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FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13
OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)

          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.

          Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

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

          State the aggregate market value of the voting and non-voting common  equity held by non-affiliates of the registrant.  The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a the last business day of the registrant’s most recently complete second quarter, June 30, 2002.  (See definition of affiliate in Rule 405, 17 CFR 230.405) $242,449,707.

          NOTE:  If a determination as to whether a particular person or entity is an affiliate cannot be made without involving unreasonable effort and expense, the aggregate market value of the common stock held by non-affiliates may be calculated on the basis of assumptions reasonable under the circumstances, provided that the assumptions are set forth in this Form.

APPLICABLE ONLY TO REGISTRANT INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

          Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

 (APPLICABLE ONLY TO CORPORATE REGISTRANTS)

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
11,623,863 shares outstanding as of February 28, 2003.
DOCUMENTS INCORPORATED BY REFERENCE.

          List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933.  The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980).

Exhibit Index on Pages
90-92

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FORM 10-K

TABLE OF CONTENTS AND CROSS REFERENCE SHEET

Table of Contents

PART I

Forward-Looking Statements

          Certain statements contained herein, including, without limitation, statements containing the words “anticipates”, “believes,” “intends,” “should”, “expects” and words of similar import, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.  Such factors include, among others, the following: credit quality, general economics and business conditions in those areas in which the Company operates; demographic changes; competition; fluctuations in interest rates; changes in business strategy or development plans; changes in governmental regulation; and other factors referenced herein, including, without limitation, under the captions Provision for Credit Losses, Non-Performing Assets, Allowance for Credit Losses, Market Risk, Liquidity, Interest Rate Sensitivity, Recent Accounting Developments and Other Matters. Given these uncertainties, the reader is cautioned not to place undue reliance on such forward-looking statements.  The Company disclaims any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.

Item 1.      Business

General

          GBC Bancorp (the “Company”), a California corporation incorporated in 1980, is a registered bank holding company under the Bank Holding Company Act of 1956, as amended, and is headquartered at 800 West 6th Street in Los Angeles, California 90017.  The Company owns all of the outstanding stock of its subsidiary General Bank (the “Bank”), a California state-chartered bank which commenced operations in March, 1980. GBC Bancorp functions primarily as a holding company for the Bank.

          The Bank has conducted the business of a commercial bank since it commenced operations.  The Bank is a community bank that serves individuals and small to medium-sized businesses through eighteen branch offices located in the greater Los Angeles, San Diego and Silicon Valley areas of California, a branch office in the state of Washington and two branches located in Boston, Massachusetts.  A loan production office in New York, New York was closed in the third quarter.  The Bank has an operations center in Rosemead and has branches located in downtown Los Angeles, Monterey Park, Torrance, Artesia, Alhambra, City of Industry, Irvine, San Diego, Arcadia, Diamond Bar,

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Northridge, Orange, Huntington Beach, Cupertino, Millbrae, Aliso Viejo, Fremont and San Jose.

          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.  Please refer to paragraphs entitled  “Regulatory Matters” in Part II, item 7.

          On February 28 2002, General Bank consummated its purchase transaction of Liberty Bank and Trust Co. of Boston.  The purchase transaction was accounted for in accordance with SFAS No. 141, “Business Combinations”.  The assets, net of cash acquired, had a fair value of $34,288,000 and the fair value of liabilities assumed was $32,326,000.  Goodwill in the amount of $4,515,000 and core deposit premium in the amount of $964,000 were initially recognized in accordance with SFAS No. 141.  SFAS No. 142, “Goodwill and Other Intangible Assets,” requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with finite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets”.  The core deposit premium intangible is being amortized over a 5-year period, estimated to be the useful life.

          The Bank offers a variety of banking services to its customers, including accepting checking, savings and time deposits; making secured and unsecured loans; offering traveler’s checks, safe deposit boxes, credit cards and other fee-based services; and providing international trade-related services. 

Lending Activities

          The Bank’s primary emphasis is on commercial and real estate lending, real estate construction lending, and, to a lesser extent, small business lending.

          The Bank maintains an International Banking Division which facilitates international trade by providing financing, letter of credit services and collections, as well as other international trade-related banking services. The Bank does not make loans to foreign banks, foreign governments or their central banks, or commercial and industrial loans to entities domiciled outside of the United States, except for the extension of overdraft privileges to its foreign correspondent banks on a limited, case by case, basis. 

          The Bank maintains a Small Business Lending department to provide loans for small to medium-sized businesses.  Loan products offered include US SBA Guarantee programs and conventional in-house programs.  The 7(a) loan is the primary

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US SBA guaranteed program with loan amounts up to $500,000 and maturity up to 25 years.  The maximum loan amount of $500,000 was reduced from $2 million on October 1, 2002.  As of December 31, 2002, the Bank’s 7(a) servicing portfolio was approximately $57 million, including $10 million sold to the secondary market.

Competition

          The Bank actively competes for deposits and loans with other banks and financial institutions located in its service area.  Interest rates, customer service and legal lending limits are the principal competitive factors and the Gramm-Leach-Bliley Act of 1999 has expanded competition.  In order to compete with other financial institutions in its service area, the Bank relies principally upon providing quality service to its customers, personal contact by its officers, directors and employees, and local promotional activity.  Competitors presently include banks serving the Asian population in Southern and Northern California, as well as major banks with extensive branch systems operating over a wide geographic area.  Many of the banks have greater financial resources and facilities than the Bank and many offer certain services, such as trust services, not currently offered by the Bank.

Subsidiaries

Bank Subsidiaries

          GBC Investment & Consulting Company, Inc., a wholly-owned subsidiary of the Bank, was incorporated to provide specific, in-depth expertise in the areas of investment and consultation on an international and domestic basis.  An office was established in Taipei, Taiwan, to coordinate and develop business between the Bank and prospective customers in Taiwan and other Asian countries.  As of and for the year ended December 31, 2002, GBC Investment & Consulting Company, Inc. reported total assets of $8,700 and a net loss of $63,200.

          GBC Leasing Company, Inc. is the Bank’s leasing subsidiary.  The Bank owns 90% of the voting stock of this company which was formed to acquire various assets, such as equipment on lease, promissory notes and leases and/or partnership interests in partnerships owning such types of assets, in exchange for its common stock in transfers qualifying as a tax free exchange of property, described in Section 351 of the Internal Revenue Code of 1986, as amended.  GBC Leasing Company engages in no off-balance sheet/synthetic lease activities.  As of and for the year ended December 31, 2002, GBC Leasing Company, Inc. reported total assets of $54,900, and a net loss of $12,300.  

          GBC Insurance Services, Inc. is a wholly-owned subsidiary of the Bank and operates exclusively as a full service insurance agent/broker to provide additional

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financial service to the Bank’s customers.  In August, 1997, the business of GBC Insurance Services, Inc. was transferred to a division of General Bank.  Accordingly, the insurance subsidiary is in an inactive status.

          GBC Real Estate Investments, Inc. is a wholly owned subsidiary of the Bank. The purpose of this subsidiary is to engage in real estate investment activities, which may include equity interests in limited partnerships and limited liability companies that own or invest in commercial real estate development properties. To date, there have been no transactions involving this subsidiary.

          On August 21, 2001, GBC Trade Services, Asia Limited (“Trade Services”) was incorporated as a wholly-owned subsidiary of the Bank.  Trade Services is a Hong Kong based non-financial institution that will serve as a vehicle to reissue, in Hong Kong, letters of credit for the account of its U.S. based import customers in favor of beneficiaries.  As of and for the year ended December 31, 2002, Trade Services reported total assets of $38,100 and net income of $40,000.

          On September 1, 2001, GB Capital Trust, a real estate investment trust (“REIT”) was incorporated.  The REIT is operated so as to be entitled to the tax treatment provided in Section 856 of the Internal Revenue Code entitled “Definition of Real Estate Investment Trust”.  The Bank owns 100% of the voting common trust units issued by the REIT.  As of and for the year ended December 31, 2002, the REIT reported total assets of $863,093,000 and net income of $54,235,000.  The REIT declared a cash dividend on the voting common trust units of $146,000,000 of which $52,300,000 represented a return of capital.

Holding Company Subsidiaries

          In addition to its wholly-owned bank subsidiary, the Company owns all of the outstanding stock of GBC Venture Capital, Inc. The business purpose of GBC Venture Capital, Inc. is to hold stock warrants received as part of business relationships and to make equity investments in companies and limited partnerships subject to applicable regulatory restrictions.  As of and for the year ended December 31, 2002, GBC Venture Capital, Inc., reported total assets of $10,532,000 and net loss of  $1,509,000. The net loss was primarily the result of the recording of losses associated with the venture capital fund limited partnerships in which GBC Venture Capital, Inc. invests.

Supervision and Regulation

General

The following generally refers to certain statutes and regulations affecting the banking industry. These references provide brief summaries only and are not intended to

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be complete.  These references are qualified in their entirety by the referenced statutes and regulations.  In addition, some statutes and regulations which apply to and regulate the operation of the banking industry might exist which are not referenced below.  Changes in applicable statutes and regulations may have a material effect on the business of the Company and its subsidiaries.  This regulatory framework is intended primarily for the protection of depositors and deposit insurance funds and not for the protection of security holders.

GBC Bancorp

          The Company is a bank holding company within the meaning of the Bank Holding Company act of 1956, as amended  (“BHCA”) and is subject to the supervision and regulation of the Federal Reserve Bank of San Francisco.  As a bank holding company, the Company is required to file reports with the Federal Reserve Board (the “Federal Reserve”) and to provide such additional information as the Federal Reserve may require.  The Federal Reserve also has the authority to examine the Company and each of its subsidiaries with the cost thereof to be borne by the Company.

          The Company is subject to the periodic reporting requirements of the Securities Exchange Act of 1934, as amended, which include, but are not limited to, the filing of annual, quarterly and other reports with the Securities and Exchange Commission.

          In November of 1999, the Gramm-Leach-Bliley Financial Modernization Act (the “Act”) was signed into law and became effective on March 11, 2000. The Act repealed the prohibitions among banks, securities firms and insurance companies by rescinding provisions of the Glass-Steagall Act and the Bank Holding Company Act. Activities permitted by the Act are those that are financial in nature or incidental to financial activities. The Act identifies the following activities as financial in nature: lending; insurance activities, including underwriting, agency and brokerage; providing financial investment advisory services; underwriting in, and acting as a broker or dealer in securities; merchant banking; and insurance company portfolio investment. It is not yet known which, if any, of these financial activities the Company will engage in.

          The Federal Reserve may require that the Company terminate an activity or terminate control of or liquidate or divest certain subsidiaries or affiliates when the Federal Reserve believes the activity or the control of the subsidiary or affiliate constitutes a significant risk to the financial safety, soundness, or stability of any of its banking subsidiaries.  The Federal Reserve also has the authority to regulate provisions of certain bank holding company debt, including authority to impose interest ceilings and reserve requirements on such debt.  Under certain circumstances, the Company must file written notice and obtain approval from the Federal Reserve prior to purchasing or redeeming its equity securities.

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          Under the BHCA and regulations adopted by the Federal Reserve, a bank holding company and its nonbanking subsidiaries are prohibited from requiring certain tie-in arrangements in connection with any extension of credit, lease or sale of property, or furnishing of services.  Further, the Company is required by the Federal Reserve to maintain certain levels of capital. See “—Capital Standards.”

          The Company is required to obtain the prior approval of the Federal Reserve for the acquisition of more than 5% of the outstanding shares of any class of voting securities or substantially all of the assets of any bank or bank holding company.  Prior approval of the Federal Reserve is also required for the merger or consolidation of the Company and another bank holding company.

          The Company is prohibited by the BHCA, except in certain statutorily prescribed instances, from acquiring direct or indirect ownership or control of more than 5% of the outstanding voting shares of any corporation that is not a bank or bank holding company and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or furnishing services to its subsidiaries.  However, the Company, subject to the prior approval of the Federal Reserve, may engage in, or acquire shares of companies engaged in, any activities that are deemed by the Federal Reserve to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.  See “Modernization Act of 1999”.

          Under Federal Reserve regulations, a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner.  In addition, it is the Federal Reserve’s policy that in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks.  A bank holding company’s failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve to be an unsafe and unsound banking practice or a violation of the Federal Reserve’s regulations or both.

          The Company’s primary source of income is the receipt of dividends from the Bank.  The Bank’s ability to make such payments to the Company is subject to certain statutory and regulatory restrictions.  There can be no assurance that the Bank will be in a position to pay dividends to the Company.  The ability of the Company to pay dividends to its shareholders is subject to the restrictions set forth in the California General Corporation Law (the “Corporation Law”).  The Corporation Law provides that a corporation may make a distribution to its shareholders if the corporation’s retained earnings equals at least the amount of the proposed distribution.  The Corporation Law further provides that, in the event that sufficient retained earnings are not available for the proposed distribution, a corporation may nevertheless make a distribution to its shareholders if it meets two conditions, which generally are as follows: (i) the

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corporation’s assets equal at least 1 1/4 times its liabilities; and (ii) the corporation’s current assets equal at least its current liabilities or, if the average of the corporation’s earnings before taxes on income and before interest expense for the two preceding fiscal years was less than the average of the corporation’s interest expense for such fiscal years, then the corporation’s current assets equal at least  1 1/4 times its current liabilities.  The Bank’s ability to make dividend payments is also subject to the provisions of a Memorandum of Understanding. Please refer to paragraphs entitled  “Regulatory Matters” in Part II, item 7.

          In addition, bank subsidiaries of bank holding companies are subject to certain restrictions imposed by federal law in dealing with their holding companies and other affiliates.  Subject to certain exceptions set forth in the Federal Reserve Act, a bank can make a loan or extend credit to an affiliate, purchase or invest in the securities of an affiliate, purchase assets from an affiliate, accept securities of an affiliate as collateral security for a loan or extension of credit to any person or company or issue a guarantee, acceptance or letter of credit on behalf of an affiliate only if the aggregate amount of the above transactions of such subsidiary does not exceed 10 percent of such subsidiary’s capital stock and surplus on a per affiliate basis, or 20 percent of such subsidiary’s capital stock and surplus on an aggregate affiliate basis.  Such transactions must be on terms and conditions that are consistent with safe and sound banking practices.  A bank and its subsidiaries generally may not purchase a low-quality asset, as that term is defined in the Federal Reserve Act, from an affiliate.  Such restrictions also prevent a holding company and its other affiliates from borrowing from a banking subsidiary of the holding company unless the loans are secured by collateral.

          The BHCA and regulations of the Board also impose certain constraints on the redemption or purchase by a bank holding company of its own shares of stock. The Company’s stock repurchase programs are discussed in the ensuing three paragraphs.

          On December 20, 1999, the Board of Directors authorized a stock repurchase program approving the buy-back of up to $10 million of the Company’s stock.  This program was completed on April 25, 2001.  384,154 shares were repurchased for a total of $10 million at an average cost per share of $26.03, of which 215,054 were repurchased in 2001 and 169,100 were repurchased in 2000.

          In February 2001, the Board of Directors authorized a stock repurchase program approving the buy-back of up to 500,000 shares of the Company’s stock.  As of December 31, 2002, 405,000 shares had been repurchased at an average cost of $26.83 per share for a total of $10.9 million under this program, of which 403,000 were repurchased in 2001 and 2,000 were repurchased in 2002.

          On October 11, 2001, the Board of Directors authorized a stock repurchase program approving the buy-back of up to 300,000 shares of Company’s stock under conditions which allow such repurchases to be accretive to earnings.  As of December 31, 2002, no shares had been repurchased under this program.

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General Bank (the “Bank”)

          Banks are extensively regulated under both federal and state law.  The Bank, a California state-chartered bank, is subject to primary supervision, periodic examination and regulation by the California Department of Financial Institutions (the “DFI”) and the Federal Deposit Insurance Corporation (the “FDIC”).

          The Bank is insured by the FDIC up to a maximum of $100,000 per depositor.  For this protection, the Bank, as is the case with all insured banks, is subject to the rules and regulations of the FDIC.  The Bank, while not a member of the Federal Reserve System, is subject to certain regulations of the Board. 

          Various requirements and restrictions under the laws of the state of California and the United States affect the operations of the Bank.  State and federal statutes and regulations relate to many aspects of the Bank’s operations, including reserves against deposits, interest rates payable on deposits, loans, investments, mergers and acquisitions, borrowings, dividends and locations of branch offices.  Further, the Bank is required to maintain certain levels of capital. 

          There are statutory and regulatory limitations on the amount of dividends which may be paid to the Company by the Bank.  California law restricts the amount available for cash dividends by state-chartered banks to the lesser of retained earnings or the bank’s net income for its last three fiscal years (less any distributions to shareholders made during such period).  In the event a bank has no retained earnings or net income for its last three fiscal years, cash dividends may be paid in an amount not exceeding the net income for such bank’s last preceding fiscal year only after obtaining the prior approval of the Commissioner of the DFI.

          The FDIC also has authority to prohibit the Bank from engaging in what, in the FDIC’s opinion, constitutes an unsafe or unsound practice in conducting its business.  It is possible, depending upon the financial condition of the bank in question and other factors, that the FDIC could assert that the payment of dividends or other payments might, under some circumstances, be such an unsafe or unsound practice. 

          Banks are subject to certain restrictions imposed by federal law on any extensions of credit to, or the issuance of a guarantee or letter of credit on behalf of, its affiliates, the purchase of or investments in stock or other securities thereof, the taking of such securities as collateral for loans and the purchase of assets of such affiliates.  Such restrictions prevent affiliates from borrowing from the Bank unless the loans are secured by marketable obligations of designated amounts.  Further, such secured loans and investments by the Bank in any other affiliate is limited to 10 percent of the Bank’s capital and surplus (as defined by federal regulations) and such secured loans and

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investments are limited, in the aggregate, to 20 percent of the Bank’s capital and surplus (as defined by federal regulations).  California law also imposes certain restrictions with respect to transactions involving other controlling persons of the Bank.  Additional restrictions on transactions with affiliates may be imposed on the Bank under the prompt corrective action provisions of the FDIC Improvement Act (“FDICIA”).

Potential Actions

          Commercial banking organizations, such as the Bank, may be subject to potential enforcement actions by the Board, the FDIC and the Commissioner of the DFI for unsafe or unsound practices in conducting their business or for violations of any law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the agency.  Enforcement actions may include the imposition of a conservator or receiver, the issuance of a cease-and-desist order that can be judicially enforced, the termination of insurance of deposits, the imposition of civil money penalties, the issuance of directives to increase capital, the issuance of formal and informal agreements, the issuance of removal and prohibition orders against institution-affiliated parties and the imposition of restrictions and sanctions under the prompt corrective action provisions of FDICIA.

Effect of Governmental Policies and Recent Legislation

          Banking is a business that depends on rate differentials.  In general, the difference between the interest rates paid by a bank on its deposits and its borrowings and the interest rates received by a bank on loans extended to its customers and securities held in a bank’s portfolio comprise the major portion of a bank’s earnings.  These rates are highly sensitive to many factors that are beyond the control of a bank.  Accordingly, the earnings and growth of a bank are subject to the influence of local, domestic and foreign economic conditions, including recession, unemployment and inflation.

          The commercial banking business is not only affected by general economic conditions but is also influenced by monetary and fiscal policies of the federal government and the policies of regulatory agencies, particularly the Board.  The Board implements national monetary policies (with objectives such as curbing inflation and combating recession) by its open-market operations in United States Government securities, by adjusting the required level of reserves for financial intermediaries subject to its reserve requirements and by varying the discount rates applicable to borrowings by depository institutions.  The actions of the Board in these areas influence the growth of bank loans, investments and deposits and also affect interest rates charged on loans and paid on deposits.  The nature and impact of any future changes in monetary policies cannot be predicted.

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          From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial intermediaries.  Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial intermediaries are frequently made in Congress, in the California legislature and before various bank regulatory and other professional agencies.  The likelihood of any major changes and the impact such changes might have on the Company are impossible to predict.  Certain of the potentially significant changes which have been enacted and proposals which have been made recently are discussed below.

Gramm-Leach-Bliley Financial Modernization Act of 1999

          The Gramm-Leach-Bliley Financial Modernization Act was signed into law in 1999. This Act, among other things:

This Act has resulted in the Bank facing increased competition.

Capital Standards

          Each federal banking agency has promulgated regulations defining the following five categories in which a banking organization will be placed, based on its capital ratios:  well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized.

          To be “adequately capitalized,” the Corporation and the Bank must maintain minimum ratios of total capital to risk-weighted assets of eight percent (8%) and of Tier 1 capital to risk-weighted assets of four percent (4%).  For the Corporation and the Bank, Tier 1 capital includes common shareholders’ equity, less goodwill and certain other deductions, including the unrealized net gains and losses, after applicable taxes, on

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available-for-sale securities carried at fair value.  For the Corporation and the Bank, total capital also includes the allowance for credit losses, subordinated debt, and net unrealized gains on marketable securities, subject to limitations established by the guidelines.  At least half of total capital must be in the form of Tier 1 capital.

          Capital is compared to the risk associated with a banking organization’s operations for both transactions reported on the balance sheet as assets as well as transactions which are off-balance sheet items, such as letters of credit and recourse arrangements.  Under the capital regulations, the nominal dollar amounts of assets and the balance sheet equivalent amounts of off-balance sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain U.S. Treasury securities, to 100% for assets with relatively high credit risk, such as commercial loans.  At December 31, 2002, the Company and the Bank exceeded the required ratios for classification as “well capitalized”. Please refer to paragraphs entitled  “Regulatory Matters” in Part II, item 7.

          In addition to the risk-based capital guidelines, federal banking agencies require banking organizations to maintain a minimum amount of Tier 1 capital to total assets, referred to as the leverage ratio.  For a banking organization rated in the highest of the five categories used by the federal banking agencies to rate banking organizations, the minimum leverage ratio of Tier 1 capital to total assets is 3%.  For all other banking organizations, the minimum ratio of Tier 1 capital to total assets is 4%.  Banking organizations with supervisory, financial, operational, or managerial weaknesses, as well as organizations that are anticipating or experiencing significant growth, are expected to maintain capital ratios above the minimum levels.  In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the federal banking agencies have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios.

          In January, 2002, federal banking agencies also issued a new rule that went into effect April 1, 2002, requiring that equity investments in nonfinancial companies be subject to different capital requirements than those currently applied to traditional banking investments, whether such equity investments are made by Financial Holding Companies under the merchant banking authority of the Financial Services Modernization Act, by bank holding companies through small business investment companies (“SBIC”), under Regulation K or in less than 5% of the shares of a nonfinancial company under authority of the BHCA, or by state banks as authorized by the Federal Deposit Insurance Act.  The rules require a series of marginal capital charges on covered equity investment that increase with the level of those investments as a percentage of Tier 1 capital.  Subject to certain exceptions, including investments grandfathered under the rules, the rules require that if the aggregate adjusted carrying value of the investments is less than 15% of the Tier 1 capital of the bank holding company, 8% of the adjusted carrying value would be deducted from Tier 1 capital.  For investment between 15% and 25% of Tier 1 capital, 12% of the investment must be deducted and for investments of 25% or more, 25% of the investment must be deducted.

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No additional capital charge applies to SBIC investments if the carry value of the investments does not exceed 15% of the Tier 1 capital of the depository institutions.  At December 31, 2002, the Company’s equity investments in nonfinancial companies was 6.31% of Tier 1 capital.  Therefore, management believes that the rules will not have a material adverse effect on the Company’s financial condition or results of operation in the near term.

Prompt Corrective Action and Other Enforcement Mechanisms

          Federal banking agencies possess broad powers to take corrective and other supervisory action to resolve the problems of insured depository institutions, including but not limited to those institutions that fall below one or more prescribed minimum capital ratios.

          An institution that, based upon its capital levels, is classified as well capitalized, adequately capitalized, or undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice warrants such treatment.  At each successive lower capital category, an insured depository institution is subject to more restrictions.  The federal banking agencies, however, may not treat a significantly undercapitalized institution as critically undercapitalized unless its capital ratio actually warrants such treatment.

          In addition to measures taken under the prompt corrective action provisions, commercial banking organizations may be subject to potential enforcement actions by the federal regulators for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation, or any condition imposed in writing by the agency or any written agreement with the agency.

BIS Guidelines

          The U.S. federal bank regulatory agencies’ risk-capital guidelines are based upon the 1988 capital accord of the Basle Committee on Banking Supervision (the “BIS”).  The BIS is a committee of central banks and bank supervisors/regulators from the major industrialized countries that develops broad policy guidelines that each country’s supervisors can use to determine the supervisory policies they apply.  In January 2001 the BIS released a proposal to replace the 1988 capital accord with a new capital accord that would set capital requirements for operational risk and refine the existing capital requirements for credit risk and market risk exposures.  Operational risk is defined to mean the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events.  The 1988 capital accord does not include separate capital requirements for operational risk.  The BIS proposal outlines several alternatives for capital assessment of operational risks, including two standardized approaches and an “internal measurement approach” tailored to individual institutions’

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circumstances.  The BIS has stated that its objective is to finalize a new capital accord in the fourth quarter of 2003 and for member countries to implement the new accord at year-end 2006.  The ultimate timing for the new accord, and the specifics of capital assessments for addressing operational risk, is uncertain.  The Company expects that a new capital accord addressing operational risk will eventually be adopted by the BIS and implemented by the U.S. federal bank regulatory agencies.  The Company cannot determine whether new capital requirements that may arise out of a new BIS capital accord will increase or decrease minimum capital requirements applicable to the Company and its bank subsidiary.

Safety and Soundness Standards

          The federal banking agencies have adopted guidelines establishing standards for safety and soundness, as required by the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”).  The guidelines set forth operational and managerial standards relating to internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation, fees and benefits.  The guidelines establish the safety and soundness standards that the agencies will use to identify and address problems at insured depository institutions before capital becomes impaired.  If an institution fails to comply with a safety and soundness standard, the appropriate federal banking agency may require the institution to submit a compliance plan.  Failure to submit a compliance plan or to implement an accepted plan may result in enforcement action.

          The federal banking agencies have issued regulations prescribing uniform guidelines for real estate lending.  The regulations require insured depository institutions to adopt written policies establishing standards, consistent with such guidelines, for extensions of credit secured by real estate.  The policies must address loan portfolio management, underwriting standards and loan to value limits that do not exceed the supervisory limits prescribed by the regulations.

          Appraisals for “real estate - related financial transactions” must be conducted by either state-certified or state-licensed appraisers for transactions in excess of certain amounts.  State-certified appraisers are required for all transactions with a transaction value of $1,000,000 or more; for all nonresidential transactions valued at $250,000 or more; and for “complex” 1-4 family residential properties of $250,000 or more.  A state-licensed appraiser is required for all other appraisals.  However, appraisals performed in connection with “federally related transactions” must now comply with the federal banking agencies’ appraisal standards.  Federally related transactions include the sale, lease, purchase, investment in, or exchange of, real property or interests in real property, the financing of real property, and the use of real property or interests in real property for a loan or investment, including mortgage backed securities.

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          Federal regulations require banks to maintain adequate valuation allowances for potential credit losses.  The Company has an internal risk analysis and review staff that continually reviews loan quality and ultimately reports to the Audit Committee.  This analysis includes a detailed review of the classification and categorization of problem loans, assessment of the overall quality and collectibility of the loan portfolio, consideration of loan loss experience, trends in problem loans, concentration of credit risk, and current economic conditions, particularly in California.  Based on this analysis, management determines the adequate level of allowance required.  The allowance for credit losses is allocated to different segments of the loan portfolio, but the entire allowance is available for the loan portfolio in its entirety.

Premiums for Deposit Insurance

          Federal law has established several mechanisms to increase funds to protect deposits insured by the Bank Insurance Fund (“BIF”) administered by the FDIC.  The FDIC is authorized to borrow up to $30 billion from the United States Treasury; up to 90 percent of the fair market value of assets of institutions acquired by the FDIC as receiver from the Federal Financing Bank; and from depository institutions that are members of  BIF.  Any borrowings not repaid by asset sales are to be repaid through insurance premiums assessed to member institutions.  Such premiums must be sufficient to repay any borrowed funds within 15 years and provide insurance fund reserves of $1.25 for each $100 of insured deposits.  The FDIC also has authority to impose special assessments against insured deposits.

          The FDIC has implemented a risk-based assessment system, as required by FDICIA, under which an institution’s premium assessment is based on the probability that the deposit insurance fund will incur a loss with respect to the institution, the likely amount of any such loss, and the revenue needs of the deposit insurance fund.  As long as BIF’s reserve ratio is less than a specified “designated reserve ratio,” or 1.25 percent, the total amount raised from BIF’s members by the risk-based assessment system may not be less than the amount that would be raised if the assessment rate for all BIF members were 0.023 percent of deposits.  In September 1995, the FDIC lowered assessments from their rates ranging from $0.23 to $0.31 per $100 of insured deposits to rates ranging from $0.04 to $0.31, depending on the condition of the bank, as a result of the recapitalization of BIF.  In November of the same year, the FDIC voted to reduce its premiums for well capitalized banks to zero, effective January 1, 1996.  Other banks will be charged risk-based premiums up to $0.27 per $100 of deposits.  The Bank, being considered well capitalized, made no payments of FDIC insurance premium for the year ended December 31, 2002.  However, as a result of the findings of the regulatory examination of the Bank, effective in 2003, the Bank will make payments of $0.03 per $100 of insured deposits. Please refer to paragraphs entitled  “Regulatory Matters” in Part II, item 7.

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Other Items

          FDICIA also, among other things, (i) limits the percentage of interest paid on brokered deposits and limits the unrestricted use of such deposits to only those institutions that are well capitalized; (ii) requires the FDIC to charge insurance premiums based on the risk profile of each institution; (iii) eliminates “pass through” deposit insurance for certain employee benefit accounts unless the depository institution is well capitalized or, under certain circumstances, adequately capitalized; (iv) prohibits insured state chartered banks from engaging as principal in any type of activity that is not permissible for a national bank unless the FDIC permits such activity and the bank meets all of its regulatory capital requirements; (v) directs the appropriate federal banking agency to determine the amount of readily marketable purchased mortgage servicing rights that may be included in calculating such institution’s tangible, core and risk-based capital; and (vi) provides that, subject to certain limitations, any federal savings association may acquire or be acquired by any insured depository institution.

          In addition, the FDIC has issued final regulations implementing provisions of FDICIA relating to powers of insured state banks.  Final regulations issued prohibit insured state banks from making equity investments of a type, or in an amount, that are not permissible for national banks.  In general, equity investments include equity securities, partnership interests and equity interests in real estate.

          Certain regulations prohibit insured state banks from engaging as principal in any activity not permissible for a national bank, without FDIC approval.  The proposal also provides that subsidiaries of insured state banks may not engage as principal in any activity that is not permissible for a subsidiary of a national bank, without FDIC approval.

Community Reinvestment Act and Fair Lending Developments

          The Bank is subject to certain fair lending requirements and reporting obligations involving home mortgage lending operations and Community Reinvestment Act (the “CRA”) activities.  The CRA generally requires the federal banking agencies to evaluate the record of financial institutions in meeting the credit needs of their local community, including low and moderate income neighborhoods.  In addition to substantial penalties and corrective measures that may be required for a violation of certain fair lending laws, the federal banking agencies may take compliance with such laws and the CRA into account when regulating and supervising other activities.

          In January 2001, the federal banking agencies adopted new regulations implementing the CRA “sunshine” provision of the Financial Services Modernization Act.  Those provisions require insured depository institutions (or their affiliates) and nongovernmental entities or persons that are parties to certain written agreements made pursuant to, or in connection with, the fulfillment of the CRA to make such agreements available to the public and the relevant federal banking agency.  Insured depository institutions (or their affiliates) and nongovernmental entities or persons that are parties to

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such agreements are also required to file annual reports concerning the agreements with the relevant agency.  The Bank is not currently and has never been a party to a written CRA- related agreement with a nongovernmental entity.

          A bank’s compliance with its CRA obligations is based on a performance-based evaluation system which bases CRA ratings on an institution’s lending service and investment performance.  When a bank holding company applies for approval to acquire a bank or other bank holding company, the Federal Reserve will review the assessment of each subsidiary bank of the applicant bank holding company, and such records may be the basis for denying the application.  In connection with its assessment of CRA performance, the appropriate bank regulatory agency assigns a rating of “outstanding,” “satisfactory,” “needs to improve,” or “substantial noncompliance.”  A bank’s CRA rating will also affect the ability of the bank and its bank holding company to take advantage of the new powers granted by the Financial Services Modernization Act.  Based on the most current examination report dated January 31, 2002, the Bank was rated “high satisfactory”.

Hazardous Waste Clean-Up Costs

          Management is aware of recent legislation and cases relating to hazardous waste clean-up costs and potential liability.  Based on a general survey of the loan portfolios of the Bank, management is not aware of any potential liability for hazardous waste contamination.

USA PATRIOT Act

          On October 26, 2001, the President signed into law comprehensive anti-terrorism legislation known as the “USA PATRIOT Act”.  Title III of the USA PATRIOT Act substantially broadened the scope of U.S. anti–money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra–territorial jurisdiction of the United States.  The U.S. Treasury Department (“Treasury”) has issued a number of implementing regulations which apply various requirements of the USA PATRIOT Act to financial institutions such as the Bank and mutual funds and private investment companies advised or sponsored by the Company’s subsidiaries.  Those regulations impose new obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing.  Treasury is expected to issue a number of additional regulations which will further clarify the USA PATRIOT Act’s requirements.

          Failure of a financial institution to comply with the USA PATRIOT Act’s requirements could have serious legal and reputational consequences for the institution.  The Company has adopted appropriate policies, procedures and controls to address

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compliance with the requirements of the USA PATRIOT Act under the existing regulations and will continue to revise and update its policies, procedures and controls to reflect changes required by the Act and Treasury’s regulations.

Sarbanes – Oxley Act

          On July 30, 2002, the Senate and the House of Representatives of the United States enacted the Sarbanes-Oxley Act of 2002, a law that addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. Effective August 29, 2002, as directed by Section 302(a) of Sarbanes-Oxley, the Company’s chief executive officer and chief financial officer are each required to certify that the Company’s Quarterly and Annual Reports do not contain any untrue statement of a material fact. The rules have several requirements, including having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of the Company’s internal controls; they have made certain disclosures to the Company’s auditors and the audit committee of the Board of Directors about internal controls; and they have included information in the Company’s Quarterly and Annual Reports about their evaluation and whether there have been significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the evaluation. 

Other Regulations and Policies

          Various requirements and restrictions under the laws of the United States and the State of California affect the operations of the Bank.  Federal regulations include requirements to maintain non-interest bearing reserves against deposits, limitations of the nature and amount of loans which may be made, and restrictions on payment of dividends.  The Commissioner of the DFI approves the number and locations of the branch offices of a bank.  California law exempts banks from the usury laws.

          Additional legislative and administrative actions affecting the banking industry may be considered by the United States Congress, the California legislature, and various regulatory agencies, including those referred to above. It cannot be predicted with certainty whether such legislative or administrative action will be enacted or the extent to which the banking industry in general or the Company and the Bank in particular would be affected.

Employees

          As of December 31, 2002, the Bank had approximately 397 full-time equivalent employees.  None of the employees are represented by labor unions.  Benefit programs are available to eligible employees and include, group medical-dental plans, paid sick leave, paid vacation, and a 401(k) plan.

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Item 2.        Properties

          GBC Bancorp shares common quarters with General Bank at 800 West 6th Street, Los Angeles, California 90017.  The Bank leases approximately 41,501 square feet of rentable area which includes the ground floor and the second, fourteenth and fifteenth floors of the building.  The initial lease term will expire in the year 2009, and the Bank has two five-year options to renew the lease following the expiration date of the initial term.  As of December 31, 2002, the monthly base rent for the facility is $83,100 and is payable to the lessor, Capital & Counties, USA, Inc.  The monthly base rent is subject to change on specified dates during the 15-year initial lease term pursuant to the lease agreement.

          As of December 31, 2002, the Bank operated full-service branches at twenty leased locations (including the 800 West 6th Street, Los Angeles location which houses the downtown branch of the Bank) and one location where it owns the building and land.  In addition, the Bank has certain operating and administrative departments located at 4128 Temple City Boulevard, Rosemead, California, where it owns the building and land with approximately 27,600 square feet of space.  The net book value of the two owned facilities (building and land) as of December 31, 2002, was $ 2,045,000.  Expiration dates of the Bank’s leases range from September, 2003 to June, 2010. As of December 31, 2002, the Bank has eighteen full-service branches located in California (fourteen of which are in the Southern California area), one full-service branch located in the state of Washington and two branches located in Boston, Massachusetts.

Item 3.        Legal Proceedings

          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. 

Item 4.        Submission of Matters to a Vote of Security Holders

          During the fourth quarter of 2002, no matters were submitted to a vote of the Company’s security holders.

Item 4A.       Executive Officers of the Registrant

          There are no family relationships between any of the executive officers of the Company.  The following information indicates the position and age of the executive

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officers of the Company and the Bank, and their business experience during the prior five years:

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PART II

Item 5.       Market for the Registrant’s Common Equity and Related Security Holder Matters

Market Information

          The common stock of the Company has been traded in the NASDAQ National Market under the symbol GBCB since November 24, 1987.

          The market makers for GBC Bancorp are: Hoefer & Arnett; Keefe, Bruyette & Woods, Inc.; Wedbush Morgan Securities; First Tennesse Securities Corp.; Jeffries & Company, Inc.; Knight Securities, L.P.; Merrill Lynch, Pierce, Fenner; Morgan Stanley & Co., Inc.; Alternate Display Facility; Cincinnati Stock Exchange; Goldman, Sachs & Co.; Ladenburg, Thalmann & Co.; Moors & Cabot, Inc.; Sandler O’Neill & Partners; Schwab Capital Markets; Susquehanna Capital Group.

          The high and low last sale or bid prices for each quarter of the years 2002 and 2001, as reported by the NASDAQ, are as follows:

Holders

          As of February 10, 2003, there were 199 holders of record of the Company’s common stock according to the records of the Company’s transfer agent.

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Dividend

          Cash dividends per share were declared during the most recent two years as per the following table:

          The Company’s subsidiary, General Bank, is limited in the payment of dividends by the Financial Code of the State of California which provides that dividends in any one year may not exceed the lesser of the Bank’s undivided profits or the net income for the prior three years, less cash distributions to stockholders during such period.  As of December 31, 2002, approximately $27.5 million of undivided profits of the Bank is available for dividends to the Company, subject to the subordinated debt covenant restrictions and the Memorandum of Understanding described in the “Regulatory Matters” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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Item 6.       Selected Financial Data

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our 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 borrowers’ ability to repay, as described in “Allowance for Credit Losses.”

Accounting for derivatives is in compliance with Statement of Financial Accounting Standards (“SFAS No. 133”), “Accounting for Derivative Instruments and Hedging Activities”, as amended. Implementation in 2001 of SFAS No. 133 had a material impact on the carrying value of derivative instruments. 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 as described in “Non-Interest Income”, “Non-Interest Expense” and “Cumulative Effect of a Change of Accounting Principle”.

Results of Operations

The consolidated net loss for GBC Bancorp and subsidiaries (the “Company”) for the year ended December 31, 2002, totaled $5,790,000. This compares to net income of $32,602,000 in 2001 and $38,476,000 in 2000. Diluted (loss)/earnings per share were $(0.50), $2.78 and $3.26 for the years 2002, 2001 and 2000, respectively. The decline to a loss of $5,790,000 in 2002 from net income of $32,602,000 in 2001 is the result primarily of a $56,264,000 increase in the provision for credit losses. In addition, non-interest income declined by $6,757,000 in 2002 compared to 2001. Also, the implementation of SFAS No. 133, on January 1, 2001, resulted in pre-tax income of $8,561,000, which was partially offset by a pre-tax reduction of fair value as of December 31, 2001, of $6,762,000. Thus, in 2001, there was pre-tax income of $1,799,000, related to the derivatives. However, during 2002, the pre-tax fair value of the Company’s derivatives declined $111,000. Thus there was a $1,910,000 pre-tax impact comparing the two years relating to the fair value of the Company’s derivatives. Finally, net interest income partially offset the impact of the above, reflecting an increase of $5,293,000, or 6.0%.

Consolidated net income for GBC Bancorp and subsidiaries for the year ended December 31, 2001, totaled $32,602,000. This compares to net income of $38,476,000 in 2000. Diluted earnings per share were $2.78 for 2001 compared to $3.26 for 2000. The $5,874,000 decline in net income from 2000 to 2001 was primarily the result of an increase of $18,900,000 in the provision for credit losses and a $6,109,000 reduction of non-interest income partially offset by a $4,579,000 reduction of non-interest expense and $4,962,000 representing the cumulative effect of a change in accounting principle, net of taxes, representing the transition adjustment resulting from the adoption of SFAS No. 133.

Net Interest Income

Net interest income in 2002 totaled $94,219,000 compared to net interest income of $88,926,000 in 2001. The $5,293,000 or 6.0%, increase is the result of the growth of interest-earning assets to $2,450.4 million from $2,058.1 million, or 19.1%, as of December 31, 2002 and 2001, respectively. The effect of the increase of interest-earning assets was partially offset by a decline of the net interest margin. For the years ended December 31, 2002 and 2001, the net interest margin was 3.85% and 4.32%, respectively.

Total interest income for the year ended December 31, 2002, was $146,906,000 compared to $155,478,000 for the year ago period. The $8,572,000, or 5.5% decrease, was due to the 155 basis point decline of the yield on earning assets, partially offset by the above referenced growth of average-earning assets. The yield on earning assets was 6.00% and 7.55% for the years ended December 31, 2002 and 2001, respectively. During 2002, there was downward movement of the prime rate. The daily average prime rate in 2002 was 4.67%. This compares to 6.91% during 2001, a decline of 224 basis points. The yield on loans and leases for the years ending December 31, 2002 and 2001, was 6.89% and 8.52%, respectively. The 163 basis point decline is primarily a function of the average prime rate. Approximately 70% of the loan portfolio is prime driven loans. Contributing to the reduced yield on earning assets was a decline of 124 basis points on the securities portfolio. For the years ended December 31, 2002 and 2001, this yield was 5.49% and 6.73% respectively. 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 a gain on sale of $10,127,000. The weighted average yield on the securities sold was 6.43%. The reinvestment of the proceeds at reduced yields exerted downward pressure on the securities yield as well as the reinvestment of the cash flows from the portfolio during 2002. Because of the direction of money market rates there was an acceleration of bond prepayments exacerbating the yield decline.

The 220 basis point decline to 1.74% from 3.94% for the years 2002 and 2001, respectively, of the yield on federal funds sold and securities purchased under agreements to resell directly reflects the decrease of the daily average prime rate.

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The following table displays the yield declines for the various categories of interest earning assets:

There was also downward pressure exerted on the yield on average earning assets due to the composition of the average earning assets. Average loans and leases, the highest yielding of the interest earning assets, comprised 48.9% and 51.7% of total average earning assets for the years ended December 31, 2002 and 2001, respectively. Federal funds sold and securities purchased under agreements to resell, the lowest yielding of the interest-earning assets comprised 4.7% and 3.7% of total average earning assets for the years ended December 31, 2002 and 2001, respectively.

The impact on interest income resulting from the decline of the prime rate was partially offset by the increase of average interest earning assets. As indicated above, for 2002 as compared to 2001, average interest earning assets increased $392.3 million. The growth was primarily represented by increases of $217.4 million and $134.4 million in investment securities and loans and leases, respectively.

Total interest expense for the year ended December 31, 2002, was $52,687,000 compared to $66,552,000 for the year ago period. The $13,865,000, or 20.8%, decline was the result of a decline of the cost of funds. For the years ended December 31, 2002 and 2001, the cost of funds was 2.59% and 3.99%, a decrease of 140 basis points. The decline reflected the money market conditions as described above. Interest-bearing deposits declined to 2.16% from 3.80% for the years ended December 31, 2002 and 2001, respectively. For the years ended December 31, 2002 and 2001, average interest bearing deposits were $1,677.4 million and $1,514.9 million, respectively, an increase of $162.5 million, or 10.7%. The deposit products with the largest average balance were money market accounts and time deposits. The interest paid on money market accounts and time deposits declined to 1.58% and 2.63% in 2002, respectively from 2.28% and 4.58% in 2001, respectively.

Partially offsetting the decreasing interest rates was the growth of interest bearing deposits and the increased average balance of borrowings from the Federal Home Loan Bank, the most expensive source of funds, excluding the Company’s subordinated debt. For the years ended December 31, 2002 and 2001, average borrowings from the Federal Home Loan Bank (“FHLB”) were $313.4 million and $113.8 million, respectively, representing a $199.6 million, or 175% increase. Average borrowings from the FHLB as a percentage of average interest bearing liabilities for the years ended December 31, 2002 and 2001, were 15.4% and 6.8%, respectively. The interest paid on borrowings from the FHLB was 4.13% and 4.79% for the years 2002 and 2001, respectively.

The net interest spread, defined as the difference between the yield on earning assets and the cost of funds, declined to 3.41% in 2002 compared to 3.56% in 2001. The net interest margin, defined as net interest income divided by average interest earning assets, declined to 3.85% in 2002 from 4.32% in 2001. In addition to the reduced net interest spread, the net interest margin was impacted by the reduction of the percentage of average interest earning assets funded by non-costing sources. For the years ended December 31, 2002 and 2001, this percentage declined to 17.4% from 19.0%, respectively.

Net interest income in 2001 totaled $88,926,000 compared to net interest income of $88,442,000 in 2000. The $484,000, or 0.6%, increase was the result of an increase of average earning assets offset by a decline of the net interest margin primarily due to declining short-term interest rates. For the years ended December 31, 2001 and 2000, the balance of average interest earning assets was $2,058.1 million and $1,840.5 million, respectively.

Total interest income for the year ended December 31, 2001 was $155,478,000, compared to $163,121,000 for the year ago period. The $7,643,000, or 4.7%, decrease was due primarily to a 131 basis point decline of the yield on earning assets, partially offset by a $217.5 million increase of the balance of average interest earning assets. The reduced yield was in large measure a reflection of the reductions of the prime rate of interest during the course of the year ended December 31, 2001. As of December 31, 2001 the prime rate of interest was 4.75% compared to 9.50% as of December 31, 2000. The 475 basis point decline was the result of eleven prime rate decreases during 2001. For the years ended December 31, 2001 and 2000, the daily average prime rate for the Bank was 6.91% and 9.24%, respectively, a decline of 233 basis points. Another factor contributing to the yield decline was the reduction in net interest recoveries. For the years ended December 31, 2001 and 2000, net interest recoveries were $548,000 and $4,919,000, respectively. Excluding these net interest recoveries, the yield on earning assets would have been 7.53% and 8.60% for the years ended December 31, 2001 and 2000, representing a decline of 107 basis points. As would be expected, all categories of interest earning assets reflected yield declines as shown in the following table:

Total interest expense for the year ended December 31, 2001, was $66,552,000 compared to $74,679,000 for the year ago period. The $8,127,000, or 10.9%, decline is the result of an 89 basis point decrease in the cost of funds. The rate decrease is primarily due to declining money market conditions. For the years ended December 31, 2001 and 2000, the cost of funds was 3.99% and 4.88%, respectively. The rates paid on time deposits declined to 4.58% for the year 2001 from 5.45% for the year 2000. All other categories of deposits reflected reductions of the rates paid thereon and was a direct reflection of the decline in interest rates

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as discussed above. Rates paid on borrowings from the Federal Home Loan Bank also reflected a decline from 4.96% to 4.79%.

The impact on interest expense of the reduced cost of funds was partially offset by the increase of the average balance of interest bearing deposits. For the years ended December 31, 2001 and 2000, the average balance of interest bearing liabilities was $1,668.6 million and $1,529.9 million, respectively, representing an increase of $138.7 million, or 9.1%. Included in this increase was a $68.0 million increase of borrowings from the Federal Home Loan Bank.

The net interest spread declined to 3.56% in 2001 from 3.98% in 2000. The net interest margin declined to 4.32% in 2001 from 4.81% in 2000.

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The following table represents the net interest spread, net interest margin, average balances, interest income and expense, and the average yield/rates by asset and liability category: