UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

CATHAY BANCORP, INC.

(Exact name of registrant as specified in its charter)

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 ý    No o

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common stock, $.01 par value, 18,036,196 shares outstanding as of August 8, 2003.

CATHAY BANCORP, INC. AND SUBSIDIARIES

2^NDQUARTER 2003 REPORT ON FORM 10-Q

TABLE OF CONTENTS

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PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

(Unaudited)

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CATHAY BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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CATHAY BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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CATHAY BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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CATHAY BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Business

Cathay Bancorp, Inc. (the “Bancorp”) is the holding company for Cathay Bank (the “Bank”) and Cathay Capital Trust I (and together the “Company” or “we”, “us,” or “our”).  The Bank was founded in 1962 and offers a wide range of financial services.  The Bank now operates twelve branches in Southern California, eight branches in Northern California, three branches in New York State, one branch in Houston, Texas, and a representative office in Hong Kong, and in Shanghai, China.  In addition, the Bank’s subsidiary, Cathay Investment Company, maintains an office in Taiwan.  The Bank is a commercial bank, servicing primarily individuals, professionals, and small to medium-sized businesses in the local markets in which its branches are located.  Cathay Capital Trust I is a statutory trust formed under the laws of the state of Delaware in June, 2003, which issued trust preferred securities for raising capital in connection with the proposed merger with GBC Bancorp.

Recent Announcement

On May 7, 2003, the Bancorp announced the signing of a merger agreement whereby GBC Bancorp (“GBC”) will merge into the Bancorp, the name of which will be changed to Cathay General Bancorp.  Simultaneously, General Bank, a wholly-owned subsidiary of GBC, will merge into the Bank.  At the closing of the merger, the Bancorp will pay cash of $162.4 million and will issue 6.75 million shares of its common stock for all the outstanding shares of GBC, subject to adjustment under certain conditions.  The allocation of the cash and stock consideration among the GBC shareholders will be dependent, among other factors, on the elections made by GBC shareholders.

Completion of the merger, is subject to certain conditions, including approval by the shareholders of both the Bancorp and GBC and applicable regulatory authorities.  Subject to obtaining such approvals, the transaction is expected to close before the end of 2003.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with 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 GAAP for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.  Certain reclassifications have been made to the prior year’s financial statements to conform to the June 30, 2003 presentation.  For further information, refer to the audited consolidated financial statements and footnotes included in the Company’s annual report on Form 10-K for the year ended December 31, 2002.

The preparation of the consolidated financial statements in accordance with GAAP requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. The most significant estimate subject to change relates to the allowance for loan losses.

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Recent Accounting Pronouncements

In December 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“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.  The Company adopted the fair value method of accounting for stock options prospectively on January 1, 2003.  See “Stock-Based Compensation,” in these Notes to Condensed Consolidated Financial Statements.

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

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities,” an interpretation of Accounting Research Bulletin 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 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, and at June 30, 2003, the carrying amount of those investments in real estate was $4.72 million.  The Company had satisfied all capital commitments required for the two investments in real estate prior to 2003, and in addition, under the terms of both limited partnership agreements, the Company is not liable for the debts, liabilities, contracts, or any other obligation of these limited partnerships. Application of Interpretation No. 46 for the Company will be the third quarter of 2003.  The Company does not expect that the adoption will 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

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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 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 Cathay Bancorp for the first interim period beginning after June 15, 2003.  The Company has not completed its analysis to determine the impact of adopting this Statement.  However, the Company does not expect that the adoption will have a material impact on the Company’s results of operations or financial position.

Financial Derivatives

The Company enters into financial derivatives in order to seek mitigation of exposure to interest rate risks related to its interest-earning assets and interest-bearing liabilities. The Company recognizes all derivatives on the balance sheet at fair value.  Fair value is based on dealer quotes, or quoted prices from instruments with similar characteristics.  The Company uses financial derivatives designated for hedging activities as cash flow hedges.  For derivatives designated as cash flow hedges, changes in fair value are recognized in other comprehensive income until the hedged item is recognized in earnings.

On March 21, 2000, the Company hedged a portion of its floating interest rate loans through an interest rate swap agreement with a $20.00 million notional amount.  The purpose of the hedge is to provide a measure of stability in the future cash receipts from such loans over the term of the swap agreement, which at June 30, 2003 was less than seven quarters.  Amounts to be paid or received on the interest rate swap are reclassified into earnings upon the receipt of interest payments on the underlying hedged loans, including amounts totaling $589,000 that were reclassified into earnings during the six months ended June 30, 2003.  The estimated net amount of the existing gains within accumulated other comprehensive income that are expected to be reclassified into earnings within the next 12 months is approximately $1.24 million.

Earnings per Share

Basic earnings per share excludes dilution and is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding for the period.  Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock and resulted in the issuance of common stock that then shared in earnings.

For the three months ended June 30, 2003 and 2002, all options to purchase shares of common stock were included in the computation of diluted earnings per share. For the six months ended June 30, 2003, options to purchase an additional 179,167 shares of common stock were outstanding, but were not included in the computation of diluted earnings per share because their inclusion would have had an antidilutive effect.  All options were included in the computation of diluted earnings per share for the six months ended June 30, 2002.

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The following table sets forth basic and diluted earnings per share calculations:

Stock-Based Compensation

Prior to 2003, the Company used the intrinsic-value method to account for stock-based compensation.  Accordingly, no expense was recorded in periods prior to 2003, because the stock’s fair market value did not exceed the exercise price at the date of grant.  In 2003, the Company adopted prospectively the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation,” as amended by FASB Statement No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure, an Amendment of FASB Statement No. 123,” and began recognizing the expense associated with stock options granted during 2003 using the fair value method, which resulted in a $97,000 charge to the second quarter of 2003 and a $194,000 charge to the first six months of 2003 to salaries and employee benefits.  Stock-based compensation expense for stock options is calculated based on the fair value of the award at the grant date, and is recognized as an expense over the vesting period of the grant.  The Company uses the Black-Scholes option pricing model to estimate the value of granted options.  This model takes into account the option exercise price, the expected life, the current price of the underlying stock, the expected volatility of the Company’s stock, expected dividends on the stock and a risk-free interest rate.  Since compensation cost is measured at the grant date, the only variable whose change would impact expected compensation expense recognized in future periods for 2003 grants is actual forfeitures.

If the compensation cost for the Company’s stock option plan had been determined using the fair value at the grant dates for all awards under the Plan consistent with the method of SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company’s net income and earnings per share for the periods presented would have been reduced to the pro forma amounts indicated in the table below.

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Commitments and Contingencies

In the normal course of business, the Company becomes a party to financial instruments with off-balance sheet risk to meet the financing needs of its customers.  These financial instruments include commitments to extend credit in the form of loans, or through commercial or standby letters of credit.  Those instruments represent varying degrees of exposure to risk in excess of the amounts included in the accompanying condensed consolidated statements of condition.  The contractual or notional amount of these instruments indicates a level of activity associated with a particular class of financial instrument and is not a reflection of the level of expected losses, if any.

The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments.  The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.  Unless noted otherwise, the Company does not require collateral or other security to support financial instruments with credit risk.

Commitments to extend credit are agreements to lend to a customer provided there is no violation of any condition established in the commitment agreement.  These commitments generally have fixed expiration dates and are expected to expire without being drawn upon.  The total commitment amounts do not necessarily represent future cash requirements.  The Company evaluates each customer’s creditworthiness on a case-by-case basis.  The amount of collateral obtained if deemed necessary by the Company upon extension of credit is based on management’s credit evaluation of the borrowers.

Letters of credit and bill of lading guarantees are conditional commitments issued by the Company to guarantee the performance of a customer to a third party.  The credit risk involved in issuing letters of credit is essentially the same as that involved in making loans to customers.

Investment Securities

During the second quarter of 2003, the Company reduced its holdings in US dollar-denominated corporate bonds issued by certain Hong Kong entities to $2.61 million, after selling bonds with a net book value of $20.94 million.  Management had intended to hold these bonds to maturity at the time of purchase, and therefore, designated these securities as held-to-maturity.  However, as the SARS situation persisted in Hong Kong, management came to believe that there was a risk that the credit rating of these bonds may potentially be adversely impacted.  As a result of the sales of these held-to-maturity securities, the remaining securities in the portfolio were tainted and were transferred to the available-for-sale portfolio as of May 31, 2003.  At the time of transfer, the securities held-to-maturity portfolio was primarily comprised of US government agencies, state and municipal securities, mortgage-backed securities, collateralized mortgage obligations, assets-backed securities, and corporate bonds.  The carrying value and the estimated fair value of the securities in the held-to-maturity portfolio were $411.40 million and $429.89 million, respectively at the time of transfer to the securities available-for-sale portfolio.  The net unrealized gains were $18.49 million.

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Trust Preferred Securities

In connection with the proposed merger with GBC, Cathay Bancorp completed the issuance of $20.00 million of trust preferred securities in June 2003, which qualify as Tier 1 capital under current regulatory guidelines.  The trust preferred securities have a variable interest rate of three-month LIBOR plus 3.15%, with an interest rate cap of 11.75% during the first five years, the no-call period.  The trust preferred securities are redeemable, in whole or in part, at the option of Cathay Bancorp, once each quarter, beginning five years after their issuance.  The trust preferred securities carry a 30-year term.

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is given based on the assumption that the reader has access to and has read the Annual Report on Form 10-K for the year ended December 31, 2002, of Cathay Bancorp, Inc. (“Bancorp”) and its wholly-owned subsidiary Cathay Bank (the “Bank” and together the “Company” or “we”, “us,” or “our”).

The statements in this report include forward-looking statements regarding management’s beliefs, projections, and assumptions concerning future results and events.  These forward-looking statements may, but do not necessarily, also include words such as “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates,” “may,” “will,” “should,” “could,” “predicts,” “potential,” “continue” or similar expressions.  Forward-looking statements in this report include, but are not limited to, those regarding the proposed merger with GBC Bancorp, such as statements about the approvals and timing of the merger.  Forward-looking statements are not guarantees.  They involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements.  Such factors include, among other things, adverse developments, or conditions related to or arising from:

•                  our expansion into new market areas;

•                  fluctuations in interest rates;

•                  demographic changes;

•                  increases in competition;

•                  deterioration in asset or credit quality;

•                  changes in the availability of capital;

•                  adverse regulatory developments;

•                  changes in business strategy or development plans, including the deregistration of the registered investment company, which became effective in March 2003, and the formation of a real estate investment trust, for which we received regulatory approval in February 2003;

•                  general economic or business conditions;

•                  other factors discussed in Part II – Item 7 – “Factors that May Affect Future Results,” in our Annual Report on Form 10-K for the year ended December 31, 2002; and

•                  risks described in our registration statement on Form S-4 (which we filed in connection with the proposed merger with GBC) under the section entitled “risk factors.”

Actual results in any future period may also vary from the past results discussed in this report.  Given these risks and uncertainties, we caution readers not to place undue reliance on any forward-looking statements, which speak as of the date of this report.  We have no intention and undertake no obligation to update any forward-looking statement or to publicly announce the results of any revision of any forward-looking statement to reflect future developments or events.

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We invite you to visit us at our Web site at www.cathaybank.com, to access free of charge our annual report on Form 10-K, our quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports and our quarterly earnings releases, all of which are made available as soon as practicable after we electronically file such materials with, or furnish it to the SEC.  In addition, you can write us to obtain a free copy of any of those reports at Cathay Bancorp, Inc., 777 North Broadway, Los Angeles, California 90012, Attn: Investor Relations.

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 consolidated 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 loan losses involves significant judgments and assumptions by management, which has 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 on historical experience and other factors, which are believed to be reasonable under the circumstances as described under the heading “Allowance for Loan Losses.”

SECOND QUARTER HIGHLIGHTS:

•                  An increase of 8.23% in second quarter 2003 net income to $13.25 million compared with $12.24 million during the same quarter a year ago.

•                  Strong total asset growth of $258.63 million or 9.39% to $3.01 billion at June 30, 2003, from December 31, 2002 of $2.75 billion.

•                  Gross loan growth from December 31, 2002  of $77.06 million or 4.10%, primarily in commercial mortgage loans and commercial loans.

•                  Deposit accounts growth of $130.24 million or 5.63%, of which $39.81 million was in transaction and money market accounts.

•                  Net recoveries of $60,000 compared with net charge-offs of $3.50 million in the year ago quarter.

•                  Return on average stockholders’ equity was 17.35% and return on average assets was 1.81% for the quarter ended June 30, 2003.

