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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

Quarterly Report under Section 13 or 15(d)

of The Securities Exchange Act of 1934

For the Quarter Ended March 31, 2003 Commission file number 0-16213

(Exact name of registrant as specified in its charter)

(State or other jurisdiction of (I.R.S. Employer Identification No.)

incorporation or organization)

(Address of principal executive offices) (Zip code)

Registrant's telephone number, including area code 213/972-4174

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.

Yes X No _______

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12 b-2 of the Exchange Act.)

Yes X No _______

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the period covered by this report.

Common stock, no par value, 11,557,562 shares issued and outstanding as of March 31, 2003.

PART I - FINANCIAL INFORMATION

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1. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Company's financial condition and results of operations for the interim periods presented in this Form 10-Q have been included. Operating results for the interim periods are not necessarily indicative of financial results for the full year. Certain reclassifications have been made to the prior period financial statements to conform to the current period presentation. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Significant balance sheet items which could be materially affected by such estimates include loans and leases, which are presented net of the allowance for credit losses, the valuation for other real estate owned, the estimated residual value of leveraged leases and the tax benefits from the real estate investment trust subsidiary.

The financial statements include the accounts of GBC Bancorp ("Bancorp"), its wholly owned subsidiaries, GBC Venture Capital, Inc. ("VC") and General Bank, (the "Bank"), a California state chartered bank, and the Bank's wholly owned subsidiaries, GBC Insurance Services, Inc., GBC Investment & Consulting Company, Inc., GBC Real Estate Investments, Inc., GBC Trade Services, Asia Limited and GB Capital Trust II. The Bank also holds 90% of the voting stock of GBC Leasing Company, Inc., which amount is not material.

 

2. Commitments and Contingencies

In the normal course of business, there are various outstanding commitments to extend credit which are not reflected in the accompanying interim consolidated financial statements.

The following is a summary of the Company's commitments and contingencies as of March 31, 2003 and December 31, 2002:

 

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	March 31,	December 31,
(In Thousands)	2003	2002
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Undisbursed Commitments	$581,750	$581,939
Standby Letters of Credit	34,473	32,707
Bill of Lading Guarantees	995	528
Commercial Letters of Credit	65,733	65,709

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3. Pending Litigation

In the normal course of business, the Company is subject to pending and threatened legal actions. After reviewing pending actions with counsel, management believes that the outcome of such actions will not have a material adverse effect on the financial condition or the results of operations of the Company.

4. Earnings (Loss) Per Share

Basic earnings / (loss) per share is determined by dividing net income/(loss) by the weighted average number of shares of common stock outstanding, while diluted earnings per share is determined by dividing net income by the weighted average number of shares of common stock outstanding adjusted for the dilutive effect of common stock equivalents. In the event of a loss from operations, no common stock equivalents are included in the computation of the diluted loss per share. The following table sets forth basic and diluted earnings/(loss) per share calculations:

 

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	Three Months Ended March 31,
	2003	2002
(In Thousands Except per Share Data)
<s>	<c>	<c>
Net Income (Loss)	$ 4,120	($2,906)
Weighted-average Shares:
Basic Shares Outstanding	11,628	11,590
Dilutive Effect of Equivalent Shares	13	-
Dilutive Shares Outstanding	11,641	11,590
Earnings/(Loss) per Share- Basic	$0.35	($0.25)
Earnings/(Loss) per Share- Diluted	$0.35	($0.25)

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The average anti-dilutive equivalent shares outstanding for the three months ended March 31, 2003 and 2002 were 1,367,496 and 1,573,050, respectively. Equivalent shares represent options to purchase Company stock.

5. Quarterly Dividends

On February 25, 2003, the Company's Board of Directors declared a quarterly common stock cash dividend of $0.12 per share payable on or about April 15, 2003 to shareholders of record on March 31, 2003. Please see also Note 7, Regulatory Matters, below.

6. Recent Accounting Developments

In June 2001, the Financial Accounting Standards Board ("FASB") issued Statements of Financial Accounting Standards ("SFAS") No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires the Company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development, and/or normal use of the assets. The Company also records a corresponding asset that is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The Company adopted SFAS No. 143 on January 1, 2003. The adoption of SFAS No. 143 did not have a material effect on the Company's financial statements.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 amends existing guidance on reporting gains and losses on the extinguishment of debt to prohibit the classification of the gain or loss as extraordinary, as the use of such extinguishments have become part of the risk management strategy of many companies. SFAS No. 145 also amends SFAS No. 13 to require sale-leaseback accounting for certain lease modifications that have economic effects similar to sale-leaseback transactions. The provisions of the Statement related to the rescission of Statement No. 4 is applied in fiscal years beginning after May 15, 2002. Earlier application of these provisions is encouraged. The provisions of the Statement related to Statement No. 13 were effective for transactions occurring after May 15, 2002, with early application encouraged. The adoption of SFAS No. 145 did not have a material effect on the Company's financial statements.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. The provisions of this Statement were effective for exit or disposal activities initiated after December 31, 2002, with early application encouraged. The adoption of SFAS No. 146 did not have a material effect on the Company's financial statements.

In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation were applicable to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim and annual periods ending after December 15, 2002. The adoption of the Interpretation did not have a material effect on the Company's financial statements.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements. Certain of the disclosure modifications are required for periods ending after December 15, 2002, and are included in the notes to these consolidated financial statements.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003. For public enterprises, such as the Company, with a variable interest in a variable interest entity created before February 1, 2003, the Interpretation applies to that enterprise no later than the beginning of the first interim or annual reporting period beginning after June 15, 2003. The application of this Interpretation is not expected to have a material effect on the Company's financial statements. The Interpretation requires certain disclosures in financial statements issued after January 31, 2003, if it is reasonably possible that the Company will consolidate or disclose information about variable interest entities when the Interpretation becomes effective. As of March 31, 2003, the Company owned interests in two limited partnerships, for which it is reasonably possible that the limited partnerships may be construed to be variable interest entities subject to consolidation under Interpretation No. 46. Both of these investments were formed for the purpose of investing in low-income housing projects, which qualify for federal low-income housing tax credits and/or California tax credits. At March 31, 2003, the carrying amount of those investments in real estate was $1.5 million. As of March 31, 2003, the Company had fully satisfied all capital commitments required under the respective limited partnership agreements. The Company is not liable for the debts, liabilities, contracts, or any other obligation of these limited partnerships under the terms of the respective limited partnership agreements. The Company has not completed its analysis to determine the impact to the Company of adopting Interpretation No. 46, which for the Company will be in the third quarter of 2003. However, the Company expects that the adoption will not have a material impact on the Company's results of operations or financial position.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. In particular, this Statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative and when a derivative contains a financing component that warrants special reporting in the statement of cash flows. This Statement is generally effective for contracts entered into or modified after June 30, 2003 and is not expected to have a material impact on the Company's financial statements.

7. Regulatory Matters

As a result of the findings of the regulatory examination of General Bank dated June 10, 2002, General Bank has entered into a Memorandum of Understanding (MOU) with the Federal Deposit Insurance Corporation and the California Department of Financial Institutions ("DFI"). The MOU provides that the Bank shall retain management acceptable to the regulatory authorities and shall maintain a Tier 1 leverage capital ratio of at least 7.5%. As of March 31, 2003, the Bank's Tier 1 leverage capital ratio was 8.09%. The MOU further provides that the Bank shall not, without prior written consent of the regulatory authorities, pay cash dividends in the event that payment of such dividends would result in noncompliance with this capital ratio. Although the Bank has historically paid such dividends to GBC Bancorp ("GBC") at the time of payment of GBC's dividend, as of March 31, 2003, GBC had $14.2 million of cash and a short-term promissory note from General Bank, which is sufficient to pay dividends at the current annual level of $5.6 million per year and $3.4 million of interest on its subordinated debt per year for over a year without receiving a dividend from the Bank. Management does not believe that the MOU will affect the payment of dividends and interest by GBC Bancorp.

The MOU further provides for reductions in the level of classified assets to specified percentages of Tier 1 Capital plus the Allowance for Credit Losses by March 31, 2003 and June 30, 2003. As of March 31, 2003, the Bank had reduced such classified assets to the level required to be achieved by June 30, 2003. The MOU further calls for the timely identification and classification of problem loans, improvement of credit-related analysis and reports, a second review of real estate appraisals, and improvements in the loan underwriting and monitoring processes. Although the examination report found the Bank's allowance for credit losses to be adequate, management was required to modify the methodology for the size and complexity of the loan portfolio. Bank Secrecy Act policies and procedures were to be improved to eliminate identified deficiencies and a program to reasonably ensure compliance with the requirements for establishing accounts with a W-8 tax-exempt status was to be developed and implemented. Improvements in the documentation and testing of the interest rate risk model were also called for. The Bank has revised its policies, methodologies and procedures as they relate to both the credit and Bank Secrecy Act issues identified in the MOU. Among other things, the Bank has initiated employee training and a program to test for the effectiveness of the new policies, methodologies and procedures. Neither the FDIC nor the DFI has yet examined the Bank to test for compliance with the MOU.

As a result of the ratings received by General Bank, GBC Bancorp was no longer eligible to retain its status as a Financial Holding Company ("FHC"). The Company informed the Federal Reserve Bank of San Francisco of its decision to decertify itself as an FHC, effective immediately. GBC Bancorp had not utilized the expanded authorities available as an FHC, and therefore the decertification has no impact on its existing business or on its business strategies.

8. Accounting for Stock-Based Compensation

On January 1, 1996, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation, which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.

The Company applies APB Opinion No. 25 in accounting for its stock option plans and, accordingly, no compensation cost has been recognized for the fair value of the options granted in the consolidated financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net income / (loss) and earnings / (loss) per share ("EPS") for the indicated periods would have been changed to the pro forma amounts indicated below:

 

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		For The Three Month Ended March 31,
(In Thousands, Except Per Share Data)		2003		2002
Net Income/(Loss) as Reported		$ 4,120		$ (2,906)
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Stock-based Employee Compensation Expense
determined under fair value based method,
net of related tax effects		244		243
Pro Forma Net Income/(Loss)		$ 3,876		$ (3,149)
Earnings/(Loss) per share as Reported - Basic		$ 0.35		$ (0.25)
Earnings/(Loss) per shareas Reported - Diluted		$ 0.35		$ (0.25)
Pro Forma Earnings/(Loss) per share - Basic		$ 0.33		$ (0.27)
Pro Forma Earnings/(Loss) per share - Diluted		$ 0.33		$ (0.27)

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The Black-Scholes model was utilized for purposes of the option pricing. The volatility of 40.1% and 39.3%, for the options granted in 2003 and 2002, respectively, was based on historical weekly closing prices and historical annual dividend rates. The expected life of the options ranged from 1 month to 10 years. The annualized dividend yield was 1.99% and 2.48% for 2003 and 2002, respectively. The risk-free interest rate, which is based on the treasury bill/note rate, was 1.19% and 1.70% for options granted during 2003 and 2002, respectively. The weighted average fair value at date of grant for options granted during 2003 and 2002, was $3.39 and $5.89, respectively.

9. Subsequent Events

On May 7, 2003, the Company announced the signing of a merger agreement with Cathay Bancorp, Inc. ("Cathay"). The transaction is valued at approximately $450 million, or $37.95 per share of Company stock, based on information available on May 6, 2003. The per share value is based on the Company's 11,636,563 shares outstanding as of March 31, 2003, adjusted for assumptions the Company has made concerning the expected exercise of stock options (including the shares cancelled for cashless exercise or shares withheld for taxes) and taking into account the agreement by Peter Wu, Chairman, President and Chief Executive Officer, to forfeit some of his contingency stock options, which is discussed below. While the Company believes that these assumptions are reasonable, there can be no assurance that the ultimate number of shares will not exceed that used in making the per share value calculation. If the transaction is completed, the Company's shareholders will receive, in the aggregate, 6,750,000 shares of Cathay stock and $162.4 million in cash. Based on the value of Cathay stock on May 6, 2003, the aggregate consideration would consist of approximately 64% in Cathay stock and approximately 36% in cash. Under the merger agreement, GBC Bancorp will merge into Cathay, the name of which will be changed to Cathay General Bancorp, and General Bank will merge into Cathay's wholly-owned subsidiary, Cathay Bank.

Completion of the merger is subject to shareholder and regulatory approvals and customary closing conditions. Accordingly, there can be no assurance that the merger will be completed or that it will be completed in the expected time period.

On May 7, 2003, the Company filed a press release announcing the transaction and the merger agreement as exhibits to its current report on Form 8-K. Those documents contain more detailed information about the terms and conditions of the transaction.

On May 5, 2003, Peter Wu agreed to forfeit certain contingency stock options with a value, determined immediately prior to the closing of the merger, of $1,000,000. This forfeiture is effective only if the merger with Cathay is consummated. In addition, in exchange for the right to exercise their options on a cashless basis, certain holders of contingency stock options have agreed to forfeit the right to exercise their options during a 45-day period following the closing. This forfeiture is also effective only if the merger with Cathay is consummated. For more information relating to the contingency stock options, please see our proxy statement for the 2003 shareholders meeting filed with the SEC and the exhibits to this Form 10-Q.

In April, 2003, a settlement of litigation was entered into whereby the Bank will receive approximately $1.1 million in the second quarter of 2003.

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The discussion and analysis of our financial condition and results of operations are based upon our unaudited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.

Accounting for the allowance for credit losses involves significant judgments and assumptions by management which have a material impact on the carrying value of net loans; management considers this accounting policy to be a critical accounting policy. The judgments and assumptions used by management are based upon the evaluation of the loan portfolio, the economic environment, historical loan loss experience, collateral values and assessments of borrower's ability to repay, as described in "Allowance for Credit Losses", below.

Accounting for derivatives is in compliance with SFAS No.133, "Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133"). The judgments and assumptions used by management to value derivatives are based on the most recent information available and other factors which are believed to be reasonable under the circumstances.

For the quarter ended March 31, 2003, the net income totaled $4,120,000, or $0.35 diluted earnings per share, compared to a net loss of $2,906,000, or $0.25 diluted loss per share for the first quarter of 2002.

The $7,026,000 increase of net income was primarily the result of a $13,896,000 reduction of the provision for credit losses. Non-interest income also reflected an increase of $2,480,000 due mainly to a $3 million write-down of the Bank's investment in the carrying value of the Aircraft Finance Trust ("AFT") during the quarter ended March 31, 2002. Partially offsetting the above was a $4,521,000 reduction of net interest income, due mainly to declining margins, and a $1,042,000 increase of non-interest expense.

The annualized return (loss) on average assets ("ROA") for the Company was 0.67% and (0.48)% for the quarters ended March 31, 2003 and 2002, respectively. The annualized return (loss) on average stockholders' equity ("ROE") for the quarters ended March 31, 2003 and 2002 was 8.01% and (5.59)%, respectively.

For the quarters ended March 31, 2003 and 2002, net interest income before the provision for credit losses was $19,521,000 and $24,042,000, respectively, representing a decrease of $4,521,000, or 18.8%. The reduction was due to the decline of the net interest margin to 3.24% from 4.08% the corresponding period of a year ago.

Total interest income for the quarter ended March 31, 2003 was $31,305,000 compared to $37,137,000 for the corresponding period of a year ago. The decrease of $5,832,000, or 15.7%, was related to the decline of the yield on earning assets. For the quarters ended March 31, 2003 and 2002, the yield was 5.19% and 6.30%, respectively. All categories of interest earning assets declined, resulting from the decline of the daily average prime rate and of money market rates. For the quarters ended March 31, 2003 and 2002, the daily average prime rate of interest was 4.25% and 4.75%, respectively, representing a 50 basis point decrease. The following table displays the yield decline for the various categories of interest earning assets comparing the quarters ended March 31, 2003 and 2002:

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The 41 basis point decline of the yield on loans and leases is mainly a function of the decline of the prime rate. The 178 basis point decline of the yield on securities is the result of high prepayments received on mortgage-backed securities, the proceeds of which are invested at lower reinvestment rates. Also, during the second quarter of 2002, there were sales of securities from the available-for-sale portfolio with a book value of $206.2 million with related gains on sale totaling $10,127,000. The yield on federal funds sold and securities purchased under agreements to resell declined to 1.34% from 1.86% for the quarter ended March 31, 2003 and 2002, respectively, mirroring the decline of the above-referenced average prime rate.

The downward pressure on the yield on earning assets exerted by the above was partially mitigated by the change in the composition of average earning assets. For the quarters ended March 31, 2003 and March 31, 2002, average loans and leases, the highest yielding interest earning asset, represented 50.0% and 48.3%, respectively, of total average earning assets. For the quarters ended March 31, 2003 and 2002, the average balance of federal funds sold and securities purchased under agreements to resell, the lowest yielding interest earning asset, was 6.1% and 3.6% respectively, of total average earning assets.

The impact of the declining yields on interest income was partially offset by a $54.6 million growth of average interest earning assets to $2,447.0 million from $2,392.4 million for the quarter ended March 31, 2003 and 2002, respectively. The growth of average interest earning assets was comprised of increases of $68.1 million and $62.7 million of loans and leases and federal funds sold and securities purchased under agreements to resell, respectively, offset by a decrease of $76.2 million in securities.

Total interest expense for the quarter ended March 31, 2003 was $11,784,000 compared to $13,095,000 for the corresponding period of a year ago. The decrease of $1,311,000, or 10.0%, was due to the decrease of the cost of funds from 2.69% for the quarter ended March 31, 2002 to 2.39% for the quarter ended March 31, 2003. The 30 basis point decrease of the cost of funds was primarily the result of the decline of deposit rates caused by the decrease of the prime rate of interest, as discussed above. For the quarters ended March 31, 2003 and 2002, average rates paid on interest-bearing deposits were 1.92% and 2.31%, respectively, representing a 39 basis point decline. The 9 basis point difference between the decline of the cost of funds and the deposit rates paid was mainly due to the $54.3 million, or 21.3%, increase of average borrowings from the Federal Home Loan Bank, a more expensive source of funds than the Bank's deposit products. The interest paid on average borrowings from the FHLB was 4.04% and 4.22% for the quarters ended March 31, 2003 and 2002, respectively. The average balance of interest-bearing deposits was $1,651.7 million and $1,682.1 million for the quarters ended March 31, 2003 and 2002, respectively.

Partially offsetting the impact of the decrease of the cost of funds was the growth of average interest-bearing liabilities. For the quarters ended March 31, 2003 and 2002, average interest bearing liabilities were $2,000.6 million and $1,976.8 million, respectively, representing a $23.8 million, or 1.2% growth. A $54.3 million increase in average borrowings from the Federal Home Loan Bank was partially offset by a $30.4 million net decrease of average interest-bearing deposits. This decrease was the result of the non-renewal of deposits from the state of California. These deposits, included in time deposits of $100,000 or more, had an average balance of $140 million during the quarter ended March 31, 2002. There were no such deposits with the Bank during the quarter ended March 31, 2003. Excluding the state of California deposits, the average balance of time deposits of $100,000 or more increased $105.6 million from the quarter ended March 31, 2002 to the quarter ended March 31, 2003.

For the quarters ended as indicated, the average balance and rates paid for the interest-bearing deposit categories were as follows (dollars in thousands):

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The net interest spread, defined as the yield on earning assets less the rates paid on interest-bearing liabilities, decreased to 2.80% for the quarter ended March 31, 2003 from 3.61% for the corresponding period of a year ago and is due to the difference in the reduction of the cost of funds compared to the reduction of the yield on earning assets.

The net interest margin, defined as the annualized difference between interest income and interest expense divided by average interest-earning assets, decreased 84 basis points to 3.24% for the quarter ended March 31, 2003, from 4.08% for the corresponding period of a year ago. The decline of the net interest margin was primarily due to the decline of the net interest spread for the reasons discussed in the above paragraphs.

For the quarter ended March 31, 2003, a provision for credit losses of $4,618,000 was recorded compared to a $18,514,000 provision for credit losses for the corresponding quarter of a year ago, representing a $13,896,000 decrease. As of March 31, 2003, the review of problem loans and leases resulted in $2.5 million of net charge-offs which compares with $6.2 million of net charge-offs for the corresponding period of a year ago. A portion of the first quarter provision for 2003 was taken in recognition of the uncertain status of the lease of an aircraft to Continental Airlines. (See also Loans and Leases in section following.) Non-accrual loans at March 31, 2003 were $23.9 million, a decrease of $31.5 million from March 31, 2002.

The amount of the provision for credit losses is determined by management and is based upon the quality of the loan portfolio, management's assessment of the economic environment, evaluations made by regulatory authorities, historical loan loss experience, collateral values, assessment of borrowers' ability to repay, and estimates of probable known and interest future losses. Please refer to the discussion in "Allowance for Credit Losses".

Non-interest income/(loss) for the quarter ended March 31, 2003 totaled $977,000 compared to ($1,503,000) for the same period ended March 31, 2002, representing a $2,480,000 increase. The increase is primarily due to the $2,580,000 reduction in expense from other investments. During the quarter ended March 31, 2002, the Bank's investment in AFT was written down $3,011,000. As of December 31, 2002, the balance of this investment was written off.

Other investments also includes the Company's share of the operating results of various venture capital funds in which the Company is a limited partner. The Company recorded $783,000 of net losses for these partnerships in the first quarter of 2003 compared to $352,000 of net losses for the corresponding quarter of a year ago.

Total non-interest expense for the quarters ended March 31, 2003 and 2002 was $9,650,000 and $8,608,000, respectively, representing a $1,042,000 or 12.1% increase. The increase was primarily due to the following:

• An increase in other professional service fees totaling $469,000, included as other non-interest expense
• An increase in salaries and employee benefits totaling $212,000
• An increase in the decline of the fair value of derivatives of $161,000

The above were partially offset by a decrease of furniture and equipment expense totaling $261,000. This decrease was primarily due to the expensing of training and data conversion costs associated with the implementation of a new accounting system in the first quarter of 2002.

For the quarter ended March 31, 2003 and 2002, the provision/(benefit) for income taxes was $2,110,000 and ($1,677,000), respectively. The provision for the quarter ended March 31, 2003 represented 33.9% of pre-tax income and assumes a 35% federal income tax rate. For the quarter ended March 31, 2003, there was no state tax provision due to GB Capital Trust II, a real estate investment trust. For the quarter ended March 31, 2002, the tax benefit represented 36.6% of the pre-tax loss.

As of March 31, 2003, total assets were $2,507.2 million, representing a $3.5 million, or 0.1%, decrease from total assets of $2,510.7 million as of December 31, 2002. The asset decline was primarily due to the reduction of cash and cash equivalents and securities available-for-sale of $42.1 million and $24.6 million, respectively. Offsetting the above was a $62.0 million increase in total loans and leases. Total deposits and total loans and leases were at record levels as of March 31, 2003. Stockholders' equity increased to $205.8 million as of March 31, 2003 from $204.1 million as of December 31, 2002, a growth of $1.7 million, or 0.8%.

As of March 31, 2003, total loans and leases were $1,260.7 million compared to $1,198.6 million as of December 31, 2002, representing a 5.2% increase. The increase was primarily due to growth in conventional real estate loans amounting to $59.5 million. In addition, real estate construction loans increased $15.1 million or 5.01%. Offsetting the above increases were decreases of $7.0 million and $5.6 million in commercial loans and other loans, respectively.

The following table sets forth the amount of loans and leases outstanding by category and the percentage of each category to the total loans and leases outstanding:

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The two largest concentrations in commercial loans continue to be the apparel/textile industry and the computer/electronic goods industry (excluding early-stage technology companies). The approximate amounts of commercial loans for these two segments as of March 31, 2003 are $62.7 million and $42.8 million, respectively. In addition, there are $28.5 million of loans to early-stage high technology companies. As of March 31, 2003, $30.8 million of loans originated by the closed New York loan production office remained outstanding.

Also included in commercial loans are five credits that are participations in facilities to Indian casinos that are construction loans to be repaid under a mini-perm facility from cash flow from the casinos. The total commitments were $40.8 million as of March 31, 2003 and the total loans outstanding were $29.9 million.

The Company is also maintaining close contact with customers involved in international trade to determine if their businesses are being impacted by the outbreak of severe acute respiratory syndrome (SARS). At this point, they are reporting that this has not made a significant impact on their businesses. Overall transactions in the international trade financing business have declined somewhat, but management believes this is related to the sluggish economy rather than SARS.

Construction loans are real estate loans secured by first trust deeds. Conventional real estate loans are loans, other than construction loans, secured by first trust deeds or junior real estate liens. The following table sets forth the break down by type of collateral for construction and conventional real-estate loans as of March 31, 2003 and December 31, 2002:

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As of March 31, 2003, the Company had an ownership interest in one leveraged lease of a Boeing 737 aircraft leased by Continental Airlines. As of March 31, 2003, the total investment in the Continental Airlines lease, included as part of loans and leases, was $9.2 million. Such amount includes an estimated residual value of $7.6 million. The debt that is senior to the Company's investment was $12.0 million. Although the current market value of such aircraft is difficult to ascertain at this time, should the lessee default, the lease would be substantially at risk due to the debt outstanding and the depressed market value of such aircraft.

A certain degree of risk is inherent in the extension of credit. The Company performs a quarterly assessment of the credit portfolio to determine the appropriate level of the allowance. Included in the assessment is the identification of loan impairment. A loan is identified as impaired when it is probable that interest and principal will not be collected in accordance with the contractual terms of the loan agreement. Loan impairment is measured by estimating the expected future cash flows and discounting them at the respective effective interest rate or by valuing the underlying collateral in the case of collateral-dependent loans.

The Company has a policy of classifying loans (including impaired loans) which are 90 days past due as to principal and/or interest as non-accrual loans unless management determines that the fair value of underlying collateral is substantially in excess of the loan amount or circumstances justify treating the loan as fully collectible. After a loan is placed on non-accrual status, any interest previously accrued but not yet collected is reversed against current income. The amortization of any deferred loan fees is stopped. A loan is returned to accrual status only when the borrower has demonstrated the ability to make future payments of principal and interest as scheduled, and has demonstrated a sustained period of repayment performance in accordance with the contractual terms. Interest received on non-accrual loans generally is either applied as principal reduction or reported as recoveries on amounts previously charged-off, in accordance with management's judgment as to the collectibility of principal.

The following table provides information on the Company's past due loans, non-accrual loans, restructured loans and other real estate owned, net, as of the dates indicated:

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Total non-performing assets increased from $26.3 million as of December 31, 2002 to $28.7 million as of March 31, 2003. The $2.4 million, or 9.1%, increase was the result of the increase of loans 90 days or more past due still accruing.

As of March 31, 2003, there were 4 credits (3 borrowers) totaling $4.2 million that were 90 days or more past due and still accruing. Management does not anticipate any loss exposure on these credits.

The non-accrual loans decreased $0.9 million, or 3.4%, to $23.9 million as of March 31, 2003 from $24.8 million as of December 31, 2002. The decline was primarily due to a $4.6 million decrease in non-accrual commercial loans offset by a $3.5 million increase in non-accrual construction loans. The increase in non-accrual construction loans was primarily due to a $3.5 million credit originated in the state of Washington. There were charge-offs of $2,785,000 during the quarter. Approximately $2.4 million of the charge-offs in the first quarter of 2003 were related to two loans originated out of the Company's former loan production office in New York.

The following table identifies the components of the increase in non-accrual loans during the quarter ended March 31, 2003:

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The following table breaks out the Company's non-accrual loans by category as of March 31, 2003 and December 31, 2002:

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Of the $18.3 million of non-accrual commercial loans as of March 31, 2003, $1.7 million, $1.4 million and $3 thousand were from the apparel textile, computer/electronic goods industries and early-stage high technology companies, respectively. $6.3 million of the non-accrual commercial loans were originated by the closed New York loan production office.

As of March 31, 2003, the balance of restructured loans was $0.6 million compared to $0.7 million as of December 31, 2002. The $0.1 million decline is the result of monthly pay-downs on the one restructured loan outstanding as of March 31, 2003. It is the same loan that was outstanding as of December 31, 2002. A loan is categorized as restructured if the original interest rate on such loan, the repayment terms, or both, are modified due to a deterioration in the financial condition of the borrower. Restructured loans may also be put on a non-accrual status in keeping with the Bank's policy of classifying loans which are 90 days past due as to principal and/or interest. Restructured loans which are non-accrual loans are not included in the balance of restructured loans. As of March 31, 2003, there was one restructured loan with a balance of $46,000 on non-accrual status. The yield of the restructured loan as of March 31, 2003 was 11.25%.

There are no commitments to lend additional funds on any of the restructured loans.

During the first quarter of 2003 and as of March 31, 2003, there was no other real estate owned ("OREO").

During the first quarter of 2002, there was a foreclosure on a property which was subsequently sold for a $7,000 gain. This amount is included as a reduction of OREO expense, net.

A loan is identified as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the loan agreement. Loan impairment is measured by estimating the expected future cash flows and discounting them at the respective effective interest rate or by valuing the underlying collateral for collateral-dependent loans. The following table discloses pertinent information as it relates to the Company's impaired loans, as of the dates indicated:

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The average balance of total recorded investment in impaired loans was $17.0 million for the three months ended March 31, 2003 and $13.2 million for the year ended December 31, 2002.

For the quarters ended March 31, 2003 and 2002, interest income recognized on impaired loans was $21,000 and $355,000, respectively. Of the amount of interest income recognized during the quarters ended March 31, 2003 and 2002, no interest was recognized under the cash basis method.

Management cannot predict the extent to which the current economic environment, including the real estate market, may continue to improve or worsen, or the full impact such environment may have on the Bank's loan portfolio. Furthermore, as the Bank's primary regulators review the loan portfolio as part of their routine, periodic examinations of the Bank, their assessment of specific credits may affect the level of the Bank's non-performing loans. Accordingly, there can be no assurance that other loans will not be placed on non-accrual, become 90 days or more past due, have terms modified in the future, or become OREO.

As of March 31, 2003, the balance of the allowance for credit losses was $27.6 million, representing 2.19% of outstanding loans and leases. This compares to an allowance for credit losses of $25.5 million as of December 31, 2002, representing 2.13% of outstanding loans and leases.

The table below summarizes the activity in the allowance for credit losses (which amount includes the allowance on impaired loans), for the quarter ended as indicated:

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As of March 31, 2003, the allowance represented 115.5% of non-accrual loans and 96.2% of non-performing and restructured loans combined. As of December 31, 2002, the allowance represented 103.1% of non-accrual loans and 97.0% of non-performing and restructured loans combined.

The provision for credit losses is an amount required to maintain an allowance for credit losses that management believes is adequate to cover probable credit losses related to specifically identified loans as well as probable credit losses inherent in the remainder of the loan and lease portfolio. Allocation of the allowance is made for analytical purposes only, and the entire allowance is available to absorb probable and estimable credit loss inherent in the portfolio, including unfunded commitments. Additions to the allowance result from recording provision for loan losses or loan recoveries, while charge-offs are deducted from the allowance. Management evaluates the loan portfolio, the economic environment, historical loan loss experience, collateral values and assessments of borrowers' ability to repay in determining the amount of the allowance for credit losses. The balance of the allowance for credit losses is an accounting estimate of probable but unconfirmed losses in the Bank's loan portfolio as of March 31, 2003 and December 31, 2002. Such an amount is based on ongoing, quarterly assessments of the probable estimated losses inherent in the loan and lease portfolio, and to a lesser extent, unused commitments to provide financing. The Company's methodology for assessing the appropriateness of the allowance consists primarily of the use of a formula allowance.

The formula allowance is calculated by applying loss factors to outstanding loans and leases and certain unused commitments, in each case based on the internal risk rating of such loans, pools of loans, leases or commitments. Changes in risk ratings of both performing and non-performing loans affect the amount of the formula allowance. Loss factors are based on the Company's historical loss experience and may be adjusted for significant factors that, in management's judgment, affect the collectibility as of the evaluation date. Loss factors are described as follows:

• Problem graded loan loss factors represent percentages generated by a migration analysis which tracks loss experience over the previous twelve quarters, except for those loans identified as impaired. For loans that are identified as impaired that are collateral-dependent, impairment is measured based on the estimated fair value of the collateral. For impaired loans that are not collateral-dependent, impairment is measured by estimating the expected future cash flows and discounting them at the loan's estimated future cash flows and discounting them at the loan's effective interest rate. If the measurement of the impaired loan is less than the recorded amount of the loan, impairment is recognized by creating or adjusting an existing valuation allowance with a corresponding charge to the provision for loan losses.
• Pass graded loan loss factors are based on a similar migration analysis.
• The Bank has identified six portfolio segments where a specific loss factor will be developed and applied. The segments are: Real Estate Term Loans, Real Estate Construction Loans, Land Loans, High Technology Credits, Loans to borrowers in the apparel and textile industries, and borrowers in the computer and electronics industries. Each portfolio segment shares risk characteristics that are common to the group of loans. Each segment is subject to a migration analysis to establish a loss factor for the particular segment.

Adjustments to the final allowance reflect management's analysis of current conditions which are expected to affect loss experience. Additionally, management may, at the end of each quarter, establish further discretionary allowances for the period which reflect temporary influences on expected loan loss experience. Factors include:

• Changes in economic and business conditions.
• Changes in the nature of and concentrations in the portfolio.
• Changes in the trend of amounts and/or severity of past due and classified loans, trends in the level of non-accrual loans, troubled debt restructurings, or other indicators.
• Changes in external factors such as competition or legal and regulatory requirements.

The Company classifies its securities as held-to-maturity, trading or available-for- sale. Securities classified as held-to-maturity are those debt securities that the Company has the positive intent and ability to hold until maturity. These securities are carried at amortized cost. As of March 31, 2003 and December 31, 2002, there were no securities held-to-maturity.

Securities that are obtained and held principally for the purpose of selling them in the near term are classified as trading and are reported at fair value, with unrealized gains and losses included in earnings. Equity securities received upon the exercise of warrants and distributions from venture capital funds are classified as trading.

Securities that could be sold in response to changes in interest rates, increased loan demand, liquidity needs, capital requirements or other similar factors are classified as securities available-for-sale. These securities are carried at fair value, with unrealized gains or losses reflected net of tax in other comprehensive income.

As of March 31, 2003, the Company recorded net unrealized gains of $23,047,000 on its available-for-sale portfolio. Accumulated other comprehensive income includes $14,981,000, representing the net unrealized gains of the available-for-sale securities, net of tax.

The amortized cost, gross unrealized gains, gross unrealized losses and fair value of securities as of March 31, 2003 and December 31, 2002 were as follows:

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