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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

Commission file number: 0-22528

Indicate by check mark whether the registrant (1) has filed reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days.

Number of shares outstanding of the registrant’s sole class of common stock at November 12, 2002: 6,368,993.

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Quaker City Bancorp, Inc.
Index

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Item 1.           FINANCIAL STATEMENTS

Quaker City Bancorp, Inc.
Consolidated Statements of Financial Condition
Unaudited
(In thousands, except share data)

See accompanying notes to consolidated financial statements.

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Quaker City Bancorp, Inc.
Consolidated Statements of Operations
Unaudited
(In thousands, except share and per share data)

See accompanying notes to consolidated financial statements.

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Quaker City Bancorp, Inc.
Consolidated Statements of Comprehensive Income
Unaudited
(In thousands)

See accompanying notes to consolidated financial statements.

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Quaker City Bancorp, Inc.
Consolidated Statements of Cash Flows
Unaudited
(In thousands)

See accompanying notes to consolidated financial statements.

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Quaker City Bancorp, Inc.
Notes to Consolidated Financial Statements

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QUAKER CITY BANCORP, INC.

This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of the Securities Exchange Act of 1934 (the”Exchange Act”), as amended by the Private Securities Litigation Reform Act of 1995.  All statements, other than statements of historical facts, included in this report that address results or developments that the Company expects or anticipates will or may occur in the future, including such things as (i) business strategy; (ii) economic trends, including the condition of the real estate market in southern California, and the direction of interest rates and prepayment speeds of mortgage loans and mortgage-backed securities (“MBS”); (iii) the adequacy of the Company’s allowances for loan and real estate losses; (iv) goals; (v) expansion and growth of the Company’s business and operations; and (vi) other matters are forward-looking statements.  These statements are based upon certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments as well as other factors it believes are appropriate in the circumstances.  These statements are subject to a number of risks and uncertainties, many of which are beyond the control of the Company, including general economic, market or business conditions; real estate market conditions, particularly in California; the opportunities (or lack thereof) that may be presented to and pursued by the Company; competitive actions by other companies; changes in law or 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.

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”).  At September 30, 2002, the Bank operated twenty-three retail banking offices in southern California, including twelve “in-store” Wal-Mart branches.  Two new Wal-Mart in-store branches were opened in September 2002 and one opened in October 2002, in the communities of Pico Rivera, Santa Fe Springs and Long Beach, California. The Bank is scheduled to open three additional in-store Wal-Mart branches within the next two fiscal years, bringing its total to sixteen in-store Wal-Mart branches. Wal-Mart has entered into an agreement with another financial institution for the opening of additional in-store branches throughout the United States.  It is not known whether the Bank will open any additional branches in Wal-Mart stores other than the sixteen currently under agreement.  The Bank is subject to significant competition from other financial institutions, and is also subject to the regulations of various government agencies and undergoes periodic examinations by those regulatory authorities.

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The Company is primarily engaged in attracting deposits from the general public in the areas in which its branches are located and investing such deposits and other available funds (primarily Federal Home Loan Bank (“FHLB”) advances)  in loans secured by multifamily mortgages, one-to-four family residential mortgages, commercial real estate mortgages and MBS.

RESULTS OF OPERATIONS

Net Earnings.  The Company recorded net earnings of $5.6 million, $0.83 per diluted share, for the quarter ended September 30, 2002, a 17.0% increase in earnings per share from the same period last year, with net earnings of $4.7 million, $0.71 per diluted share.  The increase in net earnings for the three months ended September 30, 2002 as compared to September 30, 2001 is primarily a result of an increase in net interest income as discussed below.

Interest Income.  Interest income amounted to $25.0 million for the quarter ended September 30, 2002 as compared to $26.1 million for the quarter ended September 30, 2001.  The decrease in interest income for the three month period ended September 30, 2002 is primarily a result of a decline in the yield on earning assets.  The yield on average earning assets was 6.80% for the quarter ended September 30, 2002 compared to 8.00% for the quarter ended September 30, 2001.  The reduction in market interest rates during the past year has resulted in the downward repricing of adjustable-rate loans, increased loan payoffs, and loan originations and refinancings funded at historically low interest rates.  Average earning assets for the current quarter increased to $1.47 billion compared to $1.30 billion for the same period last year, a 12.82% increase.

Interest Expense.  Interest expense for the quarter ended September 30, 2002 was $10.5 million, compared to $13.8 million for the same quarter in the previous year.  The decrease in interest expense for the three months ended September 30, 2002 is primarily a result of a decrease in the cost of interest-bearing liabilities during the period.  The average cost of funds was 3.21% for the quarter ended September 30, 2002 as compared to 4.66% for the quarter ended September 30, 2001, a decrease of 145 basis points or 31.12% over the comparable period of last year. 

Net Interest Income Before Provision for Loan Losses.  Net interest income before provision for loan losses for the quarter ended September 30, 2002 amounted to $14.5 million compared to $12.3 million for the same period last year.  The net interest margin for the three months ended September 30, 2002 was 3.89% compared to 3.77% for the same period last year, as the cost of interest bearing liabilities decreased more quickly than the yield on interest earning assets decreased.  Approximately $446.9 million of the Bank’s adjustable rate loans are constrained by floor rates that are above current market rates as of the quarter ended September 30, 2002. This, together with the reduction in the cost of funds and the lagging loan pricing indices, contributed to the expansion of the net interest margin in the first quarter of fiscal 2003 compared to the first quarter of fiscal 2002.  

The net interest margin for the quarter ended June 30, 2002 was 4.16% as compared to 3.89%quarter ended September 30, 2002.  Net interest income for the quarter ended September 30, 2002 was down $308,000 from the quarter ended June 30, 2002. The reduction in the net interest margin from the historically high June 2002 level was due, in part, to new loan production and purchases (primarily adjustable rate loans) in the current lower rate market.  The Company also continues to extend maturities on FHLB advances and retail deposits in a rate environment that management considers favorable for extension.

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The following table displays average interest rates on the Company’s interest-earning assets and interest-bearing liabilities:

Provision for Loan Losses.  The Company maintains valuation allowances for losses on loans and real estate that the Company’s management believes to be inherent in those portfolios.  The Company’s management evaluates the adequacy of the level of the loss allowance at least quarterly as a function of its internal asset review process.

The Company’s Internal Asset Review Committee meets monthly to review and determine asset classifications and to recommend any changes to the asset valuation allowance.  This Committee is comprised of the Senior Loan Servicing Officer (Chairperson), Chief Executive Officer, Chief Financial Officer, Senior Residential Lending Officer, Senior Capital Markets Officer, Senior Income Property Lending Officer, Assistant Treasurer and Controller.  The Internal Auditors of the Company also attend the meeting.  The Chairperson of the Internal Asset Review Committee prepares reports for the Board of Directors’ Loan Committee regarding asset quality.

The Company’s management considers various factors when assessing the adequacy of the allowance for loan losses including risk characteristics inherent in the collateral types, asset classifications, estimated collateral values, local and national economic conditions, historical loan loss experience, and the Company’s underwriting policies.

The Company’s internal asset review system and loss allowance methodology are designed to provide for timely identification of problem assets and recognition of losses.  The current asset monitoring process includes the use of asset classification to segregate the assets, primarily real estate loans, into types of loans.  Currently, loan type classifications include one-to-four family loans, multifamily loans, commercial and land loans, and other loans.

The allowance for loan losses consists of three elements: (i) specific valuation allowances, (ii) general valuation allowances based on historical loan loss experience and current trends, and (iii)  adjustments to general valuation allowances based on general economic conditions and other risk factors in the Company’s individual markets.

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          Specific Valuation Allowances.  A specific valuation allowance for losses on a loan is established when management determines the loan to be impaired and the loss can be reasonably estimated.  Generally, the Company’s loans are collateral dependent, therefore, specific reserves are established based upon the value of the underlying collateral.  To comply with this policy, management has established a monitoring system that requires an annual review of  real estate loans on commercial properties with balances in excess of $500,000 and for multifamily loans with balances in excess of $750,000.  In addition, all assets considered to be adversely classified or criticized are reviewed monthly for impairment.  The annual review process requires an analysis of current operating statements, an evaluation of the property’s current and past performance, an evaluation of the borrower’s ability to repay, and an evaluation of the overall condition and estimated value of the collateral. 

          General Valuation Allowances.  These allowances relate to assets with no well-defined deficiencies or weaknesses  and take into consideration losses that are inherent within the portfolio but that have not yet been realized.  General valuation allowances are determined by applying factors that include the mix of loan products within the portfolio, any change in underwriting standards, past loss experience and general economic conditions and other risk factors.  Past loss experience within homogeneous loan categories is analyzed at least annually.  The Company may revise general valuation allowance factors whenever necessary in order to address improving or deteriorating credit quality trends or specific risks associated with a given loan category.

          General Economic Conditions and Other Risk Factors.  The Company considers general economic conditions and other risk factors when setting valuation allowances.  These factors are based on local marketplace conditions and/or events that could affect loan repayment.  The assessment of general economic conditions inherently involves a higher degree of uncertainty as it requires management to anticipate the impact that economic trends, legislative actions or other unique market and/or portfolio issues have on estimated credit losses.  For example, in assessing economic risks in the marketplace, management  considers local unemployment trends,  expansion and contraction plans of major employers, and other similar indicators.  Consideration of other risk factors typically includes recent loss experience in specific portfolio segments, trends in loan quality, concentrations of credit risk together with any internal administrative risk factors.  These risk factors are carefully reviewed by management and are revised as conditions dictate.

The Company has increased its commercial real estate and land loan portfolio in recent years to a level of 22.24% of total gross loans at September 30, 2002, compared to 8.39% at June 30, 1997.  Both because the size of the commercial real estate loan portfolio has increased and most of the loans comprising the portfolio were originated within the last five 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.  As a result of the potentially higher risk of these loans, a higher level of general allowance for loan losses has been allocated to the multifamily and commercial real estate portfolios.  These loans typically involve higher loan principal amounts and the repayment of such loans generally depends on the income produced by the operation or sale of the property being sufficient to cover operating expenses and debt service.  In addition, multifamily and commercial real estate values tend to be more cyclical and recessionary

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economic conditions that prevailed in prior years in the Company’s lending market area tend to result in higher vacancy, reduced rental rates and net operating incomes from multifamily and commercial real estate properties, although the southern California real estate market generally remained strong for the first nine months in 2002 despite signs of weakness in certain segments of the market.

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 loan types listed:

Management added $200,000 to the general loan loss reserve for the first quarter of fiscal 2003 primarily as a result of growth in both the multifamily and commercial real estate loan portfolios during the quarter.  The Company recorded no loan loss provision for the quarter ended September 30, 2001.  The Company adjusted down its allocation of the general allowance for single family loans during the first quarter of fiscal 2003.  The Company’s single family loan portfolio has performed better than anticipated, given the current historically low interest rates combined with the relative strength of the southern California real estate market.

As a result of the potential weakness in certain segments of real estate markets and other economic factors, increases in the allowance for loan losses may be required in future periods.  In addition, the Office of Thrift Supervision (“OTS”) and the Federal Deposit Insurance Corporation (“FDIC”), as an integral part of their examination process, periodically review the Company’s allowance for loan losses.  These agencies may require the Company to increase the allowance for loan losses based on their judgments of the information available at the time of their examination.

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The following is a summary of the activity in the allowance for loan losses:

The specific allowance for loan and real estate losses was $40,000 at September 30, 2002 as compared to $146,000 at September 30, 2001.  The specific allowance declined due to loan payoffs and increased real estate values in southern California.

Other Income.  Other income for the three months ended September 30, 2002 was $2.3 million as compared to $1.7 million for the same period last year, an increase of 29.56%.   Included in other income for the three months ended September 30, 2002 was an increase of $347,000 in deposit fee income related to checking accounts, up 42.63% from the same period last year, $120,000 of deferred gains recognized, and an increase of $102,000 in loan service charges and fees, up 19.77%from the same period last year.

Other Expense.   Other expense for the three months ended September 30, 2002 increased to $6.9 million compared to $5.7 million for the same period last year.  Other expense for the three months ended September 30, 2002 increased from the same period last year as a result of costs related to retirement plan contributions including compensation costs for the Employee Stock Ownership Plan (“ESOP”) and planned branch network expansion expenses with seven new in-store branches opened since January 2002. As shares are released from the ESOP, compensation expense is recognized to the extent that the fair market value of the shares exceeds the book value of the shares.  The weighted average market price of the Company’s common stock for the months ended September 30, 2002 and 2001 was $33.93 and $24.33, respectively. 

The efficiency ratio for the quarter ended September 30, 2002 increased to 41.18% compared to 40.67% for the same period last year. The efficiency ratio is the measurement of general and administrative expense as a percentage of net interest income before provision for loan losses and other income, excluding nonrecurring items.

Income Taxes.   The Company’s effective tax rates were 41.49% and 42.73% for the quarters ended September 30, 2002 and 2001, respectively.  The effective tax rates were comparable to the applicable statutory rates in effect.  The reduction of the effective tax rate for the quarter ended September 30, 2002 as compared to the quarter ended September 30, 2001 is attributable to a one-time tax benefit of $158,000 recognized during the current quarter covered by this report due to a change in the State of California tax law regarding reserves for loan losses.

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FINANCIAL CONDITION

Total stockholders’ equity for the Company was $131.5 million at September 30, 2002, compared to $128.5 million at June 30, 2002.  Total assets were $1.51 billion at September 30, 2002, an increase of $27.4 million compared to June 30, 2002.

Pursuant to previously announced plans to repurchase Company stock, the Company acquired in the open market 113,574 shares of its common stock at an average price per share of $35.22 during the quarter ended September 30, 2002.  On October 17, 2002, the Board of Directors authorized the additional repurchase of up to 5% of the Company’s outstanding common stock.  This 5% authorization, in combination with the 157,551 shares remaining from the previous Board repurchase  authorization, brings the total number of shares authorized for repurchase to 484,170, approximately 7.4% of the Company’s currently outstanding common stock.

Total loans receivable (including loans receivable held-for-sale) amounted to $1.25 billion at September 30, 2002 compared to $1.20 billion at June 30, 2002.  The following table presents loans receivable at the dates indicated:

Loan originations totaled $102.7 million and loan purchases totaled $54.2 million for the quarter ended September 30, 2002, compared to loan originations of $84.6 million and loan purchases of $25.0 million for the quarter ended September 30, 2001.

Loan originations were comprised of the following:

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Loan purchases were comprised of the following:

The increase in loan production for the three months ended September 30, 2002 compared to the same period in the previous year is primarily a result of an increase in one-to-four family and multifamily loan originations from increased refinancings due to the lower interest rate environment, as well as an increase in multifamily and commercial real estate loan purchases.  At present, the Company expects to continue its focus on one-to-four family, multifamily and commercial real estate lending during the current fiscal year.

MBS held-to-maturity totaled $102.6 million at September 30, 2002, compared to $117.8 million at June 30, 2002.  There were $15.3 million in amortization and payoffs and no MBS held-to-maturity purchases made during quarter ended September 30, 2002.  MBS available-for-sale amounted to $39.3 million at September 30, 2002 compared to $26.4 million at June 30, 2002.  Approximately $15.1 million of MBS available-for-sale purchases were partially offset by $2.2 million in amortization and payoffs during the quarter ended September 30, 2002.

CAPITAL RESOURCES AND LIQUIDITY

From time to time the Company has obtained advances from the FHLB as an alternative to retail deposit funds.  FHLB advances increased $9.3 million to $340.0 million for the quarter ended September 30, 2002.   Deposits increased by$9.6 million to $1.02 billion for the three months ended September 30, 2002.  In addition, while the majority of the Bank’s deposits are retail in nature, the Bank has accepted $65.0 million in time deposits from a political subdivision.  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.

In addition to FHLB advances and proceeds from increases in customer deposits, other sources of liquidity for the Company include principal repayments on loans and MBS, proceeds from sales of loans held-for-sale and other cash flows generated from operations.  Principal repayments on loans were $80.6 million and $69.9 million for the three months ended September 30, 2002 and 2001, respectively.  With continued downward pressure on interest rates, loans paid off more rapidly than in the previous reporting period. 

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Proceeds from loan sales amounted to $18.8 million for the quarter ended September 30, 2002 as compared to $19.6 million for the quarter ended September 30, 2001.  Loans serviced for others were$280.3 million at September 30, 2002 compared to $280.0 million at June 30, 2002.

The Financial Regulatory Relief and Economic Efficiency Act of 2000 repealed the statutory liquidity requirement for savings associations, citing the requirement as unnecessary.  In light of this action, the OTS repealed its liquidity regulations, with the following exception. Savings associations must continue to maintain sufficient liquidity to ensure safe and sound operation; the appropriate level of liquidity will vary depending on the activities in which the savings association engages.  The Bank believes that its level of liquidity is consistent with its safe and sound operation.

Sources of capital and liquidity for the Company on a stand- alone basis includes distributions from the Bank.  Dividends and other capital distributions from the Bank are subject to regulatory restrictions.

ASSET QUALITY

The following table sets forth information regarding nonaccrual  loans, troubled debt restructured loans and real estate acquired through foreclosure at the dates indicated:

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The Company’s nonaccrual policy provides that interest accruals generally are to be discontinued once a loan is past due for a period of 60 days or more.  Loans may also be placed on nonaccrual status even though they are less than 60 days past due if management concludes that it is probable that the borrower will not be able to comply with the repayment terms of the loan.

The Company defines nonperforming loans as nonaccrual loans and troubled debt restructured loans.  Nonperforming loans are reported net of specific allowances.  Nonperforming assets are defined as nonperforming loans and real estate acquired through foreclosure.

Nonperforming assets decreased to $3.4 million, 0.22% of total assets at September 30, 2002,  compared to $4.3 million, 0.29% of total assets at June 30, 2002.  Classified loans decreased to $9.0 million at September 30, 2002, compared to $11.4 million at June 30, 2002.

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 generally 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 one-to-four family loans with principal balances of less than $300,000, real estate loans on commercial properties with balances of less than $500,000 and multifamily loans with balances of less than $750,000.

Factors considered as part of the periodic loan review process to determine whether a loan is impaired, as defined under Statement of Financial Accounting Standards No. 114, “Accounting by Creditors for Impairment of a Loan,” and as amended by Statement of Financial Accounting Standards No. 118, “Accounting by Creditors for Impairment of a Loan–Income Recognition and Disclosures,” 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 September 30, 2002, the Company had a gross investment in impaired loans of $40,000 for which specific valuation allowances of $40,000 had been established. 

During the three months ended September 30, 2002, the Company’s average investment in impaired loans was $136,000.  For the three months ended September 30, 2002, income recorded on impaired loans totaled $2,000, substantially all of which was recorded in accordance with the policy for nonaccrual loans.  Payments received on impaired loans which are performing under their contractual terms are allocated to principal and interest in accordance with the terms of the loans.  All impaired loans were performing in accordance with their contractual terms at September 30, 2002.

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REGULATORY CAPITAL

The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”), and implementing OTS capital regulations include three separate minimum capital requirements for financial institutions subject to OTS supervision.  First, the tangible capital requirement mandates that the Bank’s stockholders’ equity less intangible assets be at least 1.50% of adjusted total assets as defined in the capital regulations.  Second, the core capital requirement currently mandates core capital (tangible capital plus qualifying supervisory goodwill) be at least 4.00% of adjusted total assets as defined in the capital regulations.  Third, the risk-based capital requirement presently mandates that core capital plus supplemental capital as defined by the OTS be at least 8.00% of risk-weighted assets as prescribed in the capital regulations.  The capital regulations assign specific risk weightings to all assets and off-balance sheet items. The Bank was in compliance with all capital requirements in effect at September 30, 2002, and meets all standards necessary to be considered “well-capitalized” under the prompt corrective  action regulations adopted by the OTS pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”).  The following table reflects the required and actual regulatory capital ratios of the Bank at the dates indicated: