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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

Form 10-Q

Quarterly Report Under Section 13 or 15(d)

of The Securities Exchange Act of 1934

For Quarter Ended September 30, 2002 Commission file number 0-16213

(Exact name of registrant as specified in its charter)

(State or other jurisdiction of (I.R.S. Employer Identification No.)

incorporation or organization)

(Address of principal executive offices) (Zip code)

Registrant's telephone number, including area code 213/972-4172

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

Yes X No _______

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the period covered by this report.

Common stock, no par value, 11,539,562 shares issued and outstanding as of September 30, 2002.

PART I - FINANCIAL INFORMATION

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1. Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Company's financial condition and results of operations for the interim periods presented in this Form 10-Q have been included. Operating results for the interim periods are not necessarily indicative of financial results for the full year. Certain reclassifications have been made to the prior period financial statements to conform to the current period presentation. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001.

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

 

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., GBC Investment & Consulting Company, Inc., GBC Real Estate Investments, Inc., GBC Trade Services, Asia Limited and GB Capital Trust II. The Bank also holds 90% of the voting stock of GBC Leasing Company, Inc., which amount is not material.

 

2. Change of Accounting Principle

 

On January 1, 2001 the Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," ("Statement 133"). On that date the Company recorded a transition adjustment of $8,561,000. The transition adjustment is presented net of tax in the amount of $4,962,000 as a cumulative effect of a change of accounting principle in the Company's consolidated statements of income. The Company has received rights to acquire stock in the form of warrants, as an adjunct to its high technology banking relationships. Most of the warrants contain a cashless exercise provision thereby qualifying them as derivatives under Statement 133, requiring they be carried at fair value. The amount represents the difference between the carrying value of the Company's derivatives and their fair value.

 

3. Commitments and Contingencies

 

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

 

The following is a summary of the Company's commitments as of September 30, 2002 and December 31, 2001:

 

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

 

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4. Pending Litigation

 

In the normal course of business, the Company is subject to pending and threatened legal actions. After reviewing pending actions with counsel, management believes that the outcome of such actions will not have a material adverse effect on the financial condition or the results of operations of the Company.

 

 

5. 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 the weighted average number of shares of common stock outstanding adjusted for the dilutive effect of common stock equivalents. In the case of a loss from operations no common stock equivalents are included in the computation of the diluted loss per share. The following table sets forth basic and diluted earnings per share calculations:

 

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	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

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

 

6. Quarterly Dividends

 

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

 

7. Acquisition of Liberty Bank & Trust

 

On February 28, 2002, General Bank consummated its purchase transaction of Liberty Bank and Trust Co. of Boston. The purchase transaction was accounted for in accordance with SFAS No. 141, "Business Combinations". The assets acquired had a fair value of $44,352,000 and the fair 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 initially recognized in accordance with SFAS No. 141. SFAS No. 142, "Goodwill and Other Intangible Assets," requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No.142. SFAS No.142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No.144, "Accounting for the Impairment or Disposal of Long-lived Assets". The core deposit premium intangible is being amortized over a 5-year period, estimated to be the useful life.

 

8. Recent Accounting Developments

 

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

 

The Company adopted SFAS No. 144, "Accounting for the Impairment 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's financial statements.

 

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS No. 145"). SFAS No.145 will rescind SFAS No. 4 which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income 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 and Infrequently Occurring Events and Transactions will now be used to classify those gains and losses. SFAS No. 64 amended SFAS No. 4, and is no longer necessary because SFAS No. 4 has been rescinded.

 

SFAS No. 44 was issued to establish accounting requirements for the effects of transition to the provisions of the Motor Carrier Act of 1980. Since the transition has been completed, SFAS No. 44 is no longer necessary. SFAS No. 145 amends SFAS No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions.

 

SFAS No. 145 will be effective for fiscal years beginning after May 15, 2002, with early adoption of the provisions related to the rescission of SFAS No. 4 encouraged. Upon adoption, companies must reclassify prior period items that do not meet the extraordinary item classification criteria in APB 30. It is not anticipated that the adoption of this statement will 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 no longer 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 will subsequently adjust the recorded liability for changes in estimated cash flows. SFAS No. 146 revises accounting for specified employee and contract terminations that are part of restructuring activities. Under SFAS No. 146, a company will record a liability for a cost associated with an exit or disposal activity when that liability is incurred and can be measured at fair value. A liability is incurred when an event obligates the entity to transfer or use assets - in the FASB's more demanding language, when an event leaves the company little or no discretion to avoid transferring or using the assets in the future. Commitment to an exit plan or a plan of disposal expresses only management's intended future actions and, therefore, does not meet the requirement for recognizing a liability and the related expense. The provisions of SFAS No. 146 are effective prospectively for exit or disposal activities initiated after December 31, 2002, with earlier adoption encouraged. Management has implemented the provisions of this statement relative to contract termination costs associated with the closure of the New York loan production office which is discussed in a following paragraph.

 

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

 

9. Regulatory Matters

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

The MOU further provides for reductions in the level of classified assets to specified percentages of Tier 1 Capital plus the Allowance for Loan Losses by March 31, 2003 and June 30, 2003, respectively. It further calls for the timely identification and classification of problem loans, improvement of credit-related analysis and reports, a second review of real estate appraisals, and improvements in the loan underwriting and monitoring processes. Although the examination report found the Bank's allowance for loan and lease losses to be adequate, management is to modify the methodology for the size and complexity of the loan portfolio. Bank Secrecy Act policies and procedures are to be improved to eliminate identified deficiencