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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended June 30, 2000
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission File Number 0-22528
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QUAKER CITY BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4444221
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7021 Greenleaf Avenue 90602
Whittier, California (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (562) 907-2200
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
[X] Yes [_] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the average bid and asked price of its Common Stock,
$.01 par value, on September 21, 2000, on the Nasdaq National Market System
was approximately $75,830,000.
At September 21, 2000, 5,096,077 shares of the Registrant's Common Stock
were outstanding.
Documents Incorporated by Reference
Portions of the Registrant's Proxy Statement to be filed with the Securities
and Exchange Commission in connection with the Annual Meeting of Stockholders
to be held November 15, 2000 are incorporated by reference in Part III hereof.
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TABLE OF CONTENTS
Page
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PART I
ITEM 1. BUSINESS..................................................... 1
General...................................................... 1
Lending Activities........................................... 3
Delinquencies and Classification of Assets................... 11
Nonperforming Assets and Restructured Loans.................. 13
Impaired Loans............................................... 15
Allowances for Loan and Real Estate Losses................... 15
Investment Activities........................................ 19
Sources of Funds............................................. 20
Subsidiary Activities........................................ 22
Competition.................................................. 23
Personnel.................................................... 23
Federal Taxation............................................. 23
State and Local Taxation..................................... 25
Environmental Regulation..................................... 25
Regulation and Supervision................................... 26
General..................................................... 26
Activities Restrictions..................................... 26
Deposit Insurance........................................... 27
Regulatory Capital Requirements............................. 27
Prompt Corrective Action Requirements....................... 29
Enforcement................................................. 29
Savings and Loan Holding Company Regulation................. 30
Classification of Assets.................................... 32
Community Reinvestment Act.................................. 33
Federal Home Loan Bank System............................... 33
Required Liquidity.......................................... 33
Federal Reserve System...................................... 34
Financial Modernization Legislation......................... 34
ITEM 2. PROPERTIES................................................... 36
ITEM 3. LEGAL PROCEEDINGS............................................ 37
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......... 37
ITEM 4A. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........... 37
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.......................................... 38
ITEM 6. SELECTED FINANCIAL DATA...................................... 40
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................... 42
General...................................................... 42
Results of Operations........................................ 42
Financial Condition.......................................... 44
Capital Resources and Liquidity.............................. 45
Asset/Liability Management................................... 47
Average Balance Sheet........................................ 51
Year 2000.................................................... 53
Impact of Inflation and Changing Prices...................... 54
Impact of New Accounting Standards........................... 54
Page
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK... 54
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................. F-1
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE..................................... II-1
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........... II-1
ITEM 11. EXECUTIVE COMPENSATION....................................... II-1
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................... II-1
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............... II-1
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.................................................. II-1
SIGNATURES................................................... II-7
This Annual Report on Form 10-K includes "forward-looking statements" within
the meaning of the Securities Exchange Act of 1934, as amended by the Private
Securities Litigation Reform Act of 1995. All statements, other than
statements of historical facts, included in this report that address results
or developments that Quaker City Bancorp, Inc. (the "Company") expects or
anticipates will or may occur in the future, including such things as (i)
business strategy; (ii) economic trends, including the condition of the real
estate market in southern California, and the direction of interest rates and
prepayment speeds of mortgage loans and mortgage-backed securities; (iii) the
adequacy of the Company's allowances for loan and real estate losses; (iv)
goals; (v) expansion and growth of the Company's business and operations; and
(viii) other matters are forward-looking statements. These statements are
based upon certain assumptions and analyses made by the Company in light of
its experience and its perception of historical trends, current conditions and
expected future developments as well as other factors it believes are
appropriate in the circumstances. These statements are subject to a number of
risks and uncertainties, many of which are beyond the control of the Company,
including general economic, market or business conditions; real estate market
conditions, particularly in California; the opportunities (or lack thereof)
that may be presented to and pursued by the Company; competitive actions by
other companies; changes in law of regulations; and other factors. Actual
results could differ materially from those contemplated by these forward-
looking statements. Consequently, all of the forward-looking statements made
in this report are qualified by these cautionary statements and there can be
no assurance that the actual results or developments anticipated by the
Company will be realized or, even if substantially realized, that they will
have the expected consequences to or effects on the Company and its business
or operations. Forward-looking statements made in this report speak as of the
date hereof. The Company undertakes no obligation to update or revise any
forward-looking statement made in this report.
PART I
ITEM 1. BUSINESS
General
Quaker City Bancorp, Inc., incorporated in Delaware, is primarily engaged in
the savings and loan business through its wholly owned subsidiary Quaker City
Bank (the "Bank"). The Company was organized on September 13, 1993, for the
purpose of acquiring all of the capital stock of the Bank issued in the
conversion of the Bank from mutual to stock form effective December 30, 1993.
The Bank was originally founded in 1920 as the Mutual Building and Loan
Association of Whittier, and in 1938 became a federally chartered mutual
savings and loan association. The Company's principal business is serving as
the holding company for the Bank. The executive offices of the Company are
located at 7021 Greenleaf Avenue, Whittier, California 90602, telephone number
(562) 907-2200.
The Bank currently operates fifteen retail full service branches in the
southern California communities of Whittier (2), La Habra (2), Brea,
Fullerton, La Mirada, Hacienda Heights, Anaheim Hills, Rowland Heights,
Lakewood, Los Angeles, Corona, Foothill Ranch and Placentia. Four of these
branches were opened in calendar year 2000 inside Wal-Mart stores. The Bank
also has plans to open at least two additional Wal-Mart "in-store" branches in
southern California during fiscal 2001.
The Company is a savings and loan holding company and as such is subject to
examination and regulation by the Office of Thrift Supervision ("OTS"). The
deposits of the Bank are insured by the Savings Association Insurance Fund
("SAIF") of the Federal Deposit Insurance Corporation (the "FDIC"). The Bank
is regulated by the Director of the OTS and the FDIC. The Bank is a member of
the Federal Home Loan Bank ("FHLB") of San Francisco, which is one of the 12
regional banks comprising the Federal Home Loan Bank System. The Bank is also
subject to certain regulations of the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board") with respect to
1
reserves required to be maintained against deposits and certain other matters.
See "--Regulation and Supervision--General."
The Bank's principal business has been and continues to be attracting retail
deposits from the general public in its primary deposit market area
surrounding its offices and investing those deposits, together with funds
generated from operations and borrowings. Through its wholly owned subsidiary,
Quaker City Financial Corporation ("QCFC"), the Company also engages in the
sale of insurance and investment products on an agency basis. See "--
Subsidiary Activities." The Company originates predominantly multifamily,
commercial real estate and one-to-four family loans and emphasizes multifamily
lending in low and moderate income communities, primarily in southern
California metropolitan areas. To a lesser extent, loans are also originated
and purchased in Central and Northern California. Under certain circumstances,
one-to-four family loans are purchased on loans secured by properties outside
the state of California.
Historically, the Company's principal business was the making of one-to-four
family and multifamily (five or more units) loans. In every year for which
data is presented in this report, i.e., 1996 through 2000, the Company's
multifamily loan portfolio has increased in total dollar amount and has
represented a significant portion of the Company's total loan portfolio. See
"--Lending Activities--Loan and MBS Portfolio Composition." Beginning
principally with the hiring announced in January 1998 of the income property
lending staff of another southern California financial institution, the
Company has increased its focus on commercial real estate lending. The Company
currently intends to continue its emphasis on multifamily and commercial real
estate lending, with their higher risk-adjusted rates of return, rather than
on lower yielding one-to-four family lending. At June 30, 2000, the Company's
gross loan portfolio (including loans held for sale) totaled $1.0 billion,
68.33% of which was secured by multifamily properties (approximately $505.4
million) and commercial real estate (approximately $196.5 million).
Both the multifamily and the commercial real estate loan portfolios have
grown at a significant rate during fiscal 2000. From June 30, 1999 to June 30,
2000 the net increase in the Company's multifamily portfolio was $113.8
million representing a 29.07% increase in the size of the portfolio. From June
30, 1999 to June 30, 2000, the net increase in the Company's commercial real
estate loan portfolio was $56.1 million, representing a 39.92% increase in the
size of the portfolio. At June 30, 2000, however, the $505.4 million
multifamily portfolio represented 49.20% of the Company's gross loans and the
$196.5 million commercial real estate portfolio represented 19.13% of the
Company's gross loans. As a percentage of gross loans, the multifamily
portfolio increased in size by 3.27% and the commercial real estate portfolio
increased in size by 2.65% from June 30, 1999 to June 30, 2000. See "--Lending
Activities--Multifamily Lending--Commercial Real Estate Lending."
In addition to originating loans to hold in portfolio, the Company also
originates loans for sale. The Company sold $48.9 million of loans in fiscal
2000. The Company also purchases loans for investment and for sale. During
fiscal 2000, the Company purchased $85.8 million in loans of which, $45.6
million were one-to-four family. Loans sold come from loans held in the
Company's portfolio designated as being held for sale or originated during the
most recent period and designated as held for sale. Historically, the Company
has generally retained the servicing rights on most loans sold, however, some
loans are sold servicing released. In addition, the Company invests in
securities issued by the U.S. Government and agencies thereof, mortgage-backed
securities ("MBS") and other permitted investments under applicable federal
laws and regulations. The Company's revenues are derived principally from
interest on its mortgage loans, and to a lesser extent, mortgage loan
servicing activities, and interest and dividends on its investment securities
and MBS.
The Company's primary sources of funds are deposits, borrowings from the
FHLB of San Francisco ("FHLB advances"), securities sold under agreements to
repurchase, principal and interest payments on loans and MBS and proceeds from
the sale of loans. At June 30, 2000, the
2
Company had deposits of approximately $808.2 million, including approximately
$183.6 million in certificates of deposit of $100,000 or more. The Company's
borrowings at June 30, 2000 included $290.3 million in FHLB advances. See "--
Sources of Funds."
For the year ended June 30, 2000, the Company reported net earnings of $11.8
million, $2.23 per share diluted. This compares to net earnings of $9.6
million, $1.70 per share diluted, and $6.6 million, $1.14 per share diluted,
for the years ended June 30, 1999 and 1998, respectively. The increase in
fiscal 2000 earnings over fiscal 1999 was primarily due to an increase in net
interest income partially offset by an increase in other expenses. The
increase in fiscal 1999 earnings over fiscal 1998 was also primarily due to an
increase in net interest income partially offset by an increase in other
expenses.
Total assets of the Company were $1.2 billion at June 30, 2000, an increase
of $188.5 million compared to June 30, 1999. The increase in assets was
primarily in loans, with commercial real estate loans increasing $56.1
million, multifamily loans increasing $113.8 million and one-to-four family
loans increasing $3.3 million. The asset growth was funded primarily by an
increase in deposits of $130.4 million and $55.6 million of FHLB advances.
Included in the increase of $130.4 million of deposits during fiscal 2000 is
$45.9 million of retail deposits purchased from another financial institution
and its branch office located in Rowland Heights, California. In addition,
while the vast majority of the Bank's deposits are retail in nature, the Bank
accepted $55 million in time deposits from a political subdivision during
fiscal 2000. The Bank considers these funds to be wholesale deposits and an
alternative borrowing source rather than a customer relationship and their
levels are determined by management's decision as to the most economic funding
source. At June 30, 2000, the Company had total deposits of $808.2 million and
total FHLB advances of $290.3 million.
The southern California economy and real estate market in the Company's
primary lending area have continued to be strong. The Company's level of
nonperforming assets declined from June 30, 1999. The Company includes
nonaccrual loans, troubled debt restructured loans and real estate acquired
through foreclosure ("REO") in determining its level of nonperforming assets.
At June 30, 2000, the Company reported $4.4 million in nonperforming assets
compared to $7.5 million and $9.8 million at June 30, 1999 and 1998,
respectively. The Company recorded provisions for loan losses of $1.6 million
for the year ended June 30, 2000 compared to $1.7 million and $1.5 million for
the years ended June 30, 1999 and 1998, respectively. See "--Allowances for
Loan and Real Estate Losses" and "Management's Discussion and Analysis
("MD&A")--Results of Operations."
Lending Activities
Loan and MBS Portfolio Composition. Historically, the Company's principal
business was the making of one-to-four family and multifamily loans. In every
year for which data is presented in this report, i.e., 1996 through 2000, the
Company's multifamily loan portfolio has increased in total dollar amount and
has represented a significant portion of the Company's total loan portfolio.
Beginning principally with the hiring announced in January 1998 of the income
property lending staff of another southern California financial institution,
the Company has increased its focus on commercial real estate lending. The
Company currently intends to continue its emphasis on multifamily and
commercial real estate lending, with their higher risk-adjusted rates of
return, rather than on lower yielding one-to-four family lending. At June 30,
2000, the Company had $1.0 billion of gross loans outstanding, 68.33% of which
was secured by either multifamily properties or commercial real estate. Gross
loans outstanding at June 30, 2000 included $505.4 million of multifamily
loans, representing 49.20% of gross loans, $196.5 million of commercial real
estate loans, representing 19.13% of gross loans, and $315.7 million of one-
to-four family loans, representing 30.73% of gross loans. The remainder of
gross loans at June 30, 2000 consisted of $1.5 million of land loans, or 0.14%
of gross loans, and other loans of $8.2 million, or 0.80% of gross loans.
Included in these amounts at June 30, 2000 were $21.2 million of loans held
for sale, comprising 2.06% of gross loans.
3
The net increase in the Company's multifamily loans during fiscal 2000 was
$113.8 million, representing an increase of 29.07% in the multifamily loan
portfolio as compared to June 30, 1999. The net increase in the Company's
commercial real estate loans during fiscal 2000 was $56.1 million,
representing an increase of 39.92% in the commercial real estate loan
portfolio as compared to June 30, 1999. The net increase in the Company's one-
to-four family loans during fiscal 2000 was $3.3 million, representing an
increase of 1.05% in the one-to-four family loan portfolio as compared to
June 30, 1999. As a percentage of gross loans, multifamily loans increased by
3.27%, commercial loans increased by 2.65% and one-to-four family loans
decreased by 5.92% from June 30, 1999 to June 30, 2000. These percentage
changes in the composition of the gross mortgage loan portfolio are a result
of the relative growth of the multifamily and commercial real estate loan
portfolios and the Company's sale of approximately 40% of the one-to-four
family loans it originated during the 2000 fiscal year. The Company currently
intends to continue to focus on multifamily and commercial real estate
lending. During fiscal 2000, the Company purchased $85.8 million in loans of
which, $46.0 million were one-to-four family. The Company anticipates that the
purchase of one-to-four family loans will remain a focus of the Company in
fiscal 2001.
The Company invests in MBS, including securities guaranteed by the
Government National Mortgage Association ("GNMA"), Federal National Mortgage
Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC"). To
a limited extent the Company also invests in privately issued MBS which
typically have received a "AA" or "AAA" credit rating from at least one
nationally recognized rating service. The Company invests in both adjustable-
rate and fixed-rate MBS. In an effort to reduce the potential interest rate
risk inherent in fixed-rate assets, the Company purchases fixed-rate MBS with
a variety of coupon rates, maturities, and prices. Furthermore, the assets are
typically purchased with fixed-rate FHLB advances of various terms to maturity
primarily ranging from one month to five years in order to mitigate the
Company's exposure to changes in interest rates. The adjustable-rate MBS in
the Company's portfolio typically have life caps that will prevent the MBS
from further upward adjustments in rate should interest rates rise above the
cap limit. Prior to purchase, management considers the Company's overall
tolerance to interest rate risk and invests accordingly. At June 30, 2000, the
Company's MBS portfolio (including MBS available for sale) totaled
$109.9 million or 9.15% of total assets. The Company's MBS are comprised of
$81.8 million of agency securities, $1.5 million issued by other financial
institutions and $26.5 million in collateralized mortgage obligations
("CMO's"). Of the $26.5 million in CMO's 65.91% or $17.4 million are agency
guaranteed. For all years presented, the CMO's represent non-equity senior
interests in mortgage pass-through certificates and were of investment grade.
At June 30, 2000, $24.4 million in MBS were classified as available for sale.
4
The following table sets forth the composition of the Company's loan and MBS
portfolios in dollar amounts and percentages of the respective portfolio at
the dates indicated.
At June 30,
--------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---------------------- -------------------- ------------------- ------------------- --------------------
Percentage Percentage Percentage Percentage Percentage
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
---------- ---------- -------- ---------- -------- ---------- -------- ---------- -------- ----------
(Dollars in thousands)
Loans:
Residential:
One-to-four
units........... $ 315,689 30.73% $312,407 36.65% $279,862 39.26% $299,979 45.47% $303,273 48.54%
Multifamily..... 505,436 49.20 391,596 45.93 347,285 48.72 301,965 45.77 258,970 41.45
Commercial........ 196,506 19.13 140,439 16.48 77,810 10.92 55,331 8.39 60,822 9.74
Land.............. 1,456 0.14 344 0.04 348 0.05 1,352 0.21 1,038 0.17
Other............. 8,171 0.80 7,730 0.90 7,544 1.05 1,070 0.16 627 0.10
---------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Loans, gross.... 1,027,258 100.00% 852,516 100.00% 712,849 100.00% 659,697 100.00% 624,730 100.00%
====== ====== ====== ====== ======
Less:
Undisbursed loan
funds............. 320 684 579 441 378
Unamortized
discounts......... 752 1,078 2,170 2,404 2,864
Deferred loan
fees, net......... 4,138 3,852 3,612 3,493 3,093
Allowance for
loan losses....... 10,161 8,684 7,955 7,772 7,833
---------- -------- -------- -------- --------
Loans, net...... 1,011,887 838,218 698,533 645,587 610,562
Less:
Loans held for
sale:
One-to-four
units........... -- 353 1,043 623 1,455
Multifamily..... 11,173 7,234 6,464 -- 1,435
Commercial...... 10,031 9,441 -- -- --
Other........... 8 -- -- -- --
---------- -------- -------- -------- --------
Net loans held
for investment.. $ 990,675 $821,190 $691,026 $644,964 $607,672
========== ======== ======== ======== ========
Mortgage-backed
securities:
FNMA.............. $ 12,110 11.01% $ 5,509 5.51% $ 11,309 9.84% $ 13,240 17.87% $ 11,129 26.70%
FHLMC............. 5,171 4.70 399 0.40 8,272 7.20 1,298 1.75 1,697 4.07
GNMA.............. 64,474 58.62 61,858 61.91 52,306 45.52 33,577 45.32 7,885 18.92
Issued by other
financial
institutions...... 1,591 1.45 2,223 2.22 3,628 3.16 4,554 6.15 5,781 13.87
Collateralized
mortgage
obligations....... 26,648 24.22 29,939 29.96 39,391 34.28 21,423 28.91 15,185 36.44
---------- ------ -------- ------ -------- ------ -------- ------ -------- ------
109,994 100.00% 99,928 100.00% 114,906 100.00% 74,092 100.00% 41,677 100.00%
====== ====== ====== ====== ======
Plus (Less):
Unamortized
premium
(discount)........ (133) (67) 945 47 (502)
---------- -------- -------- -------- --------
Mortgage-backed
securities,
net............. 109,861 99,861 115,851 74,139 41,175
Less:
Mortgage-backed
securities
available for
sale.............. 24,404 15,783 8,274 -- --
---------- -------- -------- -------- --------
Net mortgage-
backed
securities held
to maturity..... 85,457 84,078 107,577 74,139 41,175
---------- -------- -------- -------- --------
Total net loans and
mortgage-backed
securities held for
investment or to
maturity........... $1,076,132 $905,268 $798,603 $719,103 $648,847
========== ======== ======== ======== ========
5
Loan Maturity. The following table shows the contractual maturity of the
Company's gross loans and MBS at June 30, 2000. The table includes loans held
for sale of $21.2 million and MBS available for sale of $24.4 million. The
table does not include estimated principal repayments. Actual principal
repayments on loans totaled $127.3 million, $145.6 million and $91.8
million for the years ended June 30, 2000, 1999 and 1998, respectively.
Principal repayments on MBS totaled $13.4 million, $25.0 million, and $29.6
million for the years ended June 30, 2000, 1999, and 1998, respectively.
At June 30, 2000
---------------------------------------------------------------------------
One- Total Mortgage-
to-Four Multi- Loans Backed
Family family Commercial Land Other Receivable Securities Total
-------- -------- ---------- ------ ------ ---------- ---------- ----------
(In thousands)
Amounts due:
One year or less....... $ 2,355 $ 1,819 $ 5,604 $ -- $ 344 $ 10,122 $ -- $ 10,122
-------- -------- -------- ------ ------ ---------- -------- ----------
After one year:
More than one year to
three years........... 1,176 14,305 5,778 -- -- 21,259 -- 21,259
More than three years
to five years......... 2,002 6,617 3,739 -- 15 12,373 -- 12,373
More than five years to
10 years.............. 18,132 86,025 114,425 -- 241 218,823 -- 218,823
More than 10 years to
20 years.............. 109,231 286,082 60,644 1,795 457,752 4,947 462,699
More than 20 years..... 182,793 110,588 6,316 1,456 5,776 306,929 105,047 411,976
-------- -------- -------- ------ ------ ---------- -------- ----------
Total due after one
year................. 313,334 503,617 190,902 1,456 7,827 1,017,136 109,994 1,127,130
-------- -------- -------- ------ ------ ---------- -------- ----------
Total amounts due..... $315,689 $505,436 $196,506 $1,456 $8,171 $1,027,258 $109,994 $1,137,252
======== ======== ======== ====== ====== ========== ======== ==========
The following table sets forth at June 30, 2000, the dollar amount of all
loans due after June 30, 2001, and whether such loans are fixed-rate or
adjustable rate mortgage ("ARM") loans.
At June 30, 2000
---------------------------------
Fixed Adjustable(1) Total
-------- ------------- ----------
(In thousands)
Real estate loans:
One-to-four family.......................... $132,335 $180,999 $ 313,334
Multifamily................................. 22,527 481,090 503,617
Commercial real estate...................... 36,213 154,689 190,902
Land........................................ -- 1,456 1,456
Other loans................................... 3,368 4,459 7,827
-------- -------- ----------
Total loans................................. $194,443 $822,693 $1,017,136
======== ======== ==========
- --------
(1) ARM loans include loans that adjust monthly, semiannually, annually or
once every five years. Five year ARM loans total $2.0 million one-to-four
family, $43.7 million multifamily and $79.3 million commercial real
estate.
Origination, Purchase, Sale and Servicing of Loans. The Company's mortgage
lending activities are conducted primarily through its executive and branch
offices. The Company originates both fixed- rate and ARM loans. Its ability to
originate ARM loans as opposed to fixed-rate loans is dependent upon the
relative customer demand, which is affected by the current and expected future
level of interest rates.
Additionally, the Company purchases or participates in loans originated by
other institutions. The determination to purchase loans is based upon the
Company's investment needs and market
6
opportunities. Subject to regulatory restrictions applicable to savings
associations, the Company's current loan policies allow all loan types to be
purchased. The determination to purchase specific loans or pools of loans is
subject to the Company's underwriting policies, which require consideration of
the financial condition of the borrower and the appraised value of the
property and, with respect to multifamily and commercial real estate loans,
the net operating income of the mortgaged property before debt service and
depreciation and the debt service coverage ratio (the ratio of net operating
income to debt service), among other factors. The Company has purchased loans
from independent parties in various transactions. During the year ended
June 30, 2000, of the $352.2 million of loans generated by the Company in
fiscal 2000 through origination or purchase, $85.8 million, or 24.35%, were
purchased. Of the $85.8 million of loans purchased during fiscal 2000, $28.1
million were multifamily loans, $11.7 million were commercial real estate
loans and $46.0 million were one-to-four family loans.
At origination or time of purchase, the Company designates loans as held for
investment or held for sale. Historically, loans held for sale have been sold
in the secondary market to FNMA, FHLMC and other investors. The Company
generally retains the servicing rights on most loans sold, however, certain
loans are sold servicing released. The determination to sell a specific loan
or pool of loans is made based upon the Company's investment needs, growth
objectives and market opportunities.
In an attempt to further minimize interest rate risk associated with fixed-
rate loans designated as held for sale, the Company may enter into commitments
with FNMA and other investors (known as forward commitments) to sell loans at
a future date at a specified price. The Company will then simultaneously
process and close the loans, thereby attempting to protect the price of loans
in process from interest rate fluctuations that may occur from application to
sale. There is risk involved in this forward commitment activity. In a
declining interest rate environment, borrowers may choose not to close loans,
but the Company would remain obligated to fulfill its forward commitments. The
inability of the Company to originate or acquire loans to fulfill these
commitments may result in the Company being required to pay non-delivery fees.
In an increasing interest rate environment, the Company is subject to interest
rate risk in the event its commitments to make loans to borrowers exceeds its
commitments to sell loans. At June 30, 2000, the Company had no forward
commitments with respect to fixed rate loans held for sale. The Company does
not intend to enter into forward commitments on ARM loans.
The Company sells loans and participations in loans with yield rates to the
investors based upon current market rates. Gain or loss is recognized to the
extent that the selling prices differ from the carrying value of the loans
sold based on the estimated relative fair values of the assets sold and any
retained interests, less any liabilities incurred. The assets obtained on sale
are generally loan servicing assets. Liabilities incurred in a sale may
include recourse obligations or servicing liabilities. At June 30, 2000, the
Company had originated mortgage servicing assets with a book value of $72,000.
In addition to retaining the servicing assets for originated loans, the
Company may also purchase mortgage servicing assets related to mortgage loans
originated by other institutions. The Company's current loan policies provide
that the aggregate amount of purchased mortgage servicing shall not exceed 75%
of the total loans in the Company's portfolio that are serviced for others. At
June 30, 2000, the Company had purchased mortgage servicing assets with a book
value of $197,000.
7
The following table sets forth activity in the Company's loan and MBS
portfolios for the periods indicated:
At or for the Year Ended
June 30,
------------------------------
2000 1999 1998
---------- -------- --------
(In thousands)
Gross loans:
Beginning balance............................. $ 852,516 $712,849 $659,697
Loans originated:
One-to-four family.......................... 25,836 63,016 36,227
Multifamily................................. 167,183 119,794 77,703
Commercial.................................. 72,839 87,259 21,208
Other....................................... 608 1,901 1,436
---------- -------- --------
Total loans originated...................... 266,466 271,970 136,574
Loans purchased............................. 85,752 78,075 48,112
Loans to facilitate the sale of REO......... -- 1,205 1,365
---------- -------- --------
Total...................................... 352,218 351,250 186,051
Less:
Transfer to REO............................. 1,362 3,286 6,239
Principal repayments........................ 127,343 145,612 91,846
Sales of loans.............................. 48,910 63,996 34,324
Other, net.................................. (139) (1,311) 490
---------- -------- --------
Ending balance................................ $1,027,258 $852,516 $712,849
========== ======== ========
Gross mortgage-backed securities:
Beginning balance............................. $ 99,928 $114,906 $ 74,092
Mortgage-backed securities purchased........ 23,506 70,624 71,767
Less:
Mortgage-backed securities sold............. -- 61,989 --
Principal repayments........................ 13,427 25,012 29,595
Other, net.................................. 13 (1,399) 1,358
---------- -------- --------
Ending balance................................ $ 109,994 $ 99,928 $114,906
========== ======== ========
Multifamily Lending. During the year ended June 30, 2000, the Company
originated $167.2 million of multifamily loans. The Company originates
multifamily mortgage loans generally secured by apartment buildings located in
southern California metropolitan areas. To a lesser extent multifamily loans
are also originated and purchased in Central and Northern California. In
originating a multifamily loan, the Company considers the qualifications of
the borrower as well as the securing property. Some of the foremost factors to
be considered are the net operating income of the mortgaged property before
debt service and depreciation, the debt service coverage ratio (the ratio of
net operating income to debt service) and the ratio of the loan amount to the
appraised value of the property. Pursuant to the Company's underwriting
policies, a multifamily loan generally may only be made in an amount up to 80%
of the appraised value of the underlying property. The Company also generally
requires a debt service coverage ratio of at least 110%. Properties securing a
loan are appraised by an independent appraiser and title insurance is required
on all loans. The average outstanding loan balance on multifamily loans at
June 30, 2000 was approximately $383,000, with the largest loan being
$4.8 million. The property collateralizing this loan is located in Chula
Vista, California and the loan was not classified at June 30, 2000. Declines
in the real estate values in the Company's primary lending area may result in
increases in the loan-to-value ratio on some multifamily mortgage loans
subsequent to origination.
8
When evaluating the qualifications of the borrower for a multifamily loan,
the Company considers the financial resources and income level of the
borrower, the borrower's experience in owning or managing similar property,
and the Company's lending experience with the borrower. The Company's
underwriting policies require that the borrower be able to demonstrate strong
management skills and the ability to maintain the property with current rental
income. The borrower should also present evidence of the ability to repay the
mortgage and a history of making mortgage payments on a timely basis. In
assessing the creditworthiness of the borrower, the Company generally reviews
the financial statements, employment and credit history of the borrower, as
well as other related documentation.
At June 30, 2000, the Company's multifamily loan portfolio had increased to
$505.4 million, or 49.20% of gross loans, from $391.6 million, or 45.93% of
gross loans, at June 30, 1999, an increase of $113.8 million. The multifamily
loan portfolio increased in total dollar amount during fiscal 2000 by 29.06%,
and as a percentage of gross loans by 3.27%. Of the $505.4 million multifamily
loans outstanding at June 30, 2000, 4.49% were fixed-rate loans and 95.51%
were ARM loans. Of the 95.51% of ARM loans, 9.06% or $43.7 million are tied to
a treasury bill based index that adjusts once every five years.
Multifamily loans are generally considered to involve a higher degree of
credit risk and to be more vulnerable to adverse conditions in the real estate
market and to deteriorating economic conditions, particularly changes in
interest rates than one-to-four family residential mortgage loans. These loans
typically involve higher loan principal amounts and the repayment of such
loans generally depend on the income produced by the operation or sale of the
property being sufficient to cover operating expenses and debt service.
Sometimes multifamily loans are made to groups of related borrowers, which
concentration could increase the Company's exposure should the circumstances
of one borrower negatively affect the ability of other related borrowers to
repay their loans in full on a timely basis. Recessionary economic conditions
tend to result in higher vacancy and reduced rental rates and net operating
incomes from multifamily residential properties. Of the Company's $139,000 of
charge-offs in fiscal 2000, none, were for multifamily loans. See "--
Allowances for Loan and Real Estate Losses."
Commercial Real Estate Lending. During fiscal 2000, the Company originated
$72.8 million of commercial real estate loans. The Company originates
commercial real estate loans that are generally secured by properties used for
business purposes such as small office buildings, multi-tenant industrial
properties or a combination of residential and retail facilities located
primarily in southern California. To a lesser extent, commercial real estate
loans are also originated and purchased in Central and Northern California.
The Company's underwriting procedures provide that commercial real estate
loans generally may be made in amounts up to 75% of the appraised value of the
property. These loans may be made with terms up to 30 years for ARM loans. The
Company's underwriting standards and procedures are similar to those
applicable to its multifamily loans, wherein the Company considers the net
operating income of the property and the borrower's expertise, credit history
and profitability. The Company has generally required that the properties
securing commercial real estate loans have debt service coverage ratios of at
least 110%. The average outstanding loan balance on commercial real estate
loans at June 30, 2000 was approximately $695,000. The largest commercial real
estate loan in the Company's portfolio, located in Huntington Beach,
California had an outstanding principal balance at June 30, 2000 of $3.4
million and the loan was not classified.
At June 30, 2000, the Company's commercial real estate loan portfolio had
increased to $196.5 million, or 19.13% of gross loans, from $140.4 million, or
16.48% of gross loans, at June 30, 1999, an increase of $56.1 million, or
2.65% of gross loans. This $56.1 million increase in the commercial real
estate loan portfolio during fiscal 2000 represents a 39.92% increase in the
total dollar amount of the commercial real estate portfolio. Of the $196.5
million commercial real estate loans outstanding at June 30, 2000, 19.30% were
fixed-rate loans and 80.70% were ARM loans. Of the 80.70% of ARM loans, 50.03%
or $79.3 million are tied to a treasury bill bond index that adjusts once
every five years.
9
Commercial real estate loans are generally considered to involve a higher
degree of credit risk and to be more vulnerable to adverse conditions in the
real estate market and to deteriorating economic conditions, particularly
changes in interest rates than one-to-four family residential mortgage loans.
These loans typically involve higher loan principal amounts and the repayment
of such loans generally depend on the income produced by the operation or sale
of the property being sufficient to cover operating expenses and debt service.
Sometimes commercial real estate loans are made to groups of related
borrowers, which concentration could increase the Company's exposure should
the circumstances of one borrower negatively affect the ability of other
related borrowers to repay their loans in full on a timely basis. Recessionary
economic conditions tend to result in higher vacancy and reduced rental rates
and net operating incomes from commercial properties. In addition, commercial
real estate values tend to be cyclical. Of the Company's $139,000 of charge-
offs in fiscal 2000, none were for commercial real estate loans. The Company
has significantly increased its commercial real estate loan portfolio during
the past two fiscal years. Both because the size of the commercial real estate
loan portfolio has increased significantly and most of the loans comprising
the portfolio are unseasoned, having been originated within the last two
fiscal years, the Company's past loss experience with respect to its
commercial real estate loan portfolio may not be representative of the risk of
loss in such portfolio in the future. See "--Allowances for Loan and Real
Estate Losses."
One-to-Four Family Lending. The Company originates both fixed-rate mortgage
loans and ARM loans secured by one-to-four family residences, including, to a
lesser extent, condominium and cooperative units with maturities up to 30
years. Originated loans are predominantly secured by property located in
southern California. Loan originations are generally obtained from existing or
past customers, members of the local communities and loan brokers. One-to-four
family loans are purchased with properties securing the loans located
throughout the state of California and in certain circumstances outside of
California. Included in one-to-four family loans are outstanding balances of
$19.3 million of adjustable rate home equity credit lines tied to the Wall
Street Prime index. These loans are generally secured by a first or second
trust deed, with maturities up to 25 years.
During the year ended June 30, 2000, the Company originated $25.8 million of
one-to-four family loans. The Company's policy is to originate one-to-four
family loans in amounts generally up to 80% of the lower of the appraised
value or the selling price of the property securing the loan and up to 95% of
the appraised value or selling price if private mortgage insurance is
obtained. Declines in the real estate values in the Company's lending areas
may result in increases in the loan-to-value ratio on some one-to-four family
loans subsequent to origination.
At June 30, 2000, the Company's one-to-four family loan portfolio had
increased to $315.7 million, or 30.73% of gross loans, from $312.4 million, or
36.65% of gross loans, at June 30, 1999, an increase of $3.3 million. Although
the one-to-four family loan portfolio increased in total dollar amount during
fiscal 2000 by 1.05%, it decreased as a percentage of gross loans by 5.92%.
During fiscal 2000 one-to-four family loans purchased were $46.0 million. Of
the $315.7 million one-to-four family loans outstanding at June 30, 2000,
42.64% were fixed-rate loans and 57.36% were ARM loans.
Certain Loan Terms. Since 1982, the Company has emphasized the origination
of ARM loans for retention in its portfolio. This practice has enabled the
Company to reduce its interest rate risk exposure by concentrating its loan
portfolio in assets with either shorter terms or more frequent repricing, or
both. At June 30, 2000, approximately 97.67% of the Company's multifamily,
87.76% of its commercial real estate and 57.36% of its one-to-four family
loans were ARM loans. The Company also originates fixed-rate loans in response
to customer demand. The type of loans the Company originates is dependent upon
the relative customer demand for fixed-rate or ARM loans, which in turn is
affected by the current and expected level of interest rates. Historically,
the Company has sold fixed-rate loans in the secondary market to FNMA, FHLMC
and others. During fiscal 2000, the Company retained certain fixed-rate loans
in its portfolio.
10
The interest rates for approximately 43% of the Company's ARM loans in
portfolio are indexed to the 11th District Cost of Funds Index ("COFI"). The
Company currently offers a number of ARM loan programs with interest rates
tied to Treasury bill based and COFI indices that adjust monthly, semi-
annually, annually or once every five years, some of which have payment caps.
Because of payment caps and the different times at which interest rate
adjustments and payment adjustments are made, in periods of rising interest
rates monthly payments may not be sufficient to pay the interest accruing on
some of the Company's ARM loans. The amount of any shortfall ("negative
amortization") is added to the principal balance of the loan to be repaid
through future monthly payments, which could cause increases in the amount of
principal owed to the Company over that which was originally lent. The Company
currently has approximately $531.3 million in mortgage loans that may be
subject to negative amortization. During the years ended June 30, 2000, 1999
and 1998, the negative amortization associated with these loans totaled
$109,000, $223,000 and $478,000, respectively. Significant negative
amortization can increase the associated risk of default on loans,
particularly for loans originated with relatively high loan-to-value ratios.
Based on historical experience, management does not believe that the loss
experience on the loans that are subject to negative amortization is
materially different from the loss experience on the balance of its portfolio.
Mortgage loans originated by the Company, generally include due-on-sale
clauses which provide the Company with the contractual right to deem the loan
immediately due and payable in the event the borrower transfers ownership of
the property without the Company's consent. Due-on-sale clauses are an
important means of adjusting the rates on the Company's fixed rate multifamily
and commercial mortgage loan portfolios and the Company has generally
exercised its rights under these clauses.
Loan Approval Procedures and Authority. The Company's Board of Directors has
a standing Loan Committee. The Loan Committee is primarily responsible for
establishing the lending policies of the Company and reviewing properties
offered as security. The Board of Directors has authorized the following
persons to approve loans up to the amounts indicated: mortgage loans in
amounts of $1.0 million and below may be approved by the respective Loan
Division Manager or his designate; mortgage loans in excess of $1.0 million
and up to $1.5 million require the approval of the President or any member of
the Loan Committee; and mortgage loans in excess of $1.5 million requires the
approval of at least two members of the Loan Committee.
For all loans originated by the Company, upon receipt of a completed loan
application from a prospective borrower, a credit report is ordered and
certain other information is verified by an independent credit agency and, if
necessary, additional financial information is required. Appraisals of the
real estate intended to secure proposed loans over $150,000 are required,
which appraisals currently are performed by independent appraisers designated
and approved by the Company. The Company's Board annually approves the
independent appraisers used by the Company and approves the Company's
appraisal policy. The Company's policy is to obtain title and hazard insurance
on all real estate loans. If the original loan amount exceeds 80% of the
underlying property's value on a sale or refinance of a first trust deed loan,
private mortgage insurance is required and the borrower will be required to
make payments to a mortgage impound account from which the Company makes
disbursements for property taxes and mortgage insurance.
Delinquencies and Classification of Assets
Delinquent Loans. Management performs a monthly review of all delinquent
loans and reports to the Company's Board of Directors regarding the same. The
procedures taken by the Company with respect to delinquencies vary depending
on the nature of the loan and period of delinquency.
The Company's policies generally provide that delinquent mortgage loans be
reviewed and that written notices be mailed after the 11th and 17th day of
delinquency. The Company's policies provide that telephone contact will be
attempted to ascertain the reasons for delinquency and the prospects of
repayment. When contact is made with the borrower at any time prior to
foreclosure, the Company will attempt to obtain full payment or work out a
repayment schedule with the borrower to avoid foreclosure. See also "--
Nonperforming Assets and Restructured Loans."
11
At June 30, 2000, 1999 and 1998, delinquencies in the Company's loan
portfolio were as follows:
2000 1999 1998
--------------------------------- --------------------------------- ---------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More 60-89 Days 90 Days or More
---------------- ---------------- ---------------- ---------------- ---------------- ----------------
Number Principal Number Principal Number Principal Number Principal Number Principal Number Principal
of Balance of Balance of Balance of Balance of Balance of Balance
Loans of Loans Loans of Loans Loans of Loans Loans of Loans Loans of Loans Loans of Loans
------ --------- ------ --------- ------ --------- ------ --------- ------ --------- ------ ---------
(Dollars in thousands)
One-to-four
family.......... 2 $109 28 $1,247 8 $ 456 54 $2,662 5 $ 399 22 $2,514
Multifamily...... 1 526 -- -- -- -- -- -- 5 1,377 4 1,691
Commercial....... -- -- -- -- 2 1,674 1 78 3 1,663 3 249
Other loans...... -- -- -- -- 2 61 2 121 -- -- -- --
--- ---- --- ------ --- ------ --- ------ --- ------ --- ------
Total........... 3 $635 28 $1,247 12 $2,191 57 $2,861 13 $3,439 29 $4,454
=== ==== === ====== === ====== === ====== === ====== === ======
Delinquent loans
to
total gross
loans........... 0.06% 0.12% 0.26% 0.34% 0.48% 0.62%
The loans in the above table have been considered in connection with the
Company's overall assessment of the adequacy of its allowance for loan losses.
However, there can be no assurance that the Company will not have to establish
additional loss provisions for these loans in the future. See "--Allowances
for Loan and Real Estate Losses" and "MD&A--Problem Assets."
Classification of Assets. Federal regulations and the Company's
Classification of Assets Policy require that the Company utilize an internal
asset classification system as a means of reporting problem and potential
problem assets. The Company has incorporated the OTS internal asset
classifications as a part of its credit monitoring system. The Company
currently classifies problem and potential problem assets as "Substandard,"
"Doubtful" or "Loss" assets. An asset is considered "Substandard" if it is
inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. "Substandard" assets include
those characterized by the "distinct possibility" that the insured institution
will sustain "some loss" if the deficiencies are not corrected. Loans can be
considered "Substandard" for other reasons in addition to the paying capacity
and underlying collateral, based on the Company's Classification of Assets
Policy. Assets classified as "Doubtful" have all of the weaknesses inherent in
those classified "Substandard" with the added characteristic that the
weaknesses present make "collection or liquidation in full", on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." See "--Regulation and Supervision--Classification of Assets." The
Company's Internal Asset Review Committee monthly reviews and classifies the
Company's assets and reports the results of its review to the Company's Board
of Directors.
The following table sets forth information with respect to the classified
assets of the Company at June 30, 2000.
At June 30, 2000
----------------------
Substandard
--------------
(In thousands)
Real estate loans:
One-to-four family..................................... $ 5,191
Multifamily............................................ 2,845
Commercial and Land.................................... 2,529
REO...................................................... 639
Securities............................................... 8
-------
Total Classified Assets.................................. $11,212
=======
12
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 114,
"Accounting by Creditors for Impairment of a Loan", the Company recognizes
impairment on troubled collateral dependent loans by creating a specific
valuation allowance. At June 30, 2000 and 1999, the specific valuation
allowances totaled $521,000 and $465,000, respectively. The loans for which a
specific valuation allowance was established are in the process of collection.
At such time that these loans are deemed uncollectible, the specific valuation
allowance will be charged off.
In addition to adversely classified assets, assets which do not currently
expose the Company to sufficient risk to warrant adverse classification but
possess weaknesses are designated "Special Mention." According to OTS
guidelines, Special Mention assets are not adversely classified and do not
expose an institution to sufficient risk to warrant adverse classification. At
June 30, 2000, $6.4 million of assets were graded as Special Mention, compared
to $9.3 million at June 30, 1999.
These assets have been considered in connection with the Company's overall
assessment of the adequacy of its allowance for loan losses; however, there
can be no assurance that the Company will not establish additional loss
provisions for these assets in the future. See "--Allowances for Loan and Real
Estate Losses" and "MD&A--Problem Assets."
Nonperforming Assets and Restructured Loans
After 60 days, the Company ceases the accrual of interest on loans and any
previously accrued interest is reversed. In addition, the Company may
restructure a loan due to the debtor's financial difficulty and grant a
concession which the Company would not have otherwise considered. REO is
recorded at fair value less estimated costs of disposition.
13
The following table sets forth information regarding nonaccrual loans,
troubled debt restructured loans and REO. There were no accruing loans past
due 60 days or more for any of the periods presented below.
At June 30,
----------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------- -------
(Dollars in thousands)
Real estate loans:
One-to-four family................. $1,356 $3,062 $2,779 $ 3,226 $ 1,614
Multifamily........................ 526 -- 2,257 2,387 4,949
Commercial and land................ 1,707 1,752 1,912 2,926 3,781
Other:
Consumer loans..................... -- 170 -- -- 105
------ ------ ------ ------- -------
Total nonaccrual loans(1).......... 3,589 4,984 6,948 8,539 10,449
Troubled debt restructured loans..... 211 218 223 229 234
------ ------ ------ ------- -------
Total nonperforming loans.......... 3,800 5,202 7,171 8,768 10,683
Real estate acquired through
foreclosure......................... 639 2,340 2,678 1,720 2,435
------ ------ ------ ------- -------
Total nonperforming assets......... $4,439 $7,542 $9,849 $10,488 $13,118
====== ====== ====== ======= =======
Ratios:
Net charge-offs to average loans... 0.01% 0.15% 0.18% 0.47% 1.13%
Total allowance for loan losses as
a percentage of gross loans....... 0.99 1.02 1.12 1.18 1.25
Total allowance for loan losses as
a percentage of total
nonperforming loans(2)............ 267.39 166.94 110.93 88.64 73.32
Total allowance as a percentage of
total nonperforming assets(3)..... 228.90 115.14 82.55 75.77 61.05
Total nonaccrual loans as a
percentage of gross loans(1)...... 0.35 0.58 0.98 1.29 1.67
Nonperforming loans as a percentage
of gross loans(2)................. 0.37 0.61 1.01 1.33 1.71
Nonperforming assets as a
percentage of total assets(4)..... 0.37 0.74 1.11 1.31 1.81
- --------
(1) Nonaccrual loans are net of specific allowances of $0, $68,000, $945,000,
$1.0 million and $1.8 million for the years ended June 30, 2000, 1999,
1998, 1997 and 1996, respectively.
(2) Nonperforming loans include nonaccrual and troubled debt restructured
loans. Gross loans include loans held for sale.
(3) Total allowance includes loan and REO valuation allowances.
(4) Nonperforming assets include nonperforming loans and REO.
The gross amount of interest income on nonaccrual loans that would have been
recorded during the years ended June 30, 2000, 1999 and 1998 if the nonaccrual
loans had been current in accordance with their original terms was $312,000,
$424,000 and $640,000, respectively. For the years ended June 30, 2000, 1999
and 1998, $247,000, $295,000 and $399,000, respectively, was actually earned
on nonaccrual loans and is included in interest income on loans in the
consolidated statements of operations for such years included in this report.
Interest income earned on nonaccrual loans is generally recorded utilizing the
cash-basis method of accounting. See "Financial Statements and Supplementary
Data."
14
Impaired Loans
A loan is considered impaired when based on current circumstances and
events, it is probable that a creditor will be unable to collect all amounts
due according to the contractual terms of the loan agreement. Creditors are
required to measure impairment of a loan based on any one of the following:
(i) the present value of expected future cash flows from the loan discounted
at the loan's effective interest rate, (ii) an observable market price or
(iii) the fair value of the loan's underlying collateral. The Company measures
impairment based on the fair value of the loan's underlying collateral
property. Impaired loans exclude large groups of smaller balance homogeneous
loans that are collectively evaluated for impairment. For the Company, loans
collectively reviewed for impairment include all loans with principal balances
of less than $300,000.
Factors considered as part of the periodic loan review process to determine
whether a loan is impaired, as defined under SFAS 114, address both the amount
the Company believes is probable that it will collect and the timing of such
collection. As part of the Company's loan review process the Company considers
such factors as the ability of the borrower to continue to meet the debt
service requirements, assessments of other sources of repayment, the fair
value of any collateral and the Company's prior history in dealing with the
particular type of loan involved. In evaluating whether a loan is considered
impaired, insignificant delays (less than twelve months) in the absence of
other facts and circumstances would not alone lead to the conclusion that a
loan was impaired.
At June 30, 2000 and 1999, the Company had a gross investment in impaired
loans of $1.7 million and $3.5 million, respectively. During the years ended
June 30, 2000 and 1999, the Company's average investment in impaired loans was
$1.7 million and $5.9 million and for the years then ended, interest income on
such loans totaled $126,000 and $531,000, respectively. Interest income on
impaired loans which are performing is generally recorded utilizing the cash-
basis method of accounting. Payments received on impaired loans which are
performing under their contractual terms are allocated to principal and
interest in accordance with the terms of the loans. At June 30, 2000 all
impaired loans were performing in accordance with their contractual terms.
Impaired loans totaling $1.7 million were not performing in accordance with
their contractual terms at June 30, 1999, and have been included in nonaccrual
loans at that date.
The Company recognizes impairment on troubled collateral dependent loans by
creating a specific valuation allowance. The loans for which a specific
valuation allowance was established are in the process of collection. At such
time that these loans are deemed uncollectible, the specific valuation
allowance is charged-off.
Impaired loans at June 30, 2000 include $1.7 million of loans for which
specific valuation allowances of $379,000 had been established. At June 30,
1999, the Company had $1.0 million of impaired loans for which specific
valuation allowances of $155,000 had been established and $2.5 million of such
loans for which no specific valuation allowance was considered necessary. All
such provisions for losses and related recoveries are recorded as part of the
total allowance for loan losses.
Allowances for Loan and Real Estate Losses
The Company's allowance for loan losses is comprised of specific valuation
allowances as well as a general valuation allowance ("GVA"). As discussed
above, specific valuation allowances are generally established to recognize
impairment on troubled collateral dependent loans. The GVA is maintained in an
amount that management believes will be adequate to absorb probable losses
that are anticipated on existing loan-related assets and off-balance sheet
items.
The allowance for loan losses is established through a provision for loan
losses based on management's evaluation of the risks inherent in its loan
portfolio. The allowance for loan losses is
15
maintained at an amount management considers adequate to cover estimated
losses in loans receivable which are deemed probable and estimable. The
allowance is based upon a number of factors, including asset classifications,
economic trends, industry experience and trends, industry and geographic
concentrations, estimated collateral values, management's assessment of the
credit risk inherent in the portfolio, historical loan loss experience, the
Company's underwriting policies and the regulatory environment.
The Company has significantly increased its commercial real estate loan
portfolio during the past fiscal year from $140.4 million at June 30, 1999 to
$196.5 million at June 30, 2000 (an increase of approximately 39.92%). Both
because the size of the commercial real estate loan portfolio has increased
significantly and most of the loans comprising the portfolio are unseasoned,
having been originated within the last two fiscal years, the Company's past
loss experience with respect to its commercial real estate loan portfolio may
not be representative of the risk of loss in such portfolio in the future.
Multifamily and commercial real estate loans are generally considered to
involve a higher degree of credit risk and to be more vulnerable to adverse
conditions in the real estate market and to deteriorating economic conditions,
particularly changes in interest rates than one-to-four family residential
mortgage loans. These loans typically involve higher loan principal amounts
and the repayment of such loans generally depend on the income produced by the
operation or sale of the property being sufficient to cover operating expenses
and debt service. Sometimes multifamily and commercial real estate loans are
made to groups of related borrowers, which concentration could increase the
Company's exposure should the circumstances of one borrower negatively affect
the ability of other related borrowers to repay their loans in full on a
timely basis. In addition, multifamily and commercial real estate values tend
to be more cyclical and, while the southern California real estate market
remained strong in fiscal 2000, recessionary economic conditions of the type
that prevailed in prior years in the Company's lending market area tend to
result in higher vacancy and reduced rental rates and net operating incomes
from multifamily and commercial real estate properties. See "Business--Lending
Activities--Multifamily Lending" and "--Commercial Real Estate Lending."
The Company recorded a provision for loan losses of $1.6 million for the
year ended June 30, 2000, compared to $1.7 million, $1.5 million, $3.0 million
and $2.1 million for the years ended June 30, 1999, 1998, 1997 and 1996,
respectively. The slight decrease in the provision for 2000 is primarily the
result of the continued decrease in nonperforming assets during the year. The
slight increase in the provision for fiscal 1999 compared to 1998 was
primarily a result of the overall growth in the loan portfolio as compared to
the prior year, specifically in commercial real estate loans. In addition,
certain one-to-four family loans purchased during fiscal 1999 were considered
by the Company to have higher risk characteristics because they were loans
outside of California, which has historically been considered the Company's
primary market area for one-to-four family loans. The decrease in the
provision for 1998 was primarily a result of decreased charge-offs and
nonaccrual loans during this period. Management believed that the increases in
the provisions for 1997 and 1996 were necessary to replenish the allowance for
loan losses to what management believed was an adequate level due to charge-
offs taken during these years. The increase in charge-offs in 1996 was
primarily a result of acquiring title to or resolving properties damaged in
the January 1994 Northridge earthquake as well as continued declines in the
southern California economy during this year.
Although the Company believes that the allowance for loan losses at June 30,
2000 is adequate, there can be no assurance that the Company will not have to
establish additional loss provisions based upon future events. The Company
will continue to monitor and modify its allowances for loan losses as
conditions dictate. In addition, the OTS and the FDIC, as an integral part of
their examination process, periodically review the Company's valuation
allowance. These agencies may require the Company to establish additional
allowances, based on their judgments of the information available at the time
of the examination. See "Regulation and Supervision--Classification of
Assets."
16
It is the policy of the Company to "charge-off" consumer loans when it is
determined that they are no longer collectible. The policy for loans secured
by real estate, which comprise the bulk of the Company's portfolio, is to
establish an allowance for loan losses in accordance with the Company's asset
classification process, based on generally accepted accounting principles
("GAAP"). It has generally been the practice of the Company to "charge-off"
losses after acquiring title to a property securing the loan. Prior to
acquiring title to REO, losses are recognized through the establishment of
valuation allowances. It is the Company's general policy to obtain appraisals
on the underlying property for loans 90 days or more past due and over
$500,000. If the loan amount is under $500,000, appraisals are obtained at the
time of foreclosure. It is the policy of the Company to obtain an appraisal on
all REO upon acquisition by the Company.
REO is initially recorded at fair value at the date of acquisition, less
estimated costs of disposition. Thereafter, if there is a further
deterioration in value, the Company writes down the REO directly for the
diminution in value. Real estate held for investment is carried at the lower
of cost or net realizable value. All costs of anticipated disposition are
considered in the determination of net realizable value.
The following table sets forth activity in the Company's total allowance for
loan losses and allowance for losses on REO.
At or For the Year Ended June 30,
-------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
(In thousands)
Allowance for loan losses:
Balance at beginning of year.... $ 8,684 $ 7,955 $ 7,772 $ 7,833 $12,108
Provision for loan losses....... 1,600 1,700 1,450 3,001 2,103
Allowance of portfolios
acquired....................... -- 164 -- -- 294
Charge-offs:
One-to-four family............ (125) (189) (428) (714) (994)
Multifamily................... -- (945) (839) (2,182) (4,367)
Commercial and land........... -- -- -- (165) (1,309)
Non-mortgage.................. (14) (1) -- (1) (2)
Recoveries(1)................... 16 -- -- -- --
------- ------- ------- ------- -------
Subtotal charge-offs, net..... (123) (1,135) (1,267) (3,062) (6,672)
------- ------- ------- ------- -------
Balance at end of year.......... $10,161 $ 8,684 $ 7,955 $ 7,772 $ 7,833
======= ======= ======= ======= =======
Allowance for REO losses:
Balance at beginning of year.... $ -- $ 175 $ 175 $ 175 $ 175
Additions charged to operations. -- -- -- -- --
Charge-offs..................... -- (175) -- -- --
------- ------- ------- ------- -------
Balance at end of year.......... $ -- $ -- $ 175 $ 175 $ 175
======= ======= ======= ======= =======
- --------
(1) In 2000 recoveries were on multifamily loans.
17
The following table sets forth the Company's allowance for loan losses to
total loans and the percentage of loans to total loans in each of the
categories listed.
At June 30,
------------------------------------------------------------------------------------------
2000(1) 1999(1) 1998(1)
------------------------------ ----------------------------- -----------------------------
Percentage Percentage Percentage Percentage Percentage Percentage
of of Loans of of Loans of of Loans
Allowance in Each Allowance in Each Allowance in Each
to Total Category to to Total Category to to Total Category to
Amount Allowance Total Loans Amount Allowance Total Loans Amount Allowance Total Loans
------- ---------- ----------- ------ ---------- ----------- ------ ---------- -----------
(Dollars in thousands)
One-to-four
family........... $ 2,392 23.54% 30.73% $2,371 27.30% 36.65% $1,421 17.86% 39.26%
Multifamily...... 4,903 48.25 49.20 4,216 48.55 45.93 3,556 44.70 48.72
Commercial....... 2,620 25.79 19.13 1,888 21.74 16.48 1,337 16.81 10.92
Land............. 1 .01 0.14 4 0.05 0.04 -- -- 0.05
Other............ 103 1.01 0.80 98 1.13 0.90 38 0.48 1.05
Unallocated...... 142 1.40 N/A 107 1.23 N/A 1,603 20.15 N/A
------- ------ ------ ------ ------ ------ ------ ------ ------
Total allowance
for loan losses. $10,161 100.00% 100.00% $8,684 100.00% 100.00% $7,955 100.00% 100.00%
======= ====== ====== ====== ====== ====== ====== ====== ======
At June 30,
-----------------------------------------------------------
1997(1) 1996(1)
----------------------------- -----------------------------
Percentage Percentage Percentage Percentage
of of Loans of of Loans
Allowance in Each Allowance in Each
to Total Category to to Total Category to
Amount Allowance Total Loans Amount Allowance Total Loans
------ ---------- ----------- ------ ---------- -----------
(Dollars in thousands)
One-to-four family...... $1,709 21.99% 45.47% $1,306 16.67% 48.54%
Multifamily............. 3,318 42.69 45.77 4,744 60.56 41.45
Commercial.............. 1,085 13.96 8.39 1,288 16.44 9.74
Land.................... 210 2.70 0.21 199 2.54 0.17
Other................... -- -- 0.16 -- -- 0.10
Unallocated............. 1,450 18.66 N/A 296 3.79 N/A
------ ------ ------ ------ ------ ------
Total allowance
for loan losses........ $7,772 100.00% 100.00% $7,833 100.00% 100.00%
====== ====== ====== ====== ====== ======
- ----------
(1) In 2000, 1999, 1998, 1997 and 1996, total specific allowances amounted to
$521,000, $465,000, $1.7 million, $1.6 million and $2.2 million,
respectively.
18
In fiscal 1999 the Company reevaluated its allowance methodology. This
reevaluation resulted in additional allocations of the allowance to the one-
to-four family and commercial real estate portfolios at June 30, 1999 as
compared to June 30, 1998. The increase in the unallocated allowance at
June 30, 1997 as compared to June 30, 1996, is a result of a decrease in the
allocated allowance on multifamily loans as a result of a decline in
multifamily charge-offs and nonaccrual multifamily loans during the year.
Investment Activities
Federally chartered savings associations such as the Bank have the authority
to invest in various types of liquid assets, including United States Treasury
obligations, securities of various federal agencies, certain certificates of
deposit of insured banks and savings institutions, certain bankers'
acceptances, repurchase agreements and federal funds. Subject to various
restrictions, federally chartered savings institutions may also invest their
assets in commercial paper, investment grade corporate debt securities and
mutual funds whose assets conform to the investments that a federally
chartered savings institution is otherwise authorized to make directly.
Additionally, a federally chartered savings institution such as the Bank must
maintain minimum levels of investments that qualify as liquid assets under OTS
regulations. See "--Regulation and Supervision--Required Liquidity." The Bank
currently manages liquid assets at the minimum level required under OTS
requirements in an effort to maximize overall yield on its investment
portfolio.
The investment policy of the Company attempts to provide and maintain
liquidity, generate a favorable return on investments without incurring undue
interest rate and credit risk, and complement the Company's lending
activities. Specifically, the Company's policy generally limits investments to
government and federal agency-backed securities and other non-government
guaranteed securities, including corporate debt obligations, that are
investment-grade. The Company's policy authorizes investment in marketable
equity securities meeting the Company's guidelines. The policy requires that
all investment purchases be ratified by the Board of Directors of the Company.
At June 30, 2000, the Company had federal funds sold and other short-term
investments and investment securities in the aggregate amount of $35.3 million
with a fair value of $34.2 million.
The following table sets forth certain information regarding the amortized
cost and fair values of the Company's federal funds sold and other short-term
investments and investment securities portfolio at the dates indicated:
At June 30,
-----------------------------------------------------
2000 1999 1998
----------------- ----------------- -----------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- ------- --------- ------- --------- -------
(In thousands)
Federal funds sold and
other short-term
investments............. $ 3,900 $ 3,900 $25,120 $25,120 $26,420 $26,420
======= ======= ======= ======= ======= =======
Investment securities:
Held to maturity:
U.S. Government and
Federal agency
obligations.......... $21,863 20,780 $11,986 $11,320 $ 4,729 $ 4,741
Municipal bonds....... -- -- -- -- 329 329
------- ------- ------- ------- ------- -------
Total held to
maturity........... 21,863 20,780 11,986 11,320 5,058 5,070
Available for sale:
Marketable Equity
Securities........... 9,500 9,498 -- -- 1,200 1,819
------- ------- ------- ------- ------- -------
Total investment
securities......... $31,363 $30,278 $11,986 $11,320 $ 6,258 $ 6,889
======= ======= ======= ======= ======= =======
19
The table below sets forth certain information regarding the amortized cost,
weighted average yields and contractual maturities of the Company's federal
funds sold and other short-term investments and investment securities as of
June 30, 2000.
At June 30, 2000
----------------------------------------------------------------------------------------------
More than One More than Five More than Ten
One Year or Less Year to Five Years Years to Ten Years Years Total
------------------ ------------------ ------------------ ------------------ ------------------
Weighted Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
(Dollars in thousands)
Federal funds
sold and other
short-term investments. $3,900 6.50% $ -- -- % $ -- -- % $ -- -- % $ 3,900 6.50%
====== ==== ====== ==== ======= ==== ======= ==== ======= ====
Investment
securities:
Held to
maturity:
U.S.
Government
and Federal
agency
obligations.. $ -- -- % $4,000 6.91% $11,872 7.59% $ 5,991 6.50% $21,863 7.16%
------ ------ ------- ------- -------
Total held
to
maturity... $ -- -- % $4,000 6.91% $11,872 7.59% $ 5,991 6.50% $21,863 7.16%
------ ------ ------- ------- -------
Available for
sale:
Marketable
Equity
Securities... $ -- -- % $ -- -- % $ -- -- % $ 9,500 6.12% $ 9,500 6.12%
------ ------ ------- ------- -------
Total
investment
securities. $ -- -- % $4,000 6.91% $11,872 7.59% $15,491 6.27% $31,363 6.85%
====== ====== ======= ======= =======
Sources of Funds
General. Deposits, FHLB advances, securities sold under agreements to
repurchase, loan repayments and prepayments, and proceeds from sales of loans
are the primary sources of the Company's funds for use in lending, investing
and for other general purposes.
Deposits. The Company offers a variety of deposit accounts with a range of
interest rates and terms. The Company's deposits consist of passbook savings,
checking accounts, money market accounts and certificates of deposit. The flow
of deposits is influenced significantly by general economic conditions,
changes in money market rates, prevailing interest rates and competition. The
Company's deposits are obtained predominantly from the areas in which its
branch offices are located. The Company relies primarily on customer service
and long-standing relationships with customers to attract and retain these
deposits; however, market interest rates and rates offered by competing
financial institutions significantly affect the Company's ability to attract
and retain deposits. Certificate of deposit accounts in excess of $100,000 are
not actively solicited by the Company nor does the Company currently use
brokers to obtain deposits. During the second quarter of fiscal 2000 the Bank
purchased a retail branch office and its $45.9 million of deposits from
another financial institution. This branch is located in Rowland Heights,
California. In addition, while the vast majority of the Bank's deposits are
retail in nature, the Bank accepted $55 million in time deposits from a
political subdivision during fiscal 2000. The Bank considers these funds to be
wholesale deposits and an alternative borrowing source rather than a customer
relationship and their levels are determined by management's decision as to
the most economic funding sources. Management continually monitors the
Company's certificate accounts and historically the Company has retained a
large portion of such accounts upon maturity. See "MD&A--Capital Resources and
Liquidity--Sources of Funds and Liquidity."
20
The following table presents the deposit activity of the Company for the
periods indicated:
For the Year Ended June 30,
----------------------------------
2000 1999 1998
----------- ---------- ---------
(In thousands)
Deposits.................................... $ 1,275,207 $1,005,505 $ 741,609
Withdrawals................................. (1,178,499) (938,172) (742,092)
----------- ---------- ---------
Net deposits................................ 96,708 67,333 (483)
Interest credited on deposits............... 33,682 29,596 28,207
----------- ---------- ---------
Total increase in deposits................ $ 130,390 $ 96,929 $ 27,724
=========== ========== =========
The following table presents the amount and weighted average rate of time
deposits equal to or greater than $100,000 at June 30, 2000:
For the Year Ended
June 30, 2000
--------------------
Maturity Period Weighted
Amount Average Rate
- --------------- ------- ------------
(Dollars in
thousands)
Three months or less....................................... $69,448 5.74%
Over three through six months.............................. 37,001 5.83
Over six through 12 months................................. 63,732 5.98
Over 12 months............................................. 13,459 5.98
-------
Total...................................................... 183,640 5.86
=======
The following table sets forth the distribution of the Company's average
deposit accounts for the periods indicated and the weighted average interest
rates on each category of deposits presented:
For the Year Ended June 30,
--------------------------------------------------------------------------------------
2000 1999 1998
---------------------------- ---------------------------- ----------------------------
Percentage Percentage Percentage
of Total Weighted of Total Weighted of Total Weighted
Average Average Average Average Average Average Average Average Average
Balance Deposits Rate Balance Deposits Rate Balance Deposits Rate
-------- ---------- -------- -------- ---------- -------- -------- ---------- --------
(Dollars in thousands)
Money market deposits... $163,017 22.25% 4.33% $137,473 21.73% 4.37% $110,990 19.67% 4.52%
Passbook deposits....... 21,324 2.91 1.97 18,298 2.89 1.98 17,425 3.09 2.01
NOW and other demand
deposits............... 44,497 6.07 1.42 35,219 5.57 1.35 26,363 4.67 1.27
Non-interest bearing
deposits............... 14,484 1.98 -- 11,890 1.88 -- 9,253 1.64 --
-------- ------ -------- ------ -------- ------
Total.................. 243,322 33.21 202,880 32.07 164,031 29.07
-------- ------ -------- ------ -------- ------
Certificate accounts:
Three months or less.... 114,463 15.62 5.01 113,440 17.93 5.18 111,121 19.69 5.49
Over three through
six months............. 115,463 15.76 5.24 105,071 16.61 5.14 98,605 17.48 5.51
Over six through
12 months.............. 159,648 21.79 5.43 141,279 22.33 5.23 114,989 20.38 5.56
Over one to three years. 92,458 12.62 5.67 65,252 10.31 5.78 63,974 11.34 6.00
Over three to five
years.................. 7,338 1.00 5.48 4,740 0.75 5.32 11,494 2.04 5.77
Over five to ten years.. -- -- -- -- -- -- 21 -- 5.39
Over ten years.......... 44 -- 5.33 16 0.00 5.31 -- -- --
-------- ------ -------- ------ -------- ------
Total certificates..... 489,414 66.79 5.33 429,798 67.93 5.28 400,204 70.93 5.60
-------- ------ -------- ------ -------- ------
Total deposits......... $732,736 100.00% 4.67 $632,678 100.00% 4.67 $564,235 100.00% 4.99
======== ====== ======== ====== ======== ======
21
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
contractual maturity of the certificate accounts outstanding at June 30, 2000:
Certificate Amounts Maturing in the
At June 30, Year Ending June 30,
-------------------------- --------------------------------------------------
2005 and
1998 1999 2000 2001 2002 2003 2004 thereafter Total
-------- -------- -------- -------- ------- ------ ------ ---------- --------
(In thousands)
Certificate accounts:
0 to 4.00%.............. $ -- $ 5,861 $ 4,841 $ 4,796 $ 45 $ -- $ -- $ -- $ 4,841
4.001 to 5.00%.......... 39,995 165,299 46,406 42,924 2,118 399 965 -- 46,406
5.001 to 6.00%.......... 276,992 250,461 332,621 295,197 30,363 3,264 2,119 1,678 332,621
6.001 to 7.00%.......... 76,599 30,233 191,638 168,237 15,524 1,178 90 6,609 191,638
7.001 to 8.00%.......... 7,527 327 22 22 -- -- -- -- 22
8.001 to 9.00%.......... 27 -- -- -- -- -- -- -- --
-------- -------- -------- -------- ------- ------ ------ ------ --------
Total.................. $401,140 $452,181 $575,528 $511,176 $48,050 $4,841 $3,174 $8,287 $575,528
======== ======== ======== ======== ======= ====== ====== ====== ========
Borrowings. From time to time the Company has obtained advances from the
FHLB and may do so in the future as an alternative to retail deposit funds.
FHLB advances may also be used to acquire certain other assets as may be
deemed appropriate for investment purposes. These advances are collateralized
by the capital stock of the FHLB held by the Company and certain of the
Company's mortgage loans. See "--Regulation and Supervision--Federal Home Loan
Bank System." Such advances are made pursuant to several different credit
programs, each of which has its own interest rate and range of maturities. The
maximum amount that the FHLB will advance to member institutions, including
the Company, for purposes other than meeting withdrawals, fluctuates from time
to time in accordance with the policies of the OTS and the FHLB. During fiscal
2000, the Company periodically borrowed advances to provide needed liquidity
and to supplement retail deposit gathering activity. See "MD&A--Capital
Resources and Liquidity--Sources of Funds and Liquidity." At June 30, 2000,
the Company had $290.3 million in outstanding advances from the FHLB. During
fiscal 2000, the maximum amount of FHLB advances that the Company had
outstanding at any month-end was $312.1 million.
The following table sets forth certain information regarding the Company's
borrowed funds at or for the periods ended on the dates indicated:
At or For the Year Ended June 30,
-------------------------------------
2000 1999 1998
----------- ----------- -----------
(Dollars in thousands)
FHLB advances:
Average balance outstanding............ $ 252,284 $ 189,456 $ 185,032
Maximum amount outstanding at any
month-end during the period........... $ 312,139 $ 234,700 $ 216,000
Balance outstanding at end of period... $ 290,250 $ 234,700 $ 216,000
Weighted average interest rate during
the period............................ 5.82% 5.69% 5.93%
Weighted average interest rate at end
of period............................. 6.30% 5.59% 5.86%
For information regarding securities sold under agreements to repurchase,
loan repayments and prepayments and proceeds from loan sales as sources of
funds for the Company, see "MD&A--Capital Resources and Liquidity--Sources of
Funds and Liquidity."
Subsidiary Activities
QCFC, a wholly owned subsidiary of the Bank, is currently engaged, on an
agency basis, in the sale of casualty insurance, mutual funds and annuity
products primarily to the Bank's customers and
22
members of the local community and as a trustee of the Bank's deeds of trust.
In the past, QCFC has been involved in real estate development projects. The
Bank does not currently intend to engage in any future real estate development
projects through QCFC or otherwise. As of June 30, 2000, and for the year then
ended, QCFC had $298,000 in total assets and net income of $227,000.
Competition
Savings associations face strong competition both in attracting deposits and
making real estate loans. The Company's most direct competition for deposits
has historically come from other savings associations and from commercial
banks located in its principal market areas of Los Angeles and Orange Counties
in California, including many large financial institutions which have greater
financial and marketing resources available to them. In addition, particularly
during times of high interest rates, the Company has faced significant
competition for investors' funds from short-term money market securities and
other corporate and government securities and mutual funds which invest in
such securities. Periods of low interest rates have made the attraction and
retention of deposits difficult as savers seek higher rates of return in
alternative investments. The ability of the Company to attract and retain
savings deposits depends on its ability to generally provide a rate of return,
liquidity and risk comparable to that offered by competing investment
opportunities. Furthermore, management considers the Company's reputation for
financial strength and quality service provided through its contiguous
branching network to local customers to be a major competitive advantage in
attracting and retaining savings deposits.
The Company experiences strong competition for real estate loans principally
from other savings associations, commercial banks and mortgage banking
companies. It competes for loans principally through the interest rates and
loan fees it charges and the efficiency and quality of services it provides
borrowers. Management considers the Company's focus in multifamily and low-
to-moderate income lending in the Los Angeles area to be a competitive
advantage also. Competition may increase as a result of the continuing
reduction in restrictions on the interstate operations of financial
institutions.
Under legislation adopted by Congress in 1994, bank holding companies based
in any state generally are allowed to acquire banks in California and banks
based in any state generally are allowed to acquire by merger banks based in
California. Under OTS regulations, federal savings associations have been
generally able to branch nationwide as long as the association's assets
attributable to each state outside of its home state in which it operates
branches are predominantly housing-related assets. The increased authority of
bank holding companies and banks to engage in interstate banking will allow
them to compete more effectively with savings associations.
Personnel
As of June 30, 2000, the Bank had 159 full-time employees and 47 part-time
employees. The employees are not represented by a collective bargaining unit
and the Bank considers its relationship with its employees to be good.
Federal Taxation
General. The Company reports its income for tax purposes using the accrual
method of accounting and will be subject to federal income taxation in the
same manner as other corporations with some exceptions, including particularly
the Bank's reserve for bad debts discussed below. The following discussion of
tax matters is intended only as a summary and does not purport to be a
comprehensive description of the tax rules applicable to the Company.
Tax Bad Debt Reserve. Prior to 1996, savings institutions such as the Bank
which meet certain definitional tests primarily relating to their assets and
the nature of their business ("qualifying thrifts")
23
were permitted to establish a reserve for bad debts and to make annual
additions thereto, which additions, within specified formula limits, were
deducted in arriving at their taxable income. The Bank's deduction with
respect to "qualifying loans," generally loans secured by certain interests in
real property, was computed using the Bank's actual loss experience, or 8% of
the Bank's taxable income. Use of the percentage of taxable income method of
calculating its deductible addition to its loss reserve had the effect of
reducing the maximum marginal rate of federal tax on the Bank's income to
32.20%, exclusive of any minimum or environmental tax, as compared to the
general maximum corporate federal income tax rate of 35%.
Pursuant to certain provisions appended to the Small Business Job Protection
Act signed into law in August 1996 (the "Act"), the above-described bad debt
deduction rules available to thrifts such as the Bank have been repealed.
Under the Act, the Bank has changed its method of accounting for bad debts
from the reserve method formerly permitted under section 593 of the Internal
Revenue Code of 1986, as amended (the "Code") to the "specific charge-off"
method. Under the specific charge-off method, which is governed by section 166
of the Code and the regulations thereunder, tax deductions may be taken for
bad debts only if loans become wholly or partially worthless. Although the Act
generally requires that qualifying thrifts recapture (i.e., include in taxable
income) over a six-year period a portion of their existing bad debt reserves
equal to their "applicable excess reserves," the Bank does not have applicable
excess reserves subject to recapture. However, the Bank's tax bad debt reserve
balance of approximately $10.9 million as of June 30, 2000 will, in future
years, be subject to recapture in whole or in part upon the occurrence of
certain events, such as a distribution to stockholders in excess of the Bank's
current and accumulated earnings and profits, a redemption of shares, or upon
a partial or complete liquidation of the Bank. The Bank does not intend to
make distributions to stockholders that would result in recapture of any
portion of its bad debt reserve. Since management intends to use the reserve
only for the purpose for which it was intended, a deferred tax liability of
approximately $3.8 million has not been recorded.
Distributions. To the extent that the Bank makes "non-dividend
distributions" to stockholders that are considered to result in distributions
from the tax bad debt reserve for losses on qualifying real property, then an
amount based on the amount distributed will be included in the Bank's taxable
income. Non-dividend distributions include distributions in excess of the
Bank's current and accumulated earnings and profits, distributions in
redemption of stock and distributions in partial or complete liquidation.
However, dividends paid out of the Bank's current or accumulated earnings and
profits, as calculated for federal income tax purposes, will not be considered
to result in a distribution from the Bank's tax bad debt reserves. Thus, any
dividends to the Company that would reduce amounts appropriated to the Bank's
tax bad debt reserves and deducted for federal income tax purposes may create
a tax liability for the Bank.
The amount of additional taxable income created from a distribution from the
tax bad debt reserve is an amount that when reduced by the tax attributable to
the income is equal to the amount of the distribution. The result is to tax
distributions from the tax bad debt reserve at approximately 51%. See "--
Regulation and Supervision--Savings and Loan Holding Company Regulation--
Payment of Dividends and Other Capital Distributions by Association" and
"Market for the Registrant's Common Equity and Related Stockholder Matters"
for limits on the payment of dividends of the Bank. The Bank does not intend
to make distributions that would result in a recapture of any portion of its
tax bad debt reserve.
The date of the Company's last complete Internal Revenue Service (IRS) tax
audit was December, 1985. There is a three-year statute of limitations for
federal tax filings. Tax years 1996 through 2000 are considered open tax years
for IRS audit purposes.
Dividends Received Deduction and Other Matters. The Company may exclude from
its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations.
24
The corporate dividends received deduction is generally 70% in the case of
dividends received from unaffiliated corporations with which the Company and
the Bank will not file a consolidated tax return, except that if the Company
and the Bank own more than 20% of the stock of a corporation distributing a
dividend 80% of any dividends received may be deducted.
State and Local Taxation
State of California. The California franchise tax rate applicable to the
Company equals the franchise tax rate applicable to corporations generally
plus an "in lieu" rate approximately equal to personal property taxes and
business license taxes paid by such corporations (but not generally paid by
banks or financial corporations such as the Bank); however, the total tax rate
currently applicable to the Company cannot exceed 10.84% for the 2000 calendar
year. Under California regulations, bad debt deductions are available in
computing California franchise taxes using a three or six year weighted
average loss experience method. The Company and its California subsidiary file
California state franchise tax returns on a combined basis.
The date of the Company's last examination by the California Franchise Tax
Board was December 1997. There is a four-year statute of limitations for state
tax filings. Tax years 1998 through 2000 are considered open for California
Franchise Tax audit purposes.
Delaware Taxation. As a Delaware holding company not earning income in
Delaware, the Company is exempted from Delaware Corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
Environmental Regulation
The Company's business and properties are subject to federal and state laws
and regulations governing environmental matters, including the regulation of
hazardous substances and wastes. For example, under the federal Comprehensive
Environmental Response, Compensation, and Liability Act ("CERCLA") and similar
state laws, owners and operators of contaminated properties may be liable for
the costs of cleaning up hazardous substances without regard to whether such
persons actually caused the contamination. Such laws may affect the Company as
an owner or operator of properties used in its business, and through the Bank,
as a secured lender of property that is found to contain hazardous substances
or wastes.
Although CERCLA and similar state laws generally exempt holders of security
interests, the exemption may not be available if a secured party engages in
the management of its borrower or the securing property in a manner deemed
beyond the protection of the secured party's interest. Recent federal and
state legislation, as well as guidance issued by the United States
Environmental Protection Agency and a number of court decisions, have provided
assurance to lenders regarding the activities they may undertake and remain
within CERCLA's secured party exemption. However, these assurances are not
absolute and generally will not protect a lender or fiduciary that
participates or otherwise involves itself in the management of its borrower,
particularly in foreclosure proceedings. As a result, CERCLA and similar state
statutes may influence the Bank's decision whether to foreclose on property
that is found to be contaminated. The Bank has adopted environmental
underwriting requirements for commercial real estate loans. The Bank's general
policy is to obtain an environmental assessment prior to foreclosure on
commercial real estate. See "Business--General" and "--Lending Activities--
Loan and MBS Portfolio Composition" regarding the recent and rapid expansion
of the Association's commercial real estate loan portfolio. The existence of
hazardous substances or wastes on commercial real estate properties could
cause the Bank to elect not to foreclose on the property, thereby limiting,
and in some instances precluding, the Bank from realizing on the related loan.
Should the Bank foreclose on property containing hazardous substances or
wastes, the Bank would become subject to other environmental statutes,
regulations and common law relating to matters such as, but
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not limited to, asbestos abatement, lead-based paint abatement, hazardous
substance investigation and remediation, air emissions, wastewater discharges,
hazardous waste management, and third party claims for personal injury and
property damage.
Regulation and Supervision
General
The Bank is a federally chartered savings association, a member of the FHLB
of San Francisco, and is subject to regulation by the OTS and the FDIC. The
Bank's deposits are insured by the FDIC through the SAIF, up to applicable
limits. As a result of its ownership of the Bank, the Company is a savings and
loan holding company subject to regulation by the OTS. As described in more
detail below, statutes and regulations applicable to the Bank govern such
matters as the investments and activities in which the Bank can engage; the
amount of capital the Bank must hold; mergers and changes of control;
establishment and closing of branch offices; and dividends payable by the
Bank. Statutes and regulations applicable to the Company govern such matters
as changes of control of the C