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 September 30, 2002 Commission filenumber 0-16213

 

| 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 213/972-4172
 

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, 11,539,562 shares issued andoutstanding as of September 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      ...................................................................
 

14
Item 3.
Qualitative and Quantitative Disclosure about Market      Risk....................
40
Item 4.
Controls and      Procedures......................................................................

42

PART II -
OTHER INFORMATION      .................................................................
44
Item 1.
Legal Proceedings      ..............................................................................
45
Item 2.
Changes In Securities      ..........................................................................
45
Item 3.
Default Upon Senior Securities      ............................................................
45
Item 4.
Submission Of Matters To A Vote Of Securities Holders      .....................
45
Item 5.
Other Information      ................................................................................
45
Item 6.
Exhibits And Reports On Form 8-K      ...................................................
45
Certifications      .....................................................................................

47

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

<TABLE>

<CAPTION>

 

GBC BANCORP AND SUBSIDIARIES
CONSOLIDATED FINANCIAL HIGHLIGHTS
CONDENSED BALANCE SHEETS
September 30,
December 31,
(Dollars In Thousands)
2002
 
2001
<S>
<C>
<C>
ASSETS
(Unaudited)
Cash and Due From Banks
$ 40,834
$ 33,034
Federal Funds Sold and Securities Purchased Under Agreements to Resell
161,000
90,000
Cash and Cash Equivalents
201,834
123,034
Securities Available-for-Sale at Fair Value (Amortized Cost of      $1,007,925 at
June 30, 2002 and $1,080,819 at December 31, 2001, respectively)
1,035,141
1,098,989
Trading Securities
1
31
Loans and Leases
1,213,532
1,132,889
Less: Allowance for Credit Losses
(27,666)
(23,656)
Deferred Loan Fees
(7,391)
(7,600)
Loans and Leases, net
1,178,475
1,101,633
Bank Premises and Equipment, net
6,475
6,382
Other Real Estate Owned, net
-
383
Due From Customers on Acceptances
6,309
6,471
Real Estate Held for Investment
1,645
2,129
Other Investments
8,517
11,509
Accrued Interest Receivable and Other Assets
19,493
16,682
Total Assets
$ 2,457,890
$ 2,367,243
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand
$ 229,556
$ 217,413
Interest Bearing Demand
552,130
438,660
Savings
84,807
91,418
Time Certificates of Deposit of $100,000 or More
841,944
920,615
Other Time Deposits
139,415
159,821
Total Deposits
1,847,852
1,827,927
Borrowings from the Federal Home Loan Bank
332,400
252,400
Subordinated Debt
39,367
39,269
Acceptances Outstanding
6,309
6,471
Accrued Expenses and Other Liabilities
26,261
34,858
Total Liabilities
2,252,189
2,160,925
Stockholders' Equity
Common Stock, No Par or Stated Value;
40,000,000 Shares Authorized; 11,539,562 shares (net of 79,001 shares
held in trust) at September 30, 2002 and 11,477,394 shares (net of      96,935
shares held in trust) at December 31, 2001
$ 72,912
$ 71,316
Retained Earnings
114,743
124,196
Accumulated Other Comprehensive Income
15,943
8,332
Deferred Compensation
2,103
2,474
Total Stockholders' Equity
205,701
206,318
Total Liabilities and Stockholders' Equity
$ 2,457,890
$ 2,367,243
See Accompanying Notes to Unaudited Consolidated Financial Statements
 

</TABLE>

<TABLE>

<CAPTION>

GBC BANCORP AND SUBSIAIRIES
CONSOLIDATED FINANCIAL HIGHLIGHTS
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended
For the Nine Months Ended
September 30,
September 30,
(In Thousands, Except Per Share and Share Data)
 
2002
 
2001
 
2002
 
2001
<S>
<C>
<C>
<C>
<C>
INTEREST INCOME
Loans and Leases, Including Fees
$ 20,756
$ 22,866
$ 61,015
$ 69,578
Securities Available-for-Sale
13,969
15,509
48,870
46,330
Securities Held-to-Maturity
-
3
-
33
Federal Funds Sold and Securities
Purchased under Agreements to Resell
767
816
1,403
2,549
Other
6
3
14
17
Total Interest Income
35,498
39,197
111,302
118,507
INTEREST EXPENSE
Interest Bearing Demand
2,104
1,470
5,992
6,256
Savings
256
180
855
771
Time Certificates of Deposits of $100,000 or More
5,856
10,366
18,359
33,122
Other Time Deposits
783
1,901
2,519
6,285
Federal Funds Purchased and Securities
Sold under Repurchase Agreements
-
1
7
22
Borrowings from the Federal Home Loan Bank
3,447
1,649
9,529
3,259
Subordinated Debt
870
870
2,611
2,611
Total Interest Expense
13,316
16,437
39,872
52,326
Net Interest Income
22,182
22,760
71,430
66,181
Provision for Credit Losses
5,500
6,000
63,164
13,800
Net Interest Income after Provision
 
 
 
 
for Credit Losses
16,682
16,760
8,266
52,381
NON-INTEREST INCOME
Service Charges and Commissions
1,958
2,108
5,569
6,027
Gain on Sale of Securities Available-for-Sale
-
4,927
10,127
4,927
(Loss)/Gain on Sale of Fixed Assets
(7)
-
(7)
38
Trading Account Revenue/(Loss)
473
(224)
489
1,946
Expense from Other Investments
(1,143)
(560)
(5,767)
(739)
Other
12
1,022
130
1,689
Total Non-Interest Income
1,293
7,273
10,541
13,888
NON-INTEREST EXPENSE
Salaries and Employee Benefits
5,093
5,181
15,429
15,593
Occupancy Expense
1,127
904
3,101
2,597
Furniture and Equipment Expense
801
522
2,483
1,566
Net Other Real Estate Owned (Income) Expense
(101)
(14)
(130)
(408)
Other
2,286
2,269
6,910
6,704
Change of Fair Value of Derivatives
260
286
(111)
7,401
Total Non-Interest Expense
9,466
9,148
27,682
33,453
(Loss)/Income before Income Taxes
8,509
14,885
(8,875)
32,816
(Benefit)/Provision for Income Taxes
2,809
5,121
(3,659)
11,862
Net (Loss)/Income before Cumulative Effect of a Change in Accounting      Principle
5,700
9,764
(5,216)
20,954
Cumulative Effect of a Change in Accounting Principle
-
-
-
4,962
 
 
 
Net Income/(Loss)
$ 5,700
$ 9,764
$ (5,216)
$ 25,916
Earnings (Loss) Per Share:
Net (Loss)/Income before Cumulative Effect of a Change in Accounting      Principle
Basic
$ 0.49
$ 0.84
$ (0.45)
$ 1.79
Diluted
0.49
0.84
(0.45)
1.78
Cumulative Effect of a Change in Accounting Principle
Basic
$ -
$ -
$ -
$ 0.42
Diluted
-
-
-
0.42
Net (Loss)/Income
Basic
$ 0.49
$ 0.84
$ (0.45)
$ 2.21
Diluted
0.49
0.84
(0.45)
2.20
Weighted Average Basic Shares Outstanding
11,617,754
11,607,091
11,606,377
11,707,891
Weighted Average Diluted Shares Outstanding
11,634,267
11,652,904
11,606,377
11,802,292
See Accompanying Notes to Unaudited Consolidated Financial Statements
 

</TABLE>

<TABLE>

<CAPTION>

GBC BANCORP AND SUBSIDIARIES
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND      COMPREHENSIVE INCOME/(LOSS)
(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
<S>
<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 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
(5,216)
$ (5,216)
(5,216)
Other Comprehensive Income, Net of Tax
Net Changes in Securities Valuation Allowance
7,160
7,160
7,160
Net Changes in Investment Valuation Allowance
451
451
451
Comprehensive Income
$ 2,395
Stock Held by Executive Obligation Trust
18
371

(371)
-
Stock Issuance
47
1,087
1,087
Tax Benefit-Stock Options Exercised
138
138
Stock Repurchase
(2)
(57)
(57)
Cash Dividend- $0.36 per Share
(4,180)
(4,180)
 
 
 
 
 
 
 
 
 
 
 
 
Balance at September 30, 2002
11,540
$ 72,912
$ 114,743
$ 2,103
$ 15,943
$ 205,701                                                                      
For the Nine Months
For the Year
Disclosure of Reclassification Amount:
Ended 09/30/02
Ended 12/31/2001

Net Change of Unrealized Gains Arising During Period, Net of Tax
Expense of $7,399 and $3,280 in 2002 and 2001, respectively
$ 13,743
$ 4,520
Less: Reclassification Adjustment for Gains Included in Net Income, Net      of Tax Expense of
$3,544 and $2,823 in 2002 and 2001, respectively.
(6,583)
(3,890)
Net Change of Unrealized Gains on Securities, Net of Tax
Expense of $3,855 and $457 in 2002 and 2001, respectively.
$ 7,160
$ 630
See Accompanying Notes to Unaudited Consolidated Financial Statements
 

</TABLE>

<TABLE>

<CAPTION>

GBC BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
For the Nine      Months Ended September 30,
(In Thousands)
2002
 
2001
<S>
<C>
<C>
OPERATING ACTIVITIES
Net (Loss)/Income
$ (5,216)
$ 25,916
Adjustments to Reconcile Net Income to Net Cash Provided by Operating      Activities:
Depreciation
1,199
931
Net (Accretion)/Amortization of      Discount/Premiums on Securities
2,292
(2,750)
Accretion of Discount on Subordinated Notes
98
98
Write down on Real Estate Held for Investment
484
1,273
Write-off of Securities
-
190
Provision for Credit Losses
63,164
13,800
Amortization of Deferred Loan Fees
(4,036)
(3,383)
Gain on Sale of Securities Available-for-Sale
(10,127)
(4,927)
Gain on Sale of Other Real Estate Owned
(108)
(475)
Loss in Other Investments from Equity Accounting
5,853
924
Loss/(Gain) on Sale of Fixed Assets
7
(38)
Change of Fair Value of Derivative Instruments
(111)
(1,161)
Net Increase in Trading Securities
30
4,617
Net Decrease      in Accrued Interest Receivable and Other Assets
3,370
432
Net Increase/(Decrease)      in Accrued Expenses and Other Liabilities
(11,156)
12,181
Other, net
-
(47)
Net Cash Provided      by Operating Activities
45,743
47,581
INVESTING ACTIVITIES
Purchases of Securities Available-for-Sale
(613,509)
(363,649)
Proceeds from Maturities of Securities Available-for-Sale
484,364
187,362
Proceeds from Maturities of Securities Held-to-Maturity
-
1,025
Proceeds from Sales of Securities Available-for-Sale
216,350
114,392
Net Increase      in Loans and Leases
(114,348)
(157,806)
Purchase of Equity Interest in Limited Partnerships
(1,758)
(2,314)
Proceeds from Sales of Other Real Estate Owned
508
1,145
Purchases of Premises and Equipment
(1,278)
(1,341)
Proceeds from Sale/Disposal of Premises and Equipment
150
246
Purchase of Liberty Bank & Trust Net of Cash Acquired
(1,962)
-
Net Cash Used by      Investing Activities
(31,483)
(220,940)
FINANCING ACTIVITIES
Net Increase/(Decrease)      in Demand, Interest Bearing Demand and Savings Deposits
97,666
(53,455)
Net (Decrease)/Increase      in Time Certificates of Deposit
(109,981)
131,978
Borrowings from the Federal Home Loan Bank
95,000
137,000
Repayment of Federal Home Loan Bank
(15,000)
(20,000)
Repurchase of Company Stock
(57)
(14,251)
Cash Dividends Paid
(4,175)
(3,974)
Proceeds from Exercise of Stock Options/Sale of Stock
987
3,961
Issuance of Stock Held by Trust
100
903
`
Net Cash Provided by      Financing Activities
64,540
182,162
Net Change in Cash and Cash Equivalents
78,800
8,803
Cash and Cash Equivalents at Beginning of Period
123,034
115,306
Cash and Cash Equivalents at End of Period
$ 201,834
$ 124,109
Supplemental Disclosures of Cash Flow Information
Cash Paid During This Period for
Interest
$ 39,480
$ 51,820
Income Taxes
10,401
2,160
Non-cash 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
For the nine months ended
09/30/02
09/30/01


<c>
<c>
Assets Acquired:
   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)

 
- 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. Certain reclassifications have been made to the prior periodfinancial statements to conform to the current period presentation. Theseunaudited consolidated financial statements should be read in conjunction withthe audited consolidated financial statements and notes thereto included in theCompany's Annual Report on Form 10-K for the year ended December 31, 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("Bancorp") and its wholly owned subsidiaries, GBC Venture Capital,Inc., General Bank, (the "Bank"), a California state chartered bank,and the Bank's wholly owned subsidiaries, GBC Insurance Services, Inc., GBCInvestment & Consulting Company, Inc., GBC Real Estate Investments, Inc.,GBC Trade Services, Asia Limited and GB Capital Trust II. The Bank also holds90% of the voting stock of GBC Leasing Company, Inc., which amount is notmaterial.
 
Change of Accounting Principle

 
On January 1, 2001 the Company adopted Statement of FinancialAccounting Standards No. 133, "Accounting for Derivative Instruments andHedging Activities," ("Statement 133"). On that date the Companyrecorded a transition adjustment of $8,561,000. The transition adjustment ispresented net of tax in the amount of $4,962,000 as a cumulative effect of achange of accounting principle in the Company's consolidated statements ofincome. The Company has received rights to acquire stock in the form ofwarrants, as an adjunct to its high technology banking relationships. Most ofthe warrants contain a cashless exercise provision thereby qualifying them asderivatives under Statement 133, requiring they be carried at fair value. Theamount represents the difference between the carrying value of the Company'sderivatives and their fair value.
 
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 the Company's commitments asof September 30, 2002 and December 31, 2001:
 
<TABLE>
<CAPTION>
 
 
September 30,
December 31,
(In Thousands)
2002
2001
<S>
<C>
<C>
Undisbursed Commitments
$587,956
$592,469
Standby Letters of Credit
50,211
80,091
Bill of Lading Guarantees
1,167
487
Commercial Letters of Credit
62,296
63,578
 

</TABLE>

 
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.

 

 
Earnings/ (Loss) Per Share

 

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

 

<TABLE>

<CAPTION>

Three Months Ended
Nine Months Ended
September 30,
September 30,
2002
2001
2002
2001
(In Thousands Except Share and per Share Data)
<S>
<C>
<C>
<C>
<C>
Net Income / (Loss)
$5,700
$9,764
($5,216)
$25,916
Weighted-average Shares
Basic Shares Outstanding
11,617,754
11,607,091
11,606,377
11,707,891
Dilutive Effect Equivalent Shares
16,513
45,813
-
94,401
Dilutive Shares Outstanding
11,634,267
11,652,904
11,606,377
11,802,292
Earnings/(Loss) per Share- Basic
$0.49
$0.84
($0.45)
$2.21
Earnings/(Loss) per Share- Diluted
$0.49
$0.84
($0.45)
$2.20
</TABLE>

 

The average anti-dilutive equivalent shares outstanding forthe three months ended September 30, 2002 and 2001 were 1,432,545 and 640,800,respectively. Equivalent shares represent options to purchase Company stock.

 

The average anti-dilutive equivalent shares outstanding forthe nine months ended September 30, 2002 and 2001, were 1,572,034 and 657,633,respectively.

 
Quarterly Dividends

 

In September 2002, the Company's Board of Directorsdeclared a quarterly common stock cash dividend of $0.12 per share payable on orabout October 15, 2002 to shareholders of record on September 30, 2002.Reference also Note 9, Regulatory Matters, following.

 
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.

 
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 of long-lived assets will nolonger be enough to record a one-time charge for most anticipated costs.Instead, companies will record exit or disposal costs when they 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,with earlier adoption encouraged. Management has implemented the provisions ofthis statement relative to contract termination costs associated with theclosure of the New York loan production office which is discussed in a followingparagraph.

 

In October of 2002, the FASB issued SFAS No. 147,"Acquisitions of Certain Financial Institutions". SFAS No. 147 is anamendment of FASB statements No. 72 and 144 and FASB Interpretation No. 9. TheStatement addresses the financial accounting and reporting for the acquisitionof all or part of a financial institution. It also provides guidance on theaccounting for the impairment or disposal of acquired long-term customerrelationship intangible assets. The provisions in paragraph 5 of this Statementshall be effective for acquisitions for which the date of acquisition is on orafter October 1, 2002. Other provisions are effective October 1, 2002, some ofwhich permit earlier application. The adoption of this statement has no impacton the Company.

 
Regulatory Matters

 

As a result of the findings in the regulatory examination ofGeneral Bank dated June 10, 2002, General Bank has entered into a Memorandum ofUnderstanding (MOU) with the Federal Deposit Insurance Corporation and theCalifornia Department of Financial Institutions. The MOU provides that the Bankshall retain management acceptable to the regulatory authorities and shallmaintain a Tier 1 leverage capital ratio of at least 7.5%. As of September 30,2002, General Bank's Tier 1 leverage capital ratio was 7.94%. The MOU furtherprovides that the Bank shall not, without prior written consent of theregulatory authorities, pay cash dividends in the event that payment of suchdividends will result in noncompliance with this capital ratio. Although theBank has paid such dividends to GBC Bancorp at the time of payment of GBC'sdividend, as of September 30, 2002, GBC had $14.5 million of cash, which issufficient to pay dividends at the current annual level of $5.6 million per yearand $3.4 million of interest on its subordinated debt per year for the next sixquarters without receiving a dividend from the Bank. Management does not believethat this agreement will affect the payment of dividends and interest by GBCBancorp.

 

The MOU further provides for reductions in the level ofclassified assets to specified percentages of Tier 1 Capital plus the Allowancefor Loan Losses by March 31, 2003 and June 30, 2003, respectively. It furthercalls for the timely identification and classification of problem loans,improvement of credit-related analysis and reports, a second review of realestate appraisals, and improvements in the loan underwriting and monitoringprocesses. Although the examination report found the Bank's allowance for loanand lease losses to be adequate, management is to modify the methodology for thesize and complexity of the loan portfolio. Bank Secrecy Act policies andprocedures are to be improved to eliminate identified deficiencies and a programto reasonably ensure compliance with the requirements for establishing accountswith a W-8 tax-exempt status is to be developed and implemented. Improvements inthe documentation and testing of the interest rate risk model are also calledfor. Management believes that all of the improvements set forth in the MOU canbe complied with.

 

The FDIC has raised a question as to the interpretation ofgenerally accepted accounting principles ("GAAP") that has been usedto account for the AFT investment since its inception in 1999. Although theCompany believes that its accounting is correct under GAAP and has so replied tothe regulators with the support of its independent auditors, an adverse rulingon this matter could result in the write-off of the remaining asset.

 

As a result of the ratings received by General Bank, GBCBancorp was no longer eligible to retain its status as a Financial HoldingCompany ("FHC"). The Company has informed the Federal Reserve Bank ofits decision to decertify itself as an FHC, effective immediately. GBC Bancorphad not utilized the expanded authorities available as an FHC, and therefore thedecertification has no impact on its existing business or on its businessstrategies.

 

 

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 borrowers' 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"("SFAS No. 133"). Implementation of SFAS No.133 has a material impacton the carrying value of derivative instruments; management considers thisaccounting policy to be a critical accounting policy. The judgments andassumptions used by management to mark to market derivatives are based on themost recent information available and other factors which are believed to bereasonable under the circumstances as described in "Non-InterestIncome", "Non-Interest Expense" and "Cumulative Effect of aChange of Accounting Principle".

 

OVERVIEW

 

Net income for the third quarter of 2002 was $5,700,000 or$0.49 diluted earnings per share, compared to $9,764,000, or $0.84 dilutedearnings per share, for the corresponding period of 2001. The $4,064,000decrease is the result of a reduction of $5,980,000 of non-interest income dueprimarily to the absence of gain on sale of securities available-for-sale. Netinterest income was $578,000 less and the provision for credit losses was lowerby $500,000 in 2002 compared to 2001.

 

For the nine months ended September 30, 2002, there was a netloss of $5,216,000, a decrease****of $31,132,000, compared to the net incomeof $25,916,000 earned during the corresponding period of 2001. Diluted(loss)/earnings per share for the nine months ended September 30, 2002 were($0.45) compared to $2.20 for the same period of 2001. The diluted earnings pershare for the nine months ended September 30, 2001, includes $0.42 relating tothe cumulative effect of a change in accounting principle. The decrease in netincome was primarily due to a $49,364,000 increase of the provision for creditlosses partially offset by a $5,249,000 increase in net interest income. A$5,771,000 reduction of non-interest expense was partially offset by a$3,347,000 reduction of non-interest income.

 

For the quarter ended September 30, 2002 and 2001, theannualized return on average assets ("ROA") was 0.91% and 1.79%,respectively, and the annualized return on average stockholders' equity("ROE") was 11.3% and 19.1%, respectively.

 

For the nine months ended September 30, 2002 and 2001, theROA was (0.28)% and 1.68%, respectively, and the ROE was (3.4)% and 17.4%,respectively.

 

As of September 30, 2002, the New York loan production officewas closed. New York-originated loans totaling $38 million remain outstanding asof September 30, 2002. These loans are being managed by officers in the LosAngeles office. The costs of the termination of the New York leases are includedin the financial statements in accordance with SFAS No. 147. Other costs relatedto the closure are considered immaterial.

On November 4, 2002, General Bank entered into a Memorandumof Understanding with the Federal Deposit Insurance Corp.  and theCalifornia Department of Financial Institutions.  For further informationreference Note 9, Regulatory Matters, in preceding section.

 

RESULTS OF OPERATIONS

 

 

Net Interest Income-Quarterly Results

 

For the quarter ended September 30, 2002 and 2001, netinterest income before the provision for credit losses decreased $578,000 or2.54%, from $22,760,000 to $22,182,000. The decline was due primarily to thedecrease of the net interest margin which declined to 3.61% from 4.28%. The 67basis point decline of the net interest margin was partially offset by a $327.8million increase of average earning assets.

 

Total interest income for the quarter ended September 30,2002 was $35,498,000, representing a $3,699,000, or 9.44%, decrease from thecorresponding quarter of a year ago. The decrease was primarily related to thedecline of the yield on earning assets. For the quarter ended September 30, 2002and 2001, the yield was 5.77% and 7.36%, respectively. The 159 basis pointdecline is primarily due to the reduction of the prime rate of interest and thedecision to sell $206.2 million of securities available-for-sale in the secondquarter of 2002. For the quarter ended September 30, 2002 and 2001, the dailyaverage prime rate of interest was 4.75% and 6.57%, representing a reduction of182 basis points. The yield on loans and leases declined to 6.87% from 8.23% forthe quarter ended September 30, 2002 and 2001, respectively. The 136 basis pointdecline is primarily a function of the prime rate movement. While the Companyhas a loan portfolio that is approximately 75% prime-rate driven, $321 millionof the commercial and real estate loans have floor rates. Because of thecontinuing decline of the prime rate of interest, as of September 30, 2002, $285million of these loans have reached their floor rates thereby insulating theCompany from further erosion of yield on loans and leases. The yield onsecurities declined to 5.16% from 6.69% for the quarter ended September 30, 2002and 2001, respectively, a decline of 153 basis points. The decline of the yieldon securities was the result of the sales of $206.2 million book value ofsecurities available-for-sale with a weighted average yield of 6.43%. Theproceeds received of $216.3 million were reinvested at lower yields. Inaddition, with the lower rates of interest, the Company has experienced higherlevels of pre-payments which also have been reinvested at lower yields. Theyield on federal funds sold and securities purchased under agreements to reselldeclined to 1.82% from 3.58% for the quarter ended September 30, 2002 and 2001,respectively, again mirroring the decline of the above-referenced average primerate.

 

The impact of the declining yields on interest income waspartially offset by a $327.8 million growth of average interest earning assetsto $2,439.9 million from $2,112.1 million for the quarter ended September 30,2002 and 2001 respectively. This growth was comprised of increases of $97.2million, $154.1 million and $76.5 million for loans and leases, investmentsecurities and federal funds sold and securities purchased under agreements toresell, respectively. As a result of the composition of this growth thepercentage of average loans and leases to total average earning assets declinedfrom 52.2% to 49.2%. Loans and leases is the highest yielding of the company'searning assets. Also as a result of the composition of the growth of averageearning assets, the percentage of federal funds sold and securities purchasedunder agreement to resell to total average earning assets increased to 6.8% from4.3%. Federal funds sold and securities purchased under agreement to resell arethe lowest yielding of the Company's earning assets. The impact of the abovewas further downward pressure on the yield.

 

Total interest expense for the quarter ended September 30,2002 was $13,316,000, representing a $3,121,000, or 19.0%, decrease from thecorresponding quarter of a year ago. The decrease was due primarily to thedecline of the cost of funds. For the quarter ended September 30, 2002, the costof funds was 2.60% compared to 3.79% for the corresponding period of a year ago,a decline of 119 basis points. The rates paid on total average interest bearingdeposits decreased to 2.15% from 3.57% for the quarter ended September 30, 2002and 2001, respectively.

 

The main reason for the 142 basis point decrease of the ratespaid on interest bearing deposits was the movement of the prime rate of interestas discussed above. The following table displays the average balance and ratespaid for the deposit products of the Bank for the quarters ended as indicated:

<TABLE>

 

<CAPTION>

For the Quarter Ended September 30,
2002
2001
<S>
<C>
<C>
Interest bearing demand - Average balance
$551,938
$358,650
Rate
1.51%
1.63%
Savings - Average balance
87,987
68,538
Rate
1.16%
1.04%
Time certificates of deposit
of $100,000 or more - Average balance
879,865
942,107
Rate
2.64%
4.39%
Other time deposits - Average balance
139,703
179,175
Rate
2.22%
4.09%
</TABLE>

 

Only the rates paid for savings (the least significantdeposit product from a dollar volume point of view) reflected an increase from1.04% to 1.16%. The rates paid on time certificates of deposit of $100,000 ormore and other time deposits declined 175 basis points and 187 basis points,respectively.

 

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 September 30, 2002 average interest bearingdeposits were $1,659.5 million compared to $1,548.5 million for thecorresponding period of a year ago, representing a $111.0 million, or 7.17%,increase. The increase was represented by all deposit categories except for timecertificates of deposits of $100,000 or more and other time deposits. Thedecline of time certificates of deposit of $100,000 or more was mainly theresult of the non-renewal of $125 million of deposits from the State ofCalifornia on various dates during the third quarter of 2002. Interest bearingdemand reflected the largest increase growing $193.3 million, or 53.9%.

 

The increase of average borrowings from the Federal Home LoanBank ("FHLB") had the impact of increasing interest expense from botha volume and rate perspective. The average FHLB borrowings was $333.2 millionand $132.1 million for the quarter ended September 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 4.10% and 4.95%for the quarter ended September 30, 2002 and 2001, respectively. The cost ofinterest bearing liabilities excluding deposits, was 4.60% and 5.83% for thequarter ended September 30, 2002 and 2001, respectively. This compares to ratespaid on interest bearing deposits of 2.15% and 3.57%, for the quarter endedSeptember 30, 2002 and 2001, respectively. Besides the borrowings from the FHLB,interest bearing liabilities other than deposits include federal funds purchasedand securities sold under repurchase agreement and subordinated debt.

 

The net interest spread, defined as the yield on earningassets less the rates paid on interest-bearing liabilities, decreased 40 basispoints to 3.17% for the quarter ended September 30, 2002, from 3.57% 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 67 basis points to 3.61% for the quarter ended September 30,2002, from 4.28% for the corresponding period of a year ago. The decline of thenet interest margin was primarily due to the decline of the net interest spreadand a reduction of the percentage of average interest-earning assets funded bynon-costing sources. For the quarter ended September 30, 2002 and 2001, thispercentage declined to 17.1% from 18.3%, respectively.

 

Net Interest Income - Nine-Month Results

 

For the nine months ended September 30, 2002, net interestincome before the provision for credit losses was $71,430,000, representing a$5,249,000, or 7.9%, growth over the corresponding period of a year ago. Thegrowth was achieved due to an increase of average earning assets partiallyoffset by a decrease of the net interest margin.

 

Total interest income for the nine months ended September 30,2002 was $111,302,000 compared to $118,507,000 for the corresponding period of ayear ago. The $7,205,000, or 6.1%, decrease is primarily related to the declineof the yield on earning assets. For the nine months ended September 30, 2002 and2001, the yield was 6.07% and 7.92%, respectively. The 185 basis point declineis primarily due to the reduction of the prime rate of interest. For the ninemonths ended September 30, 2002 and 2001, the daily average prime rate was 4.75%and 7.50%, respectively, a reduction of 275 basis points. The yield on loans andleases declined to 6.86% from 8.96% for the nine months ended September 30, 2002and 2001, respectively. The 210 basis point decline is primarily a function ofthe prime rate movement. The yield on securities declined to 5.64% from 6.99%for the nine months ended September 30, 2002 and 2001, respectively, a declineof 135 basis points. The yield on federal funds sold and securities purchasedunder agreements to resell declined to 1.84% from 4.51% for the nine monthsended September 30, 2002 and 2001, respectively, mirroring the decline of theabove-referenced average prime rate.

 

The impact on interest income resulting from the decline ofthe prime rate was partially offset by the increase of average interest earningassets. For the nine months ended September 30, 2002 and 2001, average interestearning assets were $2,450.6 million and $2,000.6 million, respectively,representing growth of $450.0 million, or 22.5%. The growth was representedprimarily by increases of $151.4 million and $272.1 million for loans and leasesand for investment securities, respectively. The average balance of federalfunds sold and securities purchased under agreements to resell also increased$26.5 million.

 

Total interest expense for the nine months ended September30, 2002 was $39,872,000, compared to $52,326,000 for the corresponding periodof a year ago. The decrease of $12,454,000, or 23.8%, was due to the 169 basispoint decrease in the cost of funds from 4.31% to 2.62%. The decrease of thecost of funds is due to rate decreases in all the categories of interest bearingdeposits which in turn is related to the prime rate reductions. The rates paiddeclined on all interest bearing deposits. The rates paid on total averageinterest bearing deposits decreased to 2.19% from 4.15% for the nine monthsended September 30, 2002 and 2001, respectively.

 

The decline of the cost of funds was less than the decline ofrates paid on interest bearing deposits because of the increase of borrowingsfrom the Federal Home Loan Bank which averaged $307.3 million and $86.9 millionfor the nine months ended September 30, 2002 and 2001, respectively. While thecost of these borrowings declined to 4.15% from 5.01%, it remains higher thanany deposit products.

 

Partially offsetting the decrease of the cost of funds wasthe growth of average interest-bearing liabilities, which increased $413.6million to $2,037.2 million from $1,623.6 million for the nine months endedSeptember 30, 2002 and 2001, respectively. The growth of average interestbearing liabilities was the result of a $193.1 million growth of interestbearing deposits and a $220.4 million growth of borrowings from the Federal HomeLoan Bank ("FHLB").

 

The average balance and the rates paid on deposit categoriesfor the nine months ended as indicated were as follows:

<TABLE>

 

<CAPTION>

For the nine months ended September 30,
2002
2001
<S>
<C>
<C>
Interest bearing demand - Average balance
$535,612
$366,935
Rate
1.50%
2.28%
Savings - Average balance
96,940
68,128
Rate
1.18%
1.51%
Time certificates of deposit
of $100,000 or more - Average balance
913,245
881,654
Rate
2.69%
5.02%
Other time deposits - Average balance
144,248
180,188
Rate
2.33%
4.66%
 

</TABLE>

 

For the nine months ended September 30, 2002 and 2001, thenet interest spread was 3.45% and 3.61%, respectively, a 16 basis point decline.

 

For the nine months ended September 30, 2002 and 2001, thenet interest margin was 3.90% and 4.42%, respectively, representing a 52 basispoint decrease. The decline of the margin was the result of the reduced spreadand a reduction of the percentage of average interest-earning assets funded bynon-costing sources. For the nine months ended September 30, 2002 and 2001, thispercentage declined to 17.2% from 19.0%, respectively.

 

 

Provision for Credit Losses

 

For the quarter ended September 30, 2002, a provision forcredit losses of $5,500,000, was recorded compared to a $6,000,000 provision forcredit losses for the corresponding quarter of a year ago. At quarter-end, areview of problem loans resulted in charge-offs of $5.5 million for the quartercompared to $3.4 million for the corresponding quarter of a year ago.

 

For the nine months ended September 30, 2002 and 2001, theprovision for credit losses was $63,164,000 and $13,800,000, respectively. Netcharge-offs for the nine months ended September 30, 2002 were $58.8 millioncompared to $7.7 million for the same period of 2001. Of the $59.1 million ofgross charge-offs in 2002, $46.2 million were loans originated by the New Yorkloan production office and $5.4 million was associated with a syndicated sharednational credit.

 

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 probable known and inherentfuture losses. Please refer to the discussion "Allowance for CreditLosses", following.

 

 

Non-Interest Income

 

Non-interest income for the quarter ended September 30, 2002totaled $1,293,000, representing a $5,980,000, or 82.2%, decrease compared to$7,273,000 for the quarter ended September 30, 2001. The decrease was primarilydue to the absence of both the gain on sale of available-for-sale securities of$4,927,000 and of the non-interest fee income of $1,000,000 received from apaid-off construction loan. In addition, there was an increase from expense fromother investments of $583,000 recorded in the third quarter of 2002 compared tothe same quarter of a year ago. Expense from other investments is based onrecording under the equity method the income or loss as reported by thepartnerships of which GBC Venture Capital is a limited partner and the Trust("AFT") in which the Bank holds a 10% beneficial interest. For thequarter ended September 30, 2002 and 2001, losses resulting from thepartnerships of GBC Venture Capital were $904,000 and $694,000, respectively. Inthe case of the Bank's AFT investment, for the quarter ended September 30,2002 and 2001, the financial results were $(239,000) and $134,000, respectively.Partially offsetting the above was a $697,000 increase in trading accountrevenue compared to the corresponding period of a year ago.

 

For the nine months ended September 30, 2002, non-interestincome totaled $10,541,000 representing a $3,347,000, or 24.1%, decreasecompared to $13,888,000 for the nine months ended September 30, 2001.****Non-interestincome decreased primarily due to the increase of expenses from otherinvestments of $5,028,000 during the nine months ended September 30, 2002 plusthe absence of non-interest fee income of $1,600,000 from a paid-offconstruction loan. For the nine months ended September 30, 2002 and 2001, lossesresulting from the partnerships of GBC Venture Capital were $2,373,000 and$1,038,000, respectively. In the case of the Bank's AFT investment, for thenine months ended September 30, 2002 and 2001, the financial results were$(3,394,000) and $299,000, respectively. Offsetting the above was an increase inthe gain on sale of available-for-sale securities of $5,200,000.

 

Trading account revenue is income earned on securitiesclassified as trading account 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.

 

 

 

Non-Interest Expense

 

For the three months ended September 30, 2002, non-interestexpense was $9,466,000, representing a $318,000, or 3.48%, increase from$9,148,000 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. (Seealso " Cumulative Effect of a Change in Accounting Principle",following.) For the quarter ended September 30, 2002 and 2001, the decline ofthe fair value of derivatives was approximately the same. The $318,000 ofnon-interest expense increase was primarily due to increases of $223,000 and$279,000 for occupancy expense and furniture and equipment expense,respectively. Partially offsetting the above were a decrease of $88,000 fromsalaries and employee benefits and an increase of $87,000 from net other realestate owned income. The decrease of salaries and employee benefits was the netresult of a reduced incentive expense (resulting from reduced pre-tax earnings)partially offset by increased salary expense due to an increase of employees. Asof September 30, 2002 and 2001, there was 408 and 356 full-time equivalentpersonnel, respectively. The increase of net other real estate owned income isthe result of the sale of other real estate owned ("OREO") in thethird quarter resulting in a $101,000 gain. Gain / loss on sale of OREO isincluded with expense related to OREO and classified as non-interest expense.

 

Included as a component of other non-interest expense isprofessional services expense which increased $377,000. The increase was dueprimarily to costs associated with problem loans and consulting fees related tothe real estate investment trust (REIT). However, partially offsetting theincrease of other professional services was the absence of net operating lossesand the decrease of the amortization expenses related to the low-income housing("LIH") properties. One of the three LIH investments had been writtento a zero basis as of December 31, 2001.

 

For the quarter ended September 30, 2002, the Company'sefficiency ratio, defined as non-interest expense excluding the change of fairvalue of derivatives divided by the sum of net interest income plus non-interestincome less trading revenue and income (loss) from venture capital fundinvestments and gain on sale of securities available-for-sale, increased to38.1% from 34.2% for the corresponding year-ago period.
** **
For the nine months ended September 30, 2002, non-interestexpense was $27,682,000, representing a $5,771,000, or 17.3%, decrease from the$33,453,000 reported for the corresponding period of a year ago. Excluding thechange of fair value of derivatives, non-interest expense was $27,793,000 forthe nine months ended September 30, 2002 compared to $26,052,000 for thecorresponding nine months of a year ago. The $1,741,000 increase was primarilydue to increases of $504,000 and $917,000 for occupancy expense and furnitureand equipment expense, respectively. The increase of furniture and equipmentexpense was primarily due to implementation of a new accounting system for theCompany's international transactions and the associated expensing ofimplementation costs. As of September 30, 2002, the net increase in fair valueof derivatives from December 31, 2001 was $111,000. This compares to a declineof $7,401,000 as of September 30, 2001 from the value of the derivatives onJanuary 1, 2001 at which time SFAS No. 133 was implemented. (See also"Cumulative Effect of a Change in Accounting Principle", following.)

 

Included as a component of other non-interest expense isother professional services expense which increased $1,570,000. As was the casewith the quarterly comparison, there were increased problem loans and the REITconsulting fees. Also, for the nine months ended September 30, 2002 professionalservices included costs relating to the Liberty Bank acquisition. Partiallyoffsetting the increase of other professional service expense for the ninemonths ended September 30, 2002 and 2001 were reductions of low income housingexpense, legal settlement costs and net operating losses. For the nine monthsended September 30, 2002 and 2001, the Company's efficiency ratio (as definedabove) was 36.0% and 35.2%, respectively.

 

 

Provision for Income Taxes

 

For the quarter ended September 30, 2002 and 2001, theprovision for income taxes was $2,809,000 and $5,121,000, respectively,representing effective tax rates of 33.0% and 34.4%. For the quarter endedSeptember 30, 2002, there was no state tax provision. For the quarter endedSeptember 30, 2001, the effective state tax was 2.90% compared to a statutoryrate of 10.84%. The low state tax rate was due to the formation of GB CapitalTrust II as a Bank subsidiary in the third quarter of 2001.

 

For the nine months ended September 30, 2002, the tax benefitwas $3,659,000 and assumes a 35% federal income tax rate and a low incomehousing tax credit. This compares to a tax provision of $11,862,000 for thecorresponding nine months of a year ago representing an effective tax rate of36.1%. For the nine months ended September 30, 2002, there was no state taxbenefit assumed. For the nine months ended September 30, 2001, the effectivestate tax was 6.54% compared to a statutory rate of 10.84%. The reduced statetax rate was due to the reason as described in the above paragraph.

 

 

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 ofincome for the nine months ended September 30, 2001.

 

 

FINANCIAL CONDITION

 

As of September 30, 2002, the total assets were $2,457.9million, a $90.7 million, or 3.8%, increase from $2,367.2 million, as ofDecember 31, 2001. As of September 30, 2002, total deposits were $1,847.9million, a $19.9 million, or 1.1% increase from December 31, 2001.

 

Stockholders' equity decreased to $205.7 million as ofSeptember 30, 2002 from $206.3 million, as of December 31, 2001, a reduction of$0.6 million, or 0.3%. The decline is primarily the result of the net loss forthe nine months ended September 30, 2002 and the payment of cash dividends,partially offset by the net increase of the securities available-for-salevaluation.

 

A major part of the funding for the growth of outstandingassets was provided by increased borrowings from the Federal Home Loan Bankwhich grew $80.0 million, as of September 30, 2002 compared to December 31,2001.

 

Loans and Leases

 

As of September 30, 2002, total loans and leases were$1,213.5 million compared to $1,132.9 million as of December 31, 2001,representing a $80.6 million, or 7.1% increase. The increase was primarily dueto growth of $102.5 million in the conventional real estate portfolio. Realestate construction loans also increased $32.9 million. Partially offsetting theabove growth was the decline in commercial loans of $65.2 million. The declineis represented by a reduction in the borrowing of the Company's existingcustomers and from charge-offs. For the nine months ended September 30, 2002,$58.1 million of charge-offs have been from the commercial loan portfolio,representing virtually all of the gross charge-offs of $59.1 million, asdiscussed in a previous section.

 

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>

 

September 30, 2002
December 31, 2001
(In Thousands)
Amount
Percentage
Amount
Percentage
<S>
<C>
<C>
<C>
<C>
Commercial
$ 430,523
35.47%
$ 495,681
43.76%
Real Estate - Construction
267,736
22.06%
234,860
20.73%
Real Estate - Conventional
467,063
38.49%
364,567
32.18%
Installment
208
0.02%
101
N/A
Other Loans
30,696
2.53%
20,345
1.80%
Leveraged Leases
17,306
1.43%
17,335
1.53%
Total
$ 1,213,532
100.00%
$1,132,889
100.00%
N/A = Percentage less than 0.01
</TABLE>

 

As of September 30, 2002, included in the commercial loans isapproximately $275 million of trade finance loans. While imposition of the TaftHartley Act has suspended the work stoppage, the west coast dock dispute mayhave affected some of these borrowers, as it stopped imports and exports intosouthern California. In addition, a backlog continues to exist. Managementcannot determine the negative impact on the loan portfolio at this time. Servicecharges and commissions, which is included in non-interest income, will also beaffected by the dispute, as it includes letter of credit commissions and wiretransfer fees that will be reduced during the period of the dispute and backlog.Such commissions and fees totaled $0.8 million in the 3rd quarter,2002.

 

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 September 30, 2002 are$54 million and $61 million, respectively. There are approximately $40 millionof loans to early stage high technology companies.

 

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 $43.5 million as of September 30, 2002 and the total loansoutstanding were $32.2 million. The Bank does not intend to participate inadditional casino loans.

 

As indicated above, conventional real estate loans and realestate-construction loans reflected an increase of $102.5 million and $32.9million, respectively. The following table sets forth the breakdown by type ofcollateral for construction and conventional real-estate loans as of September30, 2002 and December 31, 2001:

<TABLE>

<CAPTION>

 
9/30/2002
12/31/2001
(In Thousands)
Conventional
Conventional
Construction
Real Estate
Construction
Real Estate
Project Type
Loans
Percentage
Loans

Percentage
Loans
Percentage
Loans

Percentage
<S>
<C>
<C>
<C>
<C>
<C>
<C>
<C>
<C>
Residential:
Single-Family
$ 97,380
36%
$ 13,208
3%
$ 104,427
45%
$ 9,385
3%
Townhouse
991
-
493
0
6,589
3
506
0
Condominums
100,778
38
2,478
1
91,998
39
3,483
1
Multi-Family
10,681
4
56,829
12
17,026
7
24,941
7
Land Development
39,391
15
-
-
4,952
2
272
0
Land
-
-
41,609
9
-
-
32,257
9
 
 
 
 
 
 
 
 

Total Residential
$ 249,221
93%
$ 114,617
25%
$ 224,992
96%
$ 70,844
19%

Non-Residential:

Warehouse
$ -
0%
$ 56,918
12%
$ -
0%
$ 46,824
13%
Retail Facilities
3,369
1
86,200
19
481
-
85,240
24
Industrial Use
2,702
1
52,480
11
-
-
30,389
8
Office
8,030
3
71,117
15
7,938
3
45,933
13
Hotel and Motel
2,828
1
61,998
13
-
-
64,539
18
Land
-
-
950
0
-
-
-
-
Other
1,586
1
22,783
5
1,449
1
20,798
6

Total Non-Residential
$ 18,515
7%
$ 352,446
75%
$ 9,868
4%
$ 293,723
81%

Total
$ 267,736
100%
$ 467,063
100%
$ 234,860
100%
$ 364,567
100%
 

</TABLE>

 

Land collateralized conventional real estate loans totaling$41.6 million and $32.3 million as of September 30, 2002 and December 31, 2001,respectively, were reclassified from other - non residential to landresidential.

 

As of September 30, 2002, the Company had an ownershipinterest in two leveraged leases of Boeing 737 aircraft leased by two major U.S.airlines. As of September 30, 2002, the total investment included as part ofloans and leases was $17.3 million. Such amount includes an estimated residualvalue of $13.1 million. One of the lessees is in financial difficulty and couldfile for bankruptcy. If this happens, the book value of that investment of $8.2million as of September 30, 2002 would be substantially at risk if the lease wasterminated, as the estimated value of the aircraft at that date was $14.8million and the debt that is senior to the Company's investment as of thatdate was $14.9 million. Were the second lessee to file for bankruptcy, thatinvestment would also be substantially at risk as well.

 

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 (includingimpaired loans) 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)**September 30, 2002**December 31, 2001
<S>
<C>
<C>
Loans 90 Days or More Past Due and Still Accruing
 

$ 1,209
 

$ 1,730
Non-accrual Loans
17,724
24,940
Total Loans 90 Days or More Past Due
18,933
26,670
Restructured Loans (on Accrual Status)
699
1,706
Total Non-performing and Restructured Loans
 

19,632
 

28,376
Other Real Estate Owned, Net
-
383**Total Non-performing Assets**$ 19,632**$ 28,759
 

</TABLE>

Total non-performing assets decreased to $19.6 million, as ofSeptember 30, 2002, from $28.8 million, as of December 31, 2001, representing a$9.2 million, or 31.7%, decrease. While all categories of non-performing assetsreflected declines, the largest reduction was the $7.2 million decrease ofnon-accrual loans.

 

Loans 90 Days or More Past Due

 

As of September 30, 2002, there were three commercial creditstotaling $1.2 million that were 90 days or more past due and still accruing. Asof October 16, 2002, one credit of $0.6 million has been fully paid-off. Asecond borrower with a loan balance of $0.4 million has brought interest currentand has been renewed. The third borrower has reduced loan outstandings from$205,000 to $54,000; however, interest remains past due. The Company anticipatesinterest will be brought current in the near future.

 

Non-Accrual Loans

 

The non-accrual loans declined $7.2 million, or 28.9%, to$17.7 million as of September 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 decreasein non-accrual loans during the nine months ended September 30, 2002:

<TABLE>

 

<CAPTION>

 
**Non-Accrual Loans (In Thousands)**
 
<S>
<C>
Balance, December 31, 2001
$24,940
Add: Loans placed on non-accrual
70,265
Less: Charge-offs
(58,996)
Returned to accrual status
(4,381)
Repayments
(14,059)
Transfer to OREO
(45)
Balance, September 30, 2002**$17,724
</TABLE>

 

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

<TABLE>

 

<CAPTION>

 

 

(IN THOUSANDS)**September 30, 2002**December 31, 2001
<S>
<C>
<C>
Commercial
$ 12,935
$ 15,093
Real Estate-Construction
3,066
9,738
Real Estate-Conventional
1,723
109**Total**$17,724**$24,940
</TABLE>

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

 

 

Restructured Loans

 

As of September 30, 2002, the balance of restructured loanswas $0.7 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 90days past due as to principal and/or interest. Restructured loans which arenon-accrual loans are not included in the balance of restructured loans. As ofSeptember 30, 2002, there was one restructured loan with a balance of $50,000 onnon-accrual status. The weighted average yield of the restructured loans (onaccrual status) as of September 30, 2002 was 11.18%.

 

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

Other Real Estate Owned

As of December 31, 2001, other real estate owned("OREO"), net of valuation allowance of $0.4 million, totaled $0.4million and consisted of one property. This property was sold at a gain of$101,000 during the third quarter of 2002.

 

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)
September 30, 2002
Dec. 31, 2001
<S>
<C>
<C>
Recorded Investment with Related Allowance
$11,037
$28,734
Recorded Investment with no Related Allowance
-
273
Total Recorded Investment
11,037
29,007
Allowance for Impaired Loans
(2,336)
(5,224)
Net Recorded Investment in Impaired Loans
$8,701
$23,783
</TABLE>

 

The average balance of impaired loans before the allowancewas $28.1 million for the nine months ended September 30, 2002 and $23.5 millionfor the year ended December 31, 2001.

 

For the nine months ended September 30, 2002 and 2001,interest income 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'snon-performing loans. Accordingly, there can be no assurance that other loanswill not be placed on non-accrual, become 90 days or more past due, have termsmodified in the future, or become OREO.

 

 

Allowance for Credit Losses

 

As of September 30, 2002, the balance of the allowance forcredit losses was $27.7 million, representing 2.28% of outstanding loans andleases. This compares to an allowance for credit losses of $23.7 million as ofDecember 31, 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 thenine months ended as indicated:

 

<TABLE> 

<CAPTION>

 

(In Thousands)**September 30, 2002**September 30, 2001
<S>
<C>
<C>
Balance, Beginning of Period
$23,656
$19,426
Provision for Credit Losses
63,164
13,800
Charge-offs
(59,089)
(8,783)
Recoveries
338
1,090
Reclass of Off-Balance Sheet Credit Exposure
(403)
0
Balance, End of Period
$27,666
$25,533
 

</TABLE>

 

As of September 30, 2002, the allowance represents 140.9% and156.1% 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 ofSeptember 30, 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' abilityto repay, in order to determine the amount of the allowance for credit losses.The balance of the allowance for credit losses is an accounting estimate ofprobable but unconfirmed incurred losses in the Bank's loan portfolio as ofSeptember 30, 2002. Such an amount is based on ongoing, quarterly assessments ofthe probable estimated losses inherent in the loan and lease portfolio, and to alesser extent, unused commitments to provide financing. The Company'smethodology for assessing the appropriateness of the allowance consistsprimarily of the use of a 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 non-performing loansaffect the amount of the formula allowance. Loss factors are based on theCompany's historical loss experience and may be adjusted for significantfactors that, in management's judgement, affect the collectibility of theportfolio as of 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 September 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 September 30,2002 and 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 September 30, 2002, the Company recorded net unrealizedgains of $27,216,000 on its available-for-sale portfolio. Accumulated othercomprehensive income includes $17,690,000, representing the net unrealized gainson the available-for-sale portfolio, net of tax.

 

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

<TABLE>

 

<CAPTION>

 

Gross
Gross
(In Thousands)
Amortized
Unrealized
Unrealized
Fair
September 30, 2002
Cost
Gains
Losses
Value
<S>
<C>
<C>
<C>
<C>**Securities Available-for-Sale
State and Municipal Securities
$ 2,223
$ 74
$ -
$ 2,297
U. S. Treasuries
1,072
47
-
1,119
U.S. Government Agencies
62,005
3,080
-
65,085
Mortgage Backed Securities
521,791
12,802
880
533,713
Commercial Mortgage Backed Securities
95,462
4,754
-
100,216
Corporate Notes
35,537
596
-
36,133
Collateralized Mortgage Obligations
241,614
5,913
181
247,346
Asset Backed Securities
30,434
1,011
-
31,445
FHLB Stock
17,787
-
-
17,787
Total
$1,007,925
$28,277
$ 1,061
$1,035,141**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. Treasuries
-
-
-
-
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 September 30, 2002, the fair value of total securitiesavailable-for-sale was $1,035.1 million, of which $36.1 million is unsecuredcorporate debt, as shown below (dollars in millions). Not included in the tableis $5.0 million of notes issued by Gillette Co. purchased in September of 2002,for settlement in October of 2002.

<TABLE>

 

<CAPTION>

 

<S>
<C>
CIT Group
$ 10.1
Countrywide Credit
2.1
Daimler Chrysler
6.2
Gannett Company Inc.
5.3
General Motors
1.0
Heller Financial
5.1
Lehman Brothers
1.1
National Rural Utilities
5.2
Total
$ 36.1
 

</TABLE>

 

As of September 30, 2002, trading securities totaled $1,000and were comprised of one equity issue which is a non-interest bearinginstrument.

 

There were sales of securities from the available-for-saleportfolio with a book value of $206.2 million and $109.2 million for proceeds of$216.3 million and $114.4 million during the nine months ended September 30,2002 and 2001, respectively. For the nine months ended September 30, 2002 and2001, net gains on sale of available-for-sale securities were $10,127,000 and$4,927,000, respectively.

 

There were no sales of securities held-to-maturity during thenine months ended September 30, 2002 and 2001.

 

Other Investments

 

As of September 30, 2002, other investments totaled $8.5million. The balance includes $8.0 million in various venture capital funds thatinvest in technology companies. As of September 30, 2002, undisbursedcommitments to invest in these various funds totaled $4.9 million. In additionto seeking an appropriate return from such investments, the Company seeks to usethe investments to increase its high technology banking business. Also includedin other investments is a 10% equity ownership in the beneficial interest of anaircraft trust ("AFT"). As of September 30, 2002, the investmenttotaled $2.7 million which amount excludes an accumulated other comprehensiveloss amount of $2.7 million. The other comprehensive loss balance reduces thecarrying value of the Company's investment to zero. AFT owns 36 aircraft onlease to different lessees in various countries. The Company accounts for thisinvestment using the equity method.

 

 

As more fully discussed in the section below entitled"Regulatory Matters", the use of the equity method in accounting forthe AFT investment has been questioned by the Federal Deposit InsuranceCorporation ("FDIC").

 

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 $1,847.9 million as ofSeptember 30, 2002, representing a $20.0 million, or 1.1%, increase from totaldeposits of $1,827.9 million, as of December 31, 2001. The increase wasprimarily due to interest bearing demand deposits which grew $113.5 million.This increase was partially offset by a $78.7 million decrease in time depositsgreater than $100,000. The decrease was mainly due to the non-renewal of timedeposits totaling $140.0 million from the state of California.

 

The Company believes that the majority of its depositcustomers have strong ties to the Bank. Although the Company has a significantamount of time deposits of $100,000 or more having maturities of one year orless, in the past the depositors have generally renewed their deposits at theirmaturity. Accordingly, the Company believes its deposit source to be stable.

 

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

<TABLE>

<CAPTION>

(In Thousands)
Amount
<S>
<C>
3 Months or Less
$332,017
Over 3 Months Through 6 Months
142,948
Over 6 Months Through 12 Months
321,507
Over 12 Months
45,472**Total**$841,944
 

</TABLE>

 

Other Borrowings

 

As of September 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 $332.4 million, as ofSeptember 30, 2002. The advances are under an existing line of credit wherebythe FHLB has granted the Bank an amount equal to 25% of its assets.

 

The maturity schedule of outstanding advances as of September30, 2002 is as follows:

<TABLE>

 

<CAPTION>

 

(In Thousands)
Amount
Fixed Rate of Interest
<S>
<C>
<C>
3 Months or Less
$ 10,000
4.81%
Over 3 Months Through 12 Months
95,000
3.18% - 5.25%
Over 1 Year Through 3 Years
227,400
2.89% - 5.25%
Total
$ 332,400
2.89% - 5.25%
</TABLE>

The total outstanding advances of $332.4 million as ofSeptember 30, 2002 have a composite fixed rate of interest of 4.05%.

 

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 $205.7 million as of September30, 2002, a decrease of $0.6 million, or 0.3%, from $206.3 million, as ofDecember 31, 2001. The decline was the result of the net loss of $5.2 millionand cash dividend declarations of $4.2 million, partially offset by a netincrease of available-for-sale securities valuation allowance, net of tax, of$7.2 million.

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 September 30, 2002, 405,000 shares had been repurchased at anaverage cost of $26.83 per share for a total of $10.9 million. There is anadditional 300,000 share program authorized by the Board after the above programis completed.

 

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

<TABLE>

 

<CAPTION>

 
 
Well-Capitalized
September 30,
December 31, 
Requirements
2002
2001**<S>
<C>
<C>
<C>**GBC Bancorp   
Tier 1 Leverage Ratio
5%
7.40%
8.73%
Tier 1 Risk-Based Capital Ratio
6%
10.52%
10.70%
Total Risk-Based Capital Ratio
10%
13.58%
14.09%**General Bank   
Tier 1 Leverage Ratio
5%
7.94%
9.25%
Tier 1 Risk-Based Capital Ratio
6%
11.30%
11.38%
Total Risk-Based Capital Ratio
10%
12.56%
12.63%
 

</TABLE>

 

Reference also Note 9, Regulatory Matters, inpreceding section.

 

For the quarter ended September 30, 2002, the ratio of theCompany's average stockholders' equity to average assets was 8.05%. For theyear ended 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 September30, 2002.

 

In the consolidated financial statements, the shares held inthe Trust are reduced from common stock and classified as a separate componentof stockholders' equity captioned "deferred compensation". As ofSeptember 30, 2002, this amount was $2,103,000, representing the cost of the79,001 shares held 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$874.8 million, or 35.6% of total assets, as of September 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 September 30, 2002, total loans and leases represented65.7% 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 nine months ended September 30, 2002, the Bank declared cashdividends of $4.2 million to GBC Bancorp. Reference also Note 9, RegulatoryMatters, in preceding section.

 
**"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 September 30, 2002, there was a cumulative one-yearnegative "gap" of $528.5 million, down from $663.6 million as ofDecember 31, 2001.

 

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

<TABLE>

 

<CAPTION>

 

September 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
<S>
<C>
<C>
<C>
<C>
<C>
<C>
Earning Assets
Securities Available-for-Sale
$ 57,951
$ 21,388
$ 80,242
$ 875,560
$ -
$1,035,141
Trading Account Securities
-
-
-
1
1
Federal Funds Sold & Securities
Purchased Under Agreement to Resell
161,000
161,000
Loans and Leases (1) (2)
862,560
38,087
125,531
169,630
-
1,195,808
Non-Earning Assets (2)
65,940
65,940
Total Earning Assets
$ 1,081,511
$ 59,475
$ 205,773
$ 1,045,190
$ 65,941
$2,457,890
Source of Funds for Assets
Deposits:
Demand - N/B
$ -
$ -
$ -
$ -
$ 229,556
$ 229,556
Interest Bearing Demand
552,130
-
552,130
Savings
84,807
-
-
-
-
84,807
TCD'S Under $100,000
55,414
75,626
8,375
-
-
139,415
TCD'S $100,000 and Over
332,017
464,455
45,472
-
-
841,944
Total Deposits
$ 1,024,368
$ 540,081
$ 53,847
$ -
$ 229,556
$1,847,852
Borrowings from the Federal Home Loan Bank
$ 10,000
$ 95,000
$ 227,400
$ -
$ -
$ 332,400
Subordinated Debt
-
-
39,367
-
-
39,367
Other Liabilities
-
-
-
-
32,570
32,570
Stockholders' Equity
-
-
-
-
205,701
205,701
Total Liabilities and
 
 
 
 
 
 
Stockholders' Equity
$ 1,034,368
$ 635,081
$ 320,614
$ -
$ 467,827
$2,457,890
Interest Sensitivity Gap
$ 47,143
$ (575,606)
$ (114,841)
$ 1,045,190
$ (401,886)
Cumulative Interest Sensitivity
Gap
$47,143
($528,463)
($643,304)
$401,886
-
Gap Ratio (% of Total Assets)
1.9%
-23.4%
-4.7%
42.5%
-16.3%
Cumulative Gap Ratio
1.9%
-21.5%
-26.2%
16.3%
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 Quantitative 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 September 30, 2002:

<TABLE>

 

<CAPTION>

 

September 30, 2002
Expected Maturity Date
(Dollars in Thousands)
0 to 90
 
91 to 365
 
Over 1 Year
 
Over
 
 
(In Thousands)
 
Days
 
Days
 
to 5 Years
 
5 Years
 
Total
<S>
<C>
<C>
<C>
<C>
<C>
Interest-sensitive Assets:
Securities Available-for-Sale
$ 107,716
$ 216,863
$ 572,936
$ 137,626
$ 1,035,141
Securities Held-to-Maturity
-
-
-
-
-
Federal Funds Sold & Securities
Purchased Under Agreements to Resell
161,000
-
-
-
161,000
Loans and Leases (1)
862,560
38,087
125,531
169,630
1,195,808
Total Interest-earning Assets
$ 1,131,276
$ 254,950
$ 698,467
$ 307,256
$ 2,391,949
Interest-sensitive Liabilities:
Deposits:
Interest Bearing Demand
$ 27,793
$ 83,375
$ 275,879
$ 165,083
$ 552,130
Savings
2,121
6,360
25,442
50,884
84,807
Time Certificates of Deposit
387,430
540,081
53,848
-
981,359
Total Deposits
$ 417,344
$ 629,816
$ 355,169
$ 215,967
$ 1,618,296
Federal Fund Purchase
$ -
$ -
$ -
$ -
$ -
Borrowing from FHLB
10,000
95,000
227,400
-
332,400
Subordinated Debt
-
-
39,367
-
39,367
Total Interest-sensitive Liabilities
$ 427,344
$ 724,816
$ 621,936
$ 215,967
$ 1,990,063
(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 September 30, 2002:

<TABLE>

 

<CAPTION>

 

Net Interest
Market Value of
Change in Interest
Income Volatility
Equity Volatility
Rates (Basis Points)
September 30, 2002 (1)
September 30, 2002 (2)
<C>
<C>
<C>
+200
11.4 %
(8.7) %
+100
6.9 %
(2.5) %
-100
(7.3) %
(5.0) %
-200
(11.6) %
(7.3) %- 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.               2.   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.

 

Item 4.  Controls and Procedures

 

As required by the provisions of the Sarbanes-Oxley Act of2002, and implemented by rules 13a-14 and 15d-14 under the Securities Act of1934, the Chief Executive Officer and Chief Financial Officer have reviewed theeffectiveness of the Company's disclosure controls and procedures. Anindependent advisor was engaged to review the credit process in September 2002,and its report was presented to management and the Audit Committee in October2002. Weaknesses in credit processes were identified in this report that wereconsistent with the findings by the banking examiners.

 

Improvements needed in the underwriting process wereidentified, including a requirement that all relevant information on theborrower be included and analyzed. On July 18, 2002, the Board appointed a ChiefCredit Officer, and required his approval be part of the approval process forcommercial and high tech credits, in addition to that of the Chief ExecutiveOfficer. In October 2002, that authority was extended to also include realestate credits. The Chief Credit Officer will be responsible for enforcing thecredit policies and for the quality of the underwriting analysis and process.The report noted improvements in lending structures and reporting requirementssince the appointment of the Chief Credit Officer.

 

Another identified weakness was the timely identification ofproblem loans and reporting on their status. The Chief Credit Officer will beresponsible for implementing improvements in these areas. The existing processof having quarterly meetings with line management to discuss their respectiveloan portfolios will be incorporated into the internal certifications of thedisclosure controls and procedures. Additional resources will be provided theCredit Review function to increase the oversight on this process.

 

Identified weaknesses in loan monitoring will be met, inpart, by the Chief Credit Officer's enforcement of policies regardingcollateral audits. His department has committed to have collateral auditsperformed on all remaining commercial credits requiring such an audit by the endof the year. Loan monitoring will also be part of the internal certifications byline management.

 

 

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.

 

On November 4, 2002, the Bank entered into a Memorandum ofUnderstanding with the Federal Deposit Insurance Corp. and the CaliforniaDepartment of Financial Institutions.

Item 2. CHANGES IN SECURITIES
 

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

 

 

Item 3. DEFAULT UPON SENIOR SECURITIES

 

This item is not applicable.

 

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

 

No matters were submitted to a vote of security holdersduring the quarter ended September 30, 2002.

 

 

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: Certification pursuant to 18 U.S.C.  Section 1350 for the Company's Quarterly Report on Form 10-Q for the quarter  ended June 30, 2002.

 

 

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: ____Nov. 13, 2002___                                  _/s/ Peter Wu________

                                                                                   Peter Wu, President and 

                                                                                   Chief Executive Officer

 

Dated: ____Nov. 13, 2002____                                    _/s/ Peter Lowe_________

                                                                                       Peter Lowe, Executive

                                                                                       Vice President and

                                                                                       Chief Financial Officer

 

 

Certifications

 

I, Peter Wu, certify that:

 
- I have reviewed this quarterly report on Form 10-Q of GBC Bancorp;
 
- Based on my knowledge, this quarterly report does not contain any untrue    statement of a material fact or omit to state a material fact necessary to    make the statement made, in light of the circumstances under which such    statements were made, not misleading with respect to the period covered by    this quarterly report;
 
- Based on my knowledge, the financial statements, and other financial    information included in this quarterly report, fairly present in all    material respects the financial condition, results of operations and cash    flows of the registrant as of, and for, the periods presented in this    quarterly report;
 
- The registrant's other certifying officers and I are responsible for    establishing and maintaining disclosure controls and procedures (as defined    in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
 
Designed such disclosure controls and procedures to ensure that material      information relating to the registrant, including its consolidated      subsidiaries, is made known to us by others within those entities,      particularly during the period in which this quarterly report is being      prepared;

 
Evaluated the effectiveness of the registrant's disclosure controls      and procedures as of date within 90 days prior to the filing date of this      quarterly report (the "Evaluation Date"); and

 
Presented in this quarterly report our conclusions about the      effectiveness of the disclosure controls and procedures based on our      evaluation as of the Evaluation Date;

 
- The registrant's other certifying officers and I have disclosed, based    on our most recent evaluation, to the registrant's auditors and the audit    committee of registrants's board of directors (or persons performing the    equivalent function):
 
All significant deficiencies in the design or operation of internal      controls which could adversely affect the registrant's ability to      record, process, summarize and report financial data and have identified      for the registrant's auditors any material weaknesses in internal      controls; and

 
Any fraud, whether or not material, that involves management or other      employees who have a significant role in the registrant's internal      controls; and

 
- The registrant's other certifying officers and I have indicated in this    quarterly report whether or not there were significant changes in internal    controls or in other factors that could significantly affect internal    controls subsequent to the date of our most recent evaluation, including any    corrective actions with regard to significant deficiencies and material    weaknesses.
 
 
Date: ____November 13, 2002___
 
 
 
Signature: _____/s/ Peter Wu________
Peter Wu / CEO & President
 
 
Certifications
 

I, Peter Lowe, certify that
 
- I have reviewed this quarterly report on Form 10-Q of GBC Bancorp;
 
- Based on my knowledge, this quarterly report does not contain any untrue    statement of a material fact or omit to state a material fact necessary to    make the statement made, in light of the circumstances under which such    statements were made, not misleading with respect to the period covered by    this quarterly report;
 
- Based on my knowledge, the financial statements, and other financial    information included in this quarterly report, fairly present in all    material respects the financial condition, results of operations and cash    flows of the registrant as of, and for, the periods presented in this    quarterly report;
 
- The registrant's other certifying officers and I are responsible for    establishing and maintaining disclosure controls and procedures (as defined    in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
 
Designed such disclosure controls and procedures to ensure that material      information relating to the registrant, including its consolidated      subsidiaries, is made known to us by others within those entities,      particularly during the period in which this quarterly report is being      prepared;

 
Evaluated the effectiveness of the registrant's disclosure controls      and procedures as of date within 90 days prior to the filing date of this      quarterly report (the "Evaluation Date"); and

 
Presented in this quarterly report our conclusions about the      effectiveness of the disclosure controls and procedures based on our      evaluation as of the Evaluation Date;

 
- The registrant's other certifying officers and I have disclosed, based    on our most recent evaluation, to the registrant's auditors and the audit    committee of registrants's board of directors (or persons performing the    equivalent function):
 
All significant deficiencies in the design or operation of internal      controls which could adversely affect the registrant's ability to      record, process, summarize and report financial data and have identified      for the registrant's auditors any material weaknesses in internal      controls; and

 
Any fraud, whether or not material, that involves management or other      employees who have a significant role in the registrant's internal      controls; and

 
- The registrant's other certifying officers and I have indicated in this    quarterly report whether or not there were significant changes in internal    controls or in other factors that could significantly affect internal    controls subsequent to the date of our most recent evaluation, including any    corrective actions with regard to significant deficiencies and material    weaknesses.

 

 

Date: ____November 13, 2002___

 

 

 

Signature: ____/s/ Peter Lowe_________

Peter Lowe / CFO & EVP

 ******************************************** |
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