unless such termination is due to Termination for Cause, the
Association and the Company shall pay the Executive, or in the event of his
subsequent death, his beneficiary or beneficiaries, or his estate, as the case
may be, as severance pay or liquidated damages, or both, a sum equal to two
times Executive's average annual compensation for the five preceding taxable
years, such annual compensation shall include any bonuses and any other cash
compensation paid or to be paid to Executive in any such year, the amount of
benefits paid or accrued to Executive pursuant to any employee benefit plan
maintained by the Association or Company in any such year and the amount of any
contributions made or to be made on behalf of Executive pursuant to any employee
benefit plan maintained by the Association or the Company in any such year. At
the election of the Executive such payment may be made in a lump sum or paid in
equal monthly installments during the twenty-four (24) months following the
Executive's termination. In the event that no election is made, payment to the
Executive will be made on a monthly basis during the remaining term of this
Agreement.
(b) Upon the occurrence of a Change in Control of the Association or the
Company followed at any time during the term of this Agreement by the
Executive's voluntary or involuntary termination of employment, other than for
Termination for Cause, the Association shall cause to be continued life,
medical, dental and disability coverage substantially identical to the coverage
maintained by the Association or Company for the Executive prior to his
severance, except to the extent such coverage may be changed in its application
to all Association or Company employees. Such coverage and payments shall cease
upon the expiration of twenty-four full calendar months from the Date of
Termination.
(c) Upon the occurrence of a Change in Control, Executive will be entitled
to receive benefits due to him under or contributed by the Association or
Company on his behalf pursuant to any retirement, incentive, profit sharing,
bonus, performance, disability or other employee benefit plan maintained by the
Association or Company on Executive's behalf.
(d) As of the effective date of this Agreement, and annually as of the
first business day of January or soon thereafter, Executive shall make the
election referred to in Section 3(a) hereof with respect to whether the amounts
payable under said Section 3(a) shall be paid in a lump sum or on a monthly
basis. Such election shall be irrevocable for the year for which such election
is made and shall continue in effect until the executive has made his next
annual election.
(e) Notwithstanding the preceding paragraphs of this Section 3, in no event
shall the aggregate payments or benefits to be made or afforded to Executive
under said paragraphs (the "Termination Benefits") constitute an "excess
parachute payment" under Section 280G of the Code or any successor thereto, and
in order to avoid such a result Termination Benefits will be reduced, if
necessary, to an amount (the "Non-Triggering Amount"), the value of which is one
dollar ($1.00) less than an amount equal to three (3) times Executive's "base
amount", as determined in accordance with said Section 280G. The allocation of
the reduction required hereby among the Termination
<PAGE>
Benefits provided by the preceding paragraphs of this Section 3 shall be
determined by the Executive.
4. NOTICE OF TERMINATION.
---------------------
(a) Any purported termination by the Association or by Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean the date specified in the Notice of
Termination (which, in the instance of Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, the Date of Termination shall be the
date on which the dispute is finally determined, either by mutual written
agreement of the parties, by a binding arbitration award, or by a final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected) and
provided further that the Date of Termination shall be extended by a notice of
dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the Association will continue
to pay Executive his full compensation in effect when the notice giving rise to
the dispute was given (including, but not limited to his annual salary) and
continue him as a participant in all compensation, benefit and insurance plans
in which he was participating when the notice of dispute was given, until the
dispute is finally resolved in accordance with this Agreement.
5. SOURCE OF PAYMENTS.
------------------
It is intended by the parties hereto that all payments provided in this
Agreement shall be paid in cash or check from the general funds of the
Association. The Company, however, guarantees payment and provision of all
amounts and benefits due hereunder to the Executive and, if such amounts and
benefits due from the Association are not timely paid or provided by the
Association, such amounts and benefits shall be paid or provided by the Company.
6. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS.
-----------------------------------------------------
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior agreement between the Association and the Executive,
except that this Agreement shall not affect or operate to reduce any benefit or
compensation inuring to the Executive of a kind elsewhere provided. No
provision of this Agreement shall be interpreted to mean that the Executive is
subject to receiving fewer benefits than those available to him without
reference to this
<PAGE>
Agreement.
Nothing in this Agreement shall confer upon the Executive the right to
continue in the employ of Association or shall impose on the Association any
obligation to employ or retain the Executive in its employ for any period.
7. NO ATTACHMENT.
-------------
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of, the
Executive, the Association and their respective successors and assigns.
8. MODIFICATION AND WAIVER.
-----------------------
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future or as to any act other than that
specifically waived.
9. REQUIRED REGULATORY PROVISIONS.
------------------------------
(a) The Board of Directors may terminate the Executive's employment at any
time, but any termination by the Board of Directors, other than Termination for
Cause, shall not prejudice the Executive's right to compensation or other
benefits under this Agreement. The Executive shall not have the right to
receive compensation or other benefits for any period after Termination for
Cause as defined in Section 2 hereinabove.
(b) If the Executive is suspended from office and/or temporarily prohibited
from participating in the conduct of the Association's affairs by a notice
served under Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act (12
U.S.C. (S)1818(c)(3) or (g)(1)), the Association's obligations under this
contract shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the
Association may in its discretion (i) pay the Executive all or part of the
compensation withheld while their contract obligations were suspended and (ii)
reinstate (in whole or in part) any of the obligations which were suspended.
<PAGE>
(c) If the Executive is removed and/or permanently prohibited from
participating in the conduct of the Association's affairs by an order issued
under Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act (12 U.S.C.
(S)1818(e)(4) or (g)(1)), all obligations of the Association under this contract
shall terminate as of the effective date of the order, but vested rights of the
contracting parties shall not be affected.
(d) If the Association is in default as defined in Section 3(x)(1) of the
Federal Deposit Insurance Act, all obligations of the Association under this
contract shall terminate as of the date of default, but this paragraph shall not
affect any vested rights of the contracting parties.
(e) All obligations under this contract shall be terminated, except to the
extent determined that continuation of the contract is necessary for the
continued operation of the institution: (i) by the Director of the Office of
Thrift Supervision (or his or her designee) at the time the Federal Deposit
Insurance Corporation or the Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf of the Association under the
authority contained in Section 13(c) of the Federal Deposit Insurance Act; or
(ii) by the Director of the Office of Thrift Supervision (or his or her
designee) at the time the Director (or his or her designee) approves a
supervisory merger to resolve problems related to operation of the Association
or when the Association is determined by the Director to be in an unsafe or
unsound condition. Any rights of the parties that have already vested, however,
shall not be affected by such action.
(f) Any payments made to the Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
(S)1828(k) and any rules and regulations promulgated thereunder.
10. REINSTATEMENT OF BENEFITS UNDER SECTION 9(b).
--------------------------------------------
In the event the Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Association's affairs by a notice described
in Section 9(b) hereof (the "Notice") during the term of this Agreement and a
Change in Control, as defined herein, occurs, the Association will assume its
obligation to pay and the Executive will be entitled to receive all of the
termination benefits provided for under Section 3 of this Agreement upon the
Association's receipt of a dismissal of charges in the Notice.
11. SEVERABILITY.
-------------
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
12. HEADINGS FOR REFERENCE ONLY.
---------------------------
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this
<PAGE>
Agreement.
13. GOVERNING LAW.
-------------
The validity, interpretation, performance, and enforcement of this Agreement
shall be governed by California law but only to the extent not preempted by
Federal law.
14. ARBITRATION.
-----------
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the Executive within
fifty (50) miles from the location of the Association's main office, in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction; provided, however, that the Executive shall be entitled to seek
specific performance of his right to be paid until the Date of Termination
during the pendency of any dispute or controversy arising under or in connection
with this Agreement.
15. PAYMENT OF COSTS AND LEGAL FEES.
-------------------------------
All reasonable costs and legal fees paid or incurred by the Executive
pursuant to any dispute or question of interpretation relating to this Agreement
shall be paid or reimbursed by the Association (which payments are guaranteed by
the Company pursuant to Section 5 hereof) if Executive is successful on the
merits pursuant to a legal judgment, arbitration or settlement.
16. INDEMNIFICATION.
---------------
The Association shall provide Executive (including his or her legal
representatives, successors and assigns) with coverage under a standard
directors' and officers' liability insurance policy at its expense, or in lieu
thereof, shall indemnify Executive (including his or her legal representatives,
successors and assigns) for reasonable costs and expenses incurred by Executive
in defending or settling any judicial or administrative proceeding, or
threatened proceeding, whether civil, criminal or otherwise, including any
appeal or other proceeding for review.
Indemnification by the Association shall be made only upon the final
judgment on the merits in the favor of the Executive, in case of settlement, in
case of final judgment against Executive or in the case of final judgment in
favor of Executive other than on the merits, if a majority of the disinterested
directors of the Association determine Executive was acting in good faith within
the scope of Executive's employment or authority in accordance with 12 C.F.R.
section 545.121(c)(iii).
Any such indemnification of Executive must conform with the notice
provisions of 12 C.F.R. part 545.121(c)(iii) to indemnify Executive to the
fullest for such expenses and liabilities to include, but not be limited to,
judgments, court costs and attorneys' fees and the cost of reasonable
settlements, such settlements to be approved by the Board of Directors of the
Association, if such
<PAGE>
action is brought against Executive in his or her capacity as a officer or
director of the Association, however, shall not extend to matters as to which
Executive is finally adjudged to be liable for willful misconduct in the
performance of his or her duties.
17. SUCCESSOR TO THE ASSOCIATION.
----------------------------
The Association shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Association, expressly and
unconditionally to assume and agree to perform the Association's obligations
under this Agreement, in the same manner and to the same extent that the
Association would be required to perform if no such succession or assignment had
taken place.
<PAGE>
18. SIGNATURES.
----------
IN WITNESS WHEREOF, Quaker City Federal Savings and Loan Association and
Quaker City Bancorp, Inc. have caused this Agreement to be executed by their
duly authorized officers, and Executives have signed this Agreement, on the 24th
day of April, 1998.
ATTEST: Quaker City Federal Savings
and Loan Association
/s/ Kathryn M. Hennigan By: /s/ Frederic R. McGill
- ----------------------------- ------------------------------
SEAL
ATTEST: Quaker City Bancorp, Inc.
(Guarantor)
/s/ Kathryn M. Hennigan By: /s/ Frederic R. McGill
- ----------------------------- ------------------------------
SEAL
WITNESS:
/s/ Sharon Thomson /s/ Hank Kadowaki
- ----------------------------- ------------------------------
Hank Kadowaki
Executive
<PAGE>
EXHIBIT 10.15.1 QUAKER CITY FEDERAL SAVINGS AND LOAN ASSOCIATION CHANGE
IN CONTROL AGREEMENT RENEWAL AND EXTENSION
ACKNOWLEDGMENT BETWEEN QUAKER CITY FEDERAL SAVINGS AND
LOAN ASSOCIATION AND HANK H. KADOWAKI DATED JULY 1,
1998.
QUAKER CITY FEDERAL SAVINGS AND LOAN ASSOCIATION
CHANGE IN CONTROL AGREEMENT
RENEWAL AND EXTENSION ACKNOWLEDGMENT
Name of Participant: Hank H. Kadowaki
-------------------------
The undersigned participant does hereby acknowledge that, at their regularly
scheduled meeting on June 25, 1998, the Board of Directors of Quaker City
Federal Savings and Loan Association acted to renew and extend the Quaker City
Federal Savings and Loan Association Change in Control Agreement with the
undersigned participant to a full twenty-four (24) month term, until June 30,
2000.
Dated this 1st day of July, A.D., 1998.
QUAKER CITY FEDERAL SAVINGS AND LOAN
ASSOCIATION
/s/ Hank H. Kadowaki By: /s/ Frederic R. McGill
- ------------------------ --------------------------
Participant President
<PAGE>
EXHIBIT 11.1
QUAKER CITY BANCORP
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED JUNE 30, ENDED JUNE 30, ENDED JUNE 30,
1998 1997 1996
-------------- -------------- --------------
<C> <S> <C> <C> <C>
Average Common Shares
A Outstanding................ 5,469,646 5,509,836 5,778,963
---------- ---------- ----------
B Net earnings for Period.... $6,610,000 $2,820,000 $3,569,000
========== ========== ==========
Basic Earnings Per Share [B
/ A]....................... $1.21 $0.51 $0.62
========== ========== ==========
Common Share Equivalents:
Average Stock Options
C Outstanding................ 602,107 499,128 607,904
---------- ---------- ----------
D Option Exercise Price...... $7.86 $4.80 $4.80
---------- ---------- ----------
E Exercise Proceeds [C x D].. $4,732,561 $2,395,814 $2,917,939
---------- ---------- ----------
Average Market Price in
F Period..................... $17.13 $11.06 $8.63
---------- ---------- ----------
Shares Repurchased At
G Market Price [E / F]....... 276,273 216,620 338,116
---------- ---------- ----------
Increase in Common Shares
H [C - G].................... 325,834 282,508 269,788
---------- ---------- ----------
Shares Outstanding and
I Equivalents [A + H]........ 5,795,480 5,792,344 6,048,751
========== ========== ==========
J Net Earnings for Period.... $6,610,000 $2,820,000 $3,569,000
========== ========== ==========
Diluted Earnings Per Share
[J / I].................... $1.14 $0.49 $0.59
========== ========== ==========
</TABLE>
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF QUAKER CITY BANCORP, INC.
<TABLE>
<CAPTION>
STATE OR OTHER
JURISDICTION OF
INCORPORATION
NAME OF ORGANIZATION
---- ---------------
<S> <C>
Quaker City Federal Savings and Loan Association (direct
subsidiary)................................................... Federal
Quaker City Financial Corp. (indirect subsidiary).............. California
Quaker City Neighborhood Development, Inc. (direct subsidiary). California
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Quaker City, Bancorp, Inc.
We consent to incorporation by reference in the Registration Statement (No.
33-83770) on Form S-8 of Quaker City Bancorp, Inc. of our report dated July
24, 1998, relating to the consolidated statements of financial condition of
Quaker City Bancorp, Inc. and subsidiaries as of June 30, 1998 and 1997, and
the related consolidated statements of earnings, stockholders' equity and cash
flows for each of the years in the three-year period ended June 30, 1998,
which report appears in the June 30, 1998 annual report on Form 10-K of Quaker
City Bancorp, Inc.
KPMG Peat Marwick LLP
Los Angeles, California
September 25, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 12,687
<INT-BEARING-DEPOSITS> 345
<FED-FUNDS-SOLD> 26,420
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 10,093
<INVESTMENTS-CARRYING> 112,635
<INVESTMENTS-MARKET> 113,775
<LOANS> 698,533
<ALLOWANCE> 7,955
<TOTAL-ASSETS> 887,480
<DEPOSITS> 580,910
<SHORT-TERM> 97,000
<LIABILITIES-OTHER> 13,311
<LONG-TERM> 119,000
0
0
<COMMON> 58
<OTHER-SE> 77,201
<TOTAL-LIABILITIES-AND-EQUITY> 77,259
<INTEREST-LOAN> 54,793
<INTEREST-INVEST> 8,603
<INTEREST-OTHER> 1,474
<INTEREST-TOTAL> 64,870
