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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 Quarter Ended June 30, 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 Rate 12b - 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, 11,601,962 shares issued and outstanding as of June 30, 2003.

PART I - FINANCIAL INFORMATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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 unaudited consolidated 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 June 30, 2003 and December 31, 2002:

<TABLE>

<CAPTION>

 

	June 30,	December 31,
(In Thousands)	2003	2002
<S>	<C>	<C>
Undisbursed Commitments	$524,287	$581,939
Standby Letters of Credit	32,771	32,707
Bill of Lading Guarantees	374	528
Commercial Letters of Credit	56,959	65,709

 

</TABLE>

 

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. Loss Per Share

 

Loss per share is determined by dividing net loss by the weighted average number of shares of common stock outstanding. No common stock equivalents are included in the computation of the diluted loss per share, as their impact would be anti-dilutive. The following table sets forth diluted loss per share calculations:

<TABLE>

<CAPTION>

	Three Months Ended June 30,					Six Months Ended June 30,
	2003		2002			2003		2002
<S>	<C>		<C>			<C>		<C>
(In Thousands, Except Share and per Share Data)
Net Loss	$ (13,072)		$ (8,010)			$ (8,952)		$ (10,916)
Weighted Average Shares Outstanding	11,656,182		11,611,238			11,642,070		11,600,594
Loss per Share-Basic and Diluted	($1.12)		($0.69)			$ (0.77)		$ (0.94)
The weighted average shares outstanding includes the shares held in the GBC Bancorp Executive Obligation Trust.

 

</TABLE>

 

5. Quarterly Dividends

 

On May 21, 2003, the Company's Board of Directors declared a quarterly common stock cash dividend of $0.12 per share of common stock payable on or about July 15, 2003 to shareholders of record on June 30, 2003. On February 25, 2003, the Company's Board of Directors declared a quarterly common stock cash dividend of $0.12 per share of common stock payable on April 15, 2003 to shareholders of record on March 31, 2003. Please see also Note 7, Regulatory Matters, below.

 

 

6. Recent Accounting Developments

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 were 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 June 30, 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 June 30, 2003, the carrying amount of those investments in real estate was $1.4 million. As of June 30, 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.

 

In May, 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. This Statement 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 ("FDIC") 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 June 30, 2003, the Bank's Tier 1 leverage capital ratio was 8.37%. 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. The Bank has historically paid such dividends to GBC Bancorp ("GBC") at the time of payment of GBC's dividend. As of June 30, 2003, GBC had $13.5 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 a specified percentage of Tier 1 Capital plus the Allowance for Credit Losses by June 30, 2003. As of June 30, 2003, the Bank had reduced such classified assets to well below the level required to be achieved. 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. During the first quarter of 2003, the FDIC conducted a targeted visitation to assess the Board and Management's progress in complying with the MOU.

 

During the second quarter of 2003, the FDIC issued a report on a visitation begun late in the first quarter.  The visitation was for the limited purpose of assessing, as of December 31, 2002, the Bank's compliance with the MOU.  In the report, the FDIC identified specific areas that required further attention.  The Bank continues to address these areas and has made further improvements to its policies and procedures.  In addition, the Bank continues to provide training and to test for compliance with its policies and procedures.  While there can be no assurance that the Bank is in full compliance with the MOU, management believes that the measures it has implemented have resulted in compliance with the MOU in all material respects.

 

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. Merger Agreement

 

On May 7, 2003, the Company announced the signing of a merger agreement with Cathay Bancorp, Inc. ("Cathay"). 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. Both the Company and Cathay have scheduled special shareholders meetings for September 17, 2003, and have mailed a joint proxy statement/prospectus to their respective shareholders. The Company expects that the merger will be completed by the end of 2003. However, 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.

In connection with the signing of the merger agreement with Cathay, the terms of the Company's contingency stock option plan and its 1988 and 1999 stock option plans were modified under certain conditions to accelerate vesting, allow for cashless exercise, and effect other changes, some of which lapse at the merger date.  As a result of these modifications, the Company recorded a non-cash stock compensation expense in the amount of $21,719,000 in the quarter, with the offsetting tax benefit in the amount of $5,012,000 resulting in an increase to stockholders' equity.  See Note 9, "Accounting for Stock-Based Compensation", following.

 

9. Accounting for Stock-Based Compensation

The Company applies the intrinsic value method of accounting prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees, to account for its stock option plans. Under this method, compensation expense for fixed plans is measured on the date of grant only if the then current market price of the underlying stock exceeded the exercise price, and is recorded on a straight-line basis over the applicable vesting period. Compensation expense for variable plans is generally recorded at the end of each reporting period until the date the number of shares that an individual employee is entitled to receive and the exercise price are known; compensation expense is measured based on the excess of the then current market price of the underlying stock over the exercise price and is recorded using the amortization method prescribed by FIN 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans. SFAS No. 123, Accounting for Stock-Based Compensation, established accounting and disclosure requirements using a fair value method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic value method of accounting described above, and has adopted the disclosure requirements of SFAS No. 123, as amended by SFAS No. 148.

Prior to the second quarter of 2003, options granted under the Company's 1988 Stock Option Plan and 1999 Employee Stock Incentive Plan (1999 Plan) were accounted for as fixed plans; accordingly, no compensation expense was recorded. Additionally, no compensation expense was recorded under the Company's Contingent Stock Option Plan because they would become exercisable only in the event of certain triggering events, none of which had occurred. Upon the signing of the merger agreement with Cathay, all contingent stock options became exercisable. Also, in connection with the merger agreement, the terms of the 1999 Plan were modified to allow accelerated vesting under certain circumstances, and the terms of all option plans were modified to allow for cashless exercise and effect other changes, some of which lapse upon the close of the merger. These events resulted in variable plan accounting for all of the Company's stock option plans until the earlier of exercise or expiration of the options. During the three and six-month periods ended June 30, 2003, the Company recorded $21,719,000 of stock-based compensation expense and the related tax benefit of $5,012,000.

The following table compares net loss per share as reported by the Company to the pro forma amounts that would have been reported had compensation expense been recognized for the Company's stock-based compensation plans in accordance with SFAS No. 123:

The vesting of the contingent stock options resulted in the recognition of compensation expense under SFAS No. 123. SFAS No. 123 requires that a modification to the terms of an award that increases the award's fair value at the modification date be treated, in substance, as the repurchase of the original award in exchange for a new award of greater value, with additional compensation cost arising from the modification recognized over the related service period. Therefore, the modification to the 1999 Plan to provide for accelerated vesting resulted in the measurement of additional compensation cost at the date of modification for unvested options. Fair value under SFAS No. 123 was determined using the Black-Scholes option-pricing model with the following assumptions 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 (GAAP). 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 below in "Allowance for Credit Losses".

The Company accounts for derivatives in compliance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133"). Management considers this accounting policy to be a critical accounting policy. 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.

The net loss for the second quarter of 2003 was $13,072,000, or $1.12 per diluted share compared to $8,010,000, or $0.69 per diluted share for the corresponding period of 2002. The $5,062,000, or 63.2%, increase in loss is primarily the result of a $21,719,000 non-cash stock compensation expense included in salaries and employee benefits, the absence of a $10,127,000 gain on sale of securities available-for-sale and a $7,528,000 decline of net interest income. The above were partially offset by a $35,582,000 reduction of the provision for credit losses.

Excluding the $21,719,000 non-cash stock compensation expense and the associated tax benefit of $5,012,000, operating earnings for the second quarter of 2003 would have been $3,635,000 and would have represented an increase of $11,645,000 from the corresponding quarter of a year ago. There was no non-cash stock compensation expense incurred in 2002. Management believes that the operating results of the Company can best be assessed by excluding the unusual non-cash stock compensation expense which was incurred in connection with the merger agreement with Cathay Bancorp.

For the six months ended June 30, 2003, the net loss totaled $8,952,000, a decrease of $1,964,000 from the net loss of $10,916,000 during the corresponding period of 2002. Loss per diluted share for the six months ended June 30, 2003 was $0.77, compared to the loss per diluted share of $0.94 for the same period of 2002. The reduction of net loss was primarily the result of a decrease in the provision for credit losses. For the six months ended June 30, 2003 and 2002, the provision was $8,186,000 and $57,664,000, respectively, a decline of $49,478,000. In addition, there was a $3,173,000 reduction of expense from other investments. Partially offsetting the above were the absence in 2003 of gains on securities available-for-sale, the $21,719,000 non-cash stock compensation expense included in salaries and employee benefits and a $12,049,000 reduction of net interest income.

Excluding the $21,719,000 non-cash stock compensation expense and the associated tax benefit of $5,012,000, operating earnings for the six months ended June 30, 2003 would have been $7,755,000 and would have represented an increase of $18,671,000 from the corresponding six months of a year ago. There was no non-cash stock compensation expense incurred in 2002. Management believes that the operating results of the Company can best be assessed by excluding the unusual non-cash stock compensation expense which was incurred in connection with the merger agreement with Cathay Bancorp.

The table below provides a reconciliation of the reported loss to operating earnings (loss) which excludes the non-cash stock compensation expense and related tax benefit as discussed above:

For the quarter ended June 30, 2003 and 2002, the annualized return on average assets ("ROA") was (2.13)% and (1.25)%, respectively, and the annualized return on average stockholders' equity ("ROE") was (24.97)% and (15.93)%, respectively.

For the six months ended June 30, 2003 and 2002, the ROA was (0.73)% and (0.88)%, respectively. For the six months ended June 30, 2003 and 2002, the ROE was (8.63)% and (10.67)%, respectively.

For the quarters ended June 30, 2003 and 2002, net interest income before the provision for credit losses decreased $7,528,000 or 29.9%, from $25,206,000 to $17,678,000. The decline was due primarily to the decline of the net interest margin to 2.92% from 4.01%.

Total interest income for the quarter ended June 30, 2003 was $28,780,000, representing a $9,887,000, or 25.6%, decrease from the corresponding quarter of a year ago. The decline was related to the yield on earning assets which decreased to 4.76% for the three months ended June 30, 2003 from 6.16% for the three months ended June 30, 2002. The 140 basis point decline is primarily due to the reduction of the yield on the securities portfolio. For the quarters ended June 30, 2003 and 2002, the average yield on securities available-for-sale was 3.23% and 5.75%, respectively, or a reduction of 252 basis points. Prepayments on mortgage-backed securities combined with lower reinvestment rates negatively impacted the yield on the securities portfolio. As of June 30, 2003, the expected weighted average life of the securities portfolio was 2.1 years. 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 and related gains on sale amounting to $10,127,000. The weighted average yield on the securities sold was 6.43%. The yields on the other interest earning assets also declined. The yield on loans and leases declined to 6.47% from 6.76%, for the quarters ended June 30, 2003 and 2002, respectively, representing a 29 basis point decline. The yield on federal funds sold and securities purchased under agreements to resell declined to 1.31% from 1.85% for the quarters ended June 30, 2003 and 2002, respectively, representing a 54 basis point decrease. The decline of the yield on loans and leases and the yield on federal funds sold and securities purchased under agreements to resell mirrored the decline of the average prime rate, which decreased 50 basis points to 4.25% from 4.75% for the quarters ended June 30, 2003 and 2002, respectively.

Also contributing to the reduced interest income for the three months ended June 30, 2003 compared to the three months ended June 30, 2002 was a reduction of average interest earning assets. For the three months ended June 30, 2003 and 2002, average interest earning assets were $2,426.5 million and $2,518.9 million, respectively, representing a decline of $92.4 million, or 3.7%. The decline was primarily in the securities available-for-sale portfolio, which decreased $204.2 million due to the increase of federal funds sold and securities purchased under agreement to resell. Average loans and leases increased $18.5 million, partially offsetting the decline of other average interest-earning assets.

Total interest expense for the quarter ended June 30, 2003 was $11,102,000, representing a $2,359,000, or 17.5%, decrease from the corresponding quarter of a year ago. The decrease was primarily due to a lower cost of funds. For the quarters ended June 30, 2003 and 2002, the cost of funds was 2.26% and 2.57%, respectively, representing a 31 basis point decline. The decrease in the cost of funds was primarily the result of the decrease in interest rates as explained above. In addition, there was a decline of average interest bearing liabilities of $131.9 million, or 6.3%.

For the quarter ended June 30, 2003, average interest-bearing deposits were $1,648.8 million compared to $1,728.8 million for the corresponding period of a year ago, representing a $80.0 million, or 4.6%, decrease. The decrease was attributable to decreases in all deposit categories except other time deposits which increased $9.7 million, or 6.8%. The rates paid on all categories of interest-bearing deposits decreased. For the three months ended June 30, 2003 and 2002, rates paid on interest-bearing deposits were 1.81% and 2.12%, respectively. The following table displays the average balances and rates paid for the deposit products comprising the interest-bearing deposits of the Bank for the quarters ended as indicated:

                                                                                    For the Three Months Ended June 30,

(Dollars In Thousands)                                                             2003                 2002

For the three months ended June 30, 2003 and 2002, the total of federal funds purchased, borrowings from the Federal Home Loan Bank and subordinated debt averaged $321.4 million and $373.3 million, respectively. The $51.9 million reduction was primarily due to maturities of the Federal Home Loan Bank borrowings. For the three months ended June 30, 2003 and 2002, the average balance of borrowings from the Federal Home Loan Bank was $281.5 million and $333.2 million, respectively, a decrease of $51.7 million. The rates paid on non-deposit funds were 4.55% and 4.63% for the three months ended June 30, 2003 and 2002, respectively.

The net interest spread, defined as the yield on earning assets less the rates paid on interest-bearing liabilities, decreased 109 basis points to 2.50% for the quarter ended June 30, 2003, from 3.59% for the corresponding period of a year ago. The decline is due to the differential of the reduction of the cost of funds compared to the reduction of the yield on earning assets.

The net interest margin, defined as annualized net interest income divided by average interest-earning assets, decreased 109 basis points to 2.92% for the quarter ended June 30, 2003, from 4.01% for the corresponding period of a year ago. The decline of the net interest margin was primarily the result of the decline of the net interest spread due to the reasons as discussed in the above paragraphs.

For the six months ended June 30, 2003, net interest income before the provision for credit losses was $37,199,000, representing a $12,049,000, or 24.5%, decline from the corresponding period of a year ago for the reasons discussed in the above paragraphs.

Total interest income for the six months ended June 30, 2003 was $60,085,000 compared to $75,804,000, a $15,719,000, or 20.7%, decline from the corresponding period of a year ago. The decrease is primarily the result of the decline of the yield on average interest-earning assets. For the six months ended June 30, 2003 and 2002, the yield was 4.97% and 6.22%, respectively. As was the case for the three months ended June 30, 2003 and 2002, the 125 basis point decline is primarily due to the reduction of the yield on securities available-for-sale. For the six months ended June 30, 2003 and 2002, this yield was 3.71% and 5.85%, respectively, or a reduction of 214 basis points. The decline of the yield on securities available-for-sale was due to the reasons explained above. For the six months ended June 30, 2003 and 2002, the daily average prime rate was 4.25% and 4.75%, respectively, a 50 basis point decline. The 36 basis-point decline of the yield on loans and leases from 6.86% to 6.50%, and the 54 basis-point decline of federal funds sold and securities purchased under agreements to resell to 1.32% from 1.86% for the six months ended June 30, 2003 and 2002, respectively, reflecting the 50 basis point decline of the above-referenced average prime rate of interest.

Average earning assets declined $19.3 million to $2,436.7 million for the six months ended June 30, 2003, from $2,456.0 million for the six months ended June 30, 2002. This decline was mainly due to a $140.5 million decrease in securities investment partially offset by a $78.0 million increase in federal funds sold and securities purchased under agreements and by a $43.1 million increase in loans and leases. The decline of average earning assets also contributed to the reduction of interest income.

Total interest expense for the six months ended June 30, 2003 and 2002, was $22,886,000 and $26,556,000, respectively, representing a $3,670,000, or 13.8%, decrease. This decrease is due to both the decrease of the cost of funds and the decline of interest-bearing liabilities. The cost of funds decreased 30 basis points from 2.63% to 2.33% for the six months ended June 30, 2002 and 2003. The decrease of the cost of funds was primarily the result of the decline of deposit rates caused by the movement of the prime rate of interest as discussed above. The rate paid on average interest-bearing deposits was 1.87% and 2.21% for the six months ended June 30, 2003 and 2002, respectively, or a decline of 34 basis points.

The average balance and the rates paid for the deposit products comprising the interest bearing deposits of the Bank were as follows for the six month periods as indicated:

                                                                                            For the Six Months Ended June 30,

(Dollars In Thousands)                                                                     2003                     2002

For the six months ended June 30, 2003 and 2002, the total of federal funds purchased, borrowings from the Federal Home Loan Bank and subordinated debt averaged $335.1 million and $334.2 million, respectively. The rates paid on non-deposit funds were 4.57% and 4.72% for the six months ended June 30, 2003 and 2002, respectively.

For the six months ended June 30, 2003, the net interest spread decreased to 2.64% from 3.59% for the six months ended June 30, 2002, a 95 basis point decline.

For the six months ended June 30, 2003 and 2002, the net interest margin was 3.08% and 4.04%, respectively, a 96 basis point decline. The decline of the margin was primarily the result of the reduced spread.

For the quarter ended June 30, 2003, the provision for credit losses totaled $3,568,000, compared to a $39,150,000 provision for credit losses for the corresponding period of a year ago. The decrease is mainly due to the reduced problem commercial credits. For the quarter ended June 30, 2003, the review of problem loans and leases resulted in $2.3 million of net charge-offs which compares with $47.2 million of net charge-offs for the corresponding quarter of a year ago.

For the six months ended June 30, 2003 and 2002, the provision for credit losses was $8,186,000 and $57,664,000, respectively. The net charge-offs decreased $48.6 million to $4.8 million for the six months ended June 30, 2003 from $53.4 million for the six months ended June 30, 2002.

Among the charge-offs for the six months ended June 2002, $45.3 million were associated with loans originated by the New York loan production office. This office was closed on August 9, 2002.

Non-accrual loans as of June 30, 2003 and 2002 were $21.9 million and $23.7 million, respectively, representing a decline of $1.8 million.

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 potential losses. Please refer to the discussion "Allowance for Credit Losses", following.

Non-interest income for the three months ended June 30, 2003 totaled $1,352,000, representing a $9,399,000, or 87.4%, decrease from the $10,751,000 for the three months ended June 30, 2002. This decrease was primarily due to the absence of gain from the sale of available-for-sale securities. During the three months ended June 30, 2002, the Company recognized $10,127,000 of gains from the sale of $206.2 million of securities available-for-sale. Partially offsetting the decrease was a reduction of $593,000 in expense from other investments. Expense from other investments was $668,000 and $1,261,000 for the three months ended June 30, 2003 and 2002, respectively, of which $650,000 and $1,117,000, respectively, were expenses associated with venture capital investments owned by GBC Venture Capital. Expense from other investments is recorded using the equity method of accounting.

For the six months ended June 30, 2003, non-interest income totaled $2,329,000, representing a $6,919,000, or 74.8%, decrease compared to $9,248,000 for the six months ended June 30, 2002. As was the case for the quarterly comparison, the decreases of non-interest income was primarily due to the absence of gain from the sale of securities available-for-sale. There were no sales of securities during the six months ended June 30, 2003. Offsetting the above decrease was the decline in expense from other investments. For the six months ended June 30, 2003 and 2002, expense from other investments was $1,451,000 and $4,624,000, respectively. The $3,173,000 reduction of expense from other investments was primarily the result of an impairment loss of $3,155,000 recorded in the six months ended June 30, 2002 relating to the Company's 10% beneficial ownership in Aircraft Finance Trust ("AFT"). The investment in AFT was entirely written off in the fourth quarter of 2002.

Non-Interest Expense

For the three months ended June 30, 2003, non-interest expense was $30,931,000, representing a $21,323,000, or 221.9%, increase over $9,608,000 for the corresponding period of a year ago. This increase was primarily due to the $21,719,000 non-cash stock compensation expense classified as salaries and employee benefits. This expense is associated with the vesting and modification of the terms of the Company's contingency stock option plan, which options became vested upon signing the merger agreement with Cathay Bancorp, and modifications of its 1988 and 1999 stock option plans in connection with the merger agreement with Cathay Bancorp. The non-cash stock compensation expense does not reduce the Company's stockholders' equity. Rather, a $5,012,000 tax benefit relating to the non-cash stock compensation expense was recorded, which increased stockholders' equity by such amount. This tax benefit is based on the compensation expense, net of an amount estimated as the non-deductible portion of the expense.

Non-interest expense also includes the change in fair value of the Company's derivatives which are accounted for under SFAS No. 133. For the three months ended June 30, 2003 and 2002, the fair value of the Company's warrant portfolio declined (increased) $94,000 and $(467,000), respectively. For the three months ended June 30, 2003, non-interest expense classified as "other" was $2,126,000, compared to $2,979,000 for the three months ended June 30, 2002. The decline was primarily due to a $1,179,000 litigation settlement recovery received in the second quarter of 2003, which was recorded as an offset against "other" expense. Also recorded in "other" expense was $0.7 million of merger-related expenses.

For the six months ended June 30, 2003, non-interest expense was $40,581,000, representing a $22,365,000, or 122.7%, increase from $18,216,000 reported for the corresponding period of a year ago. This increase was primarily due to the $21,719,000 non-cash stock compensation expense classified in salaries and employee benefits, as described above. For the six months ended June 30, 2003 the fair value of the Company's warrant portfolio declined $351,000 compared to a $371,000 increase during the corresponding period of the year ago period.

Non-interest expense classified as "other" was consistent with the six month period ended June 30, 2002 to the comparable period ended June 30, 2003. Professional services expenses of $1.4 million related to the announced merger were offset by the receipt of a litigation settlement recovery in the amount of $1,179,000.

For the quarters ended June 30, 2003 and 2002, the benefit for income taxes was $2,397,000 and $4,791,000, respectively. The benefit for the quarters ended June 30, 2003 and 2002 represented effective tax rates of 15.5% and 37.4% of pre-tax loss, respectively. The reduced tax benefit in 2003 is the result of the effect of the non-cash stock compensation expense and the merger-related expenses expected to be non-deductible for tax purposes.

For the six months ended June 30, 2003 and 2002, the benefit for income taxes was $287,000 and $6,468,000, respectively. The benefit for the six months ended June 30, 2003 and 2002 represented effective tax rates of 3.1% and 37.2% of pre-tax loss, respectively. The difference in the effective tax benefits is as explained above.

As of June 30, 2003, total assets decreased $104.1 million, or 4.1%, to $2,406.7 million from $2,510.7 million as of December 31, 2003. Total deposits declined $52.1 million to $1,852.0 million as of June 30, 2003, from $1,904.1 million as of December 31, 2002. Approximately $35 million of this decline occurred due to the acquisition of a corporate depositor of the Bank, whose cash was subsequently withdrawn by the acquirer. The majority of the remaining decline was associated with deposits of high tech companies.

In addition to the decline of deposits, borrowings from the Federal Home Loan Bank declined $55.0 million to $267.4 million as of June 30, 2003 from $322.4 million as of December 31, 2002 due to non-renewal of maturing advances that were repaid.

Stockholders' equity increased to $212.4 million as of June 30, 2003 from $204.1 million, as of December 31, 2002, an increase of $8.3 million, or 4.05%. The $21,719,000 non-cash stock compensation expense, as discussed in previous sections, did not reduce the Company's stockholders' equity. Rather the $5,012,000 tax benefit relating to the non-cash stock compensation expense was recorded and increased stockholders' equity by $5,012,000. (See also sections entitled "Non-Interest Expense" above, and "Capital Resources" below.)

Gross loans and leases were $1,219.8 million at June 30, 2003, compared to $1,198.6 million at December 31, 2002. As shown in the table below, the increase from year-end was entirely attributable to the conventional real estate portfolio. In the second quarter of 2003, the Bank experienced approximately $100 million of pay-offs in its construction real estate loan portfolio due to increased sales of the underlying collateral, reflecting the real estate market and the low level of interest rates. These payoffs resulted in a decline of real estate construction loans from $317 million at March 31, 2003 to $291.9 million at June 30, 2003. New loan originations and disbursements from existing loan commitments reduced the impact of the loan pay-offs. Undisbursed real estate construction loans were $226 million at June 30, 2003, up $7 million from the level of March 31, 2003.

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:

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 industry segments as of June 30, 2003 are $61.1 million and $39.4 million, respectively. There are also $19.1 million of loans to early stage high technology companies.

Also included in commercial loans are five credits that are participations in facilities to Indian casinos that are construction loans to be repaid under mini-perm facilities from the cash flow of the casinos. The total commitments were $40.3 million as of June 30, 2003 and the total loans outstanding were $28.1 million. All were performing in accordance with the borrowing agreements. The Bank does not intend to participate in additional Indian casino loans.

The following table sets forth the break-down by type of collateral for construction and conventional real-estate loans as of June 30, 2003 and December 31, 2002: