SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

Quarterly Report Under Section 13 or 15(d)

of The Securities Exchange Act of 1934

 

 

For Quarter Ended June 30, 2002 Commission file number0-16213

 

 

| GBC BANCORP 
(Exact name of registrant as specified in its charter)

 

California
95-3586596
(State or other jurisdiction of (I.R.S. EmployerIdentification No.)

incorporation or organization)

 

800 West 6th Street, Los Angeles,
California 90017
(Address of principal executive offices) (Zip code)

 

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

Former name address and former fiscal year, if changed      since last report. 
 

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

Yes X No _______
 

Indicate the number of shares outstanding of each of theissuer's classes of common stock, as of the close of the period covered by thisreport.

 

Common stock, no par value, 11,536,762 shares issued andoutstanding as of June 30, 2002.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TABLE OF CONTENTS

 

 

 

PART I -
FINANCIAL INFORMATION      .............................................................
3
Item 1.
Financial Statements      ..............................................................................
4
Item 2.
Management's Discussion and Analysis of Financial      Condition and Results of Operations      .............................................................................
 

12
Item 3.
Qualitative and Quantative Disclosures about Market      Risk .......................
35
PART II -
OTHER INFORMATION      ......................................................................
40
Item 1.
Legal Proceedings      ..................................................................................
41
Item 2.
Changes In Securities      .............................................................................
41
Item 3.
Default Upon Senior Securities      ..............................................................
41
Item 4.
Submission Of Matters To A Vote Of Securities Holders      .....................
41
Item 5.
Other Information      ...................................................................................
42
Item 6.
Exhibits And Reports On Form 8-K      ......................................................
42
PART III -
SIGNATURES      .......................................................................................
43
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

<TABLE>

 

<CAPTION>

 

GBC BANCORP AND SUBSIDIARARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30,
December 31,
(Dollars In Thousands)
2002
2001


<c>
<c>
ASSETS
Cash and Due From Banks
$ 44,931
$ 33,034
Federal Funds Sold and Securities Purchased Under Agreements to Resell
151,500
90,000
Cash and Cash Equivalents
196,431
123,034
Securities Available-for-Sale at Fair Value (Amortized Cost of      $1,121,668 at
June 30, 2002 and $1,080,819 at December 31, 2001, respectively)
1,139,285
1,098,989
Trading Securities
1
31
Loans and Leases
1,182,992
1,132,889
Less: Allowance for Credit Losses
(27,930)
(23,656)
Deferred Loan Fees
(7,985)
(7,600)
Loans and Leases, net
1,147,077
1,101,633
Bank Premises and Equipment, net
6,879
6,382
Other Real Estate Owned, net
383
383
Due From Customers on Acceptances
10,413
6,471
Real Estate Held for Investment
1,860
2,129
Other Investments
9,508
11,509
Accrued Interest Receivable and Other Assets
27,613
16,682
Total Assets
$ 2,539,450
$ 2,367,243
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand
$ 225,001
$ 217,413
Interest Bearing Demand
551,509
438,660
Savings
92,246
91,418
Time Certificates of Deposit of $100,000 or More
928,558
920,615
Other Time Deposits
139,266
159,821
Total Deposits
1,936,580
1,827,927
Borrowings from the Federal Home Loan Bank
337,400
252,400
Subordinated Debt
39,334
39,269
Acceptances Outstanding
10,413
6,471
Accrued Expenses and Other Liabilities
20,412
34,858
Total Liabilities
2,344,139
2,160,925
Stockholders' Equity
Common Stock, No Par or Stated Value;
40,000,000 Shares Authorized; 11,536,762 shares(net of 79,001 shares
held in trust) at June 30, 2002 and 11,477,394 shares (net of 96,935
shares held in trust) at December 31, 2001, respectively
$ 72,861
$ 71,316
Retained Earnings
110,437
124,196
Accumulated Other Comprehensive Income
9,910
8,332
Deferred Compensation
2,103
2,474
Total Stockholders' Equity
195,311
206,318
Total Liabilities and Stockholders' Equity
$ 2,539,450
$ 2,367,243
See Accompanying Notes to Unaudited Consolidated Financial Statements
 

</TABLE>

 

<TABLE>

 

<CAPTION>

 

GBC BANCORP AND SUBSIDIARARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended
For the Six Months Ended
June 30,
June 30,
(In Thousands, Except Per Share and Share Data)
2002
2001
2002
2001


<c>
<c>
<c>
<c>
INTEREST INCOME
Loans and Leases, Including Fees
$ 20,434
$ 23,468
$ 40,259
$ 46,712
Securities Available-for-Sale
17,984
15,478
34,901
30,821
Securities Held-to-Maturity
-
14
-
30
Federal Funds Sold and Securities
Purchased under Agreements to Resell
244
686
636
1,733
Other
5
6
8
14
Total Interest Income
38,667
39,652
75,804
79,310
INTEREST EXPENSE
Interest Bearing Demand
2,045
1,877
3,888
4,786
Savings
308
239
599
591
Time Certificates of Deposits of $100,000 or More
6,006
11,055
12,503
22,756
Other Time Deposits
795
2,031
1,736
4,384
Federal Funds Purchased and Securities
Sold under Repurchase Agreements
4
9
7
21
Borrowings from the Federal Home Loan Bank
3,433
1,189
6,082
1,610
Subordinated Debt
870
871
1,741
1,741
Total Interest Expense
13,461
17,271
26,556
35,889
Net Interest Income
25,206
22,381
49,248
43,421
Provision for Credit Losses
39,150
1,800
57,664
7,800
Net Interest Income after Provision
for Credit Losses
(13,944)
20,581
(8,416)
35,621
NON-INTEREST INCOME
Service Charges and Commissions
1,837
2,032
3,611
3,919
Gain on Sale of Securities Available-for-Sale
10,127
-
10,127
-
Gain on Sale of Fixed Assets
-
38
-
38
Trading Account Revenue
(3)
(103)
16
2,170
Expense from Other Investments
(1,261)
(44)
(4,624)
(179)
Other
51
633
118
667
Total Non-Interest Income
10,751
2,556
9,248
6,615
NON-INTEREST EXPENSE
Salaries and Employee Benefits
5,304
5,086
10,336
10,412
Occupancy Expense
1,014
863
1,974
1,693
Furniture and Equipment Expense
782
531
1,682
1,044
Net Other Real Estate Owned (Income) Expense
(4)
(437)
(29)
(394)
Other
2,979
2,243
4,624
4,435
Change of Fair Value of Derivatives
(467)
388
(371)
7,115
Total Non-Interest Expense
9,608
8,674
18,216
24,305
(Loss)/Income before Income Taxes
(12,801)
14,463
(17,384)
17,931
(Benefit)/Provision for Income Taxes
(4,791)
5,658
(6,468)
6,741
Net (Loss)/Income before Cumulative Effect of a Change in Accounting      Principle
(8,010)
8,805
(10,916)
11,190
Cumulative Effect of a Change in Accounting Principle
-
-
-
4,962
Net (Loss)/Income
$ (8,010)
$ 8,805
$ (10,916)
$ 16,152
Earnings (Loss) Per Share:
Net (Loss)/Income before Cumulative Effect of a Change in Accounting      Principle
Basic
$ (0.69)
$ 0.75
$ (0.94)
$ 0.95
Diluted
(0.69)
0.75
(0.94)
0.94
Cumulative Effect of a Change in Accounting Principle
Basic
$ -
$ -
$ -
$ 0.42
Diluted
-
-
-
0.42
Net (Loss)/Income
Basic
$ (0.69)
$ 0.75
$ (0.94)
$ 1.37
Diluted
(0.69)
0.75
(0.94)
1.36
Weighted Average Basic Shares Outstanding
11,611,238
11,728,510
11,600,594
11,759,127
Weighted Average Diluted Shares Outstanding
11,611,238
11,783,009
11,600,594
11,877,633
See Accompanying Notes to Unaudited Consolidated Financial Statements
 

</TABLE>

 

<TABLE>

 

<CAPTION>

 

GBC BANCORP SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'      EQUITY AND COMPREHENSIVE INCOME (LOSSES)
(Unaudited)
(In Thousands, Except per Share Amounts)
Accumulated
Other
Total
Common Stock
Retained
Deferred
Comprehensive
Comprehensive
Stockholders'
Shares
Amount
Earnings
Compensation
Income (Loss)
Income (Loss)
Equity


<c>
<c>
<c>
<c>
<c>
<c>
<c>
Balance at December 31, 1999
11,523
$ 57,289
$ 84,035
$ -
$ (8,286)
$ 133,038
Comprehensive Income
Net Income for the year
38,476
$ 38,476
38,476
Other Comprehensive Income, Net of Tax
Net Changes in Securities Valuation Allowance
18,178
18,178
18,178
Foreign Currency Translation Adjustment
(1)
(1)
(1)
Comprehensive Income
$ 56,654
Stock Issued for Executive Compensation
114
2,401
2,401
Stock Held by Executive Obligation Trust
(71)
(1,571)

1,571
-
Stock Issuance
161
2,975
2,975
Tax Benefit-Stock Options Exercised
960
960
Stock Repurchase
(169)
(3,732)
(3,732)
Cash Dividend- $0.39 per Share
(4,513)
(4,513)
Balance at December 31, 2000
11,558
$ 62,054
$ 114,266
$ 1,571
$ 9,891
$ 187,782
Comprehensive Income
Net Income for the year
32,602
$ 32,602
32,602
Other Comprehensive Income, Net of Tax
Net Changes in Securities Valuation Allowance
630
630
630
Net Changes in Investment Valuation Allowance
(2,188)
(2,188)
(2,188)
Net Changes in Foreign Currency Translation Adjustments
(1)
(1)
(1)
Comprehensive Income
$ 31,043
Stock Issued for Executive Compensation
-
-
-
Stock Held by Executive Obligation Trust
(26)
(903)

903
-
Stock Issuance
563
5,264
5,264
Tax Benefit-Stock Options Exercised
4,901
4,901
Stock Repurchase
(618)
(17,077)
(17,077)
Cash Dividend- $0.48 per Share
(5,595)
(5,595)
Balance at December 31, 2001
11,477
$ 71,316
$ 124,196
$ 2,474
$ 8,332
$ 206,318
Comprehensive Income
Net Loss for the Period
(10,916)
$ (10,916)
(10,916)
Other Comprehensive Income, Net of Tax
Net Changes in Securities Valuation Allowance
920
920
920
Net Changes in Investment Valuation Allowance
667
667
667
Net Changes in Foreign Currency Translation Adjustments
(9)
(9)
(9)
Comprehensive Income
$ (9,338)
Stock Issued for Executive Compensation
-
-
-
Stock Held by Executive Obligation Trust
18
371

(371)
-
Stock Issuance
44
1,041
1,041
Tax Benefit-Stock Options Exercised
133
133
Stock Repurchase
(2)
(57)
(57)
Cash Dividend- $0.24 per Share
(2,786)
(2,786)
Balance at June 30, 2002
11,537
$ 72,861
$ 110,437
$ 2,103
$ 9,910
$ 195,311
Disclosure of Reclassification Amount:
Ended 06/30/2002
Ended 12/31/2001

Net Change of Unrealized Gains (Losses) Arising During Period, Net of      Tax
Expense (Benefit) of $4,039 and $3,280 in 2002 and 2001 respectively
$ 7,503
$ 4,520
Less: Reclassification Adjustment for (Gains) Losses Included in Net      Income, Net of Tax
(Expense) Benefit of ($3,544) and ($2,823) in 2002 and 2001,      respectively.
(6,583)
(3,890)
Net Change of Unrealized (Losses) Gains on Securities, Net of Tax      (Benefit)
Expense of $495 and $457 in 2002 and 2001, respectively.
$ 920
$ 630
See Accompanying Notes to Unaudited Consolidated Financial Statements
 

</TABLE>

 

<TABLE>

 

<CAPTION>

GBC BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
For the Six Months Ended June 30,
(In Thousands)
2002
2001
OPERATING ACTIVITIES
Net (Loss)/Income
$ (10,916)
$ 16,152
Adjustments to Reconcile Net Income to Net Cash Provided      by Operating Activities:
Depreciation
746
630
Net (Accretion)/Amortization of Discount/Premiums on      Securities
1,238
(2,038)
Accretion of Discount on Subordinated Notes
65
65
Writedown on Real Estate Held for Investment
322
849
Write-off of Securities
-
190
Provision/(Benefit)      for Credit Losses
57,664
7,800
Amortization of Deferred Loan Fees
(2,799)
(2,144)
Gain on Sale of Securities Available-for-Sale
(10,127)
-
Gain      on Sale of Other Real Estate Owned
(7)
(439)
Gain      on Sale of Fixed Assets
-
(38)
Implementation of SFAS 133-Cumulative Effect of a Change      in Accounting Principle
-
(8,561)
Change of Fair Value of Derivative Instruments
(371)
7,115
Net Increase in Trading Securities
30
3,956
Net (Increase)/Decrease in Accrued Interest Receivable and      Other Assets
(4,491)
386
Net Increase/(Decrease) in Accrued Expenses and Other      Liabilities
(13,856)
9,596
Other, net
-
(2)
Net Cash Provided by Operating Activities
17,498
33,517
INVESTING ACTIVITIES
Purchases of Securities Available-for-Sale
(462,170)
(146,806)
Proceeds from Maturities of Securities Available-for-Sale
220,337
111,752
Proceeds from Maturities of Securities Held-to-Maturity
-
305
Proceeds from Sales of Securities Available-for-Sale
216,350
-
Net Increase in Loans and Leases
(78,687)
(115,674)
Purchase of Equity Interest in Limited Partnerships
(1,257)
(2,190)
Loss in Other Investments from Equity Accounting
4,692
384
Proceeds from Sales of Other Real Estate Owned
52
1,109
Purchases of Premises and Equipment
(1,106)
(802)
Proceeds from Sale/Disposal of Premises and Equipment
33
43
Purchase of Liberty Bank & Trust Net of Cash Acquired
(1,962)
-

Net Cash Used by Investing Activities
(103,718)
(151,879)
FINANCING ACTIVITIES
Net Inecrease/(Decrease) in Demand, Interest Bearing      Demand and Savings Deposits
99,929
(39,036)
Net (Decrease)/Increase in Time Certificates of Deposit
(23,516)
85,340
Borrowings from the Federal Home Loan Bank
95,000
88,000
Repayment of Federal Home Loan Bank
(10,000)
-
Repurchase of Company Stock
(57)
(12,401)
Cash Dividends Paid
(2,781)
(2,580)
Proceeds from Exercise of Stock Options/Sale of Stock
942
2,856
Issuance of Stock Held by Trust
100
903
Net Cash Provided by Financing Activities
159,617
123,082
Net Change in Cash and Cash Equivalents
73,397
4,720
Cash and Cash Equivalents at Beginning of Period
123,034
115,306
Cash and Cash Equivalents at End of Period
$ 196,431
$ 120,026
Supplemental Disclosures of Cash Flow Information
Cash Paid During This Period for
Interest
$ 26,485
$ 35,497
Income Taxes
1,010
1,115
Noncash Investing Activities
Loans Transferred to Other Real Estate Owned at Fair Value
$ 45
$ 18
See Accompanying Notes to Unaudited Consolidated Financial      Statements
</TABLE>

 

<TABLE>

 

<CAPTION>

 

Supplemental Disclosure for Acquisition of Liberty Bank & Trust
Assets Acquired:


<c>
<c>
Cash
$ 9,969
-
Securities Available-for-Sale
6,476
-
Loans and Leases
21,667
-
Premises and Equipment
171
-
Accrued Interest Receivable and Other Assets
250
-
Goodwill
4,855
-
Core Deposit Premium Intangible
964
-
44,352
-
Liabilities Assumed:
Deposits
32,240
-
Accrued Interest and Other Liabilities
181
-
32,421
-
Cash Paid for Common Stock
$ 11,931
-
See Accompanying Notes to Unaudited Consolidated Financial Statements
 

</TABLE>

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

1. Basis of Presentation
 

The accompanying unaudited consolidated financial statementshave been prepared in accordance with accounting principles generally acceptedin the United States of America for interim financial information and theinstructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they donot include all of the information and footnotes required by accountingprinciples generally accepted in the United States of America for completefinancial statements. In the opinion of management, all adjustments (consistingof normal recurring accruals) considered necessary for a fair presentation ofthe Company's financial condition and results of operations for the interimperiods presented in this Form 10-Q have been included. Operating results forthe interim periods are not necessarily indicative of financial results for thefull year. These unaudited consolidated financial statements should be read inconjunction with the audited consolidated financial statements and notes theretoincluded in the Company's Annual Report on Form 10-K for the year ended December31, 2001.

 

The preparation of financial statements in conformity withaccounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the amountsreported in the financial statements and accompanying notes. Actual resultscould differ from those estimates.

 

The financial statements include the accounts of GBC Bancorp(the "Bancorp") and its wholly owned subsidiaries, GBC VentureCapital, Inc., General Bank, (the "Bank"), a California statechartered bank, and the Bank's wholly owned subsidiaries, GBC InsuranceServices, Inc., GBC Investment & Consulting Company, Inc., GBC Real EstateInvestments, Inc., GBC Trade Services, Asia Limited and GB Capital Trust II. TheBank also holds 90% of the voting stock of GBC Leasing Company, Inc., whichamount is not material.

 

 

2. Change of Accounting Principle
 

On January 1, 2001, the Company adopted Statement ofFinancial Accounting Standards No. 133, "Accounting for DerivativeInstruments and Hedging Activities," ("Statement 133"). On thatdate a transition adjustment of $8,561,000 was recorded. The transitionadjustment is presented net of tax in the amount of $4,962,000 as a cumulativeeffect of a change of accounting principle in the Company's consolidatedstatements of income. The Company has received rights to acquire stock in theform of warrants, as an adjunct to its high technology banking relationships.Most of the warrants contain a cashless exercise provision thereby qualifyingthem as derivatives under Statement 133, requiring they be carried at fairvalue. The amount represents the difference between the carrying value of theCompany's derivatives and their fair value.

 

3. Commitments and Contingencies

 

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

 

The following is a summary of such commitments as of June 30,2002 and December 31, 2001:

 

<TABLE>

 

<CAPTION>

 

 
June 30,
December 31,
(In Thousands)
2002
2001


<c>
<c>
Undisbursed Commitments
$608,250
$592,469
Standby Letters of Credit
69,287
80,091
Bill of Lading Guarantees
897
487
Commercial Letters of Credits
79,454
63,578
 

</TABLE>

 

 

4. Pending Litigation
 

In the normal course of business, the Company is subject topending and threatened legal actions. After reviewing pending actions withcounsel, management believes that the outcome of such actions will not have amaterial adverse effect on the financial condition or the results of operationsof the Company.

 

5. Earnings /(Loss) Per Share
 

Basic earnings / (loss) per share is determined by dividingnet income/(loss) by the weighted average number of shares of common stockoutstanding, while diluted earnings per share is determined by dividing netincome by the weighted average number of shares of common stock outstandingadjusted for the dilutive effect of common stock equivalents. In the case of aloss from operations no common stock equivalents are included in the computationof the diluted loss per share. The following table sets forth basic and dilutedearnings/(loss) per share calculations:

<TABLE>

 

<CAPTION>

Three Months Ended June 30,
2002
2001
2002
2001
(Dollars in Thousands Except Share and per Share Data)


<c>
<c>
<c>
<c>
Net (Loss)/Income
$ (8,010)
$ 8,805
$ (10,916)
$ 16,152
Weighted-average shares:
Basic Shares Outstanding
11,611,238
11,728,510
11,600,594
11,759,127
Dilutive Effect Equivalent Shares Outstanding
-
54,499
-
118,506
Dilutive Shares Outstanding
11,611,238
11,783,009
11,600,594
11,877,633
Earnings per Share-Basic
($0.69)
$0.75
$ (0.94)
$ 1.37
Earnings per Share-Diluted
($0.69)
$0.75
$ (0.94)
$ 1.36
</TABLE>

The average anti-dilutive equivalent shares outstanding forthe three months and six months ended June 30, 2002 were 1,576,271 and1,574,661, respectively.

 

6. Quarterly Dividends
 

In May, 2002, the Company's Board of Directors declared aquarterly common stock cash dividend of $0.12 per share payable on or about July15, 2002 to shareholders of record on June 30, 2002.

 

7. Acquisition of Liberty Bank & Trust
 

On February 28, 2002, General Bank consummated its purchasetransaction of Liberty Bank and Trust Co. of Boston. The purchase transactionwas accounted for in accordance with SFAS No. 141, "BusinessCombinations". The assets acquired had a fair value of $44,352,000 and thefair value of liabilities assumed was $32,421,000. Goodwill in the amount of$4,855,000 and core deposit premium in the amount of $964,000 were initiallyrecognized in accordance with SFAS No. 141. SFAS No. 142, "Goodwill andOther Intangible Assets," requires that goodwill and intangible assets withindefinite useful lives no longer be amortized, but instead tested forimpairment at least annually in accordance with the provisions of SFAS No.142.SFAS No.142 also requires that intangible assets with definite useful lives beamortized over their respective estimated useful lives to their estimatedresidual values, and reviewed for impairment in accordance with SFAS No.144,"Accounting for the Impairment or Disposal of Long-lived Assets". Thecore deposit premium intangible is being amortized over a 5 year period,estimated to be the useful life.

 

 

8. Recent Accounting Developments

In June of 2001, the FASB issued SFAS No. 143,"Accounting for Asset Retirement Obligations," which requires that thefair value of a liability for an asset retirement obligation be recognized inthe period in which it is incurred if a reasonable estimate of fair value can bemade. The associated asset retirement costs would be capitalized as part of thecarrying amount of the long-lived asset and depreciated over the life of theasset. The liability is accreted at the end of each period through charges tooperating expense. If the obligation is settled for other than the carryingamount of the liability, the Company will recognize a gain or loss onsettlement. Two provisions of SFAS No.143 are effective for fiscal yearsbeginning after June 15, 2002. The adoption of this statement will have noimpact on the Company.

The Company adopted SFAS No. 144, "Accounting for theImpairment or Disposal of Long-lived Assets", effective January 1, 2002.The adoption of SFAS No. 144 did not have a significant impact on the Company'sfinancial statements.

In April 2002, the FASB issued SFAS No. 145, "Rescissionof FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, andTechnical Corrections" ("SFAS No. 145"). SFAS No.145 will rescindSFAS No. 4 which required all gains and losses from extinguishment of debt to beaggregated and, if material, classified as an extraordinary item, net of relatedincome tax effect. As a result of SFAS No. 145, the criteria in APB Opinion No.30, *Reporting the Results of Operations* - *Reporting the**Effects**of Disposal of a Segment of a Business, and Extraordinary*, *Unusual andInfrequently Occurring Events and Transactions* will now be used to classifythose gains and losses. SFAS No. 64 amended SFAS No. 4, and is no longernecessary because SFAS No. 4 has been rescinded.

SFAS No. 44 was issued to establish accounting requirementsfor the effects of transition to the provisions of the Motor Carrier Act of1980. Since the transition has been completed, SFAS No. 44 is no longernecessary. SFAS No. 145 amends SFAS No. 13 to require that certain leasemodifications that have economic effects similar to sale-leaseback transactionsbe accounted for in the same manner as sale-leaseback transactions.

SFAS No. 145 will be effective for fiscal years beginningafter May 15, 2002, with early adoption of the provisions related to therescission of SFAS No. 4 encouraged. Upon adoption, companies must reclassifyprior period items that do not meet the extraordinary item classificationcriteria in APB 30. It is not anticipated that the adoption of this statementwill have a material effect on the Company.

In July of 2002, the FASB issued SFAS No. 146,"Accounting for Costs Associated with Exit or Disposal Activities".  Commitment to a plan to exit an activity or dispose oflong-lived assets will no longer be enough to record a one-time charge for mostanticipated costs. Instead, companies will record exit or disposal costs whenthey are "incurred" and can be measured at fair value, and they willsubsequently adjust the recorded liability for changes in estimated cash flows.SFAS No. 146 revises accounting for specified employee and contract terminationsthat are part of restructuring activities. Under SFAS No. 146, a company willrecord a liability for a cost associated with an exit or disposal activity whenthat liability is incurred and can be measured at fair value. A liability isincurred when an event obligates the entity to transfer or use assets - in theFASB's more demanding language, when an event leaves the company little or nodiscretion to avoid transferring or using the assets in the future. Commitmentto an exit plan or a plan of disposal expresses only management's intendedfuture actions and, therefore, does not meet the requirement for recognizing aliability and the related expense. The provisions of SFAS No. 146 are effectiveprospectively for exit or disposal activities initiated after December 31, 2002. Management has not yet determined the impact, if any, of adoption of SFAS No.146.

 

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 

CRITICAL ACCOUNTING POLICIES

 

The discussion and analysis of our financial condition andresults of operations are based upon our consolidated financial statements,which have been prepared in accordance with accounting principles generallyaccepted in the United States of America. The preparation of these financialstatements requires management to make estimates and judgments that affect thereported amounts of assets and liabilities, revenues and expenses, and relateddisclosures of contingent assets and liabilities at the date of our financialstatements. Actual results may differ from these estimates under differentassumptions or conditions.

 

Accounting for the allowance for credit losses involvessignificant judgments and assumptions by management which have a material impacton the carrying value of net loans; management considers this accounting policyto be a critical accounting policy. The judgments and assumptions used bymanagement are based upon the evaluation of the loan portfolio, the economicenvironment, historical loan loss experience, collateral values and assessmentsof borrower's ability to repay, as described in "Allowance for CreditLosses".

 

Accounting for derivatives is in compliance with SFAS No.133,"Accounting for Derivative Instruments and Hedging Activities ("SFASNo. 133"). Implementation of SFAS No.133 has a material impact on thecarrying value of derivative instruments; management considers this accountingpolicy to be a critical accounting policy. The judgments and assumptions used bymanagement to mark to market derivatives are based on the most recentinformation available and other factors which are believed to be reasonableunder the circumstances as described in "Non-Interest Income","Non-Interest Expense" and "Cumulative Effect of a Change ofAccounting Principle".

 

 

 

OVERVIEW

 

The net loss for the second quarter of 2002 was $8,010,000,or $0.69 diluted loss per share compared to $8,805,000, or $0.75 dilutedearnings per share for the corresponding period of 2001. The $16,815,000decrease is the result of a $37,350,000 increase of the provision for creditlosses, partially offset by a $10,127,000 gain on sale of securities availablefor-sale.

 

For the six months ended June 30, 2002, the net loss totaled$10,916,000, a decrease of $27,068,000, from the net income of $16,152,000earned during the corresponding period of 2001. Diluted (loss)/earnings pershare for the six months ended June 30, 2002 was ($0.94), compared to the $1.36for the same period of 2001. The decrease in net income was the result of a$49,864,000 increase of the provision for credit losses, partially offset by the$10,127,000 gain on sale of securities available-for-sale and a $5,827,000increase in net interest income.

 

For the quarter ended June 30, 2002 and 2001, the annualizedreturn on average assets ("ROA") was (1.25)% and 1.72%, respectively,and the annualized return on average stockholders' equity ("ROE") was(15.9)% and 17.6%, respectively.

 

For the six months ended June 30, 2002 and 2001, the ROA was(0.88)% and 1.62%, respectively. For the six months ended June 30, 2002 and2001, the ROE was (10.7)% and 16.5%, respectively.

 

 

RESULTS OF OPERATIONS

 

 

Net Interest Income-Quarterly Results

 

For the quarter ended June 30, 2002 and 2001, net interestincome before the provision for credit losses increased $2,825,000 or12.6%, from $22,381,000 to $25,206,000. The growth was due to the increase ofaverage earning assets partially offset by a decrease of the net interest marginto 4.01% from 4.50%.

 

Total interest income for the quarter ended June 30, 2002 was$38,667,000, representing a $985,000, or 2.5%, decrease from the correspondingquarter of a year ago. The decrease was related to the decline of the yield onearning assets. For the quarter ended June 30, 2002 and 2001, the yield was6.16% and 7.98%, respectively. The 182 basis point decline is primarily due tothe reduction of the prime rate. For the quarter ended June 30, 2002 and 2001,the daily average prime rate of interest was 4.75% and 7.34%, respectively, or areduction of 259 basis points. The yield on loans and leases declined to 6.76%from 9.05%, for the quarter ended June 30, 2002 and 2001, respectively,representing a 229 basis point decline. Also contributing to the decline was theinclusion of an additional $447,000 of net interest recoveries and interestadjustments for the quarter ended June 30, 2001. Partially offsetting thedecline of the yield on loans and leases due to the 259 basis point decline ofthe average prime rate of interest was the fixed rate portion of the portfolioapproximating 25% of total average loans and leases. The yield on securitiesdeclined to 5.75% from 6.98% for the quarter ended June 30, 2002 and 2001,respectively, a decline of 123 basis points. The yield on federal funds sold andsecurities purchased under agreements to resell declined to 1.85% from 4.36% forthe quarter ended June 30, 2002 and 2001, respectively, mirroring the decline ofthe above-referenced average prime rate. The decline of the yield on averageearning assets to 6.16% from 7.98% was also the result of a reduced percentageof average loans and leases to total average earning assets. For the quarterended June 30, 2002 and 2001, this percentage was 48.1% and 52.2%, respectively.

 

Partially offsetting the reduced yield on average earningassets was the $526.1 million increase of average earning assets to $2,518.9million from $1,992.8 million for the quarter ended June 30, 2002 and 2001,respectively. This growth of average interest earning assets was comprised ofincreases of $172.6 million and $363.9 million for loans and leases andinvestment securities, respectively.

 

Total interest expense for the quarter ended June 30, 2002was $13,461,000, representing a $3,810,000, or 22.1%, decrease over thecorresponding quarter of a year ago. The decrease was due to a lower cost offunds. For the quarter ended June 30, 2002 and 2001, the cost of funds was 2.57%and 4.29%, respectively, representing a 172-basis point decline.

 

The decrease in the cost of funds was primarily the result ofa decrease in interest rates as explained above. The rates paid on allcategories of interest-bearing deposits decreased. For the three months endedJune 30, 2002 and 2001, rates paid on interest-bearing deposits were 2.12% and4.12%, respectively. The following table displays the average balance and ratespaid for the deposit products comprising the interest bearing deposits of theBank for the quarter ended as indicated:

<TABLE>

 

<CAPTION>

                                                                           For the Quarter Ended June 30,

(Dollars InThousands)                                        2002                                2001



<c>
<c>
Interest - bearing demand - Average balance
$545,904
$362,282
Rate
1.50%
2.08%
Savings - Average balance
102,368
67,350
Rate
1.21%
1.42%
Time certificates of deposit
of $100,000 or more - Average balance
938,456
871,620
Rate
2.57%
5.06%
Other time deposits - Average balance
142,045
178,513
Rate
2.24%
4.68%
</TABLE>

 

Partially offsetting the impact of a reduction of the ratespaid on interest bearing deposits was an increase of average interest bearingdeposits. For the quarter ended June 30, 2002 average interest bearing depositswere $1,728.8 million compared to $1,479.8 million for the corresponding periodof a year ago, representing a $249 million, or 16.8%, increase. The increase wasrepresented by all deposit categories except other time deposits which declined$36.5 million or 20.4%. Interest bearing demand reflected the largest increasegrowing $183.6 million, or 50.7%. The increase of average borrowings from theFederal Home Loan Bank ("FHLB") had the impact of increasing interestexpense from both a volume and rate perspective. The average FHLB borrowings was$333.2 million and $94.8 million for the quarter ended June 30, 2002 and 2001,respectively.

 

The increase in borrowings from the FHLB as a percentage ofaverage interest bearing liabilities, partially offset the impact of the declineof short-term interest rates. The cost of these borrowings was 4.13% and 5.03%for the quarter ended June 30, 2002 and 2001, respectively. This compares torates paid on deposits of 2.12% and 4.12%, for the quarter ended June 30, 2002and 2001, respectively.

 

The net interest spread, defined as the yield on earningassets less the rates paid on interest-bearing liabilities, decreased 10 basispoints to 3.59% for the quarter ended June 30, 2002, from 3.69% for thecorresponding period of a year ago. The decline is due to the differential ofthe reduction of the cost of funds compared to the reduction of the yield onearning assets.

 

The net interest margin, defined as the annualized differencebetween interest income and interest expense divided by average interest earningassets, decreased 49 basis points to 4.01% for the quarter ended June 30, 2002,from 4.50% for the corresponding period of a year ago. The decline of the netinterest margin was primarily due to the decline of the net interest spread anda reduction of the percentage of average interest-earning assets funded bynon-costing sources. For the quarter ended June 30, 2002 and 2001 thispercentage declined to 17.0% from 18.9%, respectively.

 

 

 

Net Interest Income-Six-Month Results

 

For the six months ended June 30, 2002, net interest incomebefore the provision for credit losses was $49,248,000, representing a$5,827,000, or 13.4%, growth over the corresponding period of a year ago.

 

Total interest income for the six months ended June 30, 2002was $75,804,000 compared to $79,310,000, a $3,506,000, or 4.4%, decline over thecorresponding period of a year ago. The decrease is the result of the decline ofthe yield on average interest earning assets. For the six months ended June 30,2002 and 2001, the yield was 6.22% and 8.23%, respectively. The 201 basis pointdecline is primarily due to the reduction of the prime rate of interest. For thesix months ended June 30, 2002 and 2001, the daily average prime rate was 4.75%and 7.98%, respectively, a 323 basis point decline. In addition, the yield wascompressed due to the decline of average loans and leases as a percentage oftotal average earning assets to 48.2% from 51.7%, for the six months ended June30, 2002 and 2001, respectively.

 

The 252 basis-point decline of the yield on loans and leasesfor the six months ended June 30, 2002 and 2001, from 9.37% to 6.85%, was lessthan the decline of the average prime rate again due to the fixed rate portionof the portfolio (approximately 25% of total average loans and leases). Theyield on securities declined to 5.85% from 7.15% for the quarter ended June 30,2002 and 2001, respectively, a decline of 130 basis points. The yield on federalfunds sold and securities purchased under agreements to resell declined to 1.86%from 5.14% for the six months ended June 30, 2002 and 2001, respectively,mirroring the decline of the above-referenced average prime rate of interest.

 

The impact of the declining yields on interest income waspartially offset by a $512.1 million growth of average earning assets to$2,456.0 million from $1,943.9 million for the six months ended June 30, 2002and 2001, respectively. This growth was mainly comprised of increases of $179.0million and $332.0 million for loans and leases and investment securities,respectively.

 

Total interest expense for the six months ended June 30, 2002and 2001, was $26,556,000 and $35,889,000, respectively, representing a$9,333,000, or 26.0%, decrease. This decrease is due to the 197 basis-pointdecrease of the cost of funds which decreased from 4.60% to 2.63% for the sixmonths ended June 30, 2001 and 2002. The decrease of the cost of funds wasprimarily the result of the decline of deposit rates caused by the movement ofthe prime rate of interest as discussed above. The rate paid on averageinterest-bearing deposits was 2.21% and 4.46% for the six months ended June 30,2002 and 2001, respectively.

 

Partially offsetting the decrease of the cost of funds wasthe growth of average interest-bearing liabilities, which increased $465.2million to $2,039.8 million from $1,574.6 million for the six months ended June30, 2002 and 2001, respectively. The growth of average interest bearingliabilities was primarily due to both a $234.9 million growth of interestbearing deposits and a $230.2 million growth of borrowings from the Federal HomeLoan Bank ("FHLB"). The growth of the FHLB borrowings also had theeffect of partially offsetting the decline of the cost of funds. The cost ofthis source of funding was 4.17% and 5.08% for the six months ended June 30,2002 and 2001, respectively.

 

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

 

<TABLE>

 

<CAPTION>

 

 

 

                                                                                   For the Six Months Ended June 30,

(Dollars InThousands)                                                    2002                        2001



<c>
<c>
Interest-bearing demand - Average balance
$ 527,314
$ 371,146
Rate
1.49%
2.60%   
Savings - Average balance
$101,491
$67,919
Rate
1.19%
1.75%   
Time certificates of deposit  
of $100,000 or more - Average balance
$ 930,211
$ 850,927
Rate
2.71%
5.38%   
Other time deposits - Average balance
$ 146,559
$ 180,705
Rate
2.39%
4.95%
</TABLE>

 

For the six months ended June 30, 2002 and 2001, the netinterest spread decreased to 3.60% from 3.63%, respectively.

 

For the six months ended June 30, 2002 and 2001, the netinterest-margin was 4.04% and 4.50%, respectively. The decline of the margin wasthe result of the reduced spread and a reduction of the percentage of averageinterest-earning assets funded by non-costing sources. For the six months endedJune 30, 2002 and 2001, this percentage declined to 17.3% from 19.4% percent,respectively.

 

Provision for Credit Losses

 

For the quarter ended June 30, 2002, there was a provisionfor credit losses of $39,150,000, compared to a $1,800,000 provision for creditlosses for the corresponding period of a year ago. Two commercial loans totaling$27 million involving two companies in the metal importing and trading businesswere charged-off in the 2nd quarter. As half of this amount was already providedfor in the 1st quarter, as previously announced, the remaining $13.5 million wasincluded in the provision for credit losses in the 2nd quarter. At this time, wecannot estimate the extent to which the collateral plus insurance coverage willprovide any recovery of this charge-off in the future.

 

At quarter-end, the review of existing problem loans resultedin $47.2 million of net charge-offs in the 2nd quarter, including the creditsdiscussed above, bringing net charge-offs for the year to $53.4 million. For thequarter, excluding the above charge-offs, the remaining $20.4 million of grosscharge-offs included $20.1 million of commercial loans. For the six months, theremaining $26.7 million of gross charge-offs (after allowing for the $27 millionof charge-offs noted above) were composed almost entirely of commercial loans.Of the charge-offs for the six months, $45.3 million were associated with loansoriginated by the New York loan production office.

 

As indicated above, a $39.2 million provision for creditlosses was recorded in the quarter, $13.5 million of which was associated withthe $27 million commercial loans in the metal importing and trading business.For the quarter, excluding the $13.5 million provision, the remaining $25.7million of provision was predominately for commercial loans. Of the $25.7million, $14.5 million was associated with a loan to a commodities exportcompany. At the beginning of August, 2002, the Company was informed that thisborrower had ceased operations. As a result, the loan was considered to be aloss under generally accepted accounting principles applicable to subsequentevents, and was charged off. Although there is collateral owned by the borrowerand the guarantors, the amount and timing of any subsequent recovery cannot beestimated. Of the $39.2 million provision for the 2nd quarter, $33.3 million wasassociated with loans originated by the New York loan production office. Therewere $24 million of loans outstanding originated by the New York loan productionoffice as of June 30, 2002.

 

For the six months ended June 30, 2002 and 2001, theprovision for credit losses was $57,664,000 and $7,800,000, respectively. Theincrease is mostly due to the problem commercial credits, as mentioned above.

 

The amount of the provision for credit losses is determinedby management and is based upon the quality of the loan portfolio, management'sassessment of the economic environment, evaluations made by regulatoryauthorities, historical loan loss experience, collateral values, assessment ofborrowers' ability to repay, and estimates of potential losses. Please refer tothe discussion "Allowance for Credit Losses", following.

 

 

Non-Interest Income

 

Non-interest income for the quarter ended June 30, 2002totaled $10,751,000, representing a $8,195,000, or 321%, increase over the$2,556,000 for the quarter ended June 30, 2001. This increase was primarily dueto the gain of $10,127,000 from the sale of $206.2 million of available-for-sale securities. Partially offsetting the securities gains was the increase of$1,217,000 in expense from other investments. Expense from other investments was$1,261,000 and $44,000 for the three months ended June 30, 2002 and 2001,respectively, of which $1,117,000 and $178,000, respectively, were expensesassociated with venture capital funds on the books of GBC Venture Capital.Expense from other investments is based on recording under the equity method theincome or loss as reported by the partnerships of which GBC Venture Capital is alimited partner and the Trust ("AFT") in which the Bank has a 10%beneficial interest.

 

For the six months ended June 30, 2002, non-interest incometotaled $9,248,000, representing a $2,633,000, or 39.8%, increase compared to$6,615,000 for the six months ended June 30, 2001. As was the case for thequarterly comparison, the increases of non-interest income was primarily due tothe gain of $10,127,000 from the sale of securities available-for-sale. Therewere no sales of securities during the six months ended June 30, 2001.Offsetting the above increase were the decreases of $2,154,000 in tradingrevenue and the increase of $4,445,000 of expense from other investments. Forthe six months ended June 30, 2002 and 2001, the trading revenue was$16,000 and $2,170,000, respectively. Trading account revenue is income earnedon securities classified as trading securities. The Company's subsidiary, GBCVenture Capital, ("VC") receives equity securities which it holds astrading securities primarily from two sources: a distribution from venturecapital funds in which it invests and the exercise of warrants acquired throughthe lending operations of General Bank, its affiliate. The recognition of fairvalue and ultimate disposition of these securities results in trading accountrevenue. For the six months ended June 30, 2002 and 2001, expense from otherinvestments was $4,624,000 and $179,000, respectively. As indicated above,expense is incurred by applying the equity method of accounting for the resultsof operation of the venture capital funds and AFT. For the six months ended June30, 2002 and 2001, the (expense)/income resulting from AFT was $(3,155,000) and$165,000, respectively. Included in the 2002 expense amount was the Company's10% share of a $28,364,000 impairment expense recorded by AFT for its fourthquarter ended December 31, 2001. The net expense recorded for the VentureCapital funds also increased from $344,000 for the six months ended June 30,2001 to $1,469,000 for the six months ended June 30, 2002.

 

 

Non-Interest Expense
 

For the three months ended June 30, 2002, non-interestexpense was $9,608,000, representing a $934,000, or 10.8%, increase over$8,674,000 for the corresponding period of a year ago. Non-interest expenseincludes the change in fair value of the Company's derivatives which areaccounted for under, Statement of Financial Accounting Standards No. 133,"Accounting for Derivative Instruments and Hedging Activities" ("SFASNo. 133"). (See also "Cumulative Effect of a change in AccountingPrinciple," following.) As of June 30, 2002, there was an increase of$467,000 of fair value compared to March 31, 2002; as of June 30, 2001 there wasa $388,000 loss of fair value compared to March 31, 2001. Excluding the changeof fair value of derivatives, non-interest expense increased by $1,789,000, or21.6%, for the quarter ended June 30, 2002 compared to the corresponding periodof a year ago, due to higher salaries and employee benefits and other expense.Salaries and employee benefits increased $218,000 primarily the result ofincreased staff, partially offset by a reduced incentive compensation expense.The full time equivalent employees was 404.4 and 347.5 for the quarter endedJune 30, 2002 and 2001, respectively. Other expense increased $736,000 primarilydue to increased professional services expense which increased $1,004,000 duringthe quarter ended June 30, 2002 compared to the corresponding period of a yearago. The increase is primarily due to the recording of $338,000 of expenserelating to the Liberty Bank acquisition and to professional services related toincreasing loan problems and to the implementation of the real estate investmenttrust.

 

For the quarter ended June 30, 2002, the Company's efficiencyratio, defined as non-interest expense excluding the change of fair value ofderivatives divided by the sum of net interest income plus non-interest incomeless trading revenue and income(loss) from venture capital fund investments andgain on sale of securities available-for-sale, increased to 37.2% from 33.0% forthe corresponding year-ago period.

 

For the six months ended June 30, 2002, non-interest expensewas $18,216,000, representing a $6,089,000, or 25.1%, decrease from $24,305,000reported for the corresponding period of a year ago. The decrease was primarilythe result of the change of the fair value of derivatives. As of June 30, 2002the net increase in fair value from December 31, 2001 was $371,000. Thiscompares to a decline of $7,115,000 from the value of the derivatives on January1, 2001 at which time SFAS No. 133 was implemented (See also "CumulativeEffect of a change in Accounting Principle", following). Excluding theeffect of the change in fair value of derivatives, non-interest expenseincreased $1,397,000, or 8.13%, for the six months ended June 30, 2002 comparedto the year ago period. With the exception of salaries and employee benefitswhich declined $76,000, all other categories of non-interest expense increased.The largest increase was furniture and equipment expense which increased$638,000. This increase was primarily due to implementation of a new accountingsystem for the Company's international transactions and the associated expensingof implementation costs amounting to $289,000. In addition, depreciation expenseincreased $125,000 as a result of various capital expenditure projects whoseeconomic benefit to the Company began in the second quarter of 2002.

 

For the six months ended June 30, 2002 and 2001, the Company'sefficiency ratio (defined as above) was 35.1% and 35.8%, respectively.

 

 

Provision for Income Taxes

 

For the quarter ended June 30, 2002, the benefit for incometaxes was $4,791,000. The tax benefit assumes a 35% federal income tax rate anda low income housing tax credit. There is no state tax benefit assumed. Thiscompares to a tax provision of $5,658,000 for the corresponding quarter of ayear ago representing an effective tax rate of 39.1%.

 

For the six months ended June 30, 2002, the tax benefit was$6,468,000 and assumes a 35% federal income tax rate and a low income housingtax credit. This compares to a tax provision of $6,741,000 for the correspondingsix months of a year ago representing an effective tax rate of 37.6%.

 

Cumulative Effect of a Change in Accounting Principle

 

On January 1, 2001, the Company adopted SFAS No. 133. On thatdate a transition adjustment of $8,561,000 was recorded. The transitionadjustment is presented net of tax in the amount of $4,962,000 as a cumulativeeffect of a change of accounting principle in the Company's statement of incomefor the six months ended June 30, 2001.

 

 

FINANCIAL CONDITION

 

As of June 30, 2002, total assets increased $172.3 million,or 7.3%, to $2,539.5 million from $2,367.2 million as of December 31, 2001. Thegrowth of total assets from December 31, 2001 to June 30, 2002 was primarilyfunded by $108.7 million growth of total deposits and by an $85.0 millionincrease of other borrowings from the Federal Home Loan Bank.

 

Stockholders' equity decreased to $195.3 million as of June30, 2002 from $206.3 million, as of December 31, 2001, a reduction of $11.0million, or 5.33%. The decline is primarily the result of the decline ofretained earnings due to the net loss for the six months ended June 30, 2002.

 

Loans and Leases

 

As of June 30, 2002, total loans and leases were $1,183.0million compared to $1,132.9 million as of December 31, 2001, representing a$50.1 million, or 4.4% increase. The increase was primarily due to growth of$88.4 million in the conventional real estate portfolio. Real estateconstruction loans also increased $23.4 million. Partially offsetting the abovegrowth was the decline in commercial loans of $60.8 million. The decline isrepresented by a reduction in the borrowing of the Company's existing customersand from charge-offs. For the six months ended June 30, 2002, $53.3 million ofcharge-offs have been from the commercial loan portfolio, representing virtuallyall of the total charge-offs of $53.6 million, as discussed in a previoussection.

 

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

<TABLE>

 

<CAPTION>

 

 

June 30, 2002
December 31, 2001
(In Thousands)
Amount
Percentage
Amount
Percentage


<c>
<c>
<c>
<c>
Commercial
$ 434,910
36.76%
$ 495,681
43.76%
Real Estate - Construction
258,210
21.83%
234,860
20.73%
Real Estate - Conventional
452,966
38.29%
364,567
32.18%
Installment
233
0.02%
101
N/A
Other Loans
19,170
1.62%
20,345
1.80%
Leveraged Leases
17,503
1.48%
17,335
1.53%
Total
$ 1,182,992
100.00%
$1,132,889
100.00%
N/A = Percentage less than 0.01
</TABLE>

 

The two largest concentrations in commercial loans continueto be the apparel/textile industry and the computer/electronic goods industry(excluding early-stage technology companies). The approximate amounts ofcommercial loans for these two industry segments as of June 30, 2002 are $60million and $63 million, respectively. There are $47 million of loans to earlystage high technology companies. Of the $27.7 million of non-accrual commercialloans as of June 30, 2002, $2.8 million, $0.7 million and $3.9 million were fromthe apparel/textile, computer/electronic goods industries and early stage hightechnology companies, respectively.

 

Also included in commercial loans are five credits that areparticipations in facilities to Indian casinos that are construction loans to berepaid under a mini-perm facility from the cash flow of the casinos. The totalcommitments were $43.4 million as of June 30, 2002 and the total loansoutstanding were $35.5 million. In July of 2002, one of the facilities prepaidtheir borrowings. The outstanding balance as of June 30, 2002 was $4,942,000. Also in July of 2002, a participation with a 5 million total commitment wasapproved.  The Bank does not intend to participate in additional Indiancasino loans.

 

Conventional real estate loans and real estate-constructionloans reflected an increase of $88.4 million and $23.4 million, respectively.The following table sets forth the break down by type of collateral forconstruction and conventional real-estate loans as of June 30, 2002 and December31, 2001:

<TABLE>

 

<CAPTION>

6/30/2002
12/31/2001
(In Thousands)
Conventional
Conventional
Construction
Real Estate
Construction
Real Estate
Project Type
Loans
Percentage
Loans

Percentage
Loans
Percentage
Loans

Percentage


<c>
<c>
<c>
<c>
<c>
<c>
<c>
<c>
Residential:
Single-Family
$ 93,481
37%
$ 15,537
3%
$ 104,427
45%
$ 13,422
4%
Townhouse
3,861
1
497
0
6,589
3
506
-
Condominums
93,524
36
1,824
1
91,998
39
3,483
1
Multi-Family
9,667
4
57,532
13
17,026
7
25,162
7
Land Development
42,327
16
-
-
4,952
2
272
-

Total Residential
$ 242,860
94%
$ 75,390
17%
$ 224,992
96%
$ 42,845
12%

Non-Residential:

Warehouse
$ -
0%
$ 53,786
12%
$ -
-%
$ 46,824
13%
Retail Facilities
2,578
1
87,842
19
481
-
84,532
23
Industrial Use
-
-
52,053
12
-
-
30,389
8
Office
7,463
3
56,119
12
7,938
3
43,555
12
Hotel and Motel
964
0
57,658
13
-
-
56,239
15
Other
4,345
2
70,118
15
1,449
1
60,183
17

Total Non-Residential
$ 15,350
6%
$ 377,576
83%
$ 9,868
4%
$ 321,722
88%

Total
$ 258,210
100%
$ 452,966
100%
$ 234,860
100%
$ 364,567
100%
 

</TABLE>

 

The increase in land development construction lending isprimarily due to a $29.0 million disbursement on a new loan during the secondquarter of 2002.

As of June 30, 2002, the Company had an ownership interest intwo leveraged leases of Boeing 737 aircraft leased by two major U.S. airlines.As of June 30, 2002, the total investment included as part of loans and leaseswas $17.2 million. Such amount includes an estimated residual value of $13.1million. The value of the leveraged leases may be affected in the future by theprofitability of the airline industry and of the two airlines, in particular.Were either of the two airlines to default on the above-described leveragedleases, the Company's investments would be substantially at risk due to the debtoutstanding and the current depressed market values of such aircraft. The leaseswere acquired in 1996 and 1997, with terms of 16 years and 19 years,respectively.

 

Non-Performing Assets

 

A certain degree of risk is inherent in the extension ofcredit. Management has credit policies in place to minimize the level of loanlosses and non-performing loans. The Company performs a quarterly assessment ofthe credit portfolio to determine the appropriate level of the allowance.Included in the assessment is the identification of loan impairment. A loan isidentified as impaired when it is probable that interest and principal will notbe collected according to the contractual terms of the loan agreement. Loanimpairment is measured by estimating the expected future cash flows anddiscounting them at the respective effective interest rate or by valuing theunderlying collateral.

 

The Company has a policy of classifying loans (including animpaired loan) which are 90 days past due as to principal and/or interest asnon-accrual loans unless management determines that the fair value of underlyingcollateral is substantially in excess of the loan amount or other circumstancesjustify treating the loan as fully collectible. After a loan is placed onnon-accrual status, any interest previously accrued, but not yet collected, isreversed against current income. A loan is returned to accrual status only whenthe borrower has demonstrated the ability to make future payments of principaland interest as scheduled, and the borrower has demonstrated a sustained periodof repayment performance in accordance with the contractual terms. Interestreceived on non-accrual loans generally is either applied as principal reductionor reported as recoveries on amounts previously charged off, according tomanagement's judgment as to the collectability of principal.

 

The following table provides information with respect to theCompany's past due loans, non-accrual loans, restructured loans and other realestate owned, net, as of the dates indicated:

<TABLE>

 

<CAPTION>

 

(IN THOUSANDS)**June 30, 2002**December 31, 2001


<c>
<c>
Loans 90 Days or More Past Due and Still Accruing
$ -
$ 1,730
Non-accrual Loans
23,667
24,940
Total Past Due Loans
23,667
26,670
Restructured Loans (on Accrual Status)
1,513
1,706
Total Non-performing and Restructured Loans
25,180
28,376
Other Real Estate Owned, Net
383
383**Total Non-performing Assets**$ 25,563**$ 28,759
 

</TABLE>

 

Total non-performing assets decreased to $25.6 million, as ofJune 30, 2002, from $28.8 million, as of December 31, 2001, representing a $3.2million, or 11.1%, decrease.

 

Loans 90 Days or More Past Due

 

As of June 30, 2002, there were no loans 90 days or more pastdue and still accruing.

 

 

Non-Accrual Loans

 

The non-accrual loans declined $1.2 million, or 4.8%, to$23.7 million as of June 30, 2002 from $24.9 million as of December 31, 2001.The reduction was primarily due to charge-offs.

 

The following table identifies the components of the increasein non-accrual loans during the six months ended June 30, 2002:

<TABLE>

 

<CAPTION>

 
**Non-Accrual Loans (In Thousands)**
 


<c>
Balance, December 31, 2001
$24,940
Add: Loans placed on non-accrual
61,376
Less: Charge-offs
(53,637)
Returned to accrual status
(2,080)
Repayments
(6,887)
Transfer to OREO
(45)
Balance, June 30, 2002**$23,667
 

</TABLE>

 

The following table breaks out the Company's non-accrualloans by category as of June 30, 2002 and December 31, 2001:

 

<TABLE>

 

<CAPTION>

 

(IN THOUSANDS)**June 30, 2002**December 31, 2001


<c>
<c>
Commercial
$ 13,166
$ 15,093
Real Estate-Construction
9,397
9,738
Real Estate-Conventional
1,104
109**Total**$23,667**$24,940
</TABLE>

 

The outstanding non-accrual commercial loans are comprisedprimarily of trade financing loans.

 

 

Restructured Loans

 

As of June 30, 2002, the balance of restructured loans was$1.5 million compared to $1.7 million as of December 31, 2001. A loan iscategorized as restructured if the original interest rate on such loan, therepayment terms, or both, are modified due to a deterioration in the financialcondition of the borrower. Restructured loans may also be put on a non-accrualstatus in keeping with the Bank's policy of classifying loans which are 90 dayspast due as to principal and/or interest. Restructured loans which arenon-accrual loans are not included in the balance of restructured loans. As ofJune 30, 2002, there was one restructured loan with a balance of $52,000 onnon-accrual status. The weighted average yield of the restructured loans as ofJune 30, 2002 was 10.30%.

 

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

Other Real Estate Owned

As of June 30, 2002 and December 31, 2001, other real estateowned ("OREO"), net of valuation allowance of $0.4 million, totaled$0.4 million and consisted of one property. On July 17, 2002, the property wassold and a gain on the sale of OREO was recognized in the amount of $101,000 andwill be reflected in the third quarter earnings.

 

During the first quarter of 2002, there was a foreclosure ona retail market, the collateral on a Small Business Administration loan, whichwas subsequently sold for a $7,000 gain on sale of OREO. Net gains on sale ofOREO are included as a reduction of OREO expense, net, on the statements ofincome.

 

 

Impaired Loans

A loan is identified as impaired when it is probable thatinterest and principal will not be collected according to the contractual termsof the loan agreement. Loan impairment is measured by estimating the expectedfuture cash flows and discounting them at the respective effective interest rateor by valuing the underlying collateral. The following table discloses pertinentinformation as it relates to the Company's impaired loans as of the datesindicated:

<TABLE>

 

<CAPTION>

(IN THOUSANDS)
June 30, 2002
Dec. 31, 2001


<c>
<c>
Recorded Investment with Related Allowance
$15,778
$28,734
Recorded Investment with no Related Allowance
-
273
Total Recorded Investment
15,778
29,007
Allowance for Impaired Loans
(2,885)
(5,224)
Net Recorded Investment in Impaired Loans
$12,893
$23,783
</TABLE>

 

The average balance of impaired loans before the allowancewas $32.2 million for the six months ended June 30, 2002 and $23.5 million forthe year ended December 31, 2001.

 

For the six months ended June 30, 2002 and 2001, interestincome recognized on impaired loans was $0 and $147,000, respectively. 

 

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

 

 

Allowance for Credit Losses

 

As of June 30, 2002, the balance of the allowance for creditlosses was $27.9 million, representing 2.36% of outstanding loans and leases.This compares to an allowance for credit losses of $23.7 million as of December31, 2001, representing 2.09% of outstanding loans and leases.

 

The table below summarizes the activity in the allowance forcredit losses (which amount includes the allowance on impaired loans) for thesix months ended as indicated:

<TABLE>

 

<CAPTION>

 

 

(In Thousands)**June 30, 2002**June 30, 2001


<c>
<c>
Balance, Beginning of Period
$23,656
$19,426
Provision for Credit Losses
57,664
7,800
Charge-offs
(53,637)
(5,348)
Recoveries
247
917
Balance, End of Period
$27,930
$22,795
</TABLE>

 

 

As of June 30, 2002, the allowance represents 110.9% and118.0% of non-performing loans and of non-accrual loans, respectively. As ofDecember 31, 2001, the allowance represented 83.4% and 94.9% of non-performingand of non-accrual loans, respectively. Non-performing loans are reviewedindividually and management believes they are adequately provided for as of June30, 2002.

 

The provision for credit losses is the amount required tomaintain an allowance for credit losses that is adequate to cover probablecredit losses related to specifically identified loans as well as probablecredit losses inherent in the remainder of the loan and lease portfolio.Management evaluates the loan portfolio, the economic environment, historicalloan loss experience, collateral values and assessments of borrowers' ability torepay, in order to determine the amount of the allowance for credit losses. Thebalance of the allowance for credit losses is an accounting estimate of probablebut unconfirmed incurred losses in the Bank's loan portfolio as of June 30,2002. Such an amount is based on ongoing, quarterly assessments of the probableestimated losses inherent in the loan and lease portfolio, and to a lesserextent, unused commitments to provide financing. The Company's methodology forassessing the appropriateness of the allowance consists primarily of the use ofa formula allowance.

 

This formula allowance is calculated by applying loss factorsto outstanding loans and leases and certain unused commitments, in each casebased on the internal risk rating of such loans, pools of loans, leases orcommitments. Changes in risk rating of both performing and nonperforming loansaffect the amount of the formula allowance. Loss factors are based on theCompany's historical loss experience and may be adjusted for significant factorsthat, in management's judgement, affect the collectibility of the portfolio asof the evaluation date. Loss factors are described as follows:

 

- Problem graded loan loss factors represent        percentages which have proven accurate over time. Such factors are        checked against and supported by migration analysis which tracks loss        experience over a five-year period.

 

- Pass graded loan loss factors are based on the        approximate average annual net charge-off rate over an eight-year        period.

 

- Pooled loan loss factors (not individually graded        loans) are based on probable net charge-offs. Pooled loans are loans and        leases that are homogeneous in nature, such as residential mortgage        loans and small business loans.

 

Management believes that the allowance for credit lossesapproximates the probable but unconfirmed losses existing in the Bank's loanportfolio, as of June 30, 2002.

 

 

Securities

 

The Company classifies its securities as held-to-maturity,trading or available-for-sale. Securities classified as held-to-maturity arethose that the Company has the positive intent and ability to hold untilmaturity. These securities are carried at amortized cost. As of June 30, 2002and December 31, 2001, there were no securities held-to-maturity.

 

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

 

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

 

As of June 30, 2002, the Company recorded net unrealizedgains of $17,617,000 on its available-for-sale portfolio. Accumulated othercomprehensive income includes $11,451,000, representing the net unrealizedgains, net of tax.

 

The amortized cost, gross unrealized gains, gross unrealizedlosses and fair value of securities at June 30, 2002 and December 31, 2001 wereas follows:

<TABLE>

 

<CAPTION>

 

Gross
Gross
(In Thousands)
Amortized
Unrealized
Unrealized
Fair
June 30, 2002
Cost
Gains
Losses
Value


<c>
<c>
<c>
<c>**Securities Available-for-Sale
State and Municipal Securities
$ 2,225
$ 18
$ -
$ 2,243
U. S. Treasuries
1,078
12
-
1,090
U.S. Government Agencies
202,034
1,003
-
203,037
Mortgage Backed Securities
502,368
6,913
124
509,157
Commercial Mortgage Backed Securities
101,085
2,560
71
103,574
Corporate Notes
35,091
649
-
35,740
Collateralized Mortgage Obligations
215,463
5,347
63
220,747
Asset Backed Securities
44,776
1,373
-
46,149
FHLB Stock
17,548
-
-
17,548
Total
$1,121,668
$17,875
$ 258
$1,139,285**Trading Account Securities
Equity Issues
$ -
$ -
$ -
$ 1
Total
$ -
$ -
$ -
$ 1
Gross
Gross
(In Thousands)
Amortized
Unrealized
Unrealized
Fair
December 31, 2001
Cost
Gains
Losses
Value**Securities Available-for-Sale
U.S. Government Agencies
$ 100,877
$ 1,614
$ 237
$ 102,254
Mortgage Backed Securities
302,827
2,212
1,963
303,076
Commercial Mortgage Backed Securities
166,332
4,879
848
170,363
Corporate Notes
87,530
4,446
-
91,976
Collateralized Mortgage Obligations
308,299
6,176
697
313,778
Asset Backed Securities
102,334
2,588
-
104,922
FHLB Stock
12,620
-
-
12,620
Total
$ 1,080,819
$ 21,915
$ 3,745
$ 1,098,989**Trading Account Securities
Equity Issues
$ -
$ -
$ -
$ 31
Total
$ -
$ -
$ -
$ 31
 

 

 

</TABLE>

 

As of June 30, 2002, the fair value of total securitiesavailable-for-sale was $1,139.3 million, of which $35.7 million is unsecuredcorporate debt, as shown below (dollars in millions):

<TABLE>

 

<CAPTION>

 



<c>
CIT Group
$ 10.2
Countrywide Credit
2.1
Daimler Chrysler
6.2
General Motor
1.0
Heller Financial
10.1
Lehman Brothers
6.1
Total
$ 35.7
</TABLE>

 

As of June 30, 2002, trading securities totaled $1,000 andwere comprised of one equity issue and is a non-interest bearing instrument.

 

There were sales of securities from the available-for-saleportfolio with a book value of $206.2 million for proceeds of $216.3 millionduring the six months ended June 30, 2002. The related gains on sale were$10,127,000. The weighted average yield on the securities sold was 6.43%. Therewere no sales of securities held-to-maturity during the six months ended June30, 2002. There were no sales of securities of available-for-sale or securitiesheld-to-maturity during the six months ended June 30, 2001.

 

Other Investments

 

As of June 30, 2002, other investments totaled $9.5 million.The balance includes various venture capital funds that invest in technologycompanies. As of June 30, 2002, undisbursed commitments to invest in thesevarious funds totaled $5.4 million. In addition to seeking an appropriate returnfrom such investments, the Company seeks to use the investments to increase itshigh technology banking business. Also included in other investments is a 10%equity ownership in the beneficial interest of an aircraft trust("AFT"). As of June 30, 2002, the investment totaled $2.9 millionwhich amount excludes an accumulated other comprehensive loss amount of $2.3million. The other comprehensive loss balance reduces the carrying value of theCompany's investment to $570,000. AFT owns 36 aircraft on lease to differentlessees in various countries. The Company accounts for this investment using theequity method. The Company recorded a $144,000 expense related to AFT in the 2ndquarter, 2002.

 

Finally, included in other investments are investments madeby the Bank in corporations responsible for lending activities qualifying under,among other things, the Community Reinvestment Act. These investments areaccounted for by the cost method or equity method, as appropriate.

 

 

Deposits

 

The Company's deposits totaled $1,936.6 million as of June30, 2002, representing a $108.7 million, or 5.9%, increase from total depositsof $1,827.9 million as of December 31, 2001. The increase was primarily due tointerest bearing demand deposits which grew $112.8 million. This increase waspartially offset by a $20.6 million decrease in other time deposits.

 

There were no brokered deposits outstanding as of June 30,2002 and December 31, 2001. The Company believes that the majority of itsdeposit customers have strong ties to the Bank. Although the Company has asignificant amount of time deposits of $100,000 or more having maturities of oneyear or less, in the past the depositors have generally renewed their depositsat their maturity. Accordingly, the Company believes its deposit source to bestable.

 

The maturity schedule of time certificates of deposit of$100,000 or more, as of June 30, 2002, is as follows:

 

<TABLE>

 

<CAPTION>

 

(In Thousands)
Amount


<c>
3 Months or Less
$527,689
Over 3 Months Through 6 Months
171,059
Over 6 Months Through 12 Months
214,358
Over 12 Months
15,452**Total**$928,558
</TABLE>

 

The State of California has advised the Bank that itsdeposits totaling $125.0 million as of June 30, 2002 will not be renewed as theymature. The deposits all mature in the third quarter of 2002. As the Company had$151.5 million of federal funds sold and securities purchased under agreementsto resell and $1,139 million of securities available-for-sale as of June 30,2002, it is not anticipated there will result any significant change to theCompany's liquidity.

 

 

Other Borrowings

 

As of June 30, 2002, the Company has two sources ofoutstanding borrowings.

 

The Bank has obtained advances from the Federal Home LoanBank of San Francisco (the "FHLB") totaling $337.4 million, as of June30, 2002. The advances are under an existing line of credit whereby the FHLB hasgranted the Bank an amount equal to 25% of its assets.

 

The maturity schedule of outstanding advances as of June 30,2002 is as follows:

<TABLE>

 

<CAPTION>

(In Thousands)
Amount
Fixed Rate of Interest


<c>
<c>
3 Months or Less
$ 5,000
5.61%
Over 3 Months Through 12 Months
65,000
4.70% - 5.25%
Over 1 Year Through 3 Years
267,400
2.89% - 5.25%
Total
$ 337,400
2.89% - 5.61%
</TABLE>

 

The total outstanding advances of $337.4 million as of June30, 2002 have a composite fixed rate of interest of 4.07%

 

Subordinated debt is comprised of a $40 million publicoffering issuance of 8.375% subordinated notes due August 1, 2007. Proceeds of$38.7 million, net of underwriting discount of $1.3 million, were received bythe Company at date of issuance. The discount is amortized as a yield adjustmentover the 10-year life of the notes.

 

Capital Resources

 

Stockholders' equity totaled $195.3 million as of June 30,2002, a decrease of $11.0 million, or 5.3%, from $206.3 million, as of December31, 2001. The decline was primarily the result of the net loss recorded for thesix months ended June 30, 2002.

In February, 2001, the Board of Directors authorized a stockrepurchase program approving the buy-back of up to 500,000 shares of the Company'sstock. As of June 30, 2002, 405,000 shares had been repurchased at an averagecost of $26.83 per share for a total of $10.9 million. There is an additional300,000 share program authorized by the Board after the above program iscompleted.

 

Capital ratios for the Company and for the Bank were asfollows as of the dates indicated:

<TABLE>

 

<CAPTION>

 
 
Well-Capitalized
June 30,
December 31, 
Requirements
2002
2001**

<c>
<c>
<c>**GBC Bancorp   
Tier 1 Leverage Ratio
5%
6.98%
8.73%
Tier 1 Risk-Based Capital Ratio
6%
10.25%
10.70%
Total Risk-Based Capital Ratio
10%
13.32%
14.09%**General Bank   
Tier 1 Leverage Ratio
5%
7.46%
9.25%
Tier 1 Risk-Based Capital Ratio
6%
10.99%
11.38%
Total Risk-Based Capital Ratio
10%
12.25%
12.63%
</TABLE>

 

For the quarter ended June 30, 2002, the ratio of theCompany's average stockholders' equity to average assets was 7.87%. For the yearended December 31, 2001, this ratio was 9.60%.

 

 

GBC Bancorp Executive Obligation Trust (The"Trust")

 

In the first quarter, 2000, the Company entered into a trustagreement providing for the Trust with Union Bank of California as trustee.There were no transactions involving the Trust for the quarter ended June 30,2002.

 

In the consolidated financial statements, the shares held inthe Trust are reduced from common stock and included as a separate component ofstockholders' equity captioned "deferred compensation". As of June 30,2002, this amount was $2,103,000, representing the cost of the 79,001 sharesheld in the Trust.

 

Liquidity

 

Liquidity measures the ability of the Company to meetfluctuations in deposit levels, to fund its operations and to provide forcustomers' credit needs. Liquidity is monitored by management on an on-goingbasis. Asset liquidity is provided by cash and short-term financial instrumentswhich include federal funds sold and securities purchased under agreements toresell, unpledged securities held to maturity maturing within one year andunpledged securities available-for-sale. These sources of liquidity amounted to$800.8 million, or 31.5% of total assets, as of June 30, 2002, compared to$823.9 million, or 34.8% of total assets, as of December 31, 2001.

 

To further supplement its liquidity, the Company hasestablished federal funds lines with correspondent banks and three masterrepurchase agreements with major brokerage companies. The Company does notanticipate any further funding from the FHLB. Notwithstanding this, managementbelieves its liquidity sources to be stable and adequate.

 

As of June 30, 2002, total loans and leases represented 61.1%of total deposits. This compares to 62.0% as of December 31, 2001.

 

The liquidity of the parent company, GBC Bancorp, isprimarily dependent on the payment of cash dividends by its subsidiary, GeneralBank, subject to the limitations imposed by the Financial Code of the State ofCalifornia. For the six months ended June 30, 2002, the Bank declared cashdividends of $2.8 million to GBC Bancorp.

 

"GAP" measurement

 

While no single measure can completely identify the impact ofchanges in interest rates on net interest income, one gauge of interest ratesensitivity is to measure, over a variety of time periods, contractualdifferences in the amounts of the Company's rate sensitive assets and ratesensitive liabilities. These differences, or "gaps", provide anindication of the extent that net interest income may be affected by futurechanges in interest rates. However, these contractual "gaps" do nottake into account timing differences between the repricing of assets and therepricing of liabilities.

 

A positive gap exists when rate sensitive assets exceed ratesensitive liabilities and indicates that a greater volume of assets thanliabilities will reprice during a given period. This mismatch may enhanceearnings in a rising rate environment and may inhibit earnings when ratesdecline. Conversely, when rate sensitive liabilities exceed rate sensitiveassets, referred to as a negative gap, it indicates that a greater volume ofliabilities than assets will reprice during the period. In this case, a risinginterest rate environment may inhibit earnings and declining rates may enhanceearnings.

 

"Gap" reports originated as a means to providemanagement with a tool to monitor repricing differences, or "gaps",between assets and liabilities repricing in a specified period, based upon theirunderlying contractual rights. The use of "gap" reports is thuslimited to a quantification of the "mismatch" between assets andliabilities repricing within a unique specified timeframe. Contractual"Gap" reports cannot be used to quantify exposure to interest ratechanges because they do not take into account timing differences betweenrepricing assets and liabilities, and changes in the amount of prepayments.

 

As of June 30, 2002, there was a cumulative one-year negative"gap" of $574.6 million, down from $663.6 million as of December 31,2001.

 

The following table indicates the Company's interest ratesensitivity position as of June 30, 2002, and is based on contractualmaturities. It may not be reflective of positions in subsequent periods:

 

<TABLE>

 

<CAPTION>

June 30, 2002
INTEREST SENSITIVITY PERIOD
0 to 90
91 to 365
Over 1 Year
Over
Non-Interest
(In Thousands)
Days
Days
to 5 Years
5 Years
Earning/Bearing
Total


<c>
<c>
<c>
<c>
<c>
<c>
Earning Assets
Securities Available-for-Sale
$ 151,729
$ 21,477
$ 87,637
$ 878,442
$ -
$ 1,139,285
Trading Account Securities
-
-
-

1
1
Federal Funds Sold & Securities
Purchased Under Agreement to Resell
151,500
-
-
-
-
151,500
Loans and Leases (1) (2)
844,324
16,446
135,530
163,025
-
1,159,325
Non-Earning Assets (2)
-
-
-
-
89,339
89,339
Total Earning Assets
$ 1,147,553
$ 37,923
$ 223,167
$ 1,041,467
$ 89,340
$ 2,539,450
Source of Funds for Assets
Deposits:
Demand - N/B
$ -
$ -
$ -
$ -
$ 225,001
$ 225,001
Interest Bearing Demand
551,509
-
-
-
-
551,509
Savings
92,246
-
-
-
-
92,246
TCD'S Under $100,000
71,225
62,026
6,015
-
-
139,266
TCD'S $100,000 and Over
527,689
385,417
15,452
-
-
928,558
Total Deposits
$ 1,242,669
$ 447,443
$ 21,467
$ -
$ 225,001
$ 1,936,580
Borrowings from the Federal Home Loan Bank
$ 5,000
$ 65,000
$ 267,400
$ -
$ 337,400
Subordinated Debt
-
-
-
39,334
-
39,334
Other Liabilities
-
-
-
-
30,825
30,825
Stockholders' Equity
-
-
-
-
195,311
195,311
Total Liabilities and
Stockholders' Equity
$ 1,247,669
$ 512,443
$ 288,867
$ 39,334
$ 451,137
$ 2,539,450
Interest Sensitivity Gap
$ (100,116)
$ (474,520)
$ (65,700)
$ 1,002,133
$ (361,797)
Cumulative Interest Sensitivity
Gap
($100,116)
($574,636)
($640,336)
$361,797
-
Gap Ratio (% of Total Assets)
-3.9%
-18.7%
-2.6%
39.5%
-14.3%
Cumulative Gap Ratio
-3.9%
-22.6%
-25.2%
14.3%
0.0%
(1) Loans and leases are before unamortized deferred loan fees and      allowance for credit losses.
(2) Non-accrual loans are included in non-earning assets.
 

</TABLE>

 

Effective asset/liability management includes maintainingadequate liquidity and minimizing the impact of future interest rate changes onnet interest income. The Company attempts to manage its interest ratesensitivity on an on going basis through the analysis of the repricingcharacteristics of its loans, securities, and deposits, and managing theestimated net interest income volatility by adjusting the terms of itsinterest-earning assets and liabilities, and through the use of derivatives asneeded.

 

 

Item 3. Qualitative and Quantatative Disclosures aboutMarket Risk
 

Market risk

 

Market risk is the risk of financial loss arising fromadverse changes in market prices and interest rates. The Company's market riskis inherent in its lending and deposit taking activities to the extent ofdifferences in the amounts maturing or degree of repricing sensitivity. Adversechanges in market prices and interest rates may therefore result in diminishedearnings and ultimately an erosion of capital.

 

Since the Company's profitability is affected by changes ininterest rates, management actively monitors how changes in interest rates mayaffect earnings and ultimately the underlying market value of equity. Managementmonitors interest rate exposure through the use of three basic measurement toolsin conjunction with established risk limits. These tools are the expectedmaturity gap report, net interest income volatility and market value of equityvolatility reports. The gap report details the expected maturity mismatch or gapbetween interest earning assets and interest bearing liabilities over aspecified timeframe. The expected gap differs from the contractual gap reportshown earlier in this section by adjusting contractual maturities for expectedprepayments of principal on loans and amortizing securities as well as theprojected timing of repricing non-maturity deposits. The following table showsthe Company's financial instruments that are sensitive to changes in interestrates categorized by their expected maturity, as of June 30, 2002:

<TABLE>

 

<CAPTION>

Expected Maturity Date
As of June 30, 2002
0 to 90
91 to 365
Over 1 Year
Over
(In Thousands)
Days
Days
to 5 Years
5 Years
Total


<c>
<c>
<c>
<c>
<c>
Interest-sensitive Assets:
Securities Available-for-Sale
$ 233,975
$ 164,193
$ 548,384
$ 192,733
$ 1,139,285
Federal Funds Sold & Securities
Purchased Under Agreements to Resell
151,500
-
-
-
151,500
Loans and Leases (1)
844,324
16,446
135,530
163,025
1,159,325
Total Interest-earning Assets
$ 1,229,799
$ 180,639
$ 683,914
$ 355,758
$ 2,450,110
Interest-sensitive Liabilities:
Deposits:
Interest Bearing Demand
$ 27,800
$ 83,400
$ 275,530
$ 164,779
$ 551,509
Savings
2,306
6,918
27,674
55,348
92,246
Time Certificates of Deposit
598,913
447,443
21,468
-
1,067,824
Total Interest - bearing Deposits
$ 629,019
$ 537,761
$ 324,672
$ 220,127
$ 1,711,579
Borrowing from FHLB
$5,000
$65,000
$267,400
$-
$337,400
Subordinated Debt
-
-
-
39,334
39,334
Total Interest-sensitive Liabilities
$ 634,019
$ 602,761
$ 592,072
$ 259,461
$ 2,088,313
(1) Loans and leases are net of non-accrual loans and before      unamortized deferred loan fees and allowance for credit losses.
 

</TABLE>

 

Expected maturities of assets are contractual maturitiesadjusted for projected payment based on contractual amortization and unscheduledprepayments of principal as well as repricing frequency. Expected maturities fordeposits are based on contractual maturities adjusted for projected rolloverrates and changes in pricing for non-maturity deposits. The Company utilizesassumptions supported by documented analysis for the expected maturities of itsloans and repricing of its deposits and relies on third party data providers forprepayment projections for amortizing securities. The actual maturities of theseinstruments could vary significantly if future prepayments and repricing differfrom the Company's expectations based on historical experience.

 

The Company uses a computer simulation analysis to attempt topredict changes in the yields earned on assets and the rates paid on liabilitiesin relation to changes in market interest rates. The net interest incomevolatility and market value of equity volatility reports measure the exposure ofearnings and capital respectively, to immediate incremental changes in marketinterest rates as represented by the prime rate change of 100 to 200 basispoints. Market value of portfolio equity is defined as the present value ofassets minus the present value of liabilities and off balance sheet contracts.The table below shows the estimated impact of changes in interest rates on netinterest income and market value of equity as of June 30, 2002:

<TABLE>

 

<CAPTION>

 

Net Interest
Market Value of
Change in Interest
Income Volatility
Equity Volatility
Rates (Basis Points)
June 30, 2002 (1)
June 30, 2002 (2)
<c>
<c>
<c>
+200
8.4%
-12.1 %
+100
5.0 %
-5.9 %
-100
-6.2 %
-1.4 %
-200
-11.9 %
-4.5 %- The percentage change in this column represents net interest income          of
the Company for 12 months in a stable interest rate environment        versus the
net interest income in the various rate scenarios.      - The percentage change in this column represents net portfolio value          of
the Company in a stable interest rate environment versus the net
portfolio value in the various rate scenarios.      
</TABLE>

 

The table below shows the estimated impact of changes ininterest rates on net interest income and market value of equity as of March 31,2002. This table is presented herein because the table as presented in theCompany's Form 10-Q filed for March 31, 2002 was erroneous.

<TABLE>

 

<CAPTION>

 

Net Interest
Market Value of
Change in Interest
Income Volatility
Equity Volatility
Rates (Basis Points)
March 31, 2002 (1)
March 31, 2002 (2)
<c>
<c>
<c>
+200
1.4 %
-14.3 %
+100
0.9 %
-7.3 %
-100
-1.8 %
4.6 %
-200
-7.4 %
2.6 %- The percentage change in this column represents net interest income          of
the Company for 12 months in a stable interest rate        environment versus the
net interest income in the various rate scenarios.      - The percentage change in this column represents net portfolio value          of
the Company in a stable interest rate environment        versus the net
portfolio value in the various rate scenarios.      
</TABLE>

 

The Company's primary objective in managing interest raterisk is to minimize the adverse effects of changes in interest rates on earningsand capital. In this regard the Company has established internal risk limits fornet interest income volatility given a 100 and 200 basis point decline in ratesof 10% and 15%, respectively, over a twelve-month horizon. Similarly, risklimits have been established for market value of portfolio equity volatility inresponse to a 100 and 200 basis point increase in rates of 10% and 15%,respectively.

 

FORWARD-LOOKING STATEMENTS

 

Certain statements contained herein, including, withoutlimitation, statements containing the words "indicates,""anticipates," "believes," "intends,""expects" and words of similar import, constitute"forward-looking statements" within the meaning of the PrivateSecurities Litigation Reform Act of 1995. Such forward-looking statementsinvolve known and unknown risks, uncertainties and other factors that may causethe actual results, performance or achievements of the Company to be materiallydifferent from any future results, performance or achievements expressed orimplied by such forward-looking statements. Such factors include, among others,the following: credit quality, general economics and business conditions inthose areas in which the Company operates; competition; fluctuations in interestrates; changes in business strategy or development plans; changes ingovernmental regulation; and other factors referenced herein, including, withoutlimitation, under the captions Provision for Credit Losses, Market Risk,Liquidity and Interest Rate Sensitivity, and Recent Accounting Developments.Given these uncertainties, the reader is cautioned not to place undue relianceon such forward-looking statements. The Company disclaims any obligation toupdate any such factors or to publicly announce the results of any revisions toany of the forward-looking statements contained herein to reflect future eventsor developments.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

Item 1. LEGAL PROCEEDINGS

 

In the normal course of business, the Company is subject topending and threatened legal actions. After reviewing pending actions withcounsel, management believes that the outcome of such actions will not have amaterial adverse effect on the financial condition or the results of operationsof the Company.

 

 

Item 2. CHANGES IN SECURITIES

 

There have been no changes in the securities of theRegistrant during the quarter ended June 30, 2002.

 

 

Item 3. DEFAULT UPON SENIOR SECURITIES

 

This item is not applicable.

 

 

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

At the Annual Meeting of Shareholders held on May 15,    2002, a proposal to elect thirteen directors to the Board of Directors of    the Registrant to hold office until the next meeting and until their    successors are elected and qualified was approved by shareholders. This    proposal received the following votes:

<TABLE>

 

<CAPTION>

 

 
For
Withheld


<c>
<c>
Benard Chen
9,761,002
106,207
Thomas C.T. Chiu
9,761,002
106,207
Chuang-I Lin
9,761,002
106,207
Ko-Yen Lin
9,761,002
106,207
Ting-Yung Liu
9,761,002
106,207
John Wang
9,761,002
106,207
Kenneth Wang
9,761,002
106,207
Chien-Te Wu
9,761,002
106,207
Julian Wu
9,761,002
106,207
Li-Pei Wu
9,761,002
106,207
Peter Wu
9,443,246
423,963
Ping C. Wu
9,761,002
106,207
Chin-Liang Yen
9,761,002
106,207
</TABLE>

 

 

Item 5. OTHER INFORMATION

 

There are no events to be reported under this item.

 

 

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

 

a) Exhibits: None
b) Reports on Form 8-K: None
 

 

 

 

 

 

 

 

 

 

 

 

 

 

PART III - SIGNATURES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SIGNATURES

 

 

Pursuant to the requirements of the Securities Exchange Actof 1934, the Registrant has duly caused this report to be signed on its behalfby the undersigned thereunto duly authorized.

 

 

 

                                                                               GBC Bancorp

                                                                               (Registrant)

 

Dated: August 13, 2002                                           /s/ Peter Wu____________

                                                                                Peter Wu, President and

                                                                                Chief Executive Officer

Dated: August 13, 2002                                            /s/ Peter Lowe___________

                                                                                Peter Lowe, Executive

                                                                                Vice President and

                                                                                  Chief Financial Officer******************************************** |
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