•                  The announcement on May 7 of the signing of a definitive agreement by which GBC Bancorp will be merged into Cathay Bancorp.

•                  On May 29, 2003, the American Bankernewspaper ranked Cathay Bancorp as the 13^th most efficient US bank holding company among the 500 largest, which is the highest among California institutions included in the rankings, based on the results in the year 2002.  Previously, the Company had been ranked 8^th by the American Bankernewspaper, based on the year-to-date results as of the third quarter 2002.

Proposed Merger with GBC Bancorp

On May 7, 2003, the Bancorp announced the signing of a merger agreement whereby GBC Bancorp (“GBC”) will merge into the Bancorp, the name of which will be changed to Cathay General Bancorp.  Simultaneously, General Bank, a wholly-owned subsidiary of GBC, will merge into the Bank.  At the closing of the merger, the Bancorp will pay cash of $162.4 million and will issue 6.75 million shares of its common stock for all the outstanding shares of GBC.  The number of the Bancorp shares is subject to increase or decrease at the option of a party under certain limited circumstances.  The allocation of

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the cash and stock consideration among the GBC shareholders will be dependent, among other factors, on the elections made by GBC shareholders.

Completion of the merger, which has been approved by the boards of directors of both the Bancorp and GBC, is subject to certain conditions, including approval by the shareholders of both the Bancorp and GBC and by applicable regulatory authorities.  Subject to obtaining such approvals, the transaction is expected to close before the end of 2003.

Income Statement Review

Net Income

Net income for the second quarter of 2003 was $13.25 million or $0.73 per diluted share, a 8.23% increase, compared to net income of $12.24 million or $0.67 per diluted share for the same quarter a year ago.  Return on average stockholders’ equity was 17.35% and return on average assets was 1.81% for the second quarter of 2003, compared with a return on average stockholders’ equity of 19.03% and return on average assets of 1.93% for the second quarter of 2002.

FINANCIAL PERFORMANCE

Taxable-Equivalent Net Interest Income Before Provision for Loan Losses

Changes in net interest income and margin result from the interaction among the volume and composition of earning assets, related yields and associated funding costs.  Accordingly, portfolio size, composition, and yields earned and funding costs can have a significant impact on net interest income and margin.

Taxable-equivalent net interest income increased by $1.14 million to $27.10 million, compared to taxable-equivalent net interest income of $25.96 million in the year ago quarter.  The level of net interest income for the second quarter of 2003 reflected the positive effect of the growth in average commercial mortgage loans, commercial loans and securities, and the growth in lower-cost core deposits accounts (defined as total deposits less time deposit accounts of $100,000 or more), which helped to mitigate the 50 basis point decrease in the target federal funds rate on November 7, 2002, by the Federal Open Market Committee (“FOMC”).  Sequentially, quarter-over-quarter, our tax-equivalent net interest income increased slightly due to increased investments in tax-exempt state and municipal securities, when compared with taxable-equivalent net interest income of $26.98 million during the first quarter 2003.

The taxable-equivalent net interest margin fell 44 basis points from 4.35% during the second quarter of 2002 to 3.91% for the second quarter 2003.  The decrease was primarily due to the decreasing interest rate environment throughout 2002 and into 2003, including the 50 basis point drop in the federal funds rate in November 2002, the prepayment and calls of higher yielding securities, and the related lagging effect of our interest-bearing time deposit accounts.  For the quarter ended June 30, 2003, we increased our net average interest-earning assets (defined as the difference between average interest-earning assets and average interest-bearing liabilities), by $83.55 million from the quarter ended June 30, 2002,

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and have changed the mix in our average interest-bearing liabilities by increasing our average lower-cost core deposits by $115.41 million, or 55.96% of the $206.23 million growth in average deposits compared to 2002.  The taxable-equivalent interest rate earned on our average interest-earning assets was 5.22% and our cost of funds on average interest-bearing liabilities equaled 1.59% during the second quarter 2003.  The comparable numbers for the second quarter of 2002 were a taxable-equivalent rate earned on our average interest-earning assets of 6.00% and a cost of funds on average interest-bearing liabilities of 1.99%.

Average daily balances, together with the total dollar amounts, on a taxable-equivalent basis, of interest income and interest expense, and the weighted-average interest rate and net interest margin were as follows:

(1)          The amount of interest earned on certain securities of states and political subdivisions and other securities held have been adjusted to a fully taxable-equivalent basis based on marginal corporate federal tax rate of 35%.

(2)          Includes average non-accrual loans of $3,672 and $6,930 for 2003 and 2002, respectively.

(3)          Loan income includes loan fees of $741 and $711 for 2003 and 2002, respectively.

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Provision for Loan Losses

We increased the provision for loan losses by $150,000 to $1.65 million during the second quarter of 2003 compared with $1.50 million for the second quarter of 2002.  The provision for loan losses represents the charge against current earnings that is determined by management, through a credit review process, as the amount needed to maintain an allowance that management believes should be sufficient to absorb loan losses inherent in the Company’s loan portfolio.  Gross charge-offs for the second quarter of 2003 were $48,000, compared with charge-offs of $3.67 million during the second quarter of 2002.  Recoveries in the second quarter of 2003 equaled $108,000, compared with recoveries of $168,000 in the same quarter a year ago.  Also see “Allowance for Loan Losses” on this second Quarter 2003 report on Form 10-Q.

Non-Interest Income

Non-interest income, which includes revenues from service charges on deposit accounts, letters of credit commissions, securities gains (losses), loan gains (losses), wire transfer fees, and other sources of fee income, rose $3.17 million or 78.92% to $7.20 million for the second quarter of 2003, compared with $4.02 million for the same quarter in 2002.

In the second quarter of 2003, the Company sold $20.94 million of its holdings in US dollar-denominated corporate bonds issued by certain Hong Kong entities whose credit ratings may potentially be adversely impacted by the effect of SARS, and reduced its remaining holdings to $2.61 million.  The gain on the sale was $4.03 million.  During the second quarter 2003, investment securities calls and write-downs on venture capital investments resulted in a net loss of $176,000, bringing the net securities gains to $3.86 million for the second quarter 2003.  Depository service fees decreased slightly to $1.47 million during the second quarter 2003, compared with $1.48 million in the year ago quarter.  Other operating income decreased by 12.96% to $1.37 million during the second quarter 2003, compared with $1.57 million in the year ago quarter.  The decrease in other operating income was due to lower fees earned on various bank services.

Non-Interest Expense

Non-interest expense increased $1.82 million to $12.03 million in the second quarter of 2003, compared to $10.21 million in the year ago quarter, primarily as a result of an increase of $833,000 in salaries and employee benefits expenses, reflecting primarily incentive accruals, annual salary adjustments, and a higher number of employees resulting in part from the opening of additional branches in 2002 and stock option expense.  During the first quarter of 2003, we adopted prospectively the fair value recognition provisions of Statement No. 123, “Accounting for Stock-Based Compensation,” as amended by FASB Statement No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure, an Amendment of FASB Statement No. 123,” which resulted in a $97,000 charge to the second quarter of 2003, and a $194,000 charge to the first six months of 2003 to salaries and employee benefits expense for the first six months of 2003.

Income Taxes

The provision for income taxes was $6.86 million or an effective income tax rate of 34.12% for the second quarter 2003 compared with $5.50 million or an effective income tax rate of 31.01% in the year ago quarter.  The effective income tax rate during the second quarter of 2003 reflected tax credits from qualified low income housing investments and the income tax benefit of a newly formed real estate investment trust (“REIT”), which received regulatory approval in February 2003.  The effective income tax benefit during the second quarter of 2002 reflected tax credits from qualified low income housing investments and the income tax benefit of a registered investment company subsidiary of the Bank, which was deregistered in March 2003.  The increase in the effective tax rate from 2002 to 2003

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resulted from the lower level of assets in the real estate investment trust in 2003, compared to those in the registered investment company in 2002.

Year-to-Date Income Statement Review

Net income was $25.78 million or $1.42 per diluted share for the six months ended June 30, 2003, an increase of 9.11% over net income of $23.63 million or $1.31 per diluted share for the same period a year ago. The Company’s net interest income before provision for loan losses increased by $2.01 million for the six months ended June 30, 2003 to $53.02 million, up 3.94%, compared to $51.02 million for the same period in 2002.  The net interest margin for the six months ended June 30, 2003 decreased 43 basis points to 3.90%, compared to 4.33% during the six months ended June 30, 2002.  On a tax-equivalent basis, the net interest margin was 3.98% for the first half of 2003, compared to 4.42% for the like period of 2002. The average daily balances, together with the total dollar amounts, on a taxable-equivalent basis, of interest income and interest expense, and the weighted-average interest rate and net interest margin were as follows:

(1)          The amount of interest earned on certain securities of states and political subdivisions and other securities held have been adjusted to a fully taxable-equivalent basis based on marginal corporate federal tax rate of 35%.

(2)          Includes average non-accrual loans of $3,570 and $7,020 for 2003 and 2002, respectively.

(3)          Loan income includes loan fees of $1,493 and $1,528 for 2003 and 2002, respectively.

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Non-interest income increased 68.56% to $12.40 million for the first six months of 2003, compared to $7.36 million in the like period a year ago.  The increase is primarily due to gains recognized in 2003 on the sale of corporate bonds with a net book value of $37.06 million.  The total gains from the sales were $5.92 million.

Return on average stockholders’ equity was 17.39% and return on average assets was 1.80% for the first six months of 2003, compared to a return on average stockholders’ equity of 18.74%, and a return on average assets of 1.89% for the six months ended June 30, 2002.  The efficiency ratio for the six months ended June 30, 2003 was 35.71%, compared to 35.75% for the same period a year ago.

Financial Condition Review

Assets

Total assets increased by $258.63 million to $3.01 billion at June 30, 2003, up 9.39% from year-end 2002 of $2.75 billion.  The increase in total assets was driven primarily by strong growth in commercial mortgage loans and commercial loans totaling $96.36 million and an increase of $201.83 million in investment securities.  Cash and cash equivalents decreased by $12.26 million from December 31, 2002.

Securities

Total securities were $909.56 million and represented 30.19% of total assets at June 30, 2003 compared with $707.73 million or 25.70% of total assets at December 31, 2002.  The increase was primarily due to purchases of U.S. agencies and mortgage-backed securities during the first six months of 2003.  Average total securities represented 29.52% of average interest-earning assets for the quarter ended June 30, 2003, compared with 26.99% for the first quarter of 2003 and 25.08% for fourth quarter of 2002.

Average securities available-for-sale (“AFS”) as a percentage of average interest-earning assets increased to 29.52% for the second quarter of 2003, from 9.53% for the first quarter of 2003 and 10.23% for the fourth quarter of 2002.  The increase was primarily due to the transfer of the held-to-maturity (“HTM”) portfolio to the AFS portfolio in the second quarter of 2003.  The Company sold $20.94 million of its holdings in US dollar-denominated corporate bonds issued by certain Hong Kong entities, whose credit rating may potentially be adversely impacted by the effect of SARS, and reduced its remaining holdings to $2.61 million.  As a result of the sales from the HTM portfolio, the remaining securities in the HTM portfolio were transferred to the AFS portfolio as of May 31, 2003.  Securities HTM represented 17.46% of average interest-earning assets for the first three months of 2003 and 14.85% for the fourth quarter 2002.  Secondarily, the increase in the AFS portfolio for the six months ended June 30, 2003 was from purchases of U.S. government agency securities, mortgage-backed securities and collateralized mortgage obligations less securities called, matured, and sold during the six months ended June 30, 2003.

During the first six months of 2003, the Bank sold corporate bonds securities with a net book value totaling $37.06 million, resulted in a gain of $5.92 million, exclusive of gains on calls of AFS and HTM securities of $45,000, and $313,000 in write-downs on AFS venture capital investments.

The fair value of the AFS securities, primarily as a result of the transfer from the held-to-maturity portfolio, increased to $909.56 million at June 30, 2003 compared to $248.27 million at December 31, 2002. The net unrealized gain on securities available-for-sale, which represented the difference between fair value and amortized cost increased to $19.21 million at June 30, 2003, compared to $9.53

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million at year-end 2002.  Net unrealized gains on the AFS securities are included in accumulated other comprehensive income, net of tax at June 30, 2003.

The average taxable-equivalent yield on investment securities decreased 140 basis points to 4.50% for the second quarter of 2003, compared with 5.90% during the same quarter a year-ago, as higher-yielding securities matured, prepaid or were sold.

The following tables summarize the composition, amortized cost, gross unrealized gains, gross unrealized losses, and fair values of securities available-for-sale, as of June 30, 2003 and December 31, 2002: