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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, 1999
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, 1999, on the Nasdaq National Market System
was approximately $80,069,000.
At September 22, 1999, 5,395,107 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 17, 1999 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.................. 13
Impaired Loans............................................... 15
Allowances for Loan and Real Estate Losses................... 15
Investment Activities........................................ 18
Sources of Funds............................................. 19
Subsidiary Activities........................................ 22
Competition.................................................. 22
Personnel.................................................... 23
Federal Taxation............................................. 23
State and Local Taxation..................................... 24
Environmental Regulation..................................... 25
Regulation and Supervision................................... 26
General..................................................... 26
Activities Restrictions..................................... 26
Deposit Insurance........................................... 27
Regulatory Capital Requirements............................. 28
Prompt Corrective Action Requirements....................... 29
Enforcement................................................. 30
Savings and Loan Holding Company Regulation................. 30
Classification of Assets.................................... 32
Community Reinvestment Act.................................. 33
Federal Home Loan Bank System............................... 33
Required Liquidity.......................................... 34
Federal Reserve System...................................... 34
Year 2000 Compliance........................................ 34
Pending Legislation......................................... 35
ITEM 2. PROPERTIES................................................... 39
ITEM 3. LEGAL PROCEEDINGS............................................ 40
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......... 40
ITEM 4A. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........... 40
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.......................................... 41
ITEM 6. SELECTED FINANCIAL DATA...................................... 43
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................... 45
General...................................................... 45
Results of Operations........................................ 45
Year 2000.................................................... 47
Financial Condition.......................................... 50
Capital Resources and Liquidity.............................. 51
Asset/Liability Management................................... 53
Average Balance Sheet........................................ 56
Impact of Inflation and Changing Prices...................... 58
Impact of New Accounting Standards........................... 58
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK... 60
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................. F-1
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE..................................... II-1
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........... II-1
ITEM 11. EXECUTIVE COMPENSATION....................................... II-1
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................... II-1
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............... II-1
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.................................................. II-1
SIGNATURES................................................... II-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 and a Year 2000 Readiness Disclosure
within the meaning of the Year 2000 Readiness Disclosure Act of 1998. 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. 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. In addition, as
announced on August 17, 1999, the Company entered into an agreement with
another Southern California based financial institution to purchase a branch
located in Rowland Heights, California. This branch will add approximately
$52.0 million in retail deposits to the Company's existing deposit base. The
purchase of the branch is scheduled to close in late October, 1999.
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
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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 12 regional
banks comprising the Federal Home Loan Bank System. The Association is also
subject to 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 its primary deposit market area
surrounding its offices and investing those deposits, together with funds
generated from operations and borrowings. Through its wholly owned subsidiary,
Quaker City Financial Corporation ("QCFC"), the Company also engages in the
sale of insurance and investment products on an agency basis. See "--
Subsidiary Activities." The Company originates predominantly multifamily,
commercial real estate and one-to-four family loans and emphasizes multifamily
lending in low and moderate income communities, primarily in Southern
California metropolitan areas. To a lesser extent, loans are also originated
and purchased in Central and Northern California. Under certain circumstances,
one-to-four family loans are purchased on loans secured by properties outside
the state of California.
Historically, the Company's principal business was the making of one-to-four
family and multifamily (five or more units) loans. In every year for which
data is presented in this report, i.e., 1995 through 1999, the Company's
multifamily loan portfolio has increased in total dollar amount and has
represented a significant portion of the Company's total loan portfolio. See
"--Lending Activities--Loan and MBS Portfolio Composition." Beginning
principally with the hiring announced in January 1998 of the income property
lending staff of another Southern California financial institution, the
Company has increased its focus on commercial real estate lending. The Company
currently intends to continue its emphasis on multifamily and commercial real
estate lending, with their higher risk-adjusted rates of return, rather than
on lower yielding one-to-four family lending. At June 30, 1999, the Company's
gross mortgage loan portfolio (including loans held for sale) totaled $852.5
million, 62.41% of which was secured by multifamily properties (approximately
$391.6 million) and commercial real estate (approximately $140.4 million).
In particular, the commercial real estate loan portfolio has grown at a
significant rate during fiscal 1999. From June 30, 1998 to June 30, 1999, the
net increase in the Company's commercial real estate loan portfolio was $62.6
million, representing an 80.49% increase in the size of the portfolio. At
June 30, 1999, however, the $140.4 million commercial real estate portfolio
represented 16.48% of the Company's gross loans. As a percentage of gross
loans, the commercial real estate portfolio increased in size by 5.56% from
June 30, 1998 to June 30, 1999. See "--Lending Activities--Commercial Real
Estate Lending."
In addition to originating loans to hold in portfolio, the Company also
originates loans for sale. The Company sold $64.0 million of loans in fiscal
1999, including nearly half of the $63.0 million one-to-four family loans it
originated during that period. The Company also purchases loans for investment
and for sale. During fiscal 1999, the Company purchased $78.1 million in loans
of which, $72.6 million were one-to-four family. Loans sold come from loans
held in the Company's portfolio designated as being held for sale or
originated during the most recent period and designated as held for sale.
Historically, the Company has generally retained the servicing rights on most
loans sold, however, some loans are sold servicing released. In addition, the
Company invests in securities issued by the U.S. Government and agencies
thereof, mortgage-backed securities ("MBS") and other permitted investments
under applicable federal laws and regulations. The Company's revenues are
derived principally from interest on its mortgage loans, and to a lesser
extent, mortgage loan servicing activities, and interest and dividends on its
investment securities and MBS.
2
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The Company's primary sources of funds are deposits, borrowings from the
FHLB of San Francisco ("FHLB advances"), securities sold under agreements to
repurchase, principal and interest payments on loans and MBS and proceeds from
the sale of loans. At June 30, 1999, the Company had deposits of approximately
$677.8 million, including approximately $99.6 million in certificates of
deposit of $100,000 or more. The Company's borrowings at June 30, 1999
included $234.7 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 stockholders of record on June 12,
1998. The dividend was intended as a distribution of retained earnings to the
Company's stockholders 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, 1999, the Company had stockholders' equity of $81.3
million, representing 8.02% of total assets.
For the year ended June 30, 1999, the Company reported net earnings of $9.6
million, $1.70 per share diluted. This compares to net earnings of $6.6
million, $1.14 per share diluted, and $2.8 million, $0.49 per share diluted,
for the years ended June 30, 1998 and 1997, respectively. The increase in
fiscal 1999 earnings over fiscal 1998 was primarily due to an increase in net
interest income partially offset by an increase in other expenses. 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.
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 $1.0 billion at June 30, 1999, an increase
of $125.9 million compared to June 30, 1998. The increase in assets was
primarily in loans, with commercial real estate loans increasing $62.6
million, multifamily loans increasing $44.3 million and one-to-four family
loans increasing $32.5 million. The asset growth was funded primarily by an
increase in deposits of $96.9 million and $18.7 million of FHLB advances. At
June 30, 1999, the Company had total deposits of $677.8 million and total FHLB
advances of $234.7 million.
The Southern California economy and real estate market in the Company's
primary lending area have shown additional improvement during the year. The
Company's level of nonperforming assets declined from June 30, 1998. 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, 1999, the Company reported $7.5 million in
nonperforming assets compared to $9.8 million and $10.5 million at June 30,
1998 and 1997, respectively. The Company recorded provisions for loan losses
of $1.7 million for the year ended June 30, 1999 compared to $1.5 million and
$3.0 million for the years ended June 30, 1998 and 1997, respectively. See "--
Allowances for Loan and Real Estate Losses" and "Management's Discussion and
Analysis ("MD&A")--Results of Operations."
Lending Activities
Loan and MBS Portfolio Composition. Historically, the Company's principal
business was the making of one-to-four family and multifamily loans. In every
year for which data is presented in this report, i.e., 1995 through 1999, the
Company's multifamily loan portfolio has increased in total dollar amount and
has represented a significant portion of the Company's total loan portfolio.
Beginning principally with the hiring announced in January 1998 of the income
property lending staff of another Southern California financial institution,
the Company has increased its focus on commercial real estate lending. The
Company currently intends to continue its emphasis on multifamily and
commercial real estate lending, with their higher risk-adjusted rates of
return, rather than on lower yielding one-to-
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four family lending. At June 30, 1999, the Company had $852.5 million of gross
loans outstanding, 62.41% of which was secured by either multifamily
properties or commercial real estate. Gross loans outstanding at June 30, 1999
included $391.6 million of multifamily loans, representing 45.93% of gross
loans, $140.4 million of commercial real estate loans, representing 16.48% of
gross loans, and $312.4 million of one-to-four family loans, representing
36.65% of gross loans. The remainder of gross loans at June 30, 1999 consisted
of $344,000 of land loans, or .04% of gross loans, and other loans of
$7.7 million, or 0.90% of gross loans. Included in these amounts at June 30,
1999 were $17.0 million of loans held for sale, comprising 2.0% of gross
loans.
The net increase in the Company's multifamily loans during fiscal 1999 was
$44.3 million, representing an increase of 12.76% in the multifamily loan
portfolio as compared to June 30, 1998. The net increase in the Company's
commercial real estate loans during fiscal 1999 was $62.6 million,
representing an increase of 80.49% in the commercial real estate loan
portfolio as compared to June 30, 1998. The net increase in the Company's one-
to-four family loans during fiscal 1999 was $32.5 million, representing an
increase of 11.63% in the one-to-four family loan portfolio as compared to
June 30, 1998. As a percentage of gross loans, multifamily loans decreased by
2.79%, commercial loans increased by 5.56% and one-to-four family loans
decreased by 2.61% from June 30, 1998 to June 30, 1999. These percentage
changes in the composition of the gross mortgage loan portfolio are a result
of the relative growth of the commercial real estate loan portfolio and the
Company's sale of nearly half of the one-to-four family loans it originated
during the 1999 fiscal year. The Company currently intends to continue to
focus on multifamily and commercial real estate lending. During fiscal 1999,
the Company purchased $78.1 million in loans of which, $72.6 million were one-
to-four family. The Company anticipates that the purchase of one-to-four
family loans will remain a focus of the Company in fiscal 2000.
The Company invests in MBS, including securities guaranteed by the
Government National Mortgage Association ("GNMA"), Federal National Mortgage
Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC"). To
a limited extent the Company also invests in privately issued MBS which
typically have received a "AA" or "AAA" credit rating from at least one
nationally recognized rating service. The Company invests in both adjustable-
rate and fixed-rate MBS. In an effort to reduce the potential interest rate
risk inherent in fixed-rate assets, the Company purchases fixed-rate MBS with
a variety of coupon rates, maturities, and prices. Furthermore, the assets are
typically purchased with fixed-rate FHLB advances of various terms to maturity
primarily ranging from one month to five years in order to mitigate the
Company's exposure to changes in interest rates. The adjustable-rate MBS in
the Company's portfolio typically have life caps that will prevent the MBS
from further upward adjustments in rate should interest rates rise above the
cap limit. Prior to purchase, management considers the Company's overall
tolerance to interest rate risk and invests accordingly. At June 30, 1999, the
Company's MBS portfolio (including MBS available for sale) totaled $99.9
million or 9.85% of total assets. The Company's MBS are comprised of
$67.9 million of agency securities, $2.2 million issued by other financial
institutions and $29.8 million in collateralized mortgage obligations (CMO's).
Of the $29.8 million in CMO's 73.83% or $22.0 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,
1999, $15.8 million in MBS were classified as available for sale.
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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.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------- ------------------- ------------------- -------------------- --------------------
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........... $312,407 36.65% $279,862 39.26% $299,979 45.47% $303,273 48.54% $288,664 51.85%
Multifamily..... 391,596 45.93 347,285 48.72 301,965 45.77 258,970 41.45 205,731 36.95
Commercial........ 140,439 16.48 77,810 10.92 55,331 8.39 60,822 9.74 60,709 10.91
Land.............. 344 0.04 348 0.05 1,352 0.21 1,038 0.17 1,046 0.19
Other............. 7,730 0.90 7,544 1.05 1,070 0.16 627 0.10 546 0.10
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Loans, gross.... 852,516 100.00% 712,849 100.00% 659,697 100.00% 624,730 100.00% 556,696 100.00%
====== ====== ====== ====== ======
Less:
Undisbursed loan
funds............. 684 579 441 378 187
Unamortized
discounts......... 1,078 2,170 2,404 2,864 2,815
Deferred loan
fees, net......... 3,852 3,612 3,493 3,093 2,442
Allowance for
loan losses....... 8,684 7,955 7,772 7,833 12,108
-------- -------- -------- -------- --------
Loans, net...... 838,218 698,533 645,587 610,562 539,144
Less:
Loans held for
sale:
One-to-four
units........... 353 1,043 623 1,455 400
Multifamily..... 7,234 6,464 -- 1,435 1,266
Commercial...... 9,441 -- -- -- --
-------- -------- -------- -------- --------
Net loans held
for investment.. $821,190 $691,026 $644,964 $607,672 $537,478
======== ======== ======== ======== ========
Mortgage-backed
securities:
FNMA.............. $ 5,509 5.51% $ 11,309 9.84% $ 13,240 17.87% $ 11,129 26.70% $ 11,367 27.77%
FHLMC............. 399 0.40 8,272 7.20 1,298 1.75 1,697 4.07 2,117 5.17
GNMA.............. 61,858 61.91 52,306 45.52 33,577 45.32 7,885 18.92 -- --
Issued by other
financial
institutions...... 2,223 2.22 3,628 3.16 4,554 6.15 5,781 13.87 11,451 27.97
Collateralized
mortgage
obligations....... 29,939 29.96 39,391 34.28 21,423 28.91 15,185 36.44 16,004 39.09
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
99,928 100.00% 114,906 100.00% 74,092 100.00% 41,677 100.00% 40,939 100.00%
====== ====== ====== ====== ======
Plus (Less):
Unamortized
premium
(discount)........ (67) 945 47 (502) (946)
-------- -------- -------- -------- --------
Mortgage-backed
securities, net. 99,861 115,851 74,139 41,175 39,993
Less:
Mortgage-backed
securities
available for
sale.............. 15,783 8,274 -- -- --
-------- -------- -------- -------- --------
Net mortgage-
backed
securities held
to maturity..... 84,078 107,577 74,139 41,175 39,993
-------- -------- -------- -------- --------
Total net loans and
mortgage-backed
securities held for
investment or to
maturity........... $905,268 $798,603 $719,103 $648,847 $577,471
======== ======== ======== ======== ========
</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, 1999. The table includes loans held
for sale of $17.0 million and MBS available for sale of $15.8 million. The
table does not include estimated principal repayments. Actual principal
repayments on loans totaled $145.6 million, $91.8 million and $54.5
million for the years ended June 30, 1999, 1998 and 1997, respectively.
Principal repayments on MBS totaled $25.0 million, $29.6 million, and $7.3
million for the years ended June 30, 1999, 1998, and 1997, respectively.
<TABLE>
<CAPTION>
At June 30, 1999
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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....... $ 104 $ 499 $ 1,680 $-- $ 316 $ 2,599 $ 419 $ 3,018
-------- -------- -------- ---- ------ -------- ------- --------
After one year:
More than one year to
three years........... 5,403 8,571 8,399 286 2 22,661 -- 22,661
More than three years
to five years......... 829 10,129 6,255 -- 14 17,227 -- 17,227
More than five years to
10 years.............. 11,581 72,532 65,839 -- 235 150,187 -- 150,187
More than 10 years to
20 years.............. 103,349 229,697 57,180 2,547 392,773 1,593 394,366
More than 20 years..... 191,141 70,168 1,086 58 4,616 267,069 97,916 364,985
-------- -------- -------- ---- ------ -------- ------- --------
Total due after one
year................. 312,303 391,097 138,759 344 7,414 849,917 99,509 949,426
-------- -------- -------- ---- ------ -------- ------- --------
Total amounts due..... $312,407 $391,596 $140,439 $344 $7,730 $852,516 $99,928 $952,444
======== ======== ======== ==== ====== ======== ======= ========
</TABLE>
The following table sets forth at June 30, 1999, the dollar amount of all
loans due after June 30, 2000, and whether such loans are fixed-rate or ARM
loans.
<TABLE>
<CAPTION>
At June 30, 1999
-------------------------------
Fixed Adjustable(1) Total
-------- ------------- --------
(In thousands)
<S> <C> <C> <C>
Real estate loans:
One-to-four family............................ $130,223 $182,080 $312,303
Multifamily................................... 10,092 381,005 391,097
Commercial real estate........................ 25,055 113,704 138,759
Land.......................................... -- 344 344
Other loans..................................... 3,686 3,728 7,414
-------- -------- --------
Total loans................................... $169,056 $680,861 $849,917
======== ======== ========
</TABLE>
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(1) ARM loans include loans that adjust monthly, semiannually, annually or
once every five years. Five year ARM loans total $914,000, one-to-four
family, $40.5 million multifamily and $58.1 million commercial real
estate.
Origination, Purchase, Sale and Servicing of Loans. The Company's mortgage
lending activities are conducted primarily through its executive and branch
offices. The Company originates both fixed- rate and ARM loans. Its ability to
originate ARM loans as opposed to fixed-rate loans is dependent upon the
relative customer demand, which is affected by the current and expected future
level of interest rates.
Additionally, the Company purchases or participates in loans originated by
other institutions. The determination to purchase loans is based upon the
Company's investment needs and market
6
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opportunities. Subject to regulatory restrictions applicable to savings
associations, the Company's current loan policies allow all loan types to be
purchased. The determination to purchase specific loans or pools of loans is
subject to the Company's underwriting policies, which require consideration of
the financial condition of the borrower and the appraised value of the
property and, with respect to multifamily and commercial real estate loans,
the net operating income of the mortgaged property before debt service and
depreciation and the debt service coverage ratio (the ratio of net operating
income to debt service), among other factors. The Company has purchased loans
from independent parties in various transactions. During the year ended
June 30, 1999, of the $351.3 million of loans generated by the Company in
fiscal 1999 through origination, purchase or to facilitate the sale of REO,
$78.1 million, or 22.23%, were purchased. Of the $78.1 million of loans
purchased during fiscal 1999, $2.7 million were multifamily loans, $2.8
million were commercial real estate loans and $72.6 million were one-to-four
family loans.
At origination or time of purchase, the Company designates loans as held for
investment or held for sale. Historically, loans held for sale have been sold
in the secondary market to FNMA, FHLMC and other investors. The Company
generally retains the servicing rights on most loans sold, however, certain
loans are sold servicing released. The determination to sell a specific loan
or pool of loans is made based upon the Company's investment needs, growth
objectives and market opportunities.
In an attempt to further minimize interest rate risk associated with fixed-
rate loans designated as held for sale, the Company may enter into commitments
with FNMA and other investors (known as forward commitments) to sell loans at
a future date at a specified price. The Company will then simultaneously
process and close the loans, thereby attempting to protect the price of loans
in process from interest rate fluctuations that may occur from application to
sale. There is risk involved in this forward commitment activity. In a
declining interest rate environment, borrowers may choose not to close loans,
but the Company would remain obligated to fulfill its forward commitments. The
inability of the Company to originate or acquire loans to fulfill these
commitments may result in the Company being required to pay non-delivery fees.
In an increasing interest rate environment, the Company is subject to interest
rate risk in the event its commitments to make loans to borrowers exceeds its
commitments to sell loans. At June 30, 1999, the Company had $334,000 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 equate approximately to
what a substitute servicer would be compensated for such services.
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. At
June 30, 1999, the Company had purchased mortgage servicing rights with a book
value of $215,000.
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,
---------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Gross loans:
Beginning balance................................ $712,849 $659,697 $624,730
Loans originated:
One-to-four family............................. 63,016 36,227 32,092
Multifamily.................................... 119,794 77,703 79,541
Commercial..................................... 87,259 21,208 3,081
Other.......................................... 1,901 1,436 292
-------- -------- --------
Total loans originated......................... 271,970 136,574 115,006
Loans purchased................................ 78,075 48,112 12,521
Loans to facilitate the sale of REO............ 1,205 1,365 4,847
-------- -------- --------
Total......................................... 351,250 186,051 132,374
Less:
Transfer to REO................................ 3,286 6,239 8,313
Principal repayments........................... 145,612 91,846 54,465
Sales of loans................................. 63,996 34,324 33,870
Other, net..................................... (1,311) 490 759
-------- -------- --------
Ending balance................................... $852,516 $712,849 $659,697
======== ======== ========
Gross mortgage-backed securities:
Beginning balance................................ $114,906 $ 74,092 $ 41,677
Mortgage-backed securities purchased........... 70,624 71,767 40,228
Less:
Mortgage-backed securities sold................ 61,989 -- --
Principal repayments........................... 25,012 29,595 7,305
Other, net..................................... (1,399) 1,358 508
-------- -------- --------
Ending balance................................... $ 99,928 $114,906 $ 74,092
======== ======== ========
</TABLE>
Multifamily Lending. During the year ended June 30, 1999, the Company
originated $119.8 million of multifamily loans. The Company originates
multifamily mortgage loans generally secured by apartment buildings located in
Southern California metropolitan areas. To a lesser extent multifamily loans
are also originated and purchased in Central and Northern California. In
originating a multifamily loan, the Company considers the qualifications of
the borrower as well as the securing property. Some of the foremost factors to
be considered are the net operating income of the mortgaged property before
debt service and depreciation, the debt service coverage ratio (the ratio of
net operating income to debt service) and the ratio of the loan amount to the
appraised value of the property. Pursuant to the Company's underwriting
policies, a multifamily loan generally may only be made in an amount up to 80%
of the appraised value of the underlying property. The Company also generally
requires a debt service coverage ratio of at least 110%. Properties securing a
loan are appraised by an independent appraiser and title insurance is required
on all loans. The average outstanding loan balance on multifamily loans at
June 30, 1999 was approximately $356,000, 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, 1999. Declines in the real
estate values in the Company's primary lending area may result in increases in
the loan-to-value ratio on some multifamily mortgage loans subsequent to
origination.
8
<PAGE>
When evaluating the qualifications of the borrower for a multifamily loan,
the Company considers the financial resources and income level of the
borrower, the borrower's experience in owning or managing similar property,
and the Company's lending experience with the borrower. The Company's
underwriting policies require that the borrower be able to demonstrate strong
management skills and the ability to maintain the property with current rental
income. The borrower should also present evidence of the ability to repay the
mortgage and a history of making mortgage payments on a timely basis. In
assessing the creditworthiness of the borrower, the Company generally reviews
the financial statements, employment and credit history of the borrower, as
well as other related documentation.
At June 30, 1999, the Company's multifamily loan portfolio had increased to
$391.6 million, or 45.93% of gross loans, from $347.3 million, or 48.72% of
gross loans, at June 30, 1998, an increase of $44.3 million. Although the
multifamily loan portfolio increased in total dollar amount during fiscal 1999
by 12.76%, it decreased as a percentage of gross loans by 2.79%. Of the $391.6
million multifamily loans outstanding at June 30, 1999, 2.61% were fixed-rate
loans and 97.39% were ARM loans. Of the 97.39% of ARM loans, 10.63% or $40.5
million are tied to a treasury bill based index that adjusts once every five
years.
Multifamily loans are generally considered to involve a higher degree of
credit risk and to be more vulnerable to adverse conditions in the real estate
market and to deteriorating economic conditions, particularly changes in
interest rates than one-to-four family residential mortgage loans. These loans
typically involve higher loan principal amounts and the repayment of such
loans generally depend on the income produced by the operation or sale of the
property being sufficient to cover operating expenses and debt service.
Sometimes multifamily loans are made to groups of related borrowers, which
concentration could increase the Company's exposure should the circumstances
of one borrower negatively affect the ability of other related borrowers to
repay their loans in full on a timely basis. Recessionary economic conditions
tend to result in higher vacancy and reduced rental rates and net operating
incomes from multifamily residential properties. Of the Company's $1.1 million
of charge-offs in fiscal 1999, $945,000, or 83.91%, were for multifamily
loans. See "--Allowances for Loan and Real Estate Losses."
Commercial Real Estate Lending. During fiscal 1999, the Company originated
$87.3 million of commercial real estate loans. The Company originates
commercial real estate loans that are generally secured by properties used for
business purposes such as small office buildings, multi-tenant industrial
properties or a combination of residential and retail facilities located
primarily in Southern California. To a lesser extent, commercial real estate
loans are also originated and purchased in Central and Northern California.
The Company's underwriting procedures provide that commercial real estate
loans generally may be made in amounts up to 75% of the appraised value of the
property. These loans may be made with terms up to 30 years for ARM loans. The
Company's underwriting standards and procedures are similar to those
applicable to its multifamily loans, wherein the Company considers the net
operating income of the property and the borrower's expertise, credit history
and profitability. The Company has generally required that the properties
securing commercial real estate loans have debt service coverage ratios of at
least 110%. The average outstanding loan balance on commercial real estate
loans at June 30, 1999 was approximately $571,000. The largest commercial real
estate loan in the Company's portfolio, located in Rolling Hills Estates,
California had an outstanding principal balance at June 30, 1999 of $3.9
million and was not classified.
At June 30, 1999, the Company's commercial real estate loan portfolio had
increased to $140.4 million, or 16.48% of gross loans, from $77.8 million, or
10.92% of gross loans, at June 30, 1998, an increase of $62.6 million, or
5.56% of gross loans. This $62.6 million increase in the commercial real
estate loan portfolio during fiscal 1999 represents an 80.49% increase in the
total dollar amount of the commercial real estate portfolio. Of the $140.4
million commercial real estate loans outstanding at June 30, 1999, 19.04% were
fixed-rate loans and 80.96% were ARM loans. Of the 80.96% of ARM loans, 51.10%
or $58.1 million are tied to a treasury bill bond index that adjusts once
every five years.
9
<PAGE>
Commercial real estate loans are generally considered to involve a higher
degree of credit risk and to be more vulnerable to adverse conditions in the
real estate market and to deteriorating economic conditions, particularly
changes in interest rates than one-to-four family residential mortgage loans.
These loans typically involve higher loan principal amounts and the repayment
of such loans generally depend on the income produced by the operation or sale
of the property being sufficient to cover operating expenses and debt service.
Sometimes commercial real estate loans are made to groups of related
borrowers, which concentration could increase the Company's exposure should
the circumstances of one borrower negatively affect the ability of other
related borrowers to repay their loans in full on a timely basis. Recessionary
economic conditions tend to result in higher vacancy and reduced rental rates
and net operating incomes from commercial properties. In addition, commercial
real estate values tend to be cyclical. Of the Company's $1.1 million of
charge-offs in fiscal 1999, none were for commercial real estate loans. The
Company has significantly increased its commercial real estate loan portfolio
during the past two fiscal years. Both because the size of the commercial real
estate loan portfolio has increased significantly and most of the loans
comprising the portfolio are unseasoned, having been originated within the
last two fiscal years, the Company's past loss experience with respect to its
commercial real estate loan portfolio may not be representative of the risk of
loss in such portfolio in the future. See "--Allowances for Loan and Real
Estate Losses."
One-to-Four Family Lending. The Company originates both fixed-rate mortgage
loans and ARM loans secured by one-to-four family residences, including, to a
lesser extent, condominium and cooperative units with maturities up to 30
years. Originated loans are predominantly secured by property located in
Southern California. Loan originations are generally obtained from existing or
past customers, members of the local communities and loan brokers. One-to-four
family loans are purchased with properties securing the loans located
throughout the state of California and in certain circumstances outside of
California. Included in one-to-four family loans are outstanding balances of
$16.1 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.
During the year ended June 30, 1999, the Company originated $63.0 million of
one-to-four family loans. The Company's policy is to originate one-to-four
family loans in amounts generally up to 80% of the lower of the appraised
value or the selling price of the property securing the loan and up to 95% of
the appraised value or selling price if private mortgage insurance is
obtained. Declines in the real estate values in the Company's lending areas
may result in increases in the loan-to-value ratio on some one-to-four family
loans subsequent to origination.
At June 30, 1999, the Company's one-to-four family loan portfolio had
increased to $312.4 million, or 36.65% of gross loans, from $279.9 million, or
39.26% of gross loans, at June 30, 1998, an increase of $32.5 million.
Although the one-to-four family loan portfolio increased in total dollar
amount during fiscal 1999 by 11.63%, it decreased as a percentage of gross
loans by 2.61%. During fiscal 1999 one-to-four family loan purchased were
$72.6 million. Of the $312.4 million one-to-four family loans outstanding at
June 30, 1999, 41.71% were fixed-rate loans and 58.29% were ARM loans.
Certain Loan Terms. Since 1982, the Company has emphasized the origination
of ARM loans for retention in its portfolio. This practice has enabled the
Company to reduce its interest rate risk exposure by concentrating its loan
portfolio in assets with either shorter terms or more frequent repricing, or
both. At June 30, 1999, approximately 97.39% of the Company's multifamily,
80.96% of its commercial real estate and 58.29% of its one-to-four family
loans were ARM loans. The Company also originates fixed-rate loans in response
to customer demand. The type of loans the Company originates is dependent upon
the relative customer demand for fixed-rate or ARM loans, which in turn is
affected by the current and expected level of interest rates. The decrease
from June 30, 1998 to June 30, 1999 in the percentage of the Company's one-to-
four family loans that were ARM loans resulted in part from greater customer
demand during fiscal 1999 for fixed-rate loans due to falling
10
<PAGE>
interest rates during the period. Historically, the Company has sold fixed-
rate loans in the secondary market to FNMA, FHLMC and others. During 1999, the
Company retained certain fixed-rate loans in its portfolio.
The interest rates for approximately 50% of the Company's ARM loans in
portfolio are indexed to the 11th District Cost of Funds Index ("COFI"). The
Company currently offers a number of ARM loan programs with interest rates
tied to Treasury bill based and COFI indices that adjust monthly, semi-
annually, annually or once every five years, some of which have payment caps.
Because of payment caps and the different times at which interest rate
adjustments and payment adjustments are made, in periods of rising interest
rates monthly payments may not be sufficient to pay the interest accruing on
some of the Company's ARM loans. The amount of any shortfall ("negative
amortization") is added to the principal balance of the loan to be repaid
through future monthly payments, which could cause increases in the amount of
principal owed to the Company over that which was originally lent. The Company
currently has approximately $410.9 million in mortgage loans that may be
subject to negative amortization. During the years ended June 30, 1999, 1998
and 1997, the negative amortization associated with these loans totaled
$223,000, $478,000 and $618,000, respectively. Significant negative
amortization can increase the associated risk of default on loans,
particularly for loans originated with relatively high loan-to-value ratios.
Based on historical experience, management does not believe that the loss
experience on the loans that are subject to negative amortization is
materially different from the loss experience on the balance of its portfolio.
Mortgage loans originated by the Company, generally include due-on-sale
clauses which provide the Company with the contractual right to deem the loan
immediately due and payable in the event the borrower transfers ownership of
the property without the Company's consent. Due-on-sale clauses are an
important means of adjusting the rates on the Company's fixed rate multifamily
and commercial mortgage loan portfolios and the Company has generally
exercised its rights under these clauses.
Loan Approval Procedures and Authority. The Company's Board of Directors has
a standing Loan Committee. The Loan Committee is primarily responsible for
establishing the lending policies of the Company and reviewing properties
offered as security. The Board of Directors has authorized the following
persons to approve loans up to the amounts indicated: mortgage loans in
amounts of $1.0 million and below may be approved by the respective Loan
Division Manager or his designate; mortgage loans in excess of $1.0 million
and up to $1.5 million require the approval of the President or any member of
the Loan Committee; and mortgage loans in excess of $1.5 million requires the
approval of at least two members of the Loan Committee.
For all loans originated by the Company, upon receipt of a completed loan
application from a prospective borrower, a credit report is ordered and
certain other information is verified by an independent credit agency and, if
necessary, additional financial information is required. Appraisals of the
real estate intended to secure proposed loans over $150,000 are required,
which appraisals currently are performed by independent appraisers designated
and approved by the Company. The Company's Board annually approves the
independent appraisers used by the Company and approves the Company's
appraisal policy. The Company's policy is to obtain title and hazard insurance
on all real estate loans. If the original loan amount exceeds 80% of the
underlying property's value on a sale or refinance of a first trust deed loan,
private mortgage insurance is required and the borrower will be required to
make payments to a mortgage impound account from which the Company makes
disbursements for property taxes and mortgage insurance.
Delinquencies and Classification of Assets
Delinquent Loans. Management performs a monthly review of all delinquent
loans and reports to the Company's Board of Directors regarding the same. The
procedures taken by the Company with respect to delinquencies vary depending
on the nature of the loan and period of delinquency.
The Company's policies generally provide that delinquent mortgage loans be
reviewed and that a written late charge notice be mailed no later than the
11th or 16th day of delinquency for mortgage
11
<PAGE>
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, 1999, 1998 and 1997, delinquencies in the Company's loan
portfolio were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------- --------------------------------- ---------------------------------
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
family.......... 8 $ 456 19 $2,662 5 $ 399 22 $2,514 4 $ 442 25 $3,011
Multifamily...... -- -- -- -- 5 1,377 4 1,691 3 1,045 4 348
Commercial....... 2 1,674 1 78 3 1,663 3 249 5 3,648 3 1,054
Other loans...... 2 61 2 121 -- -- -- -- -- -- -- --
--- ------ --- ------ --- ------ --- ------ --- ------ --- ------
Total........... 12 $2,191 22 $2,861 13 $3,439 29 $4,454 12 $5,135 32 $4,413
=== ====== === ====== === ====== === ====== === ====== === ======
Delinquent loans
to total gross
loans........... 0.26% 0.34% 0.48% 0.62% 0.78% 0.67%
</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 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.
12
<PAGE>
The following table sets forth information with respect to the classified
assets of the Company at June 30, 1999.
<TABLE>
<CAPTION>
At June 30, 1999
----------------------
Substandard
--------------
(In thousands)
<S> <C> <C> <C>
Real estate loans:
One-to-four family..................................... $ 5,653
Multifamily............................................ 2,527
Commercial and Land.................................... 4,819
REO...................................................... 2,340
Investment in subsidiaries(1)............................ 75
Securities............................................... 52
-------
Total Classified Assets.................................. $15,466
=======
</TABLE>
- --------
(1) At June 30, 1999, the Company classified as Substandard 42% of the
Company's equity investment in subsidiaries. At such date, QCFC reported
total assets of $1.1 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, 1999 and 1998, the specific valuation
allowance totaled $465,000 and $1.7 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, 1999, $9.3 million of assets were graded as Special Mention, compared
to $6.2 million at June 30, 1998.
These assets have been considered in connection with the Company's overall
assessment of the adequacy of its allowance for loan losses; however, there
can be no assurance that the Company will not establish additional loss
provisions for these assets in the future. See "--Allowances for Loan and Real
Estate Losses" and "MD&A--Problem Assets."
Nonperforming Assets and Restructured Loans
After 60 days, the Company ceases the accrual of interest on loans and any
previously accrued interest is reversed. In addition, the Company may
restructure a loan due to the debtor's financial difficulty and grant a
concession which the Company would not have otherwise considered. REO is
recorded at fair value less estimated costs of disposition.
13
<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,
-----------------------------------------
1999 1998 1997 1996 1995
------ ------ ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Real estate loans:
One-to-four family................ $3,062 $2,779 $ 3,226 $ 1,614 $ 1,269
Multifamily....................... -- 2,257 2,387 4,949 3,999
Commercial and land............... 1,752 1,912 2,926 3,781 2,510
Other:
Consumer loans.................... 170 -- -- 105 --
------ ------ ------- ------- -------
Total nonaccrual loans(1)......... 4,984 6,948 8,539 10,449 7,778
Troubled debt restructured loans.... 218 223 229 234 3,387
------ ------ ------- ------- -------
Total nonperforming loans......... 5,202 7,171 8,768 10,683 11,165
Real estate acquired through
foreclosure........................ 2,340 2,678 1,720 2,435 2,045
------ ------ ------- ------- -------
Total nonperforming assets........ $7,542 $9,849 $10,488 $13,118 $13,210
====== ====== ======= ======= =======
Ratios:
Net charge-offs to average loans.. 0.15% 0.18% 0.47% 1.13% 0.75%
General Valuation Allowance (GVA)
on loans as a percentage of total
nonaccrual loans(1).............. 164.93 89.39 72.81 54.72 99.00
GVA on loans as a percentage of
gross loans...................... 0.96 0.87 0.94 0.92 1.38
Total allowance for loan losses as
a percentage of gross loans...... 1.02 1.12 1.18 1.25 2.17
GVA on loans as a percentage of
total nonperforming loans(2)..... 158.02 86.61 70.91 53.52 68.97
Total GVA as a percentage of total
nonperforming assets(3).......... 108.99 64.84 60.95 44.92 59.61
Total nonaccrual loans as a
percentage of gross loans(1)..... 0.58 0.98 1.29 1.67 1.40
Nonperforming loans as a
percentage of gross loans(2)..... 0.61 1.01 1.33 1.71 2.01
Nonperforming assets as a
percentage of total assets(4).... 0.74 1.11 1.31 1.81 2.06
</TABLE>
- --------
(1) Nonaccrual loans are net of specific allowances of $68,000, $945,000, $1.0
million, $1.8 million and $3.7 million for the years ended June 30, 1999,
1998, 1997, 1996 and 1995, 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, 1999, 1998 and 1997 if the nonaccrual
loans had been current in accordance with their original terms was $424,000,
$640,000 and $782,000, respectively. For the years ended June 30, 1999, 1998
and 1997, $295,000, $399,000 and $469,000, respectively, was actually earned
on nonaccrual loans and is included in interest income on loans in the
consolidated statements of operations for such years included in this report.
Interest income earned on nonaccrual loans is generally recorded utilizing the
cash-basis method of accounting. See "Financial Statements and Supplementary
Data."
14
<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, 1999 and 1998, the Company had a gross investment in impaired
loans of $3.5 million and $8.1 million, respectively. During the years ended
June 30, 1999 and 1998, the Company's average investment in impaired loans was
$5.9 million and $8.2 million and for the years then ended, interest income on
such loans totaled $531,000 and $752,000, respectively. Interest income on
impaired loans which are performing is generally recorded utilizing the cash-
basis method of accounting. Payments received on impaired loans which are
performing under their contractual terms are allocated to principal and
interest in accordance with the terms of the loans. Impaired loans totaling
$1.7 million and $3.4 million were not performing in accordance with their
contractual terms at June 30, 1999 and 1998, 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, 1999 include $1.0 million of loans for which
specific valuation allowances of $155,000 had been established and $2.5
million of loans for which no specific valuation allowance was considered
necessary. At June 30, 1998, the Company had $6.0 million of impaired loans
for which specific valuation allowances of $1.2 million had been established
and $2.1 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
15
<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. The Company
has significantly increased its commercial real estate loan portfolio during
the past fiscal year from $77.8 million at June 30, 1998 to $140.4 million at
June 30, 1999 (an increase of approximately 80.49%). Both because the size of
the commercial real estate loan portfolio has increased significantly and most
of the loans comprising the portfolio are unseasoned, having been originated
within the last two fiscal years, the Company's past loss experience with
respect to its commercial real estate loan portfolio may not be representative
of the risk of loss in such portfolio in the future. Multifamily and
commercial real estate loans are generally considered to involve a higher
degree of credit risk and to be more vulnerable to adverse conditions in the
real estate market and to deteriorating economic conditions, particularly
changes in interest rates than one-to-four family residential mortgage loans.
These loans typically involve higher loan principal amounts and the repayment
of such loans generally depend on the income produced by the operation or sale
of the property being sufficient to cover operating expenses and debt service.
Sometimes multifamily and commercial real estate loans are made to groups of
related borrowers, which concentration could increase the Company's exposure
should the circumstances of one borrower negatively affect the ability of
other related borrowers to repay their loans in full on a timely basis. In
addition, multifamily and commercial real estate values tend to be more
cyclical and, while the Southern California real estate market showed
continued improvement in fiscal 1999, recessionary economic conditions of the
type that prevailed in prior years in the Company's lending market area tend
to result in higher vacancy and reduced rental rates and net operating incomes
from multifamily and commercial real estate properties. See "Business--Lending
Activities--Multifamily Lending" and "--Commercial Real Estate Lending."
The Company recorded a provision for loan losses of $1.7 million for the
year ended June 30, 1999, compared to $1.5 million, $3.0 million, $2.1 million
and $998,000 for the years ended June 30, 1998, 1997, 1996 and 1995,
respectively. The slight increase in the provision for 1999 is primarily a
result of the overall growth in the loan portfolio as compared to the prior
year, specifically in commercial real estate loans. In addition, certain one-
to-four family loans purchased are considered by the Company to have higher
risk characteristics because they are loans outside of California, which has
historically been considered the Company's primary market area for one-to-four
family loans. 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 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,
1999 is adequate, there can be no assurance that the Company will not have to
establish additional loss provisions based upon future events. The Company
will continue to monitor and modify its allowances for loan losses as
conditions dictate. In addition, the OTS and the FDIC, as an integral part of
their examination process, periodically review the Company's valuation
allowance. These agencies may require the Company to establish additional
allowances, based on their judgments of the information available at the time
of the examination. See "Regulation and Supervision--Classification of
Assets."
16
<PAGE>
It is the policy of the Company to "charge-off" consumer loans when it is
determined that they are no longer collectible. The policy for loans secured
by real estate, which comprise the bulk of the Company's portfolio, is to
establish an allowance for loan losses in accordance with the Company's asset
classification process, based on generally accepted accounting principles
("GAAP"). It has generally been the practice of the Company to "charge-off"
losses after acquiring title to a property securing the loan. Prior to
acquiring title to REO, losses are recognized through the establishment of
valuation allowances. It is the Company's general policy to obtain appraisals
on the underlying property for loans 90 days or more past due and over
$500,000. If the loan amount is under $500,000, appraisals are obtained at the
time of foreclosure. It is the policy of the Company to obtain an appraisal on
all REO upon acquisition by the Company.
REO is initially recorded at fair value at the date of acquisition, less
estimated costs of disposition. Thereafter, if there is a further
deterioration in value, the Company writes down the REO directly for the
diminution in value. Real estate held for investment is carried at the lower
of cost or net realizable value. All costs of anticipated disposition are
considered in the determination of net realizable value.
The following table sets forth activity in the Company's total allowance for
loan losses and allowance for losses on REO.
<TABLE>
<CAPTION>
At or For the Year Ended June 30,
-------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses:
Balance at beginning of year.... $ 7,955 $ 7,772 $ 7,833 $12,108 $13,660
Provision for loan losses....... 1,700 1,450 3,001 2,103 998
Allowance of portfolios
acquired....................... 164 -- -- 294 1,308
Charge-offs:
One-to-four family............ (189) (428) (714) (994) (176)
Multifamily................... (945) (839) (2,182) (4,367) (3,252)
Commercial and land........... -- -- (165) (1,309) (428)
Non-mortgage.................. (1) -- (1) (2) (2)
Recoveries...................... -- -- -- -- --
------- ------- ------- ------- -------
Subtotal charge-offs, net..... (1,135) (1,267) (3,062) (6,672) (3,858)
------- ------- ------- ------- -------
Balance at end of year.......... $ 8,684 $ 7,955 $ 7,772 $ 7,833 $12,108
======= ======= ======= ======= =======
Allowance for REO losses:
Balance at beginning of year.... $ 175 $ 175 $ 175 $ 175 $ 115
Additions charged to operations. -- -- -- -- 60
Charge-offs..................... (175) -- -- -- --
------- ------- ------- ------- -------
Balance at end of year.......... $ -- $ 175 $ 175 $ 175 $ 175
======= ======= ======= ======= =======
</TABLE>
17
<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,
-----------------------------------------------------------------------------------------
1999(1) 1998(1) 1997(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...... $2,371 27.30% 36.65% $1,421 17.86% 39.26% $1,709 21.99% 45.47%
Multifamily............. 4,216 48.55 45.93 3,556 44.70 48.72 3,318 42.69 45.77
Commercial.............. 1,888 21.74 16.51 1,337 16.81 10.92 1,085 13.96 8.39
Land.................... 4 0.05 0.01 -- -- 0.05 210 2.70 0.21
Other................... 98 1.13 0.90 38 0.48 1.05 -- -- 0.16
Unallocated............. 107 1.23 -- 1,603 20.15 N/A 1,450 18.66 N/A
------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance
for loan losses....... $8,684 100.00% 100.00% $7,955 100.00% 100.00% $7,772 100.00% 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------
1996(1) 1995(1)
----------------------------- ------------------------------
Percentage Percentage Percentage Percentage
of of Loans of of Loans
Allowance in Each Allowance in Each
to Total Category to to Total Category to
Amount Allowance Total Loans Amount Allowance Total Loans
------ ---------- ----------- ------- ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
One-to-four family...... $1,306 16.67% 48.54% $ 1,338 11.05% 51.85%
Multifamily............. 4,744 60.56 41.45 6,499 53.68 36.95
Commercial.............. 1,288 16.44 9.74 2,475 20.44 10.91
Land.................... 199 2.54 0.17 344 2.84 0.19
Other................... -- -- 0.10 -- -- 0.10
Unallocated............. 296 3.79 N/A 1,452 11.99 N/A
------ ------ ------ ------- ------ ------
Total allowance
for loan losses....... $7,833 100.00% 100.00% $12,108 100.00% 100.00%
====== ====== ====== ======= ====== ======
</TABLE>
- --------
(1) In 1999, 1998, 1997, 1996 and 1995, total specific allowances amounted to
$465,000, $1.7 million, $1.6 million, $2.2 million and $4.3 million,
respectively.
In fiscal 1999 the Company reevaluated its allowance methodology. This
reevaluation resulted in additional allocations of the allowance to the one-
to-four family and commercial real estate portfolios at June 30, 1999 as
compared to June 30, 1998. The increase in the unallocated allowance at
June 30, 1997 as compared to June 30, 1996, is a result of a decrease in the
allocated allowance on multifamily loans as a result of a decline in
multifamily charge-offs and nonaccrual multifamily loans during the year.
Investment Activities
Federally chartered savings 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.
18
<PAGE>
The investment policy of the Company attempts to provide and maintain
liquidity, generate a favorable return on investments without incurring undue
interest rate and credit risk, and complement the Company's lending
activities. Specifically, the Company's policy generally limits investments to
government and federal agency-backed securities and other non-government
guaranteed securities, including corporate debt obligations, that are
investment-grade. The Company's policy authorizes investment in marketable
equity securities meeting the Company's guidelines. The policy requires that
all investment purchases be ratified by the Board of Directors of the Company.
At June 30, 1999, the Company had federal funds sold and other short-term
investments and investment securities in the aggregate amount of $37.1 million
with a fair value of $36.4 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,
-----------------------------------------------------
1999 1998 1997
----------------- ----------------- -----------------
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............. $25,120 $25,120 $26,420 $26,420 $12,950 $12,950
======= ======= ======= ======= ======= =======
Investment securities:
Held to maturity:
U.S. Government and
Federal agency
obligations.......... $11,986 $11,320 $ 4,729 $ 4,741 $36,303 36,142
Municipal bonds....... -- -- 329 329 351 351
------- ------- ------- ------- ------- -------
Total held to
maturity........... 11,986 11,320 5,058 5,070 36,654 36,493
Available for sale:
Marketable Equity
Securities........... -- -- 1,200 1,819 1,200 1,432
------- ------- ------- ------- ------- -------
Total investment
securities......... $11,986 $11,320 $ 6,258 $ 6,889 $37,854 $37,925
======= ======= ======= ======= ======= =======
</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, 1999.
<TABLE>
<CAPTION>
At June 30, 1999
----------------------------------------------------------------------------------------------
More than One More than Five More than Ten
One Year or Less Year to Five Years Years to Ten Years Years Total
------------------ ------------------ ------------------ ------------------ ------------------
Weighted Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal funds sold
and other short-
term investments. $25,120 4.94% $ -- -- % $ -- --% $ -- -- % $25,120 4.94%
======= ==== ====== ==== ====== ==== ====== ==== ======= ====
Investment
securities:
Held to maturity:
U.S. Government
and Federal
agency
obligations..... $ -- -- % $2,000 6.20% $1,995 6.40% $7,991 6.44% $11,986 6.39%
------- ------ ------ ------ -------
Total held to
maturity....... -- -- 2,000 6.20 1,995 6.40 7,991 6.44 11,986 6.39
------- ------ ------ ------ -------
Total investment
securities..... -- -- $2,000 6.20% $1,995 6.40% $7,991 6.44% $11,986 6.39%
======= ====== ====== ====== =======
</TABLE>
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.
19
<PAGE>
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,
--------------------------------
1999 1998 1997
---------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Deposits...................................... $1,005,505 $ 741,609 $ 651,616
Withdrawals................................... (938,172) (742,092) (636,318)
---------- --------- ---------
Net deposits.................................. 67,333 (483) 15,298
Interest credited on deposits................. 29,596 28,207 25,371
---------- --------- ---------
Total increase in deposits.................. $ 96,929 $ 27,724 $ 40,669
========== ========= =========
</TABLE>
The following table presents the amount and weighted average rate of time
deposits equal to or greater than $100,000 at June 30, 1999:
<TABLE>
<CAPTION>
For the Year Ended
June 30, 1999
--------------------
Weighted
Maturity Period Amount Average Rate
- --------------- ------- ------------
(Dollars in
thousands)
<S> <C> <C>
Three months or less....................................... $31,061 5.14%
Over three through six months.............................. 11,846 4.74
Over six through 12 months................................. 42,052 5.29
Over 12 months............................................. 14,648 5.67
-------
Total...................................................... $99,607 5.23
=======
</TABLE>
20
<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,
--------------------------------------------------------------------------------------
1999 1998 1997
---------------------------- ---------------------------- ----------------------------
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... $137,473 21.73% 4.37% $110,990 19.67% 4.52% $ 83,372 15.72% 4.20%
Passbook deposits....... 18,298 2.89 1.98 17,425 3.09 2.01 17,899 3.38 1.98
NOW and other demand
deposits............... 35,219 5.57 1.35 26,363 4.67 1.27 24,011 4.53 1.16
Non-interest bearing
deposits............... 11,890 1.88 -- 9,253 1.64 -- 7,718 1.46 --
-------- ------ -------- ------ -------- ------
Total.................. 202,880 32.07 164,031 29.07 133,000 25.09
-------- ------ -------- ------ -------- ------
Certificate accounts:
Three months or less.... 113,440 17.93 5.18 111,121 19.69 5.49 99,718 18.81 5.43
Over three through six
months................. 105,071 16.61 5.14 98,605 17.48 5.51 88,175 16.63 5.43
Over six through 12
months................. 141,279 22.33 5.23 114,989 20.38 5.56 110,972 20.93 5.61
Over one to three years. 65,252 10.31 5.78 63,974 11.34 6.00 68,637 12.94 5.76
Over three to five
years.................. 4,740 0.75 5.32 11,494 2.04 5.77 29,683 5.60 6.15
Over five to ten years.. -- -- -- 21 -- 5.39 6 -- 5.23
Over ten years.......... 16 0.00 5.31 -- -- -- -- -- --
-------- ------ -------- ------ -------- ------
Total certificates..... 429,798 67.93 5.28 400,204 70.93 5.60 397,191 74.91 5.59
-------- ------ -------- ------ -------- ------
Total deposits......... $632,678 100.00% 4.67 $564,235 100.00% 4.99 $530,191 100.00% 4.97
======== ====== ======== ====== ======== ======
</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, 1999.
<TABLE>
<CAPTION>
Certificate Amounts Maturing in the Year Ending
At June 30, June 30,
-------------------------- ---------------------------------------------------
2004 and
1997 1998 1999 2000 2001 2002 2003 thereafter Total
-------- -------- -------- -------- ------- ------- ------ ---------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts:
0 to 4.00%.............. $ 167 $ -- $ 5,861 $ 5,861 $ -- $ -- $ -- $ -- $ 5,861
4.001 to 5.00%.......... 38,622 39,995 165,299 157,898 5,175 707 481 1,038 165,299
5.001 to 6.00%.......... 229,085 276,992 250,461 198,316 41,508 7,410 1,320 1,907 250,461
6.001 to 7.00%.......... 97,347 76,599 30,233 22,846 5,065 1,998 167 157 30,233
7.001 to 8.00%.......... 35,834 7,527 327 327 -- -- -- -- 327
8.001 to 9.00%.......... 344 27 -- -- -- -- -- -- --
Over 9.001%............. 20 -- -- -- -- -- -- -- --
-------- -------- -------- -------- ------- ------- ------ ------ --------
Total.................. $401,419 $401,140 $452,181 $385,248 $51,748 $10,115 $1,968 $3,102 $452,181
======== ======== ======== ======== ======= ======= ====== ====== ========
</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 1999,
the Company periodically borrowed advances to provide needed liquidity and to
supplement retail deposit gathering activity. See "MD&A--Capital Resources and
Liquidity--Sources
21
<PAGE>
of Funds and Liquidity." At June 30, 1999, the Company had $234.7 million in
outstanding advances from the FHLB. During fiscal 1999, the maximum amount of
FHLB advances that the Company had outstanding at any month-end was
$234.7 million.
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,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
FHLB advances:
Average balance outstanding............ $ 189,456 $ 185,032 $ 148,312
Maximum amount outstanding at any
month-end during the period........... $ 234,700 $ 216,000 $ 166,600
Balance outstanding at end of period... $ 234,700 $ 216,000 $ 157,700
Weighted average interest rate during
the period............................ 5.69% 5.93% 5.77%
Weighted average interest rate at end
of period............................. 5.59% 5.86% 6.10%
Securities sold under agreements to
repurchase:
Average balance outstanding............ $ -- $ -- $ 72
Maximum amount outstanding at any
month-end during the period........... $ -- $ -- $ 300
Balance outstanding at end of period... $ -- $ -- $ --
Weighted average interest rate during
the period............................ N/A N/A 5.56%
Weighted average interest rate at end
of period............................. N/A N/A N/A
</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 $101,000 at June 30, 1999. This apartment building
was sold in the first quarter of fiscal 2000 at a gain of approximately
$80,000. The Association does not currently intend to engage in any future
real estate development projects through QCFC or otherwise. As of June 30,
1999, and for the year then ended, QCFC had $1.1 million in total assets and
net income of $73,000.
Competition
Savings associations face strong competition both in attracting deposits and
making real estate loans. The Company's most direct competition for deposits
has historically come from other savings associations and from commercial
banks located in its principal market areas of Los Angeles and Orange Counties
in California, including many large financial institutions which have greater
financial and marketing resources available to them. In addition, particularly
during times of high interest rates, the Company has faced significant
competition for investors' funds from short-term money market securities and
other corporate and government securities and mutual funds which invest in
such securities. Periods of low interest rates have made the attraction and
retention of deposits difficult as
22
<PAGE>
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, 1999, the Association had 143 full-time employees and 44
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 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 tax on the Association's income
to 32.20%, exclusive of any minimum or environmental tax, as compared to the
general maximum corporate federal income tax rate of 35%.
Pursuant to certain provisions appended to the Small Business Job Protection
Act signed into law in August 1996 (the "Act"), the above-described bad debt
deduction rules available to thrifts such as the 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
23
<PAGE>
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, 1999 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 $3.8 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 make distributions that would result in a recapture of any
portion of its tax bad debt reserve.
The date of the Company's last complete Internal Revenue Service (IRS) tax
audit was December, 1985. There is a three-year statute of limitations for
federal tax filings. Tax years 1995 through 1999 are considered open tax years
for IRS audit purposes.
Dividends Received Deduction and Other Matters. The Company may exclude from
its income 100% of dividends received from the Association as a member of the
same affiliated group of corporations. The corporate dividends received
deduction is generally 70% in the case of dividends received from unaffiliated
corporations with which the Company and the Association will not file a
consolidated tax return, except that if the Company and the Association own
more than 20% of the stock of a corporation distributing a dividend 80% of any
dividends received may be deducted.
State and Local Taxation
State of California. The California franchise tax rate applicable to the
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 1999
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.
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The Company is currently under examination by the California Franchise Tax
Board for tax years ending December 1990-1993. During the current fiscal year,
the Company received notices of proposed assessment for the tax years ended
December 31, 1992 and 1993. The proposed assessments are for: (1) tax in the
amount of $54,851 and $90,640 for the tax years ended December 31, 1992 and
December 31, 1993, respectively, related to the Los Angeles Revitalization
Zone net interest deduction, and (2) tax in the amount of $260,751 for the tax
year ended December 31, 1993 related to the disallowance of a portion of the
Company's bad debt deduction for that year. The Company has protested these
assessments and the matter is currently before the Franchise Tax Board's
Appellate Division.
The Company is currently also under examination by the California Franchise
Tax Board for the tax years ending December 31, 1996-1997. 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.
Environmental Regulation
The Company's business and properties are subject to federal and state laws
and regulations governing environmental matters, including the regulation of
hazardous substances and wastes. For example, under the federal Comprehensive
Environmental Response, Compensation, and Liability Act ("CERCLA") and similar
state laws, owners and operators of contaminated properties may be liable for
the costs of cleaning up hazardous substances without regard to whether such
persons actually caused the contamination. Such laws may affect the Company as
an owner or operator of properties used in its business, and through the
Association, as a secured lender of property that is found to contain
hazardous substances or wastes.
Although CERCLA and similar state laws generally exempt holders of security
interests, the exemption may not be available if a secured party engages in
the management of its borrower or the securing property in a manner deemed
beyond the protection of the secured party's interest. Recent federal and
state legislation, as well as guidance issued by the United States
Environmental Protection Agency and a number of court decisions, have provided
assurance to lenders regarding the activities they may undertake and remain
within CERCLA's secured party exemption. However, these assurances are not
absolute and generally will not protect a lender or fiduciary that
participates or otherwise involves itself in the management of its borrower,
particularly in foreclosure proceedings. As a result, CERCLA and similar state
statutes may influence the Association's decision whether to foreclose on
property that is found to be contaminated. The Association has adopted
environmental underwriting requirements for commercial real estate loans. The
Association's general policy is to obtain an environmental assessment prior to
foreclosure on commercial real estate. See "Business--General" and "--Lending
Activities--Loan and MBS Portfolio Composition" regarding the recent and rapid
expansion of the Association's commercial real estate loan portfolio. The
existence of hazardous substances or wastes on commercial real estate
properties could cause the Association to elect not to foreclose on the
property, thereby limiting, and in some instances precluding, the Association
from realizing on the related loan. Should the Association foreclose on
property containing hazardous substances or wastes, the Association would
become subject to other environmental statutes, regulations and common law
relating to matters such as, but not limited to, asbestos abatement, lead-
based paint abatement, hazardous substance investigation and remediation, air
emissions, wastewater discharges, hazardous waste management, and third party
claims for personal injury and property damage.
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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 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,
1999, approximately 84.49% of the Association's portfolio assets constituted
qualified thrift investments and the Association met the QTL test each month
in fiscal 1999.
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.
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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, 1999, 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 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, 1999.
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 0.0580%.
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
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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, 1999, the Association's ratio of tangible capital to
adjusted total assets was 7.48%.
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 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 amended the minimum leverage requirement to be 4%
effective April 1, 1999, for all but the highest rated savings associations
and banks. At June 30, 1999, the Association's core capital ratio was
7.48%.
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
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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, 1999, the
Association's risk-based capital ratio was 12.26%, 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
or core capital is at least 5.0%, and it is not subject to any order or
directive by the OTS to meet a specific capital level. At June 30, 1999, the
Association had a risk-based capital ratio of 12.26%, a Tier 1 risk-based
capital ratio of 11.05%, and a core capital ratio of 7.48%, 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% 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
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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.
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
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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. The OTS
has promulgated a regulation that addresses a savings institution's ability to
make a capital distribution according to the institution's capital position.
Effective April 1, 1999, the OTS amended its capital distributions regulation.
The new rule establishes a "safe-harbor" amounts for capital distributions
that institutions can make without OTS prior approval or notice. It also sets
forth certain conditions that specify whether a notice or an application for
prior approval of the OTS is required if the safe harbor does not apply. The
OTS retains discretion to subject institutions that meet their capital
requirements to the more stringent capital distribution rules applicable to
institutions with less capital if the OTS notifies the institution that it is
in need of more than normal supervision. The OTS retains the authority to
prohibit any capital distribution otherwise authorized under its regulations
if the OTS determines that the distribution would constitute an unsafe or
unsound practice.
Under its regulation, an application for the prior approval of the OTS to
make a capital distribution is required if any of the following conditions are
present: the institution would not be adequately-capitalized after the
distribution, its examination ratings are not at least satisfactory or it is
considered a problem association or in troubled condition, the total amount of
all its capital distributions for the applicable calendar year (including the
proposed distribution) would exceed its net income for that year to date plus
its retained net income for the prior two years, or the distribution would
violate an applicable prohibition or OTS imposed condition on the institution.
A 30-day advanced notice is required if as is the case with the Association,
the institution is a subsidiary of a holding company, the institution would
not be well-capitalized after the distribution, or the distribution would
reduce the amount of or retire any part of its common or preferred stock or
retire any part of a debt instrument included in total capital (other than
through a regular payment on the instrument). If none of the above conditions
are present, an institution is not required to file an application or notice
with the OTS before making a capital distribution.
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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, 1999, 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 $3.8 million has not been recorded.
Enforcement. Whenever the OTS has reasonable cause to believe that the
continuation by a savings and loan holding company of any activity or of
ownership or control of any non FDIC-insured subsidiary constitutes a serious
risk to the financial safety, soundness, or stability of a savings and loan
holding company's subsidiary savings institution and is inconsistent with the
sound operation of the savings institution, the OTS may order the holding
company, after notice and opportunity for a hearing, to terminate such
activities or to divest such noninsured subsidiary. FIRREA also empowers the
OTS, in such a situation, to issue a directive without any notice or
opportunity for a hearing, which directive may (i) limit the payment of
dividends by the savings institution, (ii) limit transactions between the
savings institution and its holding company or its affiliates, and (iii) limit
any activity of the association that creates a serious risk that the
liabilities of the holding company and its affiliates may be imposed on the
savings institution.
In addition, FIRREA includes savings and loan holding companies within the
category of person designated as "institution-affiliated parties." An
institution-affiliated party may be subject to significant penalties and/or
loss of voting rights in the event such party took any action for or toward
causing, bringing about, participating in, counseling, or aiding and abetting
a violation of law or unsafe or unsound practice by a savings institution.
Classification of Assets
Savings institutions are required to classify their assets on a regular
basis, to establish appropriate allowances for losses and report the results
of such classification quarterly to the OTS. A savings institution is also
required to set aside adequate valuation allowances to the extent that an
affiliate possesses assets posing a risk to the institution, and to establish
liabilities for off-balance sheet items, such as letters of credit, when loss
becomes probable and estimable. The OTS has the authority to review the
institution's classification of its assets and to determine whether and to
what extent (a) additional assets must be classified, and (b) the
institution's valuation allowances must be increased.
32
<PAGE>
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 1999, the Association was rated
outstanding.
Federal Home Loan Bank System
The Federal Home Loan Banks provide a credit facility for member
institutions. As a member of the FHLB of San Francisco, the 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
33
<PAGE>
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, 1999 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 1999.
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, 1999, 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 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
34
<PAGE>
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.
There can be no assurance that the FFIEC or other federal regulators will
not issue new regulatory requirements that require additional work by the
Company and, if issued, that new regulatory requirements will not increase the
cost or delay the completion of the Year 2000 project.
Pending Legislation
Both the Senate and the House of Representatives in the current session of
Congress have passed parallel financial services modernization bills that
address, inter alia, the affiliations permissible to insured savings
associations and banks, insurance activities of insured institutions and their
affiliates, privacy, the Federal Home Loan Bank system and the Community
Reinvestment Act. These bills contain many provisions that are similar to ones
in financial services modernization bills considered in the two previous
Congresses. On May 6, 1999, the Senate passed, S. 900, the Financial Services
Modernization Act of 1999 by a 54-44 vote. Subsequently, on July 1, 1999, the
House passed, H.R. 10, the Financial Services Act of 1999 by a 343-86 vote. A
joint House-Senate conference has been appointed with respect to this
legislation. This committee is empowered to resolve differences between S. 900
and H.R. 10, make other changes to this legislation, and report a final bill.
At an organizational meeting on August 3, 1999, the Conference Committee took
no action on any substantive provision of this legislation. Committee staff
has met to develop proposed final provisions and the Conference Committee is
expected to meet from time to time. This Committee is not subject to any
specific deadline, and it can continue its work for as much of the 1999-2000
congressional session as necessary. If the Conference Committee agrees on a
final bill, it will be sent to the House and Senate, which may accept or
reject the bill in its entirety on a majority vote. If passed by both houses,
the bill would then be submitted to the President for his signature or veto.
The Company and the Association are unable to predict whether H.R. 10, S.
900, or any other such legislation will be enacted, what provisions any
enacted legislation may contain, or the extent to which such legislation would
affect their operations.
Activities of Savings Associations and Savings and Loan Holding
Companies. Both H.R. 10 and S. 900 contain provisions addressing the
activities and affiliations permissible for savings and loan
35
<PAGE>
holding companies. Neither bill contains provisions that had been included in
the version of H.R. 10 considered by the House Banking and House Commerce
Committees in 1998 and that would have terminated the federal savings
association charter, required savings associations to become banks and allow
the merger of the Savings Association Insurance Fund and the Bank Insurance
Fund under the Deposit Insurance Funds Act of 1996, with conforming amendments
affecting the regulation of savings and loan holding companies. S. 900 now
does contain a provision allowing a federal savings association to convert to
a national bank and retain its existing interstate branches. Both bills would
eliminate the Savings Association Insurance Fund special reserve established
in the Deposit Insurance Funds Act of 1996. This reserve holds assessments
paid by members of this Fund in excess of the statutory amount that the Fund
is required to hold.
The provisions with respect to the affiliations permissible for savings and
loan holding companies have been controversial. Both Title IV of H.R. 10 and
Title VI of S. 900 provide that no company may charter or acquire control of
an insured savings association under an application filed after a specified
date (March 4, 1999, in H.R. 10; May 4, 1999, in S. 900), unless that company
engages only in "financial" activities, as that term is defined in the
legislation and may be defined by the Federal Reserve Board after enactment.
Any company that qualified as a "unitary" savings and loan holding company
("Unitary Company") on that specified date (or was subject to an application
to become a Unitary Company filed by that date) would be able to continue to
operate under present law and be subject to no limit on its affiliate
activities. Such a grandfathered Unitary Company, or any nonbanking affiliate
thereof, accordingly would be able to commence or expand any type of activity
(including nonfinancial activities). Section 401 of H.R. 10 was amended on the
House floor to provide that a company that engages in activities that are not
financial in nature may apply to the Federal Reserve Board for approval to
continue to engage in such activities after acquiring control of a savings
association. S. 900 contains no similar provision. S. 900 expressly authorizes
multiple savings and loan holding companies also to engage in any financial
activity.
Customer Privacy. Title V of H.R. 10 was amended on the House floor to
include detailed provisions regarding the disclosure of consumer information
by any institution engaging in "financial" activities as defined in this bill.
Title V imposes an "affirmative and continuing obligation on all financial
institutions to respect the privacy of customers and protect nonpublic
personal information." To accomplish this goal, the Bill would require each
functional regulator to issue rules to insure "the security and
confidentiality of customer records," and to protect against "any anticipated
threats or hazards" or "unauthorized access to or use of such records."
This Bill would require financial institutions to provide consumers notice
and an opportunity to opt-out prior to disclosures of nonpublic personal
information to non-affiliated third parties. However the Bill specifies a
number of exceptions to this notice requirement, including: transfers for
marketing or servicing its own products (transfers to facilitate marketing
must be disclosed to the consumer); transfers to effect, administer or enforce
a transaction, such as servicing or processing a financial product or service,
maintaining or servicing the consumer's account; transfers made with the
consent or at the direction of the consumer; transfers made to protect the
confidentiality or security of a consumer's records, to protect against fraud
or liability, or for resolving customer disputes or inquiries; transfers to
persons acting in a fiduciary capacity on behalf of the consumer; transfers to
provide information to a credit rating agency, or an insurance rate advisory
organization; transfers to the financial institution's attorneys, accountants
or auditors; transfers permitted or required under other laws, the rules of
self-regulatory organizations, or for an investigation on a matter related to
public safety; and transfers in connection with a sale, transfer or merger of
the financial institution. Finally, H.R 10 expressly prohibits disclosure of
account numbers or credit card account information to third parties for use in
telemarketing, direct mail marketing or other marketing through electronic
mail.
Each financial institution would be required by the Bill to make certain
required disclosures of its privacy policies to each consumer, both at the
time of establishing a customer relationship and then
36
<PAGE>
"not less than annually." These disclosures, which may be made either in
writing or in electronic form, must set forth the institution's privacy
policies and practices and must include: policies and practices with respect
to disclosures to third parties, categories of persons to whom information may
be disclosed, the institution's policies with respect to disclosures of
nonpublic information related to former customers, the categories of
information that the institution collects, and disclosures required under the
Fair Credit Reporting Act.
The Bill would require the federal depository institution regulators, the
National Credit Union Association, the Secretary of the Treasury and the
Securities and Exchange Commission, after consultation with the Federal Trade
Commission and representative State insurance regulators, through a joint
rulemaking to develop implementing regulations. These regulations would be due
within 6 months of the date of enactment of the Bill. The privacy provisions
of this Bill would take effect six months following the completion of the
rulemaking by the functional regulators required by the bill.
H.R. 10 also includes the Financial Information Privacy Act of 1999, which
addresses "pretext calling." The Bill makes it unlawful for an unauthorized
person to seek to obtain customer information through fraudulent or deceptive
means. The only privacy provisions of S. 900 are these that restrict "pretext
calling."
Community Reinvestment Act. H.R. 10 does not amend the CRA, but would
require that before a bank holding company or financial holding company may
engage in "financial activities," each of its insured depository institution
subsidiaries must have and maintain at least a "satisfactory" CRA rating. S.
900 omits this requirement and would modify existing CRA requirements in three
ways. First, an institution that receives at least a "satisfactory" CRA rating
and has maintained such a rating for at least three years would be deemed in
compliance until its next examination, unless its regulatory agency determines
otherwise based upon "substantial verifiable information" provided by a third
party that demonstrates noncompliance. Second, S. 900 provides "sunshine"
requirements for agreements made between an insured depository institution and
any nongovernmental person or entity regarding the use of the institution's
funds or resources in excess of $10,000 annually (excluding direct lending
agreements with individuals or businesses). Finally, S. 900 exempts from the
CRA institutions with assets of not more than $100 million and located in non-
metropolitan areas.
Federal Home Loan Bank Amendments. Both S. 900 and H.R. 10 include 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 (effective January 1, 1999, under H.R. 10;
effective June 1, 2000 under S. 900). The bills expand 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 or agricultural assets (H.R. 10
includes as eligible collateral 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. Both bills transfer 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 repayment 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.
H.R. 10 goes further than previous bills by revising the capital structure
of the FHLB System. S. 900 calls for a study of FHLB capitalization by the
General Accounting Office. Under H.R. 10, FHLBanks would contribute capital
based on the riskiness of their loan portfolios, rather than on asset
37
<PAGE>
size. H.R. 10 will create several classes of FHLBank stock. One class would be
redeemable after six months. A second class must be held at least five years.
A third class would be permanent and could be transferred only to members of
the system. H.R. 10 would require the FHFB to promulgate regulations in
accordance with the statute within one year of enactment. The FHFB regulations
must set forth both a leverage requirement and risk-based capital requirement
and provide a minimum investment required of members. The Bill would require
each FHLB to submit a capital plan to the Finance Board no later than 270 days
after these regulations become final.
Preemption of State Anti-affiliation Laws and Certain Insurance Sales
Restrictions. Both S. 900 and H.R. 10 expressly preempt any state law that
would prevent or restrict the establishment of financial affiliations.
Although developed with a focus on insurance anti-affiliation laws, this
provision is not limited to insurance, but by its terms reaches any state law.
Section 104 of both S. 900 and H.R. 10 provides that no state may "prevent or
restrict" an insured depository institution, or a subsidiary or affiliate
thereof, from "being affiliated directly or indirectly with" any person or
entity engaged in any financial activity. Section 104 also provides federal
preemption of certain state laws or actions that would "prevent or restrict"
an insured depository institution, or a subsidiary or affiliate thereof, from
"engaging directly or indirectly, either by itself or in conjunction with a
subsidiary, affiliate or any other entity or person" in any financial
activity. The Bills adopt distinct tests for possible federal preemption with
respect to such activities: one for insurance sales, one for insurance
activities other than sales and one for all other activities. Except for
insurance sales law described in certain "safe harbor" provisions or enacted
prior to September 3, 1998, the Bills would provide that such state laws or
actions may be preempted if they are discriminatory against despository
institutions affiliated with insurance agencies, brokers or companies.
38
<PAGE>
ITEM 2. PROPERTIES.
At June 30, 1999, 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, 1999
-------- ----------- --------- ---------- -----------------
<S> <C> <C> <C> <C>
7021 Greenleaf Avenue Owned 7/65 None $ 867,347
Whittier, CA 90602
(Administration)
7355 Greenleaf Avenue Owned 8/18/85 None $1,179,996
Whittier, CA 90602
(Main Office)
15175 Whittier Blvd. Owned 7/29/98 None $1,309,300
Whittier, CA 90603
(Branch)
15335 Whittier Blvd. Owned/Bldg 4/1/70 None $ 95,466
Whittier, CA 90603 Leased/Land 3/31/05
(Training Center)
401 E. Whittier Blvd. Owned 12/72 None $ 350,014
La Habra, CA 90631
(Branch)
220 S. State College Blvd. Leased 1/31/92 12/31/12 $ 218,920
Brea, CA 92821
(Branch)
1701 N. Euclid Avenue Leased 7/6/76 None $ 112,723
Fullerton, CA 92835 11/30/07
(Branch)
12333 S. La Mirada Blvd. Leased 1/31/92 None $ 160,904
La Mirada, CA 90638 7/9/06
(Branch)
3160 Colima Road Leased 1/17/92 12/31/99 $ 71,084
Hacienda Heights, CA 91745
(Branch)
1921 W. Imperial Hwy. Leased 12/1/94 11/30/01 $ 32,902
Suite A
La Habra, CA 90631
(Branch)
870 N. Rose Drive Leased 2/10/98 2/28/08 $ 207,829
Placentia, CA 92870
(Branch)
8160 E. Santa Ana Canyon Leased 2/5/98 2/28/03 $ 213,698
Road,
Suite 184
Anaheim Hills, CA 92808
(Branch)
12525 Beverly Blvd. Owned 2/27/86 None $ 147,190
Whittier, CA 90601
(Training Center)
Wardman and Comstock Leased/Land 1/2/70 Month --
Whittier, CA 90602 to
(Parking Lot) Month
</TABLE>
39
<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, 1999.
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, 1999. David S.
Engelman, a private investor, became a director of the Company on September
16, 1999.
<TABLE>
<CAPTION>
Name Principal Occupation
---------------------------- -------------------------------------------------
<C> <S>
DIRECTORS:
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
Alfred J. Gobar President and Chairman, AJGA, Inc., an economics
consulting firm
Wayne L. Harvey C.P.A., Retired
David K. Leichtfuss President, Broadview Mortgage, a mortgage banking
company
Edward L. Miller Partner, law firm of Bewley, Lassleben & Miller
D. W. Ferguson Director Emeritus of the Company and of the
Association
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.
40
<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, 1999, the Company had
approximately 329 stockholders of record (not including the number of persons
or entities holding stock in nominee or street name through various brokerage
firms) and 5,395,107 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 1999 Fiscal 1998
------------------------------- ----------------------------------
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........ 17 15 1/2 17 1/4 21 1/4 20 18 19/64 19 21/32 18 13/64
Low......... 14 7/8 14 5/8 11 3/4 14 3/4 17 5/32 15 51/64 15 51/64 14 3/64
</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 1999 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. The OTS
has promulgated a regulation that addresses a savings institution's ability to
make a capital distribution according to the institution's capital position.
Effective April 1, 1999, the OTS amended its capital distributions regulation.
The new rule establishes a "safe-harbor" for capital distributions that
institutions can make without OTS prior approval or notice. It also sets forth
certain conditions that specify whether a notice or an application for prior
approval of the OTS is required if the safe harbor does not apply. Under its
regulation, an application for the prior approval of the OTS to make a capital
distribution is required if any of the following conditions are present: the
institution would not be adequately-capitalized after the distribution, its
examination ratings are not at least satisfactory or it is considered a
problem association or in troubled condition, the total amount of all its
capital distributions for the applicable calendar year (including the proposed
distribution) would exceed its net income for that year to date plus its
retained net income for the prior two years, or the distribution would violate
an applicable prohibition or OTS imposed condition on the institution. A 30-
day advance notice is required if, as is the case with the Association, the
institution is a subsidiary of a holding company, the institution would not be
well-capitalized after the distribution, or the distribution would reduce the
amount of or retire any part of its common or preferred stock or retire any
part of a debt instrument included in total capital (other than through a
regular payment on the instrument). If none of the above conditions are
present, an institution is not required to file an application or notice with
the OTS before making a capital distribution. See "Business--Regulation and
Supervision--Savings and Loan Holding Company Regulation--Payment of Dividends
and Other Capital Distributions by Association."
41
<PAGE>
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."
42
<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,
-----------------------------------------------
1999 1998 1997 1996 1995
---------- -------- -------- -------- --------
(Dollars in thousands, except per share
amounts)
<S> <C> <C> <C> <C> <C>
Selected Financial Data:
Total assets.................. $1,013,437 $887,480 $801,402 $725,085 $641,173
Total liabilities............. 932,133 810,221 731,159 657,159 574,732
Loans receivable, net......... 821,190 691,026 644,964 607,672 537,478
Loans receivable held for
sale......................... 17,028 7,507 623 2,890 1,666
Investment securities(1)...... 11,986 6,877 38,086 37,419 24,048
Mortgage-backed
securities(2)................ 99,861 115,851 74,139 41,175 39,993
Deposits...................... 677,839 580,910 553,186 512,517 481,158
Federal Home Loan Bank (FHLB)
advances..................... 234,700 216,000 157,700 135,300 63,950
Securities sold under
agreements to repurchase..... -- -- -- 300 22,873
Stockholders' equity.......... 81,304 77,259 70,243 67,926 66,441
Selected Operating Data:
Interest income............... $ 71,919 $ 64,870 $ 58,668 $ 52,646 $ 41,042
Interest expense.............. 40,316 39,110 34,901 31,151 23,503
---------- -------- -------- -------- --------
Net interest income before
provision for loan losses.. 31,603 25,760 23,767 21,495 17,539
Provision for loan losses..... 1,700 1,450 3,001 2,103 998
---------- -------- -------- -------- --------
Net interest income after
provision for loan losses.. 29,903 24,310 20,766 19,392 16,541
---------- -------- -------- -------- --------
Other income:
Loan servicing charges and
deposit fees............... 2,796 2,402 1,828 1,629 1,490
Gain on sale of loans held
for sale................... 332 175 356 175 86
Commissions................. 716 735 555 606 420
Gain on sale of securities
available for sale......... 616 -- -- -- --
Other....................... 169 16 30 79 84
---------- -------- -------- -------- --------
Total other income........ 4,629 3,328 2,769 2,489 2,080
---------- -------- -------- -------- --------
Other expense:
Compensation and employee
benefits................... 9,459 8,375 7,829 7,565 7,371
Occupancy, net.............. 2,308 1,945 1,946 1,970 1,894
Federal Deposit Insurance
premiums................... 527 517 855 1,254 1,115
Data Processing............. 853 730 707 641 561
Advertising and promotional. 1,007 924 573 513 464
Consulting fees............. 787 471 437 350 250
Other general and
administrative expense..... 2,264 2,139 2,026 2,487 2,429
---------- -------- -------- -------- --------
Total general and
administrative expense..... 17,205 15,101 14,373 14,780 14,084
Savings Association
Insurance Fund special
assessment................. -- -- 3,100 -- --
Real estate operations, net. 320 595 775 656 646
Amortization of core deposit
intangible................. -- 35 264 303 303
---------- -------- -------- -------- --------
Total other expense....... 17,525 15,731 18,512 15,739 15,033
---------- -------- -------- -------- --------
Earnings before income taxes,
extraordinary items and
cumulative effect of change
in accounting principle...... 17,007 11,907 5,023 6,142 3,588
Income taxes ................. 7,464 5,297 2,203 2,573 1,267
---------- -------- -------- -------- --------
Net earnings before
extraordinary item and
cumulative effect of change
in accounting principle...... 9,543 6,610 2,820 3,569 2,321
---------- -------- -------- -------- --------
Extraordinary item, net of
taxes........................ (61) -- -- -- --
Cumulative effect of change
in accounting principle, net
of taxes..................... 162 -- -- -- --
---------- -------- -------- -------- --------
Net earnings.................. $ 9,644 $ 6,610 $ 2,820 $ 3,569 $ 2,321
========== ======== ======== ======== ========
Basic earnings per share...... $ 1.79 $ 1.21 $ 0.51 $ 0.62 $ 0.40
========== ======== ======== ======== ========
Diluted earnings per
share(3)..................... $ 1.70 $ 1.14 $ 0.49 $ 0.59 $ 0.39
========== ======== ======== ======== ========
</TABLE>
- --------
(1) Includes $1,819, $1,432, $150 and $470 of investment securities available
for sale at June 30, 1998, 1997 and 1995, respectively. No investment
securities were available for sale at June 30, 1999 and 1996.
(2) Includes $15,783 and $8,274 of mortgage-backed securities available for
sale at June 30, 1999 and 1998, respectively. No mortgage-backed
securities were available for sale in 1997, 1996 or 1995.
(3) Diluted earnings per share in 1999, 1998, 1997, 1996 and 1995 were
calculated based on weighted average shares outstanding of 5,660,351,
5,795,480, 5,792,344, 6,048,751 and 6,015,899, respectively. The weighted
average shares have been adjusted to reflect the 25% stock dividends paid
on May 30, 1997 and June 30, 1998.
43
<PAGE>
<TABLE>
<CAPTION>
At or for the Year Ended June 30,
--------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other
Data:
Performance Ratios:
Return on average assets(1).......... 1.04% 0.78% 0.37% 0.53% 0.39%
Return on average equity(1).......... 12.10 8.96 4.11 5.25 3.53
Average equity to average assets..... 8.58 8.67 9.02 10.04 11.18
Equity to total assets............... 8.02 8.71 8.77 9.37 10.36
Interest rate spread during the
period(2)........................... 2.98 2.61 2.74 2.68 2.56
Net interest margin(3)............... 3.50 3.14 3.22 3.24 3.07
Average interest-earning assets to
average
interest-bearing liabilities........ 111.60 110.97 110.17 111.47 112.31
General and administrative expense to
average
assets.............................. 1.85 1.78 1.89 2.18 2.39
Other expense to average assets(1)... 1.89 1.85 2.44 2.32 2.55
Efficiency ratio(4).................. 48.76 52.23 54.90 62.08 72.10
Dividend pay-out ratio............... -- -- -- -- --
Regulatory Capital Ratios:
Core capital to adjusted total
assets.............................. 7.48 7.44 7.34 7.67 8.11
Core capital to risk-weighted assets. 11.05 11.84 11.42 11.53 12.83
Total capital to risk-weighted
assets.............................. 12.26 12.97 12.64 12.74 14.07
Asset Quality Ratios:
Nonperforming loans as a percentage
of gross
loans(5)............................ 0.61 1.01 1.33 1.71 2.01
Nonperforming assets as a percentage
of total assets(6).................. 0.74 1.11 1.31 1.81 2.06
GVA on loans as a percentage of gross
loans............................... 0.96 0.87 0.94 0.92 1.38
Total allowance for loan losses as a
percentage of gross loans........... 1.02 1.12 1.18 1.25 2.17
GVA on loans as a percentage of total
nonperforming loans................. 158.02 86.61 70.91 53.52 68.97
Total GVA as a percentage of total
nonperforming assets(7)............. 108.99 64.84 60.95 44.92 59.61
Number of:
Deposit accounts..................... 47,259 41,535 37,603 37,628 38,000
Mortgage loans in portfolio.......... 6,757 4,640 4,546 4,485 4,185
Mortgage loans serviced for others... 1,963 2,102 1,717 1,710 1,661
Total full-service customer
facilities.......................... 10 10 8 8 8
</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.
44
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
At June 30, 1999 the Company had total assets of $1.0 billion, total
deposits of $677.8 million and stockholders' equity of $81.3 million compared
to total assets of $887.5 million, total deposits of $580.9 million and
stockholders' equity of $77.3 million at June 30, 1998. These changes
represent a 14.19% increase in total assets and a 5.24% increase in
stockholders' equity during the fiscal 1999.
The Southern California economy and real estate markets in the Company's
lending area have continued to show improvement during the year. The Company's
level of nonperforming assets declined from June 30, 1998, 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,
1999, the Company reported $7.5 million in nonperforming assets compared to
$9.8 million and $10.5 million at June 30, 1998 and 1997, respectively. The
Company recorded a provision for loan losses of $1.7 million for the year
ended June 30, 1999 compared to $1.5 million and $3.0 million for the years
ended June 30, 1998 and 1997, respectively. See "Business--Allowances for Loan
and Real Estate Losses."
Results of Operations
General. The Company reported net earnings of $9.6 million, $1.70 per share
diluted, for the year ended June 30, 1999, compared to net earnings of $6.6
million, $1.14 per share diluted, and $2.8 million, $0.49 per share diluted,
for the years ended June 30, 1998 and 1997, respectively. This increase in
earnings for fiscal 1999 compared to fiscal 1998 was primarily attributable to
an increase in net interest income partially offset by an increase in other
expenses. The increase in earnings in fiscal 1998 over 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.
Interest Income. Interest income was $71.9 million, $64.9 million and $58.7
million for the years ended June 30, 1999, 1998, and 1997, respectively. The
$7.0 million increase in interest income in 1999 compared to 1998 resulted
from an increase in the average balance of interest-earning assets of $83.1
million while the average yield on interest-earnings assets increased 0.05% to
7.95%. 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 earning assets decreased
0.04 to 7.90%.
Interest Expense. Interest expense was $40.3 million, $39.1 million, and
$34.9 million for the years ended June 30, 1999, 1998, and 1997, respectively.
The $1.2 million increase in 1999 compared to 1998 resulted from an increase
in the average balance of interest-bearing liabilities of $70.2 million and a
decrease in the average cost on interest-bearing liabilities of 0.32% to
4.97%. 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%.
Net Interest Income Before Provision for Loan Losses. Net interest income
before provision for loan losses was $31.6 million, $25.8 million, and $23.8
million for the years ended June 30, 1999,
45
<PAGE>
1998, and 1997, respectively. The increase in 1999 compared to 1998 was
primarily a result of the increase in interest-earning assets relative to
interest-bearing liabilities during the year as well as a decrease in the cost
of interest-bearing liabilities. The increase in 1998 compared to 1997 was
also primarily a result of the increase in interest-earning assets relative to
interest-bearing liabilities.
Provision for Loan Losses. During fiscal 1999, 1998, and 1997 the Company
established $1.7 million, $1.5 million and $3.0 million, respectively, of
provisions for losses on loans. The slight increase in the provision for 1999
is primarily a result of the overall growth in the loan portfolio as compared
to the prior year, specifically in commercial real estate loans. In addition,
certain one-to-four family loans purchased are considered by the Company to
have higher risk characteristics because they are loans outside of California,
which has historically been considered the Company's primary market area for
one-to-four family loans. The decrease of $1.5 million in 1998 compared to
1997 was due to decreases in charge-offs and nonaccrual loans during the year.
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 continued
improvement during fiscal 1999, and management considers the level of
allowance for loan losses at June 30, 1999 to be adequate. However, even
though the local economy and real estate markets improved during fiscal 1999,
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 $1.3 million, or 39.09%, in 1999 to
$4.6 million as compared to fiscal 1998. During fiscal 1999, 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 continuing result of a checking account
program marketed beginning in the second quarter of fiscal 1998. In addition,
in fiscal 1999 there were pretax gains of $616,000 related to the sale of
securities available for sale. Other income increased by $559,000, or 20.19%,
in 1998 compared to 1997 as a result of fee income for deposits and loans
serviced increasing due to a larger loan and deposit base in fiscal 1998.
Other Expense. Other expense increased $1.8 million, or 11.40%, from $15.7
million in fiscal 1998 to $17.5 million in fiscal 1999. This increase in other
expense is primarily due to an increase in compensation, employee benefits and
occupancy expense. These increases during fiscal 1999 are primarily a result
of two retail banking branches opened during February 1998, the relocation of
an existing branch to a larger more accessible location in August 1998 and
additional staffing in the income property lending department of the Company.
Included in compensation and employee benefits are 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 during the
past few fiscal years in the fair value of the Company stock held by the ESOP,
ESOP expense has shown a corresponding increase. The expense related to the
ESOP was $1.0 million, $1.1 million, and $715,000 for the fiscal years ended
June 30, 1999, 1998, and 1997, respectively. The increase in consulting fees
in fiscal 1999 as compared to 1998 is primarily a result of the cost of
preparing for the Year 2000 computer issue.
Other expense decreased $2.8 million, or 15.02%, from $18.5 million in
fiscal 1997 to $15.7 million in fiscal 1998. The decrease was primarily due to
the $3.1 million one-time special SAIF assessment paid by the Association
during fiscal 1997 partially offset by an increase in the ESOP expense in 1998
as compared to 1997. 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
46
<PAGE>
that went into effect January 1997. Advertising expense increased in fiscal
1998 compared to fiscal 1997 primarily due to a marketing program initiated in
November 1997 intended to attract checking accounts.
The following is a summary of other general and administrative expenses for
the fiscal years ended:
<TABLE>
<CAPTION>
June 30,
--------------------
1999 1998 1997
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Professional fees...................................... $ 246 260 $ 236
Bank service charges................................... 305 234 270
Miscellaneous loan expenses............................ 316 486 368
Other.................................................. 1,397 1,159 1,152
------ ------ ------
$2,264 $2,139 $2,026
====== ====== ======
</TABLE>
Income Taxes. Income taxes increased by $2.2 million from $5.3 million in
fiscal 1998 to $7.5 million in fiscal 1999. Income taxes increased by $3.1
million from $2.2 million in fiscal 1997 to $5.3 million in fiscal 1998. The
effective tax rate was 43.89%, 44.49% and 43.86% for the years ended June 30,
1999, 1998 and 1997, respectively. The decrease in the effective tax rate for
1999 as compared to 1998 is primarily a result of ESOP expense as a percentage
of net earnings before income taxes being lower in the current year due to the
increase in net earnings before income taxes. The increase in the effective
tax rate in 1998 as compared to 1997 is primarily a result of the increase in
the fair value of the Company's stock held by the ESOP. 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.
Extraordinary Item and Cumulative Effect of Change in Accounting
Principle. During the fiscal year ended June 30, 1999, the Company prepaid
approximately $8.0 million of its higher cost borrowings and replaced the
funds with less expensive borrowings and retail deposits. In association with
the debt prepayment, the Company paid a prepayment fee of $61,000, after tax.
The prepayment fee is disclosed as an extraordinary item on the statement of
earnings. The Company implemented SFAS No. 133 effective July 1, 1998. Upon
implementation, approximately $78.0 million in MBS were reclassified from held
to maturity to available for sale. The Company has accounted for the gains or
losses on the sale of any such reclassified MBS sold within 90 days of the
reclassification date as the cumulative effect of a change in accounting
principle. Any gains or losses recorded on such reclassified securities sold
90 days or more after the reclassification date have been recorded as gain or
losses on sale of securities available for sale. In the first quarter of 1999,
the Company sold $29.6 million of these reclassified MBS for a gain after tax
of $162,000.
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,
47
<PAGE>
coin/currency counters, elevators, microfilmers, heating and air-conditioning
systems and emergency communications radios, is also primarily dependent upon
the Year 2000 compliance efforts and results of third parties.
State of Readiness
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 developed a comprehensive
initiative to make its IT assets and non-IT assets Year 2000 ready. 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 deemed necessary as a result of this assessment have been
installed.
The Company's non-IT assets have also been assessed for Year 2000
compliance. 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.
Installation of new ATM hardware at all branches is complete.
The Year 2000 Committee's initiative to make the Company's IT assets and
non-IT assets Year 2000 ready 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--Testing of IT assets and non-IT assets as well as testing
of third-party vendors and service providers for Year 2000 issues. The
testing of IT assets and non-IT assets is substantially complete. The
testing of third-party vendors and service providers was substantially
completed by June 30, 1999. Testing of all mission-critical systems was
also completed by June 30, 1999.
5. Implementation--This phase began with the replacement of ATM hardware,
and continued with the installation and/or upgrade of both IT and non-IT
assets as identified in the prior phases. Consistent with OTS guidelines,
the Company's deadline of mid-1999 for completion of this phase has been
met. As the Company progresses through the remaining months of 1999, the
Company will continue close oversight of vendors and service providers, and
will take any remedial action deemed necessary to maintain its Year 2000
ready status.
Costs to Address the Year 2000 Issue
The total cost of 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. The estimate of approximately $1.5
million in total Year 2000 related costs does not include any estimate for
costs associated with the implementation of any aspect of the Company's Year
2000 Contingency Plan, which Plan is discussed below. The costs associated
with implementing the Year 2000 Contingency Plan are not known. Any personnel
and consulting costs incurred in connection with the Year 2000 compliance
efforts have been and will continue to be
48
<PAGE>
expensed as incurred. The currently contemplated Year 2000 compliance costs
are expected to be funded primarily through operating cash flow and are not
expected to have a material adverse effect on the Company's business,
financial condition or results of operations. As of June 30, 1999 the costs
incurred related to Year 2000 are approximately $1.2 million.
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. Comprehensive testing of
this third-party data processing service bureau took place on September 28
through October 9, 1998. There were no material Year 2000 related problems
detected as a result of the testing.
If this third-party service provider or other third-party providers with
which the Company has material relationships are not Year 2000 ready, the
following problems could result: (i) in the case of vendors, important
services upon which the Company depends, such as telecommunications and
electrical power, could be interrupted, (ii) in the case of third-party
service providers, the Company could receive inaccurate or outdated
information, which could impair the Company's ability to perform critical data
functions, such as the processing of deposit accounts, loan servicing and
internal accounting, and (iii) in the case of governmental agencies, such as
the FHLB, and correspondent banks, such agencies and financial institutions
could fail to provide funds to the Company, which could materially impair the
Company's liquidity and affect the Company's ability to fund loans and deposit
withdrawals. In addition, whether or not the Company is Year 2000 ready, the
Company may experience an outflow of deposits if customers are concerned about
the integrity of financial institutions' records regarding customers'
accounts.
Contingency Plans
Where it has been possible to do so, the Company has completed Year 2000
readiness testing with third-party vendors and service providers. Where this
was not possible, the Company has relied upon either proxy testing or
certifications of Year 2000 compliance from vendors and service providers. The
Company's extensive correspondence with and tracking of vendor progress has
resulted in documentation attesting to the Year 2000 readiness of most of its
vendors and service providers. Where the Company has been unable to secure
such documentation, alternate vendors and service providers have been
selected.
The Company has developed a Year 2000 Contingency Plan, consisting of a pre-
event mitigating plan, designed to avoid possible Year 2000 related problems,
and a post-event contingency plan, which includes business resumption
procedures to follow in case of Year 2000 related failures. The most critical
areas included in the Year 2000 Contingency Plan are cash supply, liquidity
needs, and security. The Year 2000 Contingency Plan has been tested and
reviewed, and a plan for its implementation is currently in place. While the
Company's Year 2000 Contingency Plan addresses temporary Year 2000 related
failures, there can be no assurance that any such failures would be only
temporary or, even if such failures are temporary, that the Year 2000
Contingency Plan will perform as anticipated and adequately address any such
failures.
49
<PAGE>
There can be no assurance that the Company's Year 2000 initiative will
effectively address the Year 2000 issue, that the Company's estimates of the
timing and costs of completing the initiative will ultimately be accurate or
that the impact of any failure of the Company or its third-party vendors and
service providers to be Year 2000 compliant, or the cost of implementing any
aspect of the Year 2000 Contingency Plans, will not have a material adverse
effect on the Company's business, financial condition or results of
operations.
Financial Condition
The Company's consolidated assets totaled $1.0 billion at June 30, 1999,
compared to $887.5 million at June 30, 1998. Stockholders' equity totaled
$81.3 million at June 30, 1999 compared to $77.3 million June 30, 1998. The
increase in assets is primarily attributable to the implementation of the
Company's growth strategies and was primarily funded by retail deposit growth
and FHLB advances.
Loans and MBS (including assets held or available for sale) increased to
$938.1 million at June 30, 1999, from $814.4 million at June 30, 1998. Loans
originated and purchased for investment were $276.4 million for the year ended
June 30, 1999, compared to $143.4 million for the same period the previous
year. MBS purchased for investment increased to $70.6 million at June 30,
1999, from $63.5 million for the same period the previous year.
At June 30, 1999, the Company's multifamily loan portfolio totaled $391.6
million, or 45.93% of total loans, an increase of 12.76% as compared to $347.3
million at June 30, 1998, and its commercial loan portfolio totaled $140.4
million, or 16.48% of total loans, an increase of 80.49% as compared to $77.8
million at June 30, 1998. Of the Company's $1.1 million of charge-offs in
fiscal 1999, $945,000 or 83.93% were for multifamily loans and none were for
commercial real estate loans. The Company's commercial loan portfolio
increased significantly during the past fiscal year, increasing by
approximately 80.49%. Both because the size of the commercial real estate loan
portfolio has increased significantly and most of the loans comprising the
portfolio are unseasoned, having been originated within the last two fiscal
years, the Company's past loss experience with respect to its commercial loan
portfolio may not be representative of the risk of loss in such portfolio in
the future. See "Business--Allowances for Loan and Real Estate Losses."
Multifamily and commercial real estate loans are generally considered to
involve a higher degree of credit risk and to be more vulnerable to
deteriorating economic conditions than one-to-four family residential mortgage
loans. These loans typically involve higher loan principal amounts and the
repayment of such loans generally depend on the income produced by the
operation or sale of the property being sufficient to cover operating expenses
and debt service. Even though the Southern California real estate market
showed continued improvement in fiscal 1999, recessionary economic conditions
of the type that have prevailed in recent years in the Company's lending
market area tend to result in higher vacancy and reduced rental rates and net
operating incomes from multifamily and commercial real estate properties. See
"Business--Lending Activities--Multifamily Lending" and "--Commercial Real
Estate Lending."
Loan sales increased to $64.0 million for the year ended June 30, 1999,
compared to $34.3 million for the same period ended June 30, 1998. The
increase in loan sales is primarily a result of an increase in funding of
fixed-rate loans during a period of lower interest rates. These fixed rate
loans were generally held for sale during this period. In addition there was
an increase in sales of multi family and commercial real estate loans. Loans
serviced for others increased to $284.2 million at June 30, 1999 from $276.4
million at June 30, 1998 primarily due to the increase in loan sales.
50
<PAGE>
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. Effective April 1, 1999, the minimum core capital requirement was
increased from 3% to 4% for all but the highest rated savings associations.
See "Business--Regulation and Supervision--Regulatory Capital Requirements."
The following table summarizes the regulatory capital requirements for the
Association at June 30, 1999. As indicated in the table, the Association's
capital levels exceed all three of the currently applicable minimum capital
requirements.
<TABLE>
<CAPTION>
June 30, 1999
-----------------------------------------
Tangible Risk-Based
Capital Core Capital Capital
------------ ------------ -------------
Amount % Amount % Amount %
------- ---- ------- ---- ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Regulatory capital................ $75,297 7.48% $75,297 7.48% $83,516 12.26%
Required minimum.................. 15,100 1.50 40,267 4.00 54,508 8.00
------- ---- ------- ---- ------- -----
Excess capital.................... $60,197 5.98% $35,030 3.48% $29,008 4.26%
======= ==== ======= ==== ======= =====
</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 to
adjusted total assets is at least 5%, its ratio of core capital to risk-
weighted assets is at least 6% and its total capital to risk-weighted assets
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, 1999 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, 1999
--------------------------------------------
Total Capital
Core Capital Core Capital to Risk-
to Adjusted to Risk- Weighted
Total Assets Weighted Assets Assets
------------ --------------- -------------
Amount % Amount % Amount %
------- ---- --------------- ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Regulatory capital............. $75,297 7.48% $ 75,297 11.05% $83,516 12.26%
Well capitalized requirement... 50,333 5.00 60,399 6.00 68,135 10.00
------- ---- -------- ------ ------- -----
Excess capital................. $24,964 2.48% $ 14,898 5.05% $15,381 2.26%
======= ==== ======== ====== ======= =====
</TABLE>
During the fourth quarter of fiscal 1999, the Company announced that its
Board of Directors had authorized the repurchase in the open market of
approximately 5% of the Company's outstanding common stock or 275,000 shares.
At June 30, 1999 a total of 57,000 shares had been repurchased at prices
ranging from $16.125 to $16.375 per share. Including the 57,000 shares under
the current repurchase plan the Company has repurchased 416,500 shares during
the current fiscal year.
51
<PAGE>
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 1999 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 4.49%, 4.12%, and 5.37%, at June 30, 1999, 1998, and
1997, 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
$64.0 million, $34.3 million, and $33.9 million for fiscal 1999, 1998, and
1997, respectively. The Company originated loans for sale of $73.7 million,
$41.3 million, and $31.6 million during fiscal years 1999, 1998, and 1997,
respectively. Net cash used by investing activities consisted primarily of
loan originations, loan purchases and investment purchases, offset by
principal collections on loans and proceeds from principal reductions on MBS
and maturities of other investment securities. Loans originated and purchased
for investment were $276.4 million, $143.4 million, and $95.9 million for
fiscal 1999, 1998, and 1997, respectively. Proceeds from principal repayments
on loans were $145.6 million, $91.8 million and $54.5 million for fiscal years
ended 1999, 1998, and 1997. Proceeds from maturities and principal payments of
investment securities were $9.1 million, $31.6 million, and $8.8 million for
fiscal years ended 1999, 1998, and 1997, 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 $96.9 million for fiscal 1999, an increase of
$27.7 million for fiscal 1998, and an increase of $40.7 million for fiscal
1997. The net proceeds from FHLB advances were $18.7 million, $58.3 million,
and $22.4 million for fiscal 1999, 1998, and 1997, respectively.
Due to the Company's growth strategies in fiscal 1999, 1998, and 1997, the
Company's use of FHLB advances increased. At June 30, 1999, the Company had
$234.7 million (25.18% of total liabilities) in advances outstanding from the
FHLB compared to $216.0 million (26.66% of total liabilities) at June 30,
1998. The maximum amount of advances that the Company had outstanding at any
month-end was $234.7 million. Management anticipates increased borrowing from
the FHLB again in fiscal 2000. See "Business--Sources and Funds--Borrowings."
The Company's most liquid assets are cash and short-term investments. The
levels of these assets are dependent on the Company's operating, financing,
lending and investing activities during any given period. At June 30, 1999,
cash and short-term investments totaled $33.1 million, a decrease of 16.20%
from $39.5 million at June 30, 1998.
52
<PAGE>
At June 30, 1999, the Company had outstanding commitments to originate loans
of $14.0 million and commitments to purchase loans of $3.7 million. At June
30, 1999, the Company had $21.1 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,
1999, totaled $385.2 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.
At June 30, 1999, 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 $4.3 million, representing a one
year cumulative positive gap ratio of 0.42%. This compares to $119.7 million
at June 30, 1998, which represented a positive GAP ratio of 13.48%.
This decrease in the one year cumulative GAP ratio is primarily a result of
the following:
. a significant amount of refinancing activity during the fiscal year
from adjustable rate loans to fixed rate loans in the lower rate
environment experienced during this period
. the origination of income property loans that adjust every five years
instead of adjusting the rate in one year or less
. The Company also purchased approximately $40 million of 30-year, fixed-
rate, one-to-four family mortgage loans during the year with an
approximate remaining term of 20 years.
53
<PAGE>
The Company manages the resulting interest rate risk by extending the
maturities of various liabilities such as FHLB advances and retail
certificates of deposit.
The Company closely monitors its interest rate risk as such risk relates to
its operational strategies. The 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, 1999, 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."
54
<PAGE>
<TABLE>
<CAPTION>
At June 30, 1999
---------------------------------------------------------------------------------------------------
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............. $ 224 $ 99 $ -- $ -- $ -- $ -- $ -- $ -- $ 323
Federal funds sold
and other short-term
investments.......... 25,120 -- -- -- -- -- -- -- 25,120
Investment
securities, net(3)... -- -- -- -- 2,000 1,996 7,990 -- 11,986
Loans
receivable(1)(3)..... 480,624 56,329 7,609 17,216 103,140 79,374 103,022 -- 847,314
Mortgage-backed
securities(3)........ 10,130 7,136 486 -- -- -- 82,109 -- 99,861
FHLB stock........... 12,221 -- -- -- -- -- -- -- 12,221
-------- -------- --------- --------- --------- -------- -------- -------- ----------
Total interest-
earning assets..... 528,319 63,564 8,095 17,216 105,140 81,370 193,121 -- 996,825
-------- -------- --------- --------- --------- -------- -------- -------- ----------
Less:
Unearned discount
and deferred
fees(2).............. 3,184 373 50 114 683 526 684 -- 5,614
Allowance for loan
losses............... -- -- -- -- -- -- -- 8,684 8,684
-------- -------- --------- --------- --------- -------- -------- -------- ----------
Net interest-
earning assets...... 525,135 63,191 8,045 17,102 104,457 80,844 192,437 (8,684) 982,527
Non-interest-earning
assets............... -- -- -- -- -- -- -- 30,910 30,910
-------- -------- --------- --------- --------- -------- -------- -------- ----------
Total assets....... $525,135 $ 63,191 $ 8,045 $ 17,102 $ 104,457 $ 80,844 $192,437 $ 22,226 $1,013,437
======== ======== ========= ========= ========= ======== ======== ======== ==========
Interest-bearing
liabilities:
Money market
deposits............. $102,532 $ 2,265 $ 4,529 $ 15,166 $ 10,146 $ 16,971 $ 3,388 $ -- $ 154,997
Passbook deposits.... 603 603 1,203 4,213 3,155 5,908 3,509 -- 19,194
NOW and other demand
deposits............. 857 857 1,713 6,256 5,150 10,612 13,485 -- 38,930
Certificate
accounts(4).......... 134,806 66,606 183,836 61,863 5,070 -- -- -- 452,181
FHLB advances(5)..... 56,600 10,100 25,000 113,400 29,600 -- -- -- 234,700
-------- -------- --------- --------- --------- -------- -------- -------- ----------
Total interest-
bearing
liabilities........ 295,398 80,431 216,281 200,898 53,121 33,491 20,382 -- 900,002
Non-interest bearing
liabilities.......... -- -- -- -- -- -- -- 32,131 32,131
Stockholders'
equity............... -- -- -- -- -- -- -- 81,304 81,304
-------- -------- --------- --------- --------- -------- -------- -------- ----------
Total liabilities
and stockholders'
equity............. $295,398 $80,431 $ 216,281 $ 200,898 $ 53,121 $ 33,491 $ 20,382 $113,435 $1,013,437
======== ======== ========= ========= ========= ======== ======== ======== ==========
Interest sensitivity
gap(6)................ $229,737 $(17,240) $(208,236) $(183,796) $ 51,336 $ 47,353 $172,055 $(91,209) $ --
======== ======== ========= ========= ========= ======== ======== ======== ==========
Cumulative interest
sensitivity gap....... $229,737 $212,497 $ 4,261 $(179,535) $(128,199) $(80,846) $ 91,209 $ -- $ --
======== ======== ========= ========= ========= ======== ======== ======== ==========
Cumulative interest
sensitivity gap as a
percentage of total
assets................ 22.67% 20.97% 0.42% (17.72%) (12.65%) (7.98%) 9.00%
Cumulative net
interest-earning
assets as a percentage
of cumulative
interest-bearing
liabilities........... 177.77% 156.54% 100.72% 77.36% 84.85% 90.81% 110.13%
</TABLE>
- ----
(1) For purposes of the gap analysis, mortgage and other loans are reduced for
nonperforming loans but are not reduced for the allowance for loan losses.
(2) For purposes of the gap analysis, unearned discount and deferred fees are
pro rated for loans receivable.
(3) Includes assets held or available for sale.
(4) Certain certificate accounts have potential repricing dates which are prior
to the contractual maturity dates. The repricing dates were used for
purposes of the gap analysis.
(5) Certain FHLB Advances have call features which are prior to the contractual
maturity dates. The call dates were used for purposes of the gap analysis.
(6) Interest sensitivity gap represents the difference between net interest-
earning assets and interest-bearing liabilities.
55
<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, 1999, 1998, and 1997. 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.
56
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------------------------------
At June 30,
1999 1999 1998 1997
----------- ------------------------- ------------------------- -------------------------
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............... 4.02% $ 363 $ 24 6.61% $ 239 $ 9 3.77% $ 611 $ 20 3.27%
Federal funds sold and
other short-term
investments............ 4.94 22,949 1,006 4.38 17,691 802 4.53 8,583 505 5.88
Investment securities,
net(1)................. 6.40 12,399 858 6.92 24,186 1,608 6.65 37,819 2,503 6.62
Loans receivable(2).... 7.86 764,401 63,207 8.27 665,328 54,793 8.24 631,157 51,411 8.15
Mortgage-backed
securities, net(1)..... 6.70 92,162 6,149 6.67 102,749 6,995 6.81 51,852 3,661 7.06
FHLB stock............. 5.29 11,978 675 5.64 11,001 663 6.03 9,038 568 6.28
-------- ------- -------- ------- -------- -------
Total interest-earning
assets................ 7.54 904,252 71,919 7.95 821,194 64,870 7.90 739,060 58,668 7.94
Non-interest-earning
assets................. 24,961 29,584 21,013
-------- -------- --------
Total assets.......... $929,213 $850,778 $760,073
======== ======== ========
Liabilities and
Stockholders' equity:
Interest-bearing
liabilities:
Money market deposits.. 4.61 $137,473 6,008 4.37 $110,990 5,022 4.52 $ 83,372 3,498 4.20
Passbook deposits...... 1.99 18,298 363 1.98 17,425 351 2.01 17,899 355 1.98
NOW and other demand
deposits............... 1.41 35,219 476 1.35 26,363 336 1.27 24,011 278 1.16
Certificate accounts... 5.16 429,798 22,685 5.28 400,204 22,429 5.60 397,191 22,201 5.59
-------- ------- -------- ------- -------- -------
Total savings accounts. 4.58 620,788 29,532 554,982 28,138 522,473 26,332
FHLB advances.......... 5.59 189,456 10,784 5.69 185,032 10,972 5.93 148,312 8,565 5.77
Securities sold under
agreements
to repurchase.......... -- -- -- -- -- -- -- 72 4 5.56
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities........... 4.84 810,244 40,316 4.97 740,014 39,110 5.29 670,857 34,901 5.20
Non-interest-bearing
liabilities............ 39,283 36,984 20,667
Stockholders' equity... 79,686 73,780 68,549
-------- -------- --------
Total liabilities and
stockholders' equity... $929,213 $850,778 $760,073
======== ------- ======== ------- ======== -------
Net interest rate
spread(3).............. $31,603 2.98% $25,760 2.61% $23,767 2.74%
======= ====== ======= ====== ======= ======
Net interest margin(4). 3.50% 3.14% 3.22%
====== ====== ======
Ratio of interest-
earning assets to
interest-bearing
liabilities............ 111.60% 110.97% 110.17%
====== ====== ======
</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.
57
<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, 1999 Year Ended June 30, 1998
Compared to Compared to
Year Ended June 30, 1998 Year Ended June 30, 1997
--------------------------- ---------------------------
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.............. $ 6 $ 9 $ 15 $ (15) $ 4 $ (11)
Federal funds sold and
other short-term
investments........... 230 (26) 204 379 (82) 297
Investment securities,
net(2)................ (819) 69 (750) (906) 11 (895)
Loans receivable,
net(1), (2)........... 8,191 223 8,414 2,809 573 3,382
Mortgage-backed
securities, net(2).... (709) (137) (846) 3,460 (126) 3,334
FHLB stock............. 45 (33) 12 117 (22) 95
------- -------- ------- -------- ------- --------
Total interest-
earning assets...... 6,944 105 7,049 5,844 358 6,202
------- -------- ------- -------- ------- --------
Interest-bearing
liabilities:
Money market deposits.. 1,151 (165) 986 1,232 292 1,524
Passbook deposits...... 17 (5) 12 (10) 6 (4)
NOW and other demand
deposits.............. 119 21 140 29 29 58
Certificate accounts... 1,204 (948) 256 169 59 228
FHLB advances.......... 278 (466) (188) 2,171 236 2,407
Other borrowings....... -- -- -- (4) -- (4)
------- -------- ------- -------- ------- --------
Total interest-
bearing liabilities. 2,769 (1,563) 1,206 3,587 622 4,209
------- -------- ------- -------- ------- --------
Change in net interest
income................. $ 4,175 $ 1,668 $ 5,843 $ 2,257 $ (264) $ 1,993
======= ======== ======= ======== ======= ========
</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 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
58
<PAGE>
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 $78.0
million in MBS held to maturity were transferred to available for sale. The
Company has accounted for the gains or losses on the sale of any such
reclassified MBS sold within 90 days of the reclassification date as the
cumulative effect of a change in accounting principle. Any gains or losses
recorded on such reclassified securities sold 90 days or more after the
reclassification date have been recorded as gain or losses on sale of
securities available for sale. In the first quarter of 1999, the Company sold
$29.6 million of these reclassified MBS for a gain after tax of $162,000,
which is accounted for as a cumulative effect of a change in accounting
principle in the accompanying consolidated statements of earnings. In the
second quarter of fiscal 1999, the Company sold an additional $32.3 million of
MBS for a pretax gain of $245,000 and an after tax gain of $142,000. The
pretax gain of $245,000 is included as a gain on sale of securities available
for sale in the accompanying consolidated statements of earnings.
In August 1999, the Securities and Exchange Commission (the "SEC") issued
Staff Accounting Bulletin (SAB) No. 99 "Materiality." This bulletin expresses
the views of the SEC that exclusive reliance on certain quantitative
benchmarks to assess materiality in preparing financial statements and
performing audits of those financial statements is inappropriate.
Misstatements are not to be considered immaterial simply because they fall
beneath a numerical threshold. SAB 99 became effective upon issuance and
management does not believe that the implementation of SAB 99 will have a
material effect on the Company's financial condition or results of operations.
59
<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. 13a, "Interest Rate Risk Management." This test
measures the impact on net interest income and on net portfolio value of an
immediate change in interest rates in 100 basis point increments. Net
portfolio value is defined as the net present value of assets, liabilities,
and off-balance sheet contracts. Following are the estimated impacts of
immediate changes in interest rates at the specified levels at June 30, 1999,
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>
+300...................... -5% -33%
+200...................... -3 -18
+100...................... -1 -8
-100...................... 2 14
-200...................... 3 19
-300...................... -2 15
</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.
60
<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, 1999. Market risk sensitive instruments
are generally defined as on- and off-balance sheet derivatives and other
financial instruments.
<TABLE>
<CAPTION>
June 30, 1999
------------------------------------------------------------------------
Weighted
Average Expected Maturity/Principal Repayment
Rate End ------------------------------------------------------------------------
of Total Fair
Period 2000 2001 2002 2003 2004 Thereafter Balance(1) Value(1)
-------- -------- ------- ------- ------- -------- ---------- ---------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Sensitive
Assets:
Interest-earning
deposits.............. 4.02% $ 323 $ -- $ -- $ -- $ -- $ -- $ 323 $ 323
Fed funds sold and
other short-term
investments........... 4.94 25,120 -- -- -- -- -- 25,120 25,120
Loans Receivable:
One-to-four family... 7.60 63,287 55,119 48,583 43,490 39,451 59,415 309,345 313,651
Multifamily and Non-
Residential......... 7.99 54,678 60,778 66,386 71,545 137,148 139,874 530,409 530,239
Other................ 9.56 1,105 920 724 550 404 3,857 7,560 7,458
Mortgage-Backed
Securities............ 6.70 19,163 14,627 11,192 10,908 8,281 35,757 99,928 97,268
Investment Securities.. 6.40 220 226 235 247 2,256 8,802 11,986 11,320
FHLB stock............. 5.29 12,221 -- -- -- -- -- 12,221 12,221
Interest-Sensitive
Liabilities:
Deposits
Money Market
Deposits............ 4.61 109,326 7,583 7,583 5,073 5,073 20,359 154,997 154,997
Passbook Deposits.... 1.99 2,409 2,106 2,107 1,577 1,578 9,417 19,194 19,194
NOW and other demand
deposits............ 1.41 3,427 3,128 3,128 2,575 2,575 24,097 38,930 38,930
Certificate Accounts. 5.16 385,248 51,748 10,115 1,968 3,089 13 452,181 450,794
FHLB Advances.......... 5.59 91,700 65,600 47,800 20,600 9,000 -- 234,700 234,467
Interest-Sensitive Off-
balance sheet items:(2)
Commitments to extend
credit................ 8.02 14,049 61
Loans sold with
recourse (including
bond loans)........... 6.50 10,692 (314)
Unused lines of
credit................ 9.25 21,109 135
</TABLE>
- --------
(1) Loans are reduced for nonperforming loans but are not reduced for the
allowance for loan losses.
(2) Total balance equals the notional amount of off-balance sheet items and
interest rates are the weighted average interest rates of the underlying
loans.
Expected maturities are contractual maturities adjusted for prepayments of
principal. The Company uses certain assumptions to estimate fair values and
expected maturities. For assets, expected maturities are based upon
contractual maturity, projected repayments and prepayments of principal. The
prepayment experience reflected herein is based on the Company's historical
experience. The Company's average Constant Prepayment Rate ("CPR") on its
total fixed-rate portfolio ranges from 10% to 30% and on its adjustable rate
portfolio from 8% to 18% for interest-earning assets (excluding investment
securities, which do not have prepayment features). For deposit liabilities,
in accordance with standard industry practice and the Company's own historical
experience, "decay factors," were used to estimate deposit runoff of 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.
61
<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, 1999 and
1998...................................................................... F-3
Consolidated Statements of Earnings for Each of the Years in the Three-Year
Period Ended June 30, 1999................................................ F-4
Consolidated Statements of Comprehensive Income for Each of the Years in
the Three-Year Period Ended June 30, 1999................................. F-5
Consolidated Statements of Stockholders' Equity for Each of the Years in
the Three-Year Period Ended June 30, 1999................................. F-6
Consolidated Statements of Cash Flows for Each of the Years in the Three-
Year Period Ended June 30, 1999........................................... F-7
Notes to Consolidated Financial Statements................................. F-8
</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. and subsidiaries (the Company) as of
June 30, 1999 and 1998 and the related consolidated statements of earnings,
comprehensive income, stockholders' equity and cash flows for each of the
years in the three-year period ended June 30, 1999. 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, 1999 and 1998 and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 1999 in conformity with generally accepted
accounting principles.
KPMG LLP
July 21, 1999
Los Angeles, California
F-2
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 1999 and 1998
(In thousands, except share data)
<TABLE>
<CAPTION>
1999 1998
ASSETS ---------- -------
<S> <C> <C>
Cash and due from banks................................... $ 7,705 12,687
Interest-bearing deposits................................. 323 345
Federal funds sold and other short-term investments....... 25,120 26,420
Investment securities held to maturity (fair value of
$11,320 at June 30, 1999 and $5,070 at June 30, 1998)
(note 2)................................................. 11,986 5,058
Investment securities available for sale, at fair value
(note 2)................................................. -- 1,819
Loans receivable, net (notes 3 and 9)..................... 821,190 691,026
Loans receivable held for sale (notes 3 and 15)........... 17,028 7,507
Mortgage-backed securities held to maturity (fair value of
$81,485 at June 30, 1999 and $108,705 at June 30, 1998)
(notes 4 and 9).......................................... 84,078 107,577
Mortgage-backed securities available for sale, at fair
value (notes 4 and 9).................................... 15,783 8,274
Real estate held for sale (note 5)........................ 3,138 3,334
Federal Home Loan Bank stock, at cost (notes 6 and 9)..... 12,221 11,561
Office premises and equipment, net (note 7)............... 6,430 5,289
Accrued interest receivable and other assets (notes 2, 3,
4 and 12)................................................ 8,435 6,583
---------- -------
$1,013,437 887,480
========== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (note 8)....................................... $ 677,839 580,910
Federal Home Loan Bank advances (notes 3 and 9)......... 234,700 216,000
Deferred tax liability (note 10)........................ 1,694 2,505
Accounts payable and accrued expenses .................. 4,612 3,864
Other liabilities (notes 8 and 10)...................... 13,288 6,942
---------- -------
Total liabilities..................................... 932,133 810,221
---------- -------
Stockholders' Equity (notes 11 and 13):
Common stock, $.01 par value. Authorized 20,000,000
shares; issued and outstanding 5,457,107 shares and
5,826,888 shares at June 30, 1999 and 1998,
respectively........................................... 55 58
Additional paid-in capital.............................. 72,681 73,720
Accumulated other comprehensive income (notes 2 and 4).. 33 390
Retained earnings, substantially restricted (note 10)... 9,855 4,779
Deferred compensation (notes 12 and 13)................. (1,320) (1,688)
---------- -------
Total stockholders' equity............................ 81,304 77,259
Commitments and contingent liabilities (notes 3 and 14)
---------- -------
$1,013,437 887,480
========== =======
</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, 1999, 1998 and 1997
(In thousands, except share data)
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Interest income:
Loans receivable............................. $ 63,207 54,793 51,411
Mortgage-backed securities................... 6,149 6,995 3,661
Investment securities........................ 858 1,608 2,503
Other........................................ 1,705 1,474 1,093
--------- --------- ---------
Total interest income...................... 71,919 64,870 58,668
--------- --------- ---------
Interest expense:
Deposits (note 8)............................ 29,532 28,138 26,332
Federal Home Loan Bank advances and other
borrowings.................................. 10,784 10,972 8,569
--------- --------- ---------
Total interest expense..................... 40,316 39,110 34,901
--------- --------- ---------
Net interest income before provision for
loan losses............................... 31,603 25,760 23,767
Provision for loan losses (note 3)............. 1,700 1,450 3,001
--------- --------- ---------
Net interest income after provision for
loan losses............................... 29,903 24,310 20,766
--------- --------- ---------
Other income:
Loan servicing charges and deposit fees...... 2,796 2,402 1,828
Gain on sale of loans held for sale.......... 332 175 356
Commissions.................................. 716 735 555
Gain on sale of securities available for
sale........................................ 616 -- --
Other........................................ 169 16 30
--------- --------- ---------
4,629 3,328 2,769
--------- --------- ---------
Other expense:
Compensation and employee benefits (notes 12
and 13)..................................... 9,459 8,375 7,829
Occupancy, net............................... 2,308 1,945 1,946
Federal deposit insurance premiums........... 527 517 855
Data processing.............................. 853 730 707
Advertising and promotional.................. 1,007 924 573
Consulting fees.............................. 787 471 437
Other general and administrative expense..... 2,264 2,139 2,026
--------- --------- ---------
Total general and administrative expense... 17,205 15,101 14,373
Savings Association Insurance Fund special
assessment.................................. -- -- 3,100
Real estate operations, net (note 5)......... 320 595 775
Amortization of core deposit intangible...... -- 35 264
--------- --------- ---------
Total other expense........................ 17,525 15,731 18,512
--------- --------- ---------
Earnings before income taxes, extraordinary
items and cumulative effect of change in
accounting principle...................... 17,007 11,907 5,023
Income taxes (note 10)......................... 7,464 5,297 2,203
--------- --------- ---------
Net earnings before extraordinary item and
cumulative effect of change in accounting
principle..................................... 9,543 6,610 2,820
Extraordinary item, net of taxes (note 9)...... (61) -- --
Cumulative effect of change in accounting
principle, net of taxes (note 1).............. 162 -- --
--------- --------- ---------
Net earnings............................... $ 9,644 6,610 2,820
========= ========= =========
Basic earnings per share (note 11)............. $ 1.79 1.21 0.51
========= ========= =========
Diluted earnings per share (note 11)........... $ 1.70 1.14 0.49
========= ========= =========
Weighted average basic shares outstanding...... 5,392,564 5,469,646 5,509,836
Weighted average diluted shares outstanding.... 5,660,351 5,795,480 5,792,344
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended June 30, 1999, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
------ ----- -----
<S> <C> <C> <C>
Net earnings............................................... $9,644 6,610 2,820
------ ----- -----
Other comprehensive income:
Unrealized holding gain (loss) on securities available
for sale arising during the period, net of taxes of
$(624), $178 and $96 for the years ended June 30, 1999,
1998 and 1997, respectively............................. (879) 254 136
Less: realized gain included in net earnings and
previously included in other comprehensive income, net
of taxes of $(370) for the year ended June 30, 1999..... (522) -- --
------ ----- -----
Increase (decrease) in accumulated other comprehensive
income, net of tax........................................ (357) 254 136
------ ----- -----
Total comprehensive income............................. $9,287 6,864 2,956
====== ===== =====
</TABLE>
F-5
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended June 30, 1999, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
Accumulated Retained
Additional other earnings,
Common paid-in comprehensive substantially Deferred
Shares stock capital income restricted compensation Total
------ ------ ---------- ------------- ------------- ------------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
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
options................ 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
Net earnings............ -- -- -- -- 9,644 -- 9,644
Repurchase and
retirement of stock.... (418) (3) (1,995) -- (4,568) -- (6,566)
Exercise of stock
options................ 48 -- 231 -- -- -- 231
Unrealized loss on
securities available
for sale, net of tax... -- -- -- (357) -- -- (357)
Deferred compensation
amortized to expense... -- -- 725 -- -- 368 1,093
----- --- ------ ---- ------- ------ ------
Balance, June 30, 1999.. 5,457 $55 72,681 33 9,855 (1,320) 81,304
===== === ====== ==== ======= ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 1999, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings................................... $ 9,644 6,610 2,820
-------- -------- ---------
Adjustments to reconcile net earnings to net
cash provided (used) by operating activities:
Cumulative effect of change in accounting
principle, net of taxes..................... (162) -- --
Depreciation and amortization................ (1,574) 293 (14)
Provision for loan losses.................... 1,700 1,450 3,001
Write-downs on real estate held for sale..... 241 251 491
Provision for deferred income taxes.......... (565) 913 143
Gain on sale of real estate held for sale.... (394) (176) (385)
Gain on sale of loans held for sale.......... (332) (175) (356)
Gain on sale of securities available for
sale........................................ (616) -- --
Loans originated for sale.................... (73,674) (41,321) (31,598)
Sale of loans held for sale.................. 63,996 34,324 33,870
Federal Home Loan Bank (FHLB) stock dividend
received.................................... (660) (633) (513)
(Increase) decrease in accrued interest
receivable and other assets................. (1,852) 370 (223)
Increase (decrease) in other liabilities..... 6,346 (8,375) 10,319
Increase in accounts payable and accrued
expenses.................................... 748 321 673
Other........................................ 1,013 1,962 529
-------- -------- ---------
Total adjustments.......................... (5,785) (10,796) 15,937
-------- -------- ---------
Net cash provided (used) by operating
activities................................ 3,859 (4,186) 18,757
-------- -------- ---------
Cash flows from investing activities:
Loans originated for investment................ (198,296) (95,253) (83,408)
Loans purchased for investment................. (78,075) (48,112) (12,521)
Principal repayments on loans.................. 145,612 91,846 54,465
Sale of investment securities available for
sale.......................................... 1,558 -- --
Purchases of investment securities available
for sale...................................... - -- (1,199)
Purchases of investment securities held to
maturity...................................... (15,985) -- (7,996)
Maturities and principal repayments of
investment securities held to maturity........ 9,070 31,610 8,784
Sale of MBS available for sale................. 61,989 -- --
Purchases of MBS available for sale............ -- (8,237) --
Principal repayments of MBS available for
sale.......................................... 8,804 -- --
Purchases of MBS held to maturity.............. (70,624) (63,530) (40,228)
Principal repayments on MBS held to maturity .. 16,208 29,595 7,305
Sale of real estate held for sale.............. 2,429 3,545 3,653
Purchase of FHLB stock......................... -- (1,210) (1,054)
Investment in office premises and equipment.... (2,147) (1,923) (849)
-------- -------- ---------
Net cash used by investing activities...... (119,457) (61,669) (73,048)
-------- -------- ---------
Cash flows from financing activities:
Increase in deposits........................... 96,929 27,724 40,669
Proceeds from funding of FHLB advances......... 325,700 382,700 370,000
Repayments of FHLB advances.................... (307,000) (324,400) (347,600)
Repayments of securities sold under agreement
to repurchase................................. -- -- (300)
Repurchase and retirement of stock............. (6,566) (1,157) (2,270)
Common stock options exercised................. 231 87 577
-------- -------- ---------
Net cash provided by financing activities.. 109,294 84,954 61,076
-------- -------- ---------
Increase (decrease) in cash and cash
equivalents............................... (6,304) 19,099 6,785
Cash and cash equivalents at beginning of year.. 39,452 20,353 13,568
-------- -------- ---------
Cash and cash equivalents at end of year........ $ 33,148 $ 39,452 20,353
======== ======== =========
Supplemental disclosures of cash flow
information:
Interest paid (including interest credited).... $ 40,405 $ 38,604 34,454
Cash paid for income taxes..................... 9,650 5,295 621
======== ======== =========
Supplemental schedule of noncash investing and
financing activities:
Additions to loans resulting from the sale of
real estate acquired through foreclosure $ 1,205 1,365 4,847
Additions to real estate acquired through
foreclosure................................... 3,286 6,239 8,313
Reclassification of MBS from held to maturity
to available for sale......................... 77,961 -- --
======== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
(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, 1999, 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-8
<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 MBS and
investment securities available for sale are amortized utilizing the interest
method over the contractual terms of the assets. Loans held for sale are
carried at the lower of amortized historical cost or fair value as determined
on an aggregate basis. Assets held for indefinite periods of time include
assets that management intends to use as part of its asset/liability
management strategy and that may be sold in response to changes in interest
rates, resultant prepayment risk and other factors.
Assets Held to Maturity
Loans, MBS and investment securities, excluding those held or available for
sale, are carried at amortized historical cost, adjusted for amortization of
premiums and discounts utilizing the interest method over the contractual
terms of the assets. The carrying value of these assets is not adjusted for
F-9
<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-10
<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 loss is charged to the valuation allowance.
Loan Sales and Servicing
The Company sells loans and participations in loans with yield rates to the
investors based upon current market rates. Gain or loss on the sale of loans
is recognized to the extent that the selling prices differ from the carrying
value of the loans sold based on the estimated relative fair values of the
assets sold and any retained interests, less any liabilities incurred. The
assets obtained on sale are generally loan servicing assets. Liabilities
incurred in a sale may include recourse obligations or servicing liabilities.
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
The Company reports both basic and diluted earnings per share. Basic
earnings per share is determined by dividing net income by the average number
of shares of common stock outstanding, while diluted earnings per share is
determined by dividing net income by the average number of shares of common
stock outstanding adjusted for the dilutive effect of common stock
equivalents. Earnings per share for 1997 have been restated to conform with
the provisions of SFAS No. 128, "Earnings Per Share." Earnings per share have
been adjusted to reflect the 25% stock dividends distributed to stockholders
in May 1997 and June 1998.
F-11
<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
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), the intrinsic value method, to account for stock based
compensation. In accordance with the SFAS No. 123, "Accounting for Stock Based
Compensation", the Company includes pro forma disclosures reflecting the
impact of the fair value method on net earnings and earnings per share for
stock options granted.
Segments Information and Disclosures
On July 1, 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
standards to report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim reports to stockholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. SFAS No. 131 is effective for financial statement periods beginning
after December 15, 1997, with comparative information for earlier years to be
restated. The Company concluded it has one segment. Accordingly, the adoption
of SFAS No. 131 did not have a material effect on the consolidated financial
statements or disclosures.
Other Recent Accounting Pronouncements
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 $78.0
million in MBS were transferred to available for sale. The Company has
accounted for the gains or losses on the sale of any such reclassified MBS
sold within 90 days of the reclassification date as the cumulative effect of a
change in accounting principle. Any gains or losses recorded on such
reclassified securities sold 90 days or more after the reclassification date
have been
F-12
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
recorded as gain or losses on sale of securities available for sale. In the
first quarter of 1999, the Company sold $29.6 million of these reclassified
MBS for a nonrecurring gain after tax of $162,000, which is accounted for as a
cumulative effect of a change in accounting principle in the accompanying
consolidated statements of earnings. In the second quarter of fiscal 1999, the
Company sold an additional $32.3 million of MBS for a pretax gain of $245,000
and an after tax gain of $142,000. The pretax gain of $245,000 is included as
a gain on sale of securities available for sale in the accompanying
consolidated statements of earnings.
In August 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 99, "Materiality." This bulletin expresses the
views of the SEC that exclusive reliance on certain quantitative benchmarks to
assess materiality in preparing financial statements and performing audits of
those financial statements is inappropriate. Misstatements are not to be
considered immaterial simply because they fall beneath a numerical threshold.
SAB 99 became effective upon issuance and management does not believe that the
implementation of SAB 99 will have a material effect on the Company's
financial condition or results of operations.
(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, 1999:
Held to maturity:
U.S. Government and Federal
agency obligations............. $11,986 -- (666) 11,320
------- --- ---- ------
Total......................... $11,986 -- (666) 11,320
======= === ==== ======
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
======= === ==== ======
</TABLE>
At June 30, 1999 and 1998, the Company had accrued interest receivable on
investment securities of $212,000 and $94,000, 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 $1.6
million during 1999. There were gross gains of $371,000 realized during 1999.
There were no sales of investment securities available for sale in 1998 and
1997. There were no gross gains or losses realized during 1998 and 1997.
F-13
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The contractual principal maturities for investment securities held to
maturity as of June 30, 1999 are as follows:
<TABLE>
<CAPTION>
Contractual principal maturity
----------------------------------------
Maturing
1 year Maturing Maturing
to 5 5 years to after
Total years 10 years 10 years
------- -------- ---------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
U.S. Government and Federal agency
obligations...................... $11,986 2,000 1,995 7,991
------- ----- ----- ----- ---
Total....................... $11,986 2,000 1,995 7,991
======= ===== ===== =====
</TABLE>
(3) Loans Receivable, Net
The following table presents carrying values of loans receivable at the
dates indicated:
<TABLE>
<CAPTION>
June 30
----------------
1999 1998
-------- -------
(In thousands)
<S> <C> <C>
Real estate:
Residential:
One to four units....................................... $312,407 279,862
Multifamily............................................. 391,596 347,285
Commercial and land....................................... 140,783 78,158
-------- -------
844,786 705,305
Other....................................................... 7,730 7,544
-------- -------
852,516 712,849
Less:
Undisbursed loan funds.................................... 684 579
Unamortized discounts..................................... 1,078 2,170
Deferred loan fees, net................................... 3,852 3,612
Allowance for loan losses................................. 8,684 7,955
-------- -------
838,218 698,533
-------- -------
Less:
Held for sale:
One to four units....................................... 353 1,043
Multifamily............................................. 7,234 6,464
Commercial.............................................. 9,441 --
-------- -------
17,028 7,507
-------- -------
Held to maturity...................................... $821,190 691,026
======== =======
</TABLE>
The weighted average interest rate on the Company's loan portfolio was 7.86%
and 8.16% at June 30, 1999 and 1998, respectively.
Certain mortgage loans aggregating $370.7 million and $198.4 million at June
30, 1999 and 1998, respectively, are collateral for FHLB advances.
F-14
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At June 30, 1999 and 1998, the Association had loans with an outstanding
balance of $10.3 million and $10.5 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 $370,000 and $509,000 at June 30, 1999 and 1998, respectively.
At June 30, 1999 and 1998, the Association had accrued interest receivable
on loans of $5.0 million and $4.3 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 $284.2 million, $276.4
million and $227.9 million at June 30, 1999, 1998 and 1997, respectively.
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
June 30
-----------------------
1999 1998 1997
------- ------ ------
(In thousands)
<S> <C> <C> <C>
Allowances for loan losses:
Balance at beginning of year...................... $ 7,955 7,772 7,833
Provision for loan losses......................... 1,700 1,450 3,001
Allowance of portfolios acquired.................. 164 -- --
Charge-offs, net.................................. (1,135) (1,267) (3,062)
------- ------ ------
Balance at end of year............................ $ 8,684 7,955 7,772
======= ====== ======
</TABLE>
Credit Risk and Concentration
At June 30, 1999 and 1998, the balances of nonaccrual loans totaled $5.0
million and $6.9 million, respectively, net of specific allowances of $68,000
and $945,000. The Company's nonaccrual policy requires that loans be placed on
nonaccrual status after being delinquent 60 days or earlier if warranted.
There were no accruing loans contractually past due 60 days or more at
June 30, 1999 and 1998.
The gross amount of interest income on nonaccrual loans that would have been
recorded during the years ended June 30, 1999, 1998 and 1997 if the nonaccrual
loans had been current in accordance with their original terms was $424,000,
$640,000 and $782,000, respectively. For the years ended June 30, 1999, 1998
and 1997, $295,000, $399,000 and $469,000, respectively, were actually earned
on nonaccrual loans and are included in interest income on loans in the
accompanying consolidated statements of earnings. Interest income earned on
nonaccrual loans is generally recorded utilizing the cash-basis method of
accounting.
The Company's real estate loans are predominantly secured by properties
located in Southern California.
Impaired Loans
At June 30, 1999 and 1998, the Company had a gross investment in impaired
loans of $3.5 million and $8.1 million, respectively. During the year ended
June 30, 1999, 1998 and 1997, the Company's
F-15
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
average investment in impaired loans was $5.9 million, $8.2 million and $8.2
million, respectively, and for the years then ended, interest income on such
loans totaled $531,000, $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
$1.7 million and $3.4 million were not performing in accordance with their
contractual terms at June 30, 1999 and 1998 and have been included in
nonaccrual loans at that date.
Impaired loans at June 30, 1999 included $1.0 million of loans for which
specific valuation allowances of $155,000 had been established and $2.5
million of loans for which no specific valuation allowance was considered
necessary. At June 30, 1998, the Company had $6.0 million of impaired loans
for which specific valuation allowances of $1.2 million had been established
and $2.1 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, 1999
---------------------------------------
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... $ 62,087 -- (1,578) 60,509
Issued by other financial
institutions..................... 2,186 -- (3) 2,183
Collateralized mortgage
obligations...................... 19,805 -- (1,012) 18,793
-------- ----- ------ -------
$ 84,078 -- (2,593) 81,485
Available for sale:
GNMA, FNMA and FHLMC securities... 5,653 129 -- 5,782
Collateralized mortgage
obligations...................... 10,073 -- (72) 10,001
-------- ----- ------ -------
15,726 129 (72) 15,783
-------- ----- ------ -------
Total............................ $ 99,804 129 (2,665) 97,268
======== ===== ====== =======
<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
======== ===== ====== =======
</TABLE>
F-16
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<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>
The contractual principal maturities for MBS as of June 30, 1999, are as
follows:
<TABLE>
<CAPTION>
Contractual principal
maturity
-------------------------
Maturity Maturity
within after
Total 1 year 10 years
------- -------- --------
(In thousands)
<S> <C> <C> <C>
GNMA, FNMA and FHLMC securities.................... $67,740 -- 67,740
Issued by other financial institutions............. 2,186 411 1,775
Collateralized mortgage obligations................ 29,878 -- 29,878
------- --- ------
Total............................................ $99,804 411 99,393
======= === ======
</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.
Proceeds from sales of mortgage-backed securities available for sale were
$62.0 million during 1999. There were gross gains of $245,000 realized during
1999. There were no sales of mortgage-backed securities available for sale in
1998 and 1997. There were no gross gains or losses realized during 1998 and
1997.
The collateralized mortgage obligations held at June 30, 1999 and 1998
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
$527,000 and $673,000 at June 30, 1999 and 1998, respectively, which is
included in accrued interest receivable and other assets in the accompanying
consolidated statements of financial condition.
(5) Real Estate Held for Sale
The following is a summary of real estate held for sale, net of valuation
allowances:
<TABLE>
<CAPTION>
June 30
------------
1999 1998
------ -----
(In
thousands)
<S> <C> <C>
Acquired through foreclosure................................... $2,340 2,678
Held for development........................................... 798 831
Valuation allowance............................................ -- (175)
------ -----
$3,138 3,334
====== =====
</TABLE>
F-17
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Changes in the valuation allowance on real estate held for sale are
summarized as follows:
<TABLE>
<CAPTION>
June 30
----------------
1999 1998 1997
----- ---- ----
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year................................ $ 175 175 175
Charge-offs................................................. (175) -- --
----- --- ---
Balance at end of year...................................... $ -- 175 175
===== === ===
</TABLE>
The following table summarizes real estate operations, net:
<TABLE>
<CAPTION>
June 30
-----------------
1999 1998 1997
----- ---- ----
(In thousands)
<S> <C> <C> <C>
Net (income) loss from operations:
Real estate held for development........................ $ 14 (50) 8
Gain on sale of foreclosed real estate owned............ (394) (176) (385)
Losses on operations of foreclosed real estate owned.... 459 570 661
----- ---- ----
79 344 284
Write-downs............................................... 241 251 491
----- ---- ----
Real estate operations, net........................... $ 320 595 775
===== ==== ====
</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, 1999 and 1998 of $12.2 million and $11.6
million, respectively. FHLB stock is recorded at historical cost.
(7) Office Premises and Equipment
The following is a summary of office premises and equipment, net:
<TABLE>
<CAPTION>
June 30
--------------
1999 1998
------- ------
(In thousands)
<S> <C> <C>
Land.......................................................... $ 1,450 720
Buildings and leasehold improvements.......................... 7,757 6,933
Furniture, fixtures and equipment............................. 4,822 5,451
------- ------
14,029 13,104
Less accumulated depreciation and amortization................ 7,599 7,815
------- ------
$ 6,430 5,289
======= ======
</TABLE>
F-18
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company recorded depreciation and amortization expense on premises,
equipment and leasehold improvements of $1.0 million, $846,000 and $805,000
during 1999, 1998 and 1997, respectively.
(8) Deposits
The following is a summary of deposits:
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
----------------- -----------------
Weighted Weighted
average average
rate Amount rate Amount
-------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Money market deposits.................... 4.61% $154,997 4.56% $116,412
Passbook deposits........................ 1.99 19,194 2.14 18,411
NOW and other demand deposits............ 1.41 38,930 1.63 34,684
Non-interest bearing demand deposits..... -- 12,537 -- 10,263
Certificates of deposit:
3 months or less....................... 5.09 134,806 5.41 103,242
Over 3 through 6 months................ 4.75 66,606 5.37 97,379
Over 6 through 12 months............... 5.22 183,836 5.45 115,628
Over 12 months......................... 5.53 66,933 5.98 84,891
-------- --------
4.58 $677,839 4.90 $580,910
==== ======== ==== ========
</TABLE>
The weighted average interest rates are at the end of the period and are
based upon stated interest rates without giving consideration to daily
compounding of interest or forfeiture of interest because of premature
withdrawal.
Certificates of deposit of $100,000 or more accounted for $99.6 million and
$82.1 million of deposits at June 30, 1999 and 1998 respectively.
At June 30, 1999 and 1998, the Company had accrued interest payable on
deposits of $196,000 and $184,000, respectively, which is included in other
liabilities in the accompanying consolidated statements of financial
condition.
Deposits at June 30, 1999 mature as follows (in thousands):
<TABLE>
<S> <C>
Immediately withdrawable........................................... $225,658
Year ending June 30:
2000............................................................. 385,248
2001............................................................. 51,748
2002............................................................. 10,115
2003............................................................. 1,968
2004 and thereafter.............................................. 3,102
--------
$677,839
========
</TABLE>
F-19
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Interest expense by type of deposit account is summarized in the following
table for the periods indicated:
<TABLE>
<CAPTION>
Year ended June 30
---------------------
1999 1998 1997
------- ------ ------
(In thousands)
<S> <C> <C> <C>
Money market deposits.................................. $ 6,008 5,022 3,498
Passbook deposits...................................... 363 351 355
NOW and other demand deposits.......................... 476 336 278
Certificates of deposit................................ 22,685 22,429 22,201
------- ------ ------
$29,532 28,138 26,332
======= ====== ======
</TABLE>
(9) Federal Home Loan Bank Advances
Federal Home Loan Bank (FHLB) advances are summarized as follows:
<TABLE>
<CAPTION>
June 30
------------------
1999 1998
--------- -------
(In thousands)
<S> <C> <C>
FHLB advances, due at various dates through 2009, with
interest rates from 4.70% to 6.62% and a weighted
average rate of 5.59% at June 30, 1999 and from 5.36%
to 6.62% and a weighted average rate of 5.86% at June
30, 1998............................................. $234,700 216,000
========= =======
</TABLE>
These advances are secured by the Association's stock in the FHLB, certain
MBS and certain mortgage loans aggregating $370.7 million and $198.4 million
at June 30, 1999 and 1998, respectively. At June 30, 1999, the amount of
additional credit available from the FHLB was $116.0 million.
The maturities of FHLB advances are as follows (in thousands):
<TABLE>
<S> <C>
Year ending June 30:
2000.............................. $ 65,900
2001.............................. 52,900
2002.............................. 48,300
2003.............................. 43,600
2004 and thereafter............... 24,000
--------
$234,700
========
</TABLE>
During the fiscal year ended June 30, 1999, the Company prepaid
approximately $8.0 million of its higher cost borrowings and replaced the
funds with less expensive borrowings and retail deposits. In association with
the debt prepayment, the Company paid a prepayment fee of $61,000, after tax.
The prepayment fee is disclosed as an extraordinary item on the accompanying
consolidated statements of earnings.
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, 1999, 1998 and 1997 are
comprised of the following:
<TABLE>
<CAPTION>
Federal State Total
------- ----- -----
(In thousands)
<S> <C> <C> <C>
Year ended June 30, 1999:
Current............................................. $6,051 1,948 7,999
Deferred............................................ (582) 47 (535)
------ ----- -----
$5,469 1,995 7,464
====== ===== =====
Year ended June 30, 1998:
Current............................................. $3,606 778 4,384
Deferred............................................ 209 704 913
------ ----- -----
$3,815 1,482 5,297
====== ===== =====
Year ended June 30, 1997:
Current............................................. $1,551 509 2,060
Deferred............................................ 74 69 143
------ ----- -----
$1,625 578 2,203
====== ===== =====
</TABLE>
A reconciliation from expected Federal income taxes to consolidated
effective income taxes for the periods indicated follows. The statutory
Federal income tax rates for June 30, 1999, 1998 and 1997 were 35%, 34% and
34%, respectively.
<TABLE>
<CAPTION>
Year ended June 30
-------------------
1999 1998 1997
------ ----- -----
(In thousands)
<S> <C> <C> <C>
Expected Federal income taxes.......................... $5,952 4,048 1,708
Increases (decreases) in computed tax resulting from:
State taxes, net of Federal benefit.................. 1,297 978 381
Fair value of ESOP shares over cost.................. 254 271 138
Other, net........................................... (39) -- (24)
------ ----- -----
$7,464 5,297 2,203
====== ===== =====
</TABLE>
The Association's tax bad debt reserve balance of approximately
$10.9 million as of June 30, 1999, 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 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 $3.8 million has not been recorded.
F-21
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June 30,
1999 and 1998 are presented below:
<TABLE>
<CAPTION>
1999 1998
------- ------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Loan valuation allowances................................. $ 2,610 1,794
State income taxes........................................ 1,064 593
Deferred compensation..................................... 880 786
Amortization of core deposit.............................. 325 379
Accelerated depreciation.................................. 212 61
------- ------
Total gross deferred tax assets......................... 5,091 3,613
------- ------
Deferred tax liabilities:
Accrued interest income................................... (1,449) (1,074)
Deferred loan fees........................................ (3,124) (2,938)
FHLB stock dividends...................................... (2,135) (1,804)
Unrealized gains on securities available for sale......... (26) (302)
Other..................................................... (51) --
------- ------
Total gross deferred tax liabilities.................... (6,785) (6,118)
------- ------
Net deferred tax liability.............................. $(1,694) (2,505)
======= ======
</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, 1999 and 1998.
Included in other assets are current taxes receivable of $1.4 million and
none at June 30, 1999 and 1998, respectively.
Included in other liabilities are current taxes payable of $585,000 and
$716,000 at June 30, 1999 and 1998, respectively.
F-22
<PAGE>
(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, 1999, as shown in the
following table:
<TABLE>
<CAPTION>
Tangible capital Core capital Risk-based capital
------------------ ------------------ ------------------
Amount Percentage Amount Percentage Amount Percentage
------- ---------- ------- ---------- ------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Actual............. $75,297 7.48% $75,297 7.48% $83,516 12.26%
Required........... 15,100 1.50 40,267 4.00 54,508 8.00
------- ---- ------- ---- ------- -----
Excess............. $60,197 5.98% $35,030 3.48% $29,008 4.26%
======= ==== ======= ==== ======= =====
</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, 1999
and 1998:
<TABLE>
<CAPTION>
Total Core Core
Capital Capital Capital
to Risk- to Risk- to Adjusted
Tangible Weighted Weighted Total
Capital category Capital Ratio Assets Assets Assets
---------------- ----------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Well-capitalized........... N/A 110% 16% 15%
Adequately capitalized..... N/A 18% 14% 14%
Undercapitalized........... N/A (less than or=)8% (less than or=)4% (less than or=)4%
Significantly
undercapitalized.......... N/A (less than or=)6% (less than or=)3% (less than or=)3%
Critically
undercapitalized.......... (less than or =)2% N/A N/A N/A
Association at June 30,
1999...................... 7.48% 12.26% 11.05% 7.48%
================= =============== ================ ================
Association at June 30,
1998...................... 7.44% 12.97% 11.84% 7.44%
================= =============== ================ ================
</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, 1999 and 1998, the Association was a well-capitalized institution.
There are no conditions or events that management believes has changed the
institution's category under the capital guidelines.
Dividends
Savings association subsidiaries of holding companies generally are required
to provide their OTS District Director not less than 30 days' advance notice
of any proposed declaration of a dividend on the association's stock. Under
regulations adopted by the OTS, the insured institution's ability to declare
and pay a dividend to its holding company is subject to certain limitations.
The regulation establishes a three-tiered system of regulation, with the
greatest flexibility being afforded to well-capitalized associations. The
Association is considered a well-capitalized institution for purposes of
dividend declarations. No dividends were declared or paid by the Association
in 1999 or 1998.
F-23
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Earnings Per Share
The following is the reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations for the years as indicated:
<TABLE>
<CAPTION>
For the Year Ended For the Year Ended For the Year Ended
June 30, 1999 June 30, 1998 June 30, 1997
-------------------------------- -------------------------------- --------------------------------
Per- Per- Per-
Earnings Shares Share Earnings Shares Share Earnings Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------ ----------- ------------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS
Net earnings before
extraordinary item
and cumulative
effect of change in
accounting
principle.......... $9,543 5,392,564 $1.77 $6,610 5,469,646 $1.21 $2,820 5,509,836 $0.51
Extraordinary item,
net of taxes....... (61) -- (0.01) -- -- -- -- -- --
Cumulative effect of
change in
accounting
principle, net of
taxes.............. 162 -- 0.03 -- -- -- -- -- --
------ --------- ----- ------ --------- ----- ------ --------- -----
Earnings available
to common
stockholders....... $9,644 5,392,564 $1.79 $6,610 5,469,646 $1.21 $2,820 5,509,836 $0.51
====== ========= ===== ====== ========= ===== ====== ========= =====
Diluted EPS
Net earnings before
extraordinary item
and cumulative
effect of change in
accounting
principle.......... $9,543 5,392,564 $1.79 $6,610 5,469,646 $1.21 $2,820 5,509,836 $0.51
------ --------- ----- ------ --------- ----- ------ --------- -----
Options-common stock
equivalents........ 267,787 325,834 282,508
--------- --------- ---------
Earnings available
to common
stockholders plus
assumed conversions
before
extraordinary item
and cumulative
effect of change in
accounting
principle.......... 9,543 5,660,351 1.68 6,610 5,795,480 1.14 2,820 5,792,344 0.49
------ --------- ----- ------ --------- ----- ------ --------- -----
Extraordinary item,
net of taxes....... (61) -- (0.01) -- -- -- -- -- --
Cumulative effect of
change in account-
ing principle, net
of taxes........... 162 -- 0.03 -- -- -- -- -- --
------ --------- ----- ------ --------- ----- ------ --------- -----
Earnings available
to common stock-
holders plus as-
sumed conversions.. $9,644 5,660,351 $1.70 $6,610 5,795,480 $1.14 $2,820 5,792,344 $0.49
====== ========= ===== ====== ========= ===== ====== ========= =====
</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
-------------
1999 1998
------ -----
(In thousands)
<S> <C> <C>
Change in Benefit Obligation
Projected benefit obligation, beginning of year............... $3,796 2,829
Interest cost................................................. 206 209
Benefits paid................................................. (204) (119)
Actuarial (gain) loss......................................... (178) 877
------ -----
Projected benefit obligation, end of year..................... 3,620 3,796
------ -----
Change in Plan Assets
Fair value of plan assets, beginning of year.................. 3,402 2,703
Actual return on plan assets.................................. (174) 720
Employer contribution......................................... -- 98
Benefits paid................................................. (204) (119)
------ -----
Fair value of plan assets, end of year........................ 3,024 3,402
------ -----
Funded Status
Unrecognized transition asset................................. (5) (6)
Unrecognized prior service cost............................... (94) (128)
Unrecognized loss............................................. 779 700
------ -----
Net amount recognized......................................... $ 84 172
====== =====
Components of Net Periodic Benefit Cost
Interest cost................................................. $ 206 209
Expected return on plan assets................................ (184) (191)
Amortization of unrecognized transition obligation............ (1) (1)
Amortization of unrecognized prior service cost............... (34) (34)
Amortization of unrecognized loss............................. 101 58
------ -----
Net periodic benefit cost .................................... $ 88 41
====== =====
Accumulated Benefit Obligation, end of year................... $3,234 3,379
====== =====
Amounts Recognized in Statement of Financial Condition
Prepaid benefit cost.......................................... $ -- 172
Accrued benefit liability..................................... (210) --
Accumulated comprehensive income.............................. 294 --
------ -----
Net amount recognized......................................... $ 84 172
====== =====
</TABLE>
F-25
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The weighted average discount rates used in determining the actuarial
present value of the benefit obligations were 6.00% as of June 30, 1999 and
5.50% as of June 30, 1998. The salary increase assumption was 4.00% as of June
30, 1999 and 1998, respectively.
Supplemental Executive Retirement Plan
The Association has a supplemental executive defined benefit pension plan
covering specified employees. The benefits are based on employee compensation
and length of service and are offset by benefits provided by Social Security
and the Company's other qualified retirement plans.
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
-----------
1999 1998
----- ----
(In thousands)
<S> <C> <C>
Change in Benefit Obligation
Projected benefit obligation, beginning of year................. $ 743 491
Service cost.................................................... 79 51
Interest cost................................................... 48 37
Actuarial loss.................................................. 2 164
----- ----
Projected benefit obligation, end of year....................... 872 743
----- ----
Funded Status
Unrecognized prior service cost................................. 256 304
Unrecognized gain............................................... (259) (280)
----- ----
Net amount recognized........................................... $(875) (719)
===== ====
Components of Net Periodic Benefit Cost
Service cost.................................................... $ 79 51
Interest cost................................................... 48 37
Amortization of unrecognized prior service cost................. 47 47
Amortization of unrecognized gain............................... (19) (27)
----- ----
Net periodic benefit cost....................................... $ 155 108
===== ====
Accumulated Benefit Obligation, end of year..................... $ 413 300
===== ====
Amounts Recognized in Statement of Financial Condition
Accrued benefit liability....................................... $(874) (719)
----- ----
Net amount recognized........................................... $(874) (719)
===== ====
</TABLE>
The weighted average discount rates used in determining the actuarial
present value of the benefit obligations were 7.25% as of June 30, 1999 and
6.50% as of June 30, 1998. The salary increase assumption was 6.00% as of June
30, 1999 and 1998.
Employee Stock Ownership Plan (ESOP)
The Company has established an ESOP for all employees who are age 21 or
older and have completed one year of service with the Association during which
they have served a minimum of
F-26
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1,000 hours. The ESOP is internally leveraged and borrowed $3.1 million from
the Company to purchase 10% of the outstanding shares of the common stock of
Quaker City Bancorp, Inc. issued in the original conversion to common stock
ownership. The loan will be repaid principally from the Association's
discretionary contributions to the ESOP over a period of 10 years. At June 30,
1999 and 1998, the outstanding balance on the loan was $1.3 million and $1.6
million, respectively. Shares purchased with the loan proceeds are held in a
suspense account for allocation among participants as the loan is repaid.
Contributions to the ESOP and shares released from the suspense account are
allocated among participants on the basis of compensation, as described in the
plan, in the year of allocation. Benefits generally become 100% vested after
five years of credited service. Vesting will accelerate upon retirement, death
or disability of the participant or in the event of a change in control of the
Association or the Company. Forfeitures will be reallocated among remaining
participating employees, in the same proportion as contributions. Benefits may
be payable upon death, retirement, early retirement, disability or separation
from service. Since the annual contributions are discretionary, the benefits
payable under the ESOP cannot be estimated. The Company accounts for its ESOP
in accordance with Statement of Position 93-6. Accordingly, the Company
reports compensation expense equal to the fair value of the shares allocated,
and the allocated shares are considered outstanding for the computation of
earnings per share. The expense related to the ESOP totaled $1.0 million,
$1.1 million and $715,000 for the fiscal years ended June 30, 1999, 1998 and
1997, respectively. At June 30, 1999 and 1998, unearned compensation related
to the ESOP approximated $1.3 million and $1.6 million, respectively, and is
shown as a reduction of stockholders' equity in the accompanying consolidated
statements of financial condition.
The table below reflects ESOP activity for the periods indicated:
<TABLE>
<CAPTION>
Year ended June
30
----------------
1999 1998
------- -------
<S> <C> <C>
Unallocated shares at beginning of period.................. 339,609 323,438
Stock dividend............................................. -- 67,921
Allocated.................................................. (64,687) (51,750)
------- -------
Unallocated shares at end of period........................ 274,922 339,609
======= =======
</TABLE>
The fair value of unallocated ESOP shares totaled $4.5 million and $6.2
million at June 30, 1999 and 1998, 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.
F-27
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The expense related to the RRP for the fiscal years ended June 30, 1999,
1998 and 1997 was approximately $58,000, $115,000 and $221,000, respectively.
At June 30, 1999 and 1998, unearned compensation related to the RRPs was
approximately $0 and $57,000, respectively, and is shown as a reduction to
stockholders' equity in the accompanying consolidated statements of financial
condition.
The table below reflects RRP activity for the periods indicated:
<TABLE>
<CAPTION>
Year ended June
30
----------------
1999 1998
------- -------
<S> <C> <C>
Balance at beginning of period............................. 26,175 40,087
Stock dividend............................................. -- 5,235
Distributed................................................ (26,175) (19,147)
------- -------
Balance at end of period................................... -- 26,175
======= =======
</TABLE>
Stock Option and Incentive Plans
The stockholders of the Company have 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 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 value were the same at the
dates of award. Had compensation cost for the Company Plans been recognized
based upon the fair value of the options at the grant date consistent with the
methodology specified in SFAS No. 123, the Company's net earnings and net
earnings per share at June 30, 1999 and 1998 would have been reduced to the
pro forma amounts indicated below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Year Ended June 30
-------------------
1999 1998
--------- ---------
<S> <C> <C>
Net earnings as reported................................... $ 9,644 $ 6,610
Net earnings pro forma..................................... 9,359 6,404
Basic earnings per share as reported....................... 1.79 1.21
Basic earnings per share pro forma......................... 1.74 1.17
Diluted earnings per share as reported..................... 1.70 1.14
Diluted earnings per share pro forma....................... 1.65 1.10
</TABLE>
Pro forma disclosures are not required as of June 30, 1997 as no options
were granted in this year. The per share weighted-average fair value of stock
options granted during 1999 and 1998 were $6.69 and $8.42 respectively on the
date of grant using the Black-Scholes option-pricing model. The following
weighted-average assumptions were used for fiscal 1999: volatility of 18.54%,
no expected
F-28
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
dividends, risk-free interest rate of 5.93% and an expected life of 8 years.
The following weighted-average assumptions were used for fiscal 1998:
volatility of 25.27%, no expected dividends, risk-free interest rate of 5.66%,
and an expected life of 10 years. During the initial phase-in period, the
effects of applying SFAS No. 123 for these pro forma disclosures are not
likely to be representative of the effects on reported income for future years
as options vest over several years and additional awards may be made each
year.
The Directors' Plan authorizes the granting of stock options for a total of
161,719 shares of common stock. The Stock Plan authorizes the granting of
stock options for a total of 485,156 shares of common stock. All options
granted under both plans were granted at an exercise price of $4.80 per share.
The aggregate number of shares of common stock outstanding and available for
issuance pursuant to the 1997 Stock Plan is 291,250 shares. Options covering a
total of 110,000 shares were granted in fiscal 1999 at a weighted average
exercise price of $16.13 per share, which was the fair market value on the
grant date. Options covering a total of 181,250 shares were granted in fiscal
1998 at a weighted average exercise price of $16.50 per share, which was the
fair market value on the grant date. All 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
---------------------------------------------------------
1999 1998 1997
------------------ ------------------ -------------------
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................. 613,039 $ 8.26 449,923 $ 4.80 570,039 $4.80
Granted................. 110,000 16.13 181,250 16.50 -- --
Exercised............... (48,343) 4.80 (18,134) 4.80 (120,116) 4.80
------- ------- --------
Balance at end of
period................. 674,696 9.79 613,039 8.26 449,923 4.80
======= ======= ========
Options exercisable..... 443,863 6.39 431,789 4.80 449,923 4.80
======= ======= ========
Remaining shares
available for grant.... 8,085 118,085 8,085
======= ======= ========
</TABLE>
F-29
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options outstanding
at June 30, 1999:
<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 1999 Contractual Life Price 1999 Price
------------------------ ----------- ---------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 4.80.................. 383,446 4.5 years $ 4.80 383,446 $4.80
$16.13 to 17.85......... 291,250 8.8 years 16.36 60,417 16.50
</TABLE>
(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 $524,000, $430,000 and $430,000 in 1999, 1998 and
1997, respectively. Annual minimum lease commitments attributable to long-term
operating leases at June 30, 1999 were (in thousands):
<TABLE>
<S> <C>
Year ending June 30:
2000................................................................ $ 483
2001................................................................ 469
2002................................................................ 417
2003................................................................ 364
2004................................................................ 315
Thereafter through 2013............................................. 1,702
------
$3,750
======
</TABLE>
At June 30, 1999 and 1998, the Company had approved commitments to originate
loans of approximately $14.0 million and $15.7 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, 1999 and 1998, the Company had $21.1 million and $21.5 million
of approved undisbursed lines of credit, respectively.
At June 30, 1999 and 1998, the Company had commitments to sell loans of $6.0
million and $7.5 million, respectively, for which the related loans are
included in loans held for sale. There were commitments to purchase loans of
$3.7 million at June 30, 1999. There were no commitments to purchase loans at
June 30, 1998. The Company had no commitments to sell investment securities or
MBS at June 30, 1999 and 1998. There were no commitments to purchase
investment securities at June 30, 1999 and 1998.
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
--------------------------
1999 1998 1997
-------- ------- -------
(In thousands)
<S> <C> <C> <C>
Statement of financial condition information:
Loans receivable held for sale................... $ 17,028 7,507 623
Purchased mortgage servicing rights.............. 215 471 --
======== ======= =======
Statement of earnings information:
Loan servicing fees.............................. $ 699 870 791
Gain on sale of loans held for sale.............. 332 175 356
======== ======= =======
Statement of cash flows information:
Loans originated for sale........................ $(73,674) (41,321) (31,598)
Sale of loans held for sale...................... 63,996 34,324 33,870
======== ======= =======
</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, 1999,
the Company had purchased mortgage servicing rights with a book value of
$215,000.
(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,
1999 and 1998 and for the years ended June 30, 1999, 1998 and 1997:
Statements of Financial Condition
<TABLE>
<CAPTION>
June 30
--------------
1999 1998
Assets ------- ------
(In thousands)
<S> <C> <C>
Cash........................................................ $ 38 64
Short-term investments...................................... 7,320 10,220
Investment securities available for sale.................... -- 1,819
Investment in subsidiaries.................................. 77,996 67,906
Other assets................................................ 34 37
------- ------
$85,388 80,046
======= ======
Liabilities and Stockholders' Equity
Liabilities--other liabilities.............................. $ 4,084 2,787
Stockholders' equity........................................ 81,304 77,259
------- ------
$85,388 80,046
======= ======
</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
--------------------
1999 1998 1997
------ ----- -----
(In thousands)
<S> <C> <C> <C>
Interest income........................................ $ 566 660 709
Other income........................................... 371 -- 13
Other expense.......................................... (377) (373) (290)
Income taxes........................................... (275) (148) (210)
------ ----- -----
Earnings before equity in earnings of subsidiaries. 285 139 222
Equity in earnings of subsidiaries..................... 9,359 6,471 2,598
------ ----- -----
Net earnings........................................... $9,644 6,610 2,820
====== ===== =====
</TABLE>
Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended June 30
-----------------------
1999 1998 1997
------- ------ ------
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings........................................ $ 9,644 6,610 2,820
Adjustments to reconcile net earnings to cash
provided by operating activities:
Equity in earnings of subsidiaries................ (9,359) (6,471) (2,598)
Gain on sale of securities available for sale .... (371) -- --
Amortization...................................... -- 1 (1)
Decrease (increase) in other assets............... 3 (9) 81
Increase (decrease) in other liabilities.......... 1,297 (837) 3,454
Other............................................. 637 265 553
------- ------ ------
Total adjustments............................... (7,793) (7,051) 1,489
Net cash provided (used) by operating
activities..................................... 1,851 (441) 4,309
------- ------ ------
Cash flows from investing activities:
Proceeds from maturity of investment securities held
to maturity........................................ -- 5,000 3,400
Principal payments on MBS held to maturity.......... -- 108 383
Purchases of investment securities available for
sale............................................... -- -- (1,199)
Sale of investment securities available for sale.... 1,558 -- --
------- ------ ------
Net cash provided by investing activities....... 1,558 5,108 2,584
------- ------ ------
Cash flows from financing activities:
Repurchase and retirement of stock.................. (6,566) (1,157) (2,270)
Common stock options exercised...................... 231 87 577
------- ------ ------
Net cash used in financing activities........... (6,335) (1,070) (1,693)
------- ------ ------
Net increase (decrease) in cash and cash
equivalents.................................... (2,926) 3,597 5,200
Cash and cash equivalents, beginning of year........ 10,284 6,687 1,487
------- ------ ------
Cash and cash equivalents, end of year.............. $ 7,358 10,284 6,687
======= ====== ======
</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,
1999 1999 1998 1998
------- --------- ------------ ------------- ---
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Interest income............... $18,819 18,295 17,630 17,175
Interest expense.............. 10,373 9,908 10,028 10,007
------- ------ ------ ------
Net interest income......... 8,446 8,387 7,602 7,168
Provision for losses.......... 400 500 400 400
Other income.................. 1,064 1,011 1,177 1,377
Other expense................. 4,460 4,448 4,539 4,078
------- ------ ------ ------
Earnings before income taxes
........................... 4,650 4,450 3,840 4,067
Income taxes ................. 2,043 1,952 1,698 1,771
------- ------ ------ ------
Net earnings before
extraordinary item and
cumulative effect of change
in accounting principle.... 2,607 2,498 2,142 2,296
Extraordinary item, net of
taxes...................... -- -- (61) --
Cumulative effect of change
in accounting principle,
net of taxes............... -- -- -- 162
------- ------ ------ ------
Net earnings................ $ 2,607 2,498 2,081 2,458
======= ====== ====== ======
Basic earnings per share...... $ 0.50 0.47 0.39 0.45
======= ====== ====== ======
Diluted earnings per share.... $ 0.47 0.45 0.36 0.42
======= ====== ====== ======
</TABLE>
<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> <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>
(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
F-33
<PAGE>
QUAKER CITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
----------------------------------
1999 1998
---------------- -----------------
Carrying Fair Carrying Fair
value value value value
-------- ------- -------- -------
ASSETS:
<S> <C> <C> <C> <C>
Cash and due from banks................. $ 7,705 7,705 12,687 12,687
Interest-bearing deposits............... 323 323 345 345
Federal funds sold and other short-term
investments............................ 25,120 25,120 26,420 26,420
Investment securities................... 11,986 11,320 5,058 5,070
Investment securities available for
sale................................... -- -- 1,819 1,819
Loans receivable, net................... 821,190 834,320 691,026 702,763
Loans receivable held for sale.......... 17,028 17,028 7,507 7,507
Mortgage-backed securities held to
maturity............................... 84,078 81,485 107,577 108,705
Mortgage-backed securities available for
sale................................... 15,783 15,783 8,274 8,274
Federal Home Loan Bank stock............ 12,221 12,221 11,561 11,561
<CAPTION>
LIABILITIES:
<S> <C> <C> <C> <C>
Deposits................................ 677,839 676,452 580,910 581,753
Federal Home Loan Bank advances......... 234,700 234,467 216,000 216,262
OFF-BALANCE SHEET:
Commitments to extend credit.......... -- 61 -- 99
Unused lines of credit................ -- 135 -- 921
Loans sold with recourse (including
bond loans).......................... (314) (314) (436) (436)
======== ======= ======== =======
</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 1999 Annual
Meeting of Stockholders (the "1999 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 1999 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 1999 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 1999 Proxy
Statement.
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 Auditors' Report.............................................. F-2
Consolidated Statements of Financial Condition at June 30, 1999 and 1998.. F-3
Consolidated Statements of Earnings for Each of the Years in the Three-
Year Period Ended June 30, 1999.......................................... F-4
Consolidated Statements of Comprehensive Income for Each of the Years in
the Three-Year Period Ended June 30, 1999................................ F-5
Consolidated Statements of Stockholders' Equity for Each of the Years in
the Three-Year Period Ended June 30, 1999................................ F-6
Consolidated Statements of Cash Flows for Each of the Years in the Three-
Year Period Ended June 30, 1999.......................................... F-7
Notes to Consolidated Financial Statements................................ F-8
</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.
II-1
<PAGE>
(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)
Quaker City Bancorp, Inc. 1993 Stock Option Plan for Outside
10.2 Directors.*(1)
10.3 Quaker City Federal Savings and Loan Association Recognition and
Retention Plan for Officers and Employees.*(1)
10.4 Quaker City Federal Savings and Loan Association Recognition and
Retention Plan for Outside Directors.*(1)
10.5 Employment Agreements between Quaker City Bancorp, Inc. and Quaker
City Federal Savings and Loan Association, respectively, and J.L.
Thomas as of January 1, 1994 and as amended to September 27, 1994,
respectively.*(1)
10.5.1 Quaker City Federal Savings and Loan Association Three Year Employment
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and J.L. Thomas dated June 23,
1995.*(2)
10.5.2 Employment Agreements between Quaker City Bancorp, Inc. and Quaker
City Federal Savings and Loan Association, respectively, and J.L.
Thomas as of July 1, 1996.*(3)
10.5.3 Quaker City Federal Savings and Loan Association Three Year Employment
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and J.L. Thomas dated July 1,
1997.*(4)
10.5.4 Quaker City Federal Savings and Loan Association Three Year Employment
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and J. L. Thomas dated July 1,
1998.*(5)
10.6 Employment Agreements between Quaker City Bancorp, Inc. and Quaker
City Federal Savings and Loan Association, respectively, and Frederic
R. (Rick) McGill as of January 1, 1994 and as amended to September 27,
1994, respectively.*(1)
10.6.1 Quaker City Federal Savings and Loan Association Two Year Employment
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Frederic R (Rick) McGill
dated June 23, 1995.*(2)
10.6.2 Employment Agreements between Quaker City Bancorp, Inc. and Quaker
City Federal Savings and Loan Association, respectively, and Frederic
R. (Rick) McGill as of July 1, 1996.*(3)
10.6.3 Quaker City Federal Savings and Loan Association Three Year Employment
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Frederic R. McGill dated July
1, 1997.*(4)
10.6.4 Quaker City Federal Savings and Loan Association Three Year Employment
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Frederic R. McGill dated July
1, 1998.*(5)
10.6.5 Quaker City Federal Savings and Loan Association Three Year Employment
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Frederic R. McGill dated July
1, 1999.*
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)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.7.1 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Dwight L. Wilson dated
September 7, 1995.*(2)
10.7.2 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Dwight L. Wilson dated July
1, 1996.*(3)
10.7.3 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Dwight L. Wilson dated July
1, 1997.*(4)
10.7.4 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Dwight L. Wilson dated July
1, 1998.*(5)
10.7.5 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Dwight L. Wilson dated July
1, 1999.*
10.8 Change-in-Control Agreements between Quaker City Bancorp, Inc. and
Quaker City Federal Savings and Loan Association, respectively, and
Harold L. Rams as of January 1, 1994 and as amended to September 27,
1994, respectively.*(1)
10.8.1 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Harold Rams dated July 1,
1995.*(2)
10.8.2 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Harold Rams dated July 1,
1996.*(3)
10.8.3 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Harold Rams dated July 1,
1997.*(4)
10.8.4 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Harold Rams dated July 1,
1998.*(5)
10.8.5 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Harold Rams dated July 1,
1999.*
10.9 Change-in-Control Agreements between Quaker City Bancorp, Inc. and
Quaker City Federal Savings and Loan Association, respectively, and
Kathryn M. Hennigan as of January 1, 1994 and as amended September 27,
1994, respectively.*(1)
10.9.1 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Kathryn M. Hennigan dated
July 1, 1995.*(2)
10.9.2 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Kathryn M. Hennigan dated
July 1, 1996.*(3)
10.9.3 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Kathryn M. Hennigan dated
July 1, 1997.*(4)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.9.4 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Kathryn M. Hennigan dated
July 1, 1998.*(5)
10.9.5 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Kathryn M. Hennigan dated
July 1, 1999.*
10.10 Change-in-Control Agreements between Quaker City Bancorp, Inc. and
Quaker City Federal Savings and Loan Association, respectively, and
Karen A. Tannheimer as of January 1, 1994 and as amended to September
27, 1994, respectively.*(1)
10.10.1 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Karen A. Tannheimer dated
June 23, 1995.*(2)
10.10.2 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Karen A. Tannheimer dated
July 1, 1996.*(3)
10.10.3 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Karen A. Tannheimer dated
July 1, 1997.*(4)
10.10.4 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Karen A. Tannheimer dated
July 1, 1998.*(5)
10.10.5 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Karen A. Tannheimer dated
July 1, 1999.*
10.11 Change-in-Control Agreements between Quaker City Bancorp, Inc. and
Quaker City Federal Savings and Loan Association, respectively, and
Robert C. Teeling as of January 1, 1994 and as amended to September
27, 1994, respectively.*(1)
10.11.1 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Robert C. Teeling dated July
1, 1995.*(2)
10.11.2 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Robert C. Teeling dated July
1, 1996.*(3)
10.11.3 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Robert C. Teeling dated July
1, 1997.*(4)
10.11.4 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Robert C. Teeling dated July
1, 1998.*(5)
10.11.5 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Robert C. Teeling dated July
1, 1999.*
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.*(5)
10.15.1 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Hank H. Kadowaki dated July
1, 1998.*(5)
10.15.2 Quaker City Federal Savings and Loan Association Change in Control
Agreement Renewal and Extension Acknowledgment between Quaker City
Federal Savings and Loan Association and Hank H. Kadowaki dated July
1, 1999.*
11.1 Statement Regarding Computation of Earnings Per Share.
21 Subsidiaries of Quaker City Bancorp, Inc.
23 Consent of KPMG LLP.
27 Financial Data Schedule.
</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.
(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.
(5) Incorporated by reference to the corresponding exhibit to the Registrant's
Form 10-K as filed with the Securities and Exchange Commission for the
fiscal year ended June 30, 1998.
(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 24, 1999
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 24, 1999
____________________________________
J. L. Thomas
/s/ Frederic R. (Rick) McGill Director, President and September 24, 1999
____________________________________ Chief Executive Officer
Frederic R. (Rick) McGill (Principal Executive
Officer)
/s/ Dwight L. Wilson Senior Vice President, September 24, 1999
____________________________________ Treasurer and
Dwight L. Wilson Chief Financial Officer
(Principal Financial
Officer)
(Principal Accounting
Officer)
/s/ David T. Cannon Director September 24, 1999
____________________________________
David T. Cannon
/s/ David S. Engelman Director September 24, 1999
____________________________________
David S. Engelman
/s/ Alfred J. Gobar Director September 24, 1999
____________________________________
Alfred J. Gobar
/s/ Wayne L. Harvey Director September 24, 1999
____________________________________
Wayne L. Harvey
/s/ David K. Leichtfuss Director September 24, 1999
____________________________________
David K. Leichtfuss
/s/ Edward L. Miller Director September 24 , 1999
____________________________________
Edward L. Miller
</TABLE>
II-6
<PAGE>
Exhibit 10.6.5 Quaker City Federal Savings and Loan Association Three Year
Employment Agreement Renewal and Extension Acknowledgment between
Quaker City Federal Savings and Loan Association and Frederic R.
McGill dated July 1, 1999.
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 17, 1999, 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, 2002.
Dated this ___1st___ day of ______July___________, A.D., ____1999____________
QUAKER CITY FEDERAL SAVINGS AND
LOAN ASSOCIATION
/s/Frederic R. McGill By: /s/Jerome L. Thomas
- ---------------------------------------- ------------------------------
Executive Chairman of the Board
<PAGE>
Exhibit 10.7.5 Quaker City Federal Savings and Loan Association Change in
Control Agreement Renewal and Extension Acknowledgment
between Quaker City Federal Savings and Loan Association and
Dwight L. Wilson dated July 1, 1999.
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 17, 1999, 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,
2001.
Dated this ___1st___ day of ____July____, A.D., ______1999_______.
QUAKER CITY FEDERAL SAVINGS AND LOAN
ASSOCIATION
/s/ Dwight L. Wilson By: /s/ Frederic R. McGill
- ------------------------ --------------------------
Participant President
<PAGE>
Exhibit 10.8.5 Quaker City Federal Savings and Loan Association Change in
Control Agreement Renewal and Extension Acknowledgment between
Quaker City Federal Savings and Loan Association and Harold
Rams dated July 1, 1999.
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 17, 1999, 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,
2001.
Dated this ___1st___ day of ____July____, A.D., ______1999_______.
QUAKER CITY FEDERAL SAVINGS AND LOAN
ASSOCIATION
/s/ Harold Rams By: /s/ Frederic R. McGill
- ------------------- --------------------------
Participant President
<PAGE>
Exhibit 10.9.5 Quaker City Federal Savings and Loan Association Change in
Control Agreement Renewal and Extension Acknowledgment between
Quaker City Federal Savings and Loan Association and Kathryn M.
Hennigan dated July 1, 1999.
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 17, 1999, 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,
2001.
Dated this ___1st___ day of ____July____, A.D., ______1999_______.
QUAKER CITY FEDERAL SAVINGS AND LOAN
ASSOCIATION
/s/ Kathryn M. Hennigan By: /s/ Frederic R. McGill
- --------------------------- --------------------------
Participant President
<PAGE>
Exhibit 10.10.5 Quaker City Federal Savings and Loan Association Change in
Control Agreement Renewal and Extension Acknowledgment
between Quaker City Federal Savings and Loan Association and
Karen A. Tannheimer dated July 1, 1999.
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 17, 1999, 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,
2001.
Dated this ___1st___ day of ____July____, A.D., ______1999_______.
QUAKER CITY FEDERAL SAVINGS AND LOAN
ASSOCIATION
/s/ Karen A. Tannheimer By: /s/ Frederic R. McGill
- --------------------------- --------------------------
Participant President
<PAGE>
Exhibit 10.11.5 Quaker City Federal Savings and Loan Association Change in
Control Agreement Renewal and Extension Acknowledgment
between Quaker City Federal Savings and Loan Association and
Robert C. Teeling dated July 1, 1999.
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 onJune 17, 1999, 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, 2001.
Dated this ___1st___ day of ____July____, A.D., ______1999_______.
QUAKER CITY FEDERAL SAVINGS AND LOAN
ASSOCIATION
/s/ Robert C. Teeling By: /s/ Frederic R. McGill
- ------------------------- --------------------------
Participant President
<PAGE>
Exhibit 10.11.5 Quaker City Federal Savings and Loan Association Change in
Control Agreement Renewal and Extension Acknowledgment
between Quaker City Federal Savings and Loan Association and
Robert C. Teeling dated July 1, 1999.
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 onJune 17, 1999, 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, 2001.
Dated this ___1st___ day of ____July____, A.D., ______1999_______.
QUAKER CITY FEDERAL SAVINGS AND LOAN
ASSOCIATION
/s/ Robert C. Teeling By: /s/ Frederic R. McGill
- ------------------------- --------------------------
Participant President
<PAGE>
Exhibit 10.15.2 Quaker City Federal Savings and Loan Association Change in
Control Agreement Renewal and Extension Acknowledgment
between Quaker City Federal Savings and Loan Association and
Hank H. Kadowaki dated July 1, 1999.
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 17, 1999, 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,
2001.
Dated this ___1st___ day of ____July____, A.D., ______1999_______.
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,
1999 1998 1997
-------------- -------------- --------------
<C> <S> <C> <C> <C>
Average Common Shares
A Outstanding................ 5,392,564 5,469,646 5,509,836
---------- ---------- ----------
B Net earnings for Period.... $9,644,000 $6,610,000 $2,820,000
========== ========== ==========
Basic Earnings Per Share [B
/ A]....................... $1.79 $1.21 $0.51
========== ========== ==========
Common Share Equivalents:
C Stock Options Outstanding.. 571,279 602,107 499,128
---------- ---------- ----------
D Option Exercise Price...... $8.50 $7.86 $4.80
---------- ---------- ----------
E Exercise Proceeds [C x D].. $4,855,872 $4,732,561 $2,395,814
---------- ---------- ----------
Average Market Price in
F Period..................... $16.00 $17.13 $11.06
---------- ---------- ----------
Shares Repurchased At
G Market Price [E / F]....... 303,492 276,273 216,620
---------- ---------- ----------
Increase in Common Shares
H [C - G].................... 267,787 325,834 282,508
---------- ---------- ----------
Shares Outstanding and
I Equivalents [A + H]........ 5,660,351 5,795,480 5,792,344
========== ========== ==========
J Net Earnings for Period.... $9,644,000 $6,610,000 $2,820,000
========== ========== ==========
Diluted Earnings Per Share
[J / I].................... $1.70 $1.14 $0.49
========== ========== ==========
</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
21, 1999, relating to the consolidated statements of financial condition of
Quaker City Bancorp, Inc. and subsidiaries as of June 30, 1999 and 1998, and
the related consolidated statements of earnings, comprehensive income,
stockholders' equity and cash flows for each of the years in the three-year
period ended June 30, 1999, which report appears in the June 30, 1999 annual
report on Form 10-K of Quaker City Bancorp, Inc.
KPMG LLP
Los Angeles, California
September 24, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 7,705
<INT-BEARING-DEPOSITS> 323
<FED-FUNDS-SOLD> 25,120
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 15,783
<INVESTMENTS-CARRYING> 96,064
<INVESTMENTS-MARKET> 92,805
<LOANS> 838,218
<ALLOWANCE> 8,684
<TOTAL-ASSETS> 1,013,437
<DEPOSITS> 677,839
<SHORT-TERM> 91,400
<LIABILITIES-OTHER> 19,594
<LONG-TERM> 143,300
0
0
<COMMON> 55
<OTHER-SE> 81,249
<TOTAL-LIABILITIES-AND-EQUITY> 1,013,437
<INTEREST-LOAN> 63,207
<INTEREST-INVEST> 7,007
<INTEREST-OTHER> 1,705
<INTEREST-TOTAL> 71,919
<INTEREST-DEPOSIT> 29,532
<INTEREST-EXPENSE> 40,316
<INTEREST-INCOME-NET> 31,608
<LOAN-LOSSES> 1,700
<SECURITIES-GAINS> 616
<EXPENSE-OTHER> 17,525
<INCOME-PRETAX> 17,007
<INCOME-PRE-EXTRAORDINARY> 9,453
<EXTRAORDINARY> (61)
<CHANGES> 162
<NET-INCOME> 9,644
<EPS-BASIC> $1.79
<EPS-DILUTED> $1.70
<YIELD-ACTUAL> 7.95
<LOANS-NON> 4,984
<LOANS-PAST> 0
<LOANS-TROUBLED> 218
<LOANS-PROBLEM> 1,672
<ALLOWANCE-OPEN> 7,955
<CHARGE-OFFS> 1,126
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 8,684
<ALLOWANCE-DOMESTIC> 8,684
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