<INTEREST-DEPOSIT> 28,138
<INTEREST-EXPENSE> 39,110
<INTEREST-INCOME-NET> 25,760
<LOAN-LOSSES> 1,450
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 15,731
<INCOME-PRETAX> 11,907
<INCOME-PRE-EXTRAORDINARY> 11,907
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,610
<EPS-PRIMARY> $1.21
<EPS-DILUTED> $1.14
<YIELD-ACTUAL> 7.90
<LOANS-NON> 6,948
<LOANS-PAST> 0
<LOANS-TROUBLED> 223
<LOANS-PROBLEM> 3,357
<ALLOWANCE-OPEN> 6,496
<CHARGE-OFFS> 1,255
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 7,955
<ALLOWANCE-DOMESTIC> 7,955
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 7,067
<INT-BEARING-DEPOSITS> 336
<FED-FUNDS-SOLD> 12,950
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,432
<INVESTMENTS-CARRYING> 110,793
<INVESTMENTS-MARKET> 111,089
<LOANS> 645,587
<ALLOWANCE> 7,772
<TOTAL-ASSETS> 801,402
<DEPOSITS> 553,186
<SHORT-TERM> 76,200
<LIABILITIES-OTHER> 20,273
<LONG-TERM> 81,500
0
0
<COMMON> 47
<OTHER-SE> 70,196
<TOTAL-LIABILITIES-AND-EQUITY> 801,402
<INTEREST-LOAN> 51,411
<INTEREST-INVEST> 6,164
<INTEREST-OTHER> 1,093
<INTEREST-TOTAL> 58,668
<INTEREST-DEPOSIT> 26,332
<INTEREST-EXPENSE> 34,901
<INTEREST-INCOME-NET> 23,767
<LOAN-LOSSES> 3,001
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 18,512
<INCOME-PRETAX> 5,023
<INCOME-PRE-EXTRAORDINARY> 5,023
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,820
<EPS-PRIMARY> 0.51<F1>
<EPS-DILUTED> 0.49<F1>
<YIELD-ACTUAL> 7.94
<LOANS-NON> 8,539
<LOANS-PAST> 0
<LOANS-TROUBLED> 229
<LOANS-PROBLEM> 1,555
<ALLOWANCE-OPEN> 7,833
<CHARGE-OFFS> 3,047
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 7,772
<ALLOWANCE-DOMESTIC> 7,772
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>IN FEBRUARY 1997, THE FINANCIAL ACCOUNTING STANDARDS BOARD ISSUED SFAS NO.
128, "EARNINGS PER SHARE" (SFAS NO. 128) WHICH IS EFFECTIVE FOR FINANCIAL
STATEMENTS ISSUED FOR PERIODS AFTER DECEMBER 15, 1997. ALL PRIOR PERIOD EPS DATA
PRESENTED HEREIN IS RESTATED TO CONFORM WITH STATEMENT 128.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 2,184
<INT-BEARING-DEPOSITS> 4,984
<FED-FUNDS-SOLD> 6,400
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 78,594
<INVESTMENTS-MARKET> 78,370
<LOANS> 610,562
<ALLOWANCE> 7,833
<TOTAL-ASSETS> 725,085
<DEPOSITS> 512,517
<SHORT-TERM> 34,600
<LIABILITIES-OTHER> 9,042
<LONG-TERM> 101,000
0
0
<COMMON> 38
<OTHER-SE> 67,888
<TOTAL-LIABILITIES-AND-EQUITY> 725,085
<INTEREST-LOAN> 47,078
<INTEREST-INVEST> 4,747
<INTEREST-OTHER> 821
<INTEREST-TOTAL> 52,646
<INTEREST-DEPOSIT> 25,089
<INTEREST-EXPENSE> 31,151
<INTEREST-INCOME-NET> 21,495
<LOAN-LOSSES> 2,103
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 15,739
<INCOME-PRETAX> 6,142
<INCOME-PRE-EXTRAORDINARY> 6,142
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,569
<EPS-PRIMARY> 0.62<F1>
<EPS-DILUTED> 0.59<F1>
<YIELD-ACTUAL> 7.94
<LOANS-NON> 10,449
<LOANS-PAST> 0
<LOANS-TROUBLED> 234
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 12,108
<CHARGE-OFFS> 6,175
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 7,833
<ALLOWANCE-DOMESTIC> 7,833
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>IN FEBRUARY 1997, THE FINANCIAL ACCOUNTING STANDARDS BOARD ISSUED SFAS NO.
128, "EARNINGS PER SHARE" (SFAS NO. 128) WHICH IS EFFECTIVE FOR FINANCIAL
STATEMENTS ISSUED FOR PERIODS AFTER DECEMBER 15, 1997. ALL PRIOR PERIOD EPS DATA
PRESENTED HEREIN IS RESTATED TO CONFORM WITH STATEMENT 128.
</FN>
</TABLE>
