<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
-----------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number: 0-22528
QUAKER CITY BANCORP, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 95-4444221
- -------- ----------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
7021 Greenleaf Avenue, Whittier, California 90602
- --------------------------------------------- -----
(Address or principal executive offices) (Zip code)
Registrant's telephone number, including area code (562) 907-2200
Indicate by check mark whether the registrant (1) has filed reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days.
YES [X] NO[_]
Number of shares outstanding of the registrant's sole class of common stock at
February 11, 2000: 5,204,107.
<PAGE>
Quaker City Bancorp, Inc.
Index
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Consolidated Statements of Financial Condition (unaudited) as of
December 31, 1999 and June 30, 1999............................................................ 3
Consolidated Statements of Operations (unaudited) for the Three and Six Months
Ended December 31, 1999 and 1998............................................................... 4
Consolidated Statements of Comprehensive Income (unaudited) for the Three
and Six Months Ended December 31, 1999 and 1998................................................ 5
Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended
December 31, 1999 and 1998..................................................................... 6
Notes to Consolidated Financial Statements..................................................... 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 10
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Stockholders................................................ 21
Item 6. Exhibits and Reports on Form 8-K............................................................... 21
</TABLE>
<PAGE>
Quaker City Bancorp, Inc.
Consolidated Statements of Financial Condition
Unaudited
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
---- ----
<S> <C> <C>
Assets
Cash and due from banks............................................. $ 11,414 $ 7,705
Interest-bearing deposits........................................... 2,380 323
Federal funds sold and other short-term investments................. 7,770 25,120
Investment securities held to maturity.............................. 11,986 11,986
Investment securities available for sale............................ 5,000 --
Loans receivable, net............................................... 924,785 821,190
Loans receivable held for sale...................................... 9,322 17,028
Mortgage-backed securities held to maturity......................... 85,693 84,078
Mortgage-backed securities available for sale....................... 21,955 15,783
Real estate held for sale........................................... 292 3,138
Federal Home Loan Bank stock, at cost............................... 14,302 12,221
Office premises and equipment, net.................................. 7,112 6,430
Accrued interest receivable and other assets........................ 7,657 8,435
---------- ----------
Total assets..................................................... $1,109,668 $1,013,437
========== ==========
Liabilities and Stockholders' Equity
Deposits............................................................ $ 739,120 $ 677,839
Federal Home Loan Bank advances..................................... 272,639 234,700
Deferred tax liability.............................................. 1,224 1,694
Accounts payable and accrued expenses............................... 5,633 4,612
Other liabilities................................................... 7,583 13,288
---------- ----------
Total liabilities................................................ 1,026,199 932,133
---------- ----------
Stockholders' equity:
Common stock, $.01 par value. Authorized 20,000,000 shares; issued
and outstanding 5,246,107 shares and 5,457,107 at December 31,
1999 and June 30, 1999, respectively............................... 52 55
Additional paid-in capital.......................................... 72,062 72,681
Accumulated other comprehensive (loss) income....................... (55) 33
Retained earnings, substantially restricted......................... 12,574 9,855
Deferred compensation............................................... (1,164) (1,320)
---------- ----------
Total stockholders' equity....................................... 83,469 81,304
---------- ----------
Total liabilities and stockholders' equity....................... $1,109,668 $1,013,437
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
Quaker City Bancorp, Inc.
Consolidated Statements of Operations
Unaudited
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Loans receivable............................................ $17,929 $15,340 $35,111 $30,056
Mortgage-backed securities.................................. 1,777 1,508 3,434 3,331
Investment securities....................................... 275 299 490 443
Other....................................................... 269 483 550 975
------- ------- ------- -------
Total interest income..................................... 20,250 17,630 39,585 34,805
------- ------- ------- -------
Interest expense:
Deposits.................................................... 8,419 7,522 16,244 14,749
Federal Home Loan Bank advances and other borrowings........ 3,194 2,506 6,345 5,286
------- ------- ------- -------
Total interest expense.................................... 11,613 10,028 22,589 20,035
------- ------- ------- -------
Net interest income before provision for loan losses...... 8,637 7,602 16,996 14,770
Provision for loan losses...................................... 400 400 800 800
------- ------- ------- -------
Net interest income after provision for loan losses............ 8,237 7,202 16,196 13,970
------- ------- ------- -------
Other income:
Loan servicing charges and deposit fees..................... 881 591 1,622 1,397
Gain on sale of loans held for sale......................... 78 121 210 164
Commissions................................................. 235 174 412 349
Gain on sale of securities available for sale............... -- 271 -- 616
Other....................................................... (3) 20 7 28
------- ------- ------- -------
Total other income........................................ 1,191 1,177 2,251 2,554
------- ------- ------- -------
Other expense:
Compensation and employee benefits.......................... 2,518 2,428 4,940 4,760
Occupancy, net.............................................. 818 604 1,424 1,146
Federal deposit insurance premiums.......................... 152 129 290 260
Data processing............................................. 262 232 504 431
Advertising and promotional................................. 222 219 405 449
Consulting fees............................................. 157 145 337 267
Other general and administrative expense.................... 593 684 1,219 1,189
------- ------- ------- -------
Total general and administrative expense.................. 4,722 4,441 9,119 8,502
Real estate operations, net................................. (274) 98 (454) 145
Amortization of core deposit intangible..................... 19 -- 19 --
------- ------- ------- -------
Total other expense....................................... 4,467 4,539 8,684 8,647
------- ------- ------- -------
Earnings before income taxes, extraordinary items and
cumulative effect of change in accounting principle....... 4,961 3,840 9,763 7,877
Income taxes................................................... 2,180 1,698 4,292 3,469
------- ------- ------- -------
Earnings before extraordinary items and cumulative
effect of change in accounting principle.................. 2,781 2,142 5,471 4,408
Extraordinary item, net of taxes............................... -- (61) -- (61)
Cumulative effect of change in accounting principle, net
of taxes.................................................. -- -- -- 162
------- ------- ------- -------
Net earnings................................................... $ 2,781 $ 2,081 $ 5,471 $ 4,509
======= ======= ======= =======
Basic earnings per share....................................... $0.55 $0.39 $1.07 $0.85
Diluted earnings per share..................................... $0.52 $0.36 $1.01 $0.79
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
Quaker City Bancorp, Inc.
Consolidated Statements of Comprehensive Income
Unaudited
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings.................................................. $2,781 $2,081 $5,471 $4,539
Other comprehensive income:
Unrealized holding loss on securities
available for sale arising during the period, net of
taxes............................................... (54) (407) (88) (674)
Less: realized gain included in net earnings and
previously included in other comprehensive income,
net of taxes........................................ -- (157) -- (522)
------ ------ ------ ------
Decrease in accumulated other
comprehensive income, net of tax......................... (54) (250) (88) (152)
------ ------ ------ ------
Total comprehensive income............................... $2,727 $1,831 $5,383 $4,387
====== ====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
Quaker City Bancorp, Inc.
Consolidated Statements of Cash Flows
Unaudited
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
1999 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings................................................................... $ 5,471 $ 4,539
--------- ---------
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Cumulative effect of change in accounting principle........................ -- (162)
Depreciation and amortization.............................................. (360) (585)
Provision for loan losses.................................................. 800 800
Write-downs on real estate held for sale................................... -- 47
Gain on sale of real estate held for sale.................................. (580) (199)
Gain on sale of loans held for sale........................................ (210) (164)
Gain on sale of securities available for sale.............................. -- (616)
Loans originated for sale.................................................. (25,825) (30,214)
Proceeds from sale of loans held for sale.................................. 33,543 30,094
Federal Home Loan Bank (FHLB) stock dividend received...................... (328) (341)
(Increase) decrease in accrued interest receivable and other assets........ 778 (579)
Increase (decrease) in other liabilities................................... (5,705) 2,554
Increase in accounts payable and accrued expenses.......................... 1,021 786
Other...................................................................... 535 (592)
--------- ---------
Total adjustments...................................................... 3,669 829
--------- ---------
Net cash provided by operating activities.............................. 9,140 5,368
--------- ---------
Cash flows from investing activities:
Loans originated for investment................................................ (118,183) (88,070)
Loans purchased for investment................................................. (56,942) (50,008)
Principal repayments on loans.................................................. 71,454 69,441
Purchases of investment securities held to maturity............................ (2,925) (11,990)
Maturities and principal repayments of investment securities held to maturity.. 2,925 4,220
Purchases of investment securities available for sale.......................... (5,000) --
Proceeds from sale of investment securities available for sale................. -- 1,558
Purchases of mortgage-backed securities available for sale..................... (7,550) --
Purchases of mortgage-backed securities held to maturity....................... (8,007) (40,259)
Principal repayments on mortgage-backed securities held to maturity............ 6,397 7,594
Sale of mortgage-backed securities available for sale.......................... -- 61,872
Principal repayments on mortgage-backed securities available for sale.......... 1,285 5,068
Proceeds from sale of real estate held for sale................................ 3,506 819
Purchase of FHLB stock......................................................... (1,753) --
Investment in office premises and equipment.................................... (1,385) (1,528)
--------- ---------
Net cash used by investing activities.................................. (116,178) (41,283)
--------- ---------
Cash flows from financing activities:
Increase in deposits........................................................... 61,281 54,096
Proceeds from funding of FHLB advances......................................... 247,489 89,500
Repayments of FHLB advances.................................................... (209,550) (114,700)
Stock options exercised........................................................ 103 203
Repurchase of stock............................................................ (3,869) (2,288)
--------- ---------
Net cash provided by financing activities.............................. 95,454 26,811
--------- ---------
Decrease in cash and cash equivalents.................................. (11,584) (9,104)
Cash and cash equivalents at beginning of period................................... 33,148 39,452
--------- ---------
Cash and cash equivalents at end of period......................................... $ 21,564 $ 30,348
========= =========
</TABLE>
6
<PAGE>
Quaker City Bancorp, Inc.
Consolidated Statements of Cash Flows
(continued)
Unaudited
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
1999 1998
-------- --------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Interest paid (including interest credited)................................ $22,954 $20,957
Cash paid for income taxes................................................... 4,229 3,795
======= =======
Supplemental schedule of noncash investing and financing activities:
Additions to loans resulting from the sale of real estate acquired through
foreclosure................................................................. -- 1,042
Additions to real estate acquired through foreclosure........................ 700 1,776
Reclassification of MBS from held to maturity to available for sale.......... -- 77,961
Net change in accumulated other comprehensive income, net of taxes........... (88) (152)
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
Quaker City Bancorp, Inc.
Notes to Consolidated Financial Statements
1. The consolidated statement of financial condition as of December 31, 1999
and the related consolidated statements of operations and comprehensive
income for the three and six months ended December 31, 1999 and 1998 and
the related consolidated statements of cash flows for the six months ended
December 31, 1999 and 1998 are unaudited. These statements reflect, in the
opinion of management, all material adjustments, consisting solely of
normal recurring accruals, necessary for a fair presentation of the
financial condition of Quaker City Bancorp, Inc. (the "Company") as of
December 31, 1999 and its results of operations and comprehensive income
for the three and six months ended December 31, 1999 and 1998 and cash
flows for the six months ended December 31, 1999 and 1998. The results of
operations for the unaudited periods are not necessarily indicative of the
results of operations to be expected for the entire year of fiscal 2000.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and, therefore,
do not include all information and footnotes normally included in financial
statements prepared in conformity with generally accepted accounting
principles. Accordingly, these consolidated financial statements should be
read in conjunction with the audited consolidated financial statements and
notes thereto included in the Company's Form 10-K for the year ended June
30, 1999.
2. Earnings per share is reported on both a basic and diluted basis. Basic
earnings per share is determined by dividing net earnings by the average
number of shares of common stock outstanding, while diluted earnings per
share is determined by dividing net earnings by the average number of
shares of common stock outstanding adjusted for the dilutive effect of
common stock equivalents. Earnings per share for the three and six months
ended December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1999 1999
Basic Diluted Basic Diluted
----- ------- ----- -------
<S> <C> <C> <C> <C>
Earnings before extraordinary item and cumulative
effect of change in accounting principle............... $0.55 $0.52 $1.07 $1.01
Extraordinary item, net of taxes......................... -- -- -- --
Cumulative effect of change
in accounting principle, net of taxes................. -- -- -- --
----- ----- ----- -----
Net earnings.......................................... $0.55 $0.52 $1.07 $1.01
===== ===== ===== =====
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1998 1998
Basic Diluted Basic Diluted
------- -------- ------- -------
<S> <C> <C> <C> <C>
Earnings before extraordinary item and cumulative
effect of change in accounting principle............... $ 0.40 $ 0.37 $ 0.83 $ 0.78
Extraordinary item, net of taxes......................... (0.01) (0.01) (0.01) (0.01)
Cumulative effect of change
-- -- 0.03 0.02
in accounting principle, net of taxes................. ------ ------ ------ ------
Net earnings.......................................... $ 0.39 $ 0.36 $ 0.85 $ 0.79
====== ====== ====== ======
</TABLE>
3. In June 1998 the FASB issued Statement of Financial Accounting Standards
("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 condition and measure those instruments at fair value. It
specifies necessary conditions to be met to designate a derivative as a
hedge. As amended by SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133." SFAS No. 133 is effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. 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 mortgage-backed
securities ("MBS") were reclassified from held to maturity to available for
sale. In the first quarter of fiscal 1999, the Company sold $29.6 million of
these reclassified MBS for a gain after tax of $162,000, which is accounted
for as the cumulative effect of a change in accounting principle in the
accompanying consolidated statements of operations.
9
<PAGE>
Quaker City Bancorp, Inc.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Quaker City Bancorp, Inc., incorporated in Delaware, is primarily engaged in the
savings and loan business through its wholly owned subsidiary, Quaker City Bank
(the "Bank"), formerly Quaker City Federal Savings and Loan Association. At
December 31, 1999, the Bank operated 11 retail banking offices in Southern
California. In 1999, the Company acquired one retail bank branch in Rowland
Heights, California. This acquisition has provided the Company with an expanded
customer base and approximately $46.0 million of additional retail deposits.
Three additional branches are scheduled to open during the quarter ended March
2000 in Wal-Mart Stores located in Southern California in the communities of
Porter Ranch, Lakewood, and Corona. The Bank is subject to significant
competition from other financial institutions, and is also subject to the
regulations of various government agencies and undergoes periodic examinations
by those regulatory authorities.
The Company is primarily engaged in attracting deposits from the general public
in the areas in which its branches are located and investing such deposits and
other available funds primarily in loans secured by multifamily mortgages, one-
to-four family residential mortgages, commercial mortgages and MBS.
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Total stockholders' equity for the Company was $83.5 million at December 31,
1999, compared to $81.3 million at June 30, 1999. Consolidated assets totaled
$1.1 billion at December 31, 1999, an increase of $96.2 million compared to June
30, 1999.
In the first quarter of fiscal 2000, the Company announced its intention to
repurchase up to an additional 173,000 shares of Company common stock. As of
February 11, 2000, 46,500 shares of Company common stock have been repurchased
under this latest repurchase program.
Market risk is the risk of loss from adverse changes in market prices and rates.
The Company's market risk arises primarily from interest rate risk inherent in
its lending and deposit taking activities. To that end, management actively
monitors and manages its interest rate risk exposure. The Company does not
currently engage in trading activities. The Company's financial instruments
include interest sensitive loans receivable, federal funds sold, MBS, investment
securities, FHLB stock, deposits and borrowings. At December 31, 1999, the
Company's interest sensitive assets and interest sensitive liabilities totaled
approximately $1.1 billion and $961.6 million, respectively. The composition of
the Company's financial instruments subject to market risk has not changed
significantly since June 30, 1999.
10
<PAGE>
Total loans receivable (including loans receivable held for sale) amounted to
$934.1 million at December 31, 1999, compared to $838.2 million at June 30,
1999. The following table presents loans receivable at the dates indicated:
<TABLE>
<CAPTION>
At December 31, At June 30,
1999 1999
---- ----
(In Millions)
<S> <C> <C>
One-to-four family.......... $309.4 $312.4
Multifamily................. 461.8 391.6
Commercial and land......... 168.6 140.8
Other....................... 8.9 7.7
Unamortized discounts....... (5.2) (5.6)
Allowance for loan losses... (9.4) (8.7)
------ ------
Total...................... $934.1 $838.2
====== ======
</TABLE>
Loan originations and purchases totaled $121.5 million for the quarter ended
December 31, 1999, compared to $111.7 million for the quarter ended December 31,
1998. Loan originations and purchases totaled $201.0 million for the six months
ended December 31, 1999, compared to $168.3 million for the six months ended
December 31, 1998.
Loan originations and purchases were comprised of the following:
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
December 31, December 31, December 31, December 31,
1999 1998 1999 1998
---- ---- ---- ----
(In millions)
<S> <C> <C> <C> <C>
One-to-four family................... $ 17.3 $ 63.4 $ 35.6 $ 81.8
Multifamily.......................... 74.3 31.8 118.4 54.5
Commercial and land.................. 29.9 16.3 46.6 30.8
Other................................ 0.0 0.2 0.4 1.2
------ ------ ------ ------
Total loans originated and
purchased..................... $121.5 $111.7 $201.0 $168.3
====== ====== ====== ======
</TABLE>
The increase in loan production for the three and six months ended December 31,
1999 as compared to the same periods in the previous year is primarily a result
of an increase in multifamily and commercial loan production partially offset by
a decline in one-to-four family loan originations due to higher interest rates
during the current fiscal year as well as a decrease in loan purchase
transactions. At present, the Company expects to continue its focus on
multifamily and commercial and industrial lending during the current fiscal
year.
11
<PAGE>
From time to time the Company has obtained advances from the Federal Home Loan
Bank ("FHLB") as an alternative to retail deposit funds. The net increase in
FHLB advances were $41.1 and $37.9 million for the three and six months ended
December 31, 1999, respectively. Deposits increased by $46.3 and $61.3 million
for the three and six months ended December 31, 1999, respectively. The
acquisition of a $46.0 million retail banking branch in Rowland Heights,
California was completed this quarter. This branch acquisition has allowed the
Company to expand its retail branch operating area and provide access to new
customers. The acquisition has also provided funds to purchase loans during the
quarter at a more favorable cost of funds than with wholesale sources.
In addition to FHLB advances and proceeds from increases in customer deposits,
other sources of liquidity for the Company include principal repayments on loans
and MBS, proceeds from sales of loans held for sale and other cash flows
generated from operations. Principal repayments on loans were $38.7 million and
$35.0 million for the three months ended December 31, 1999 and 1998,
respectively. Principal repayments on loans were $71.5 million and $69.4
million for the six months ended December 31, 1999 and 1998, respectively.
Proceeds from loan sales amounted to $10.9 million for the quarter ended
December 31, 1999 as compared to $21.0 million for the quarter ended December
31, 1998. Proceeds from loan sales amounted to $33.5 million for the six months
ended December 31, 1999 as compared to $30.1 million for the same period ended
December 31, 1998. The decline in loan sales during the quarter ended December
31, 1999 is primarily a result of the decrease in loan production, specifically
one-to-four family. At present, the Company's policy is to sell most 30 and 15
year fixed-rate one-to-four family loans as well as certain adjustable-rate one-
to-four family loans, multifamily loans, and commercial and industrial loans
originated that meet predefined criteria. Loans serviced for others increased
to $298.3 million at December 31, 1999, from $284.2 million at June 30, 1999,
primarily due to loan sales of $33.5 million for the six months ended December
31, 1999, offset by principal paydowns.
The Bank, must, by regulation, maintain minimum levels of liquidity as defined
by Office of Thrift Supervision ("OTS") regulations. This requirement, which
may be varied at the direction of the OTS depending upon economic conditions and
deposit flows, is based upon a percentage of deposits and short-term borrowings.
The required ratio is currently 4%. The Bank's average liquidity ratio for the
quarters ended December 31, 1999 and 1998 was 5.08% and 4.72%, respectively.
Sources of capital and liquidity for the Company on a standalone basis include
distributions from the Bank and borrowings such as securities sold under
agreements to repurchase. Dividends and other capital distributions from the
Bank are subject to regulatory restrictions.
12
<PAGE>
RESULTS OF OPERATIONS
Comparison of the Three and Six Months Ended December 31, 1999 and 1998 The
- -----------------------------------------------------------------------
Company recorded net earnings of $2.8 million, $0.52 per diluted share for the
quarter ended December 31, 1999. This compares to net earnings of $2.1 million,
$0.36 per diluted share for the same quarter last year. The Company recorded
net earnings of $5.5 million, $1.01 per diluted share for the six months ended
December 31, 1999. This compares to net earnings of $4.5 million, $0.79 per
diluted share for the same period last year. Net earnings for the six months
ended December 31, 1998 included a gain on sale of securities available for sale
of $360,000, after tax, as well as the cumulative effect of a change in
accounting principle of $162,000, after tax. The increase in net earnings for
the three and six months ended December 31, 1999 as compared to December 31,
1998 is primarily a result of an increase in net interest income as discussed
below.
Interest Income Interest income amounted to $20.3 million for the quarter ended
- ---------------
December 31, 1999 as compared to $17.6 million for the quarter ended December
31, 1998. Interest income amounted to $39.6 million for the six months ended
December 31, 1999 as compared to $34.8 million for the six months ended December
31, 1998. The increase in interest income is primarily a result of a larger
earning asset base partially offset by a decrease in the yield on interest-
earning assets for the respective period compared to the same period in the
previous year.
Interest Expense Interest expense for the quarter ended December 31, 1999 was
- ----------------
$11.6 million, compared to $10.0 million for the same quarter in the previous
year. Interest expense for the six months ended December 31, 1999 was $22.6
million, compared to $20.0 million for the same period in the previous year. The
increase in interest expense for the three and six months ended December 31,
1999 is primarily a result of an increase in the average balance of interest-
bearing liabilities partially offset by a decrease in the cost of interest-
bearing liabilities during the period.
Net Interest Income Net interest income before provision for loan losses for
- -------------------
the quarter ended December 31, 1999 amounted to $8.6 million compared to $7.6
million for the same period last year. Net interest income before provision for
loan losses for the six months ended December 31, 1999 amounted to $17.0 million
compared to $14.8 million for the same period last year. The net interest margin
for the three months ended December 31, 1999 was 3.30%, an 11 basis point
decrease from the same period last year. The net interest margin for the six
months ended December 31, 1999 was 3.33%, a six basis point decrease from the
same period last year. The decrease in the net interest margin is primarily a
result of the decrease in the yield on interest-earning assets offset by a
decrease in the cost of interest-bearing liabilities. The increase in net
interest income is primarily a result of an increase in the amount of interest-
earning assets relative to interest-bearing liabilities in the respective
periods.
13
<PAGE>
The following table displays average interest rates on the Company's interest-
earning assets and interest-bearing liabilities:
<TABLE>
<CAPTION>
Three month average Six month average
--------------------------- ------------------------------
December 31, December 31, December 31, December 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Yield on interest-earning assets...... 7.74% 7.92% 7.77% 7.98%
Cost of interest-bearing liabilities.. 4.97% 5.09% 4.95% 5.13%
---- ---- ---- ----
Interest rate spread (1).............. 2.77% 2.83% 2.82% 2.85%
==== ==== ==== ====
Net interest margin (2)............... 3.30% 3.41% 3.33% 3.39%
==== ==== ==== ====
</TABLE>
(1) The interest rate spread represents the difference between the weighted-
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(2) The net interest margin represents net interest income as a percentage of
average interest-earning assets.
Provision for Loan Losses The provision for loan losses remained unchanged at
- -------------------------
$400,000 and $800,000 for the three and six months ended December 31, 1999,
compared to the same period last year. The allowance for loan losses is
maintained at an amount management considers adequate to cover losses on loans
receivable which are deemed probable and estimable and is based on management's
evaluation of the risks inherent in its loan portfolio and the general economy.
A number of factors are considered, including asset classifications, estimated
collateral values, local economic conditions, management's assessment of the
credit risk inherent in the portfolio, historical loan loss experience, and the
Company's underwriting policies.
As a result of the potential weakness in certain real estate markets and other
economic factors, increases in the allowance for loan losses may be required in
future periods. In addition, the OTS and the Federal Deposit Insurance
Corporation ("FDIC"), as an integral part of their examination process,
periodically review the Company's allowance for loan losses. These agencies may
require the Company to increase the allowance for loan losses based on their
judgments of the information available at the time of their examination.
14
<PAGE>
The following is a summary of the activity in the allowance for loan losses:
<TABLE>
<CAPTION>
At or for the At or for the
Three Months Ended Six Months Ended
December 31, December 31, December 31, December 31,
1999 1998 1999 1998
------------- ------------- ------------- -----------------
(In Thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period... $9,070 $7,708 $8,684 $7,955
Provision for loan losses........ 400 400 800 800
Charge-offs...................... (57) (27) (87) (674)
Recoveries....................... -- -- 16 --
------ ------ ------ ------
Balance at end of period......... $9,413 $8,081 $9,413 $8,081
====== ====== ====== ======
</TABLE>
Other Income Other income for the three months ended December 31, 1999 remained
- ------------
unchanged at $1.2 million compared to the same period last year. Other income
for the six months ended December 31, 1999 was $2.3 million compared to $2.6
million for the same period last year. Included in other income for the three
and six months ended December 31, 1998 were pretax gains of $271,000 and
$616,000 related to the sale of securities available for sale. Excluding gains
on the sale of securities, other income has increased for both the quarter and
six months ended December 31, 1999 due to an increase in deposit fees due
primarily to an increase in checking account activity. In addition, other income
for the quarter ended December 31, 1998 was reduced by a writedown of $100,000
related to a premium paid on purchased mortgage servicing rights. The premium
was initially recorded at cost and was subsequently reported at the lower of
amortized cost or fair value. There was no writedown required for the quarter
ended December 31, 1999.
Other Expense Other expense for the three months ended December 31, 1999
- -------------
remained unchanged at $4.5 million compared to the same period last year. Other
expense for the six months ended December 31, 1999 was $8.7 million compared to
$8.6 million for the same period last year. Other expense for the three month
and six months ended December 31, 1999 included net gains on the sale of real
estate held for sale of $274,000 and $454,000, respectively. Excluding these
gains, there was an increase in other expense primarily as a result of the cost
of preparing for the Year 2000 computer issue and the relocation of an existing
branch to a larger and more accessible location in December 1999 and the
acquisition of a retail banking branch from another financial institution in
November 1999. The efficiency ratio for the quarter ended December 31, 1999
improved to 48.43% compared to 52.95% for the same period last year. The
efficiency ratio is the measurement of general and administrative expense as a
percentage of net interest income and other income, excluding nonrecurring
items.
15
<PAGE>
Income Taxes The Company's effective tax rates were 43.94% and 44.22% for the
- ------------
quarters ended December 31, 1999 and 1998, respectively. The Company's
effective tax rates were 43.96% and 44.21% for the six months ended December 31,
1999 and 1998, respectively. The effective tax rates were comparable to the
applicable statutory rates in effect.
YEAR 2000
The concern over the "Year 2000" ("Y2K") issue resulted from computer programs
being written using two digits rather than four digits to identify a year in the
date field. Throughout the world there was concern that this issue could cause
computer systems to fail or create erroneous results at the Year 2000.
Beginning in 1997, the Company took various steps to mitigate the potential
impact of a Y2K problem. In general, these actions were designed to identify,
assess, and design an action plan to mitigate the risks that the Company might
have encountered relative to the Y2K problem, including risks faced by the
Company's third-party vendors.
The total cost of the Company's plan to address Y2K issues as of December 31,
1999 was $1.4 million, including estimates of personnel costs. Hardware and
software upgrades will be depreciated over their useful lives in accordance with
the Company's policy. All other costs were expensed as incurred. The total
amount expensed during fiscal 2000 and fiscal 1999 related to the Y2K issue was
$220,000 and $464,000, respectively.
Following the end of 1999 and subsequently to date, the Company experienced no
problems with its or its third-party vendors' computer systems or services
relative to the Y2K issue that had a material adverse impact on the Company's
financial condition, results of operations or liquidity. The Company has and
will continue to monitor its significant vendors with respect to Y2K problems
they may encounter as those issues may adversely affect the Company. The
Company does not believe at this time that any potential problems relative to
the Y2K issue will materially impact the Company in the future; however, no
assurance can be given that this will be the case.
16
<PAGE>
ASSET QUALITY
The following table sets forth information regarding nonaccrual loans, troubled
debt restructured loans and real estate acquired through foreclosure at the
dates indicated:
<TABLE>
<CAPTION>
At At At
December 31, June 30, December 31,
1999 1999 1998
---- ---- ----
(Dollars in Thousands)
Nonaccrual loans (1):
Real estate loans:
<S> <C> <C> <C>
One-to-four family.......................................... $ 2,787 $ 3,062 $ 2,426
Multifamily................................................. -- -- 592
Commercial and land......................................... 1,721 1,752 1,686
Consumer.................................................... 140 170 --
------- ------- -------
Total nonaccrual loans (1).................................. 4,648 4,984 4,704
Troubled debt restructured loans............................ 215 218 222
------- ------- -------
Total nonperforming loans........................... 4,863 5,202 4,926
Real estate acquired through foreclosure.................... 292 2,340 2,524
------- ------- -------
Total nonperforming assets......................... $ 5,155 $ 7,542 $ 7,450
======= ======= =======
Nonperforming loans as a percentage of gross loans (2)...... 0.51% 0.61% 0.68%
Nonperforming assets as a percentage of total assets(3)..... 0.46% 0.74% 0.83%
General Valuation Allowance (GVA) on loans
as a percentage of gross loans.......................... 0.94% 0.96% 0.90%
GVA on loans as a percentage of total nonperforming loans... 182.67% 158.02% 132.81%
Total GVA as a percentage of total nonperforming assets..... 172.32% 108.99% 90.16%
</TABLE>
(1) Nonaccrual loans are net of specific allowances of $33,000, $68,000 and
$439,000 at December 31, 1999, June 30, 1999 and December 31, 1998,
respectively.
(2) Nonperforming loans include nonaccrual and troubled debt restructured loans.
Gross loans include loans held for sale.
(3) Nonperforming assets include nonperforming loans and REO.
The Company's nonaccrual policy provides that interest accruals generally are to
be discontinued once a loan is past due for a period of 60 days or more. Loans
may also be placed on nonaccrual status even though they are less than 60 days
past due if management concludes that it is probable that the borrower will not
be able to comply with the repayment terms of the loan.
The Company defines nonperforming loans as nonaccrual loans and troubled debt
restructured loans (at December 31, 1999, all troubled debt restructured loans
were performing according to their restructured terms). Nonperforming loans are
reported net of specific allowances. Nonperforming assets are defined as
nonperforming loans and real estate acquired through foreclosure.
17
<PAGE>
Nonperforming assets decreased to $5.2 million, 0.46% of total assets at
December 31, 1999, compared to $7.5 million, 0.74% of total assets at June 30,
1999. The decrease in nonperforming assets for the three month period is
primarily a result of a reduction in real estate acquired through foreclosure.
Impaired Loans A loan is considered impaired when based on current
- --------------
circumstances and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. Creditors are required to measure impairment of a loan based on any
one of the following: (i) the present value of expected future cash flows from
the loan discounted at the loan's effective interest rate, (ii) an observable
market price or (iii) the fair value of the loan's underlying collateral. The
Company measures loan impairment based upon 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. At December 31, 1999, the Company had
a gross investment in impaired loans of $1.7 million for which specific
valuation allowances of $379,000 had been established.
During both the three and six months ended December 31, 1999, the Company's
average investment in impaired loans was $1.7 million. For the three and six
months ended December 31, 1998, the Company's average investment in impaired
loans was $6.4 million and $6.7 million, respectively. For the three and six
months ended December 31, 1999, income recorded on impaired loans totaled
$32,000 and $63,000, substantially all of which was recorded utilizing the cash-
basis method of accounting. For the three and six months ended December 31,
1998, income recorded on impaired loans totaled $152,000 and $315,000,
substantially all of which was recorded utilizing the cash-basis method of
accounting. Payments received on impaired loans which are performing under
their contractual terms are allocated to principal and interest in accordance
with the terms of the loans. All impaired loans were performing in accordance
with their contractual terms at December 31, 1999.
REGULATORY CAPITAL
The OTS' capital regulations include three separate minimum capital requirements
for financial institutions subject to OTS supervision. First, the tangible
capital requirement mandates that the Bank's stockholder's equity less
intangible assets be at least 1.50% of adjusted total assets as defined in the
capital regulations. Second, the core capital requirement currently mandates
core capital (tangible capital plus qualifying supervisory goodwill) be at least
4.00% of adjusted total assets as defined in the capital regulations. Third,
the risk-based capital requirement presently mandates that core capital plus
supplemental capital as defined by the OTS be at least 8.00% of risk-weighted
assets as prescribed in the capital regulations. The capital regulations assign
specific risk weightings to all assets and off-balance sheet items.
18
<PAGE>
The Bank was in compliance with all capital requirements in effect at December
31, 1999, and meets all standards necessary to be considered "well-capitalized"
under the prompt corrective action regulations adopted by the OTS pursuant to
the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). The
following table reflects the required and actual regulatory capital ratios of
the Bank at the dates indicated:
<TABLE>
<CAPTION>
FDICIA
FIRREA "Well-capitalized" Actual Actual
Regulatory Capital Ratios for Quaker City Minimum Minimum At December 31, At June 30,
Bank Requirement Requirement 1999 1999
- ---- ------------ ----------- ---- ----
<S> <C> <C> <C> <C>
Tangible capital........................... 1.50% N/A 7.27% 7.48%
Core capital to adjusted total assets...... 4.00% 5.00% 7.27% 7.48%
Core capital to risk-weighted assets....... N/A 6.00% 10.90% 11.05%
Total capital to risk-weighted assets...... 8.00% 10.00% 12.10% 12.26%
</TABLE>
19
<PAGE>
* * * * *
This Quarterly Report on Form 10-Q includes "forward-looking statements" within
the meaning of the Securities Exchange Act of 1934, as amended by the Private
Securities Litigation Reform Act of 1995. All statements, other than statements
of historical facts, included in this report that address results or
developments that the Company expects or anticipates will or may occur in the
future, including such things as (i) business strategy; (ii) economic trends,
including the condition of the real estate market in Southern California, and
the direction of interest rates and prepayment speeds of mortgage loans and MBS;
(iii) the adequacy of the Company's allowances for loan and real estate losses:
(iv) goals; (v) expansion and growth of the Company's business and operations;
and (vi) other matters are forward-looking statements. These statements are
based upon certain assumptions and analyses made by the Company in light of its
experience and its perception of historical trends, current conditions and
expected future developments as well as other factors it believes are
appropriate in the circumstances. These statements are subject to a number of
risks and uncertainties, many of which are beyond the control of the Company,
including general economic, market or business conditions; real estate market
conditions, particularly in California; the opportunities (or lack thereof) that
may be presented to and pursued by the Company; competitive actions by other
companies; changes in law of regulations; and other factors. Actual results
could differ materially from those contemplated by these forward-looking
statements. Consequently, all of the forward-looking statements made in this
report are qualified by these cautionary statements and there can be no
assurance that the actual results or developments anticipated by the Company
will be realized or, even if substantially realized, that they will have the
expected consequences to or effects on the Company and its business or
operations. Forward-looking statements made in this report speak as of the date
hereof. The Company undertakes no obligation to update or revise any forward-
looking statement made in this report.
20
<PAGE>
Part II. Other Information
Item 4. Submission of Matters to a Vote of Stockholders
-----------------------------------------------
At the Annual Meeting of Stockholders of the Company held on November
19, 1999, the following were approved:
Election of the following nominees as directors of the Company:
(1) David S. Engelman was elected by a vote of 5,237,432 for,
none against, with 112,699 abstentions.
(2) David K. Leichtfuss was elected by a vote of 5,237,432
for, none against, with 112,699 abstentions.
Approval of the Amendment to the Quaker City Bancorp, Inc. 1997 Stock Incentive
Plan to increase the number of shares reserved for issuance thereunder:
Votes for: 4,181,741
Votes against: 1,051,962
Votes abstaining: 114,346
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits -
11.1 Computation of Earnings per Share
27.1 Financial Data Schedule
(b) Reports on Form 8-K -
No reports on Form 8-K were filed by the registrant during
the quarter for which this report is filed.
21
<PAGE>
Signatures
----------
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Quaker City Bancorp, Inc.
Date: February 11, 2000 By: /s/ Dwight L. Wilson
----------------- -------------------------------
Dwight L. Wilson
Senior Vice President,
Treasurer and Chief Financial Officer
22
<PAGE>
EXHIBIT 11.1
Quaker City Bancorp, Inc.
Computation of Earnings Per Share
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
December 31, December 31,
1999 1999
---- ----
<S> <C> <C>
A Average common shares outstanding............... 5,080,025 5,118,409
-----------------------------
B Net earnings for period......................... $2,781,000 $5,471,000
=============================
Basic earnings per share [B/A].................. $ 0.55 $ 1.07
=============================
Common share equivalents :
C Stock options outstanding....................... 665,096 665,096
-----------------------------
D Option exercise price........................... $ 9.97 $ 10.00
-----------------------------
E Exercise proceeds [CxD]......................... $6,631,007 $6,650,960
-----------------------------
F Average market price in period.................. $ 16.84 $ 16.92
-----------------------------
G Shares repurchased at market price [E/F]........ 393,765 393,083
-----------------------------
H Increase in common shares [C-G]................. 271,331 272,013
-----------------------------
I Shares outstanding and equivalents [A+H]........ 5,351,356 5,390,422
=============================
J Net earnings for period......................... $2,781,000 $5,471,000
=============================
Diluted earnings per share [J/I]................ $ 0.52 $ 1.01
=============================
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 11,414
<INT-BEARING-DEPOSITS> 2,380
<FED-FUNDS-SOLD> 7,770
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 26,955
<INVESTMENTS-CARRYING> 97,679
<INVESTMENTS-MARKET> 97,679
<LOANS> 934,107
<ALLOWANCE> 9,413
<TOTAL-ASSETS> 1,109,668
<DEPOSITS> 739,120
<SHORT-TERM> 153,839
<LIABILITIES-OTHER> 14,440
<LONG-TERM> 118,800
0
0
<COMMON> 52
<OTHER-SE> 83,417
<TOTAL-LIABILITIES-AND-EQUITY> 1,109,668
<INTEREST-LOAN> 35,111
<INTEREST-INVEST> 3,924
<INTEREST-OTHER> 550
<INTEREST-TOTAL> 39,585
<INTEREST-DEPOSIT> 16,244
<INTEREST-EXPENSE> 22,589
<INTEREST-INCOME-NET> 16,996
<LOAN-LOSSES> 800
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 8,684
<INCOME-PRETAX> 9,763
<INCOME-PRE-EXTRAORDINARY> 9,763
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,471
<EPS-BASIC> 1.07
<EPS-DILUTED> 1.01
<YIELD-ACTUAL> 7.76
<LOANS-NON> 4,648
<LOANS-PAST> 0
<LOANS-TROUBLED> 215
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 8,684
<CHARGE-OFFS> 147
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 9,413
<ALLOWANCE-DOMESTIC> 9,413
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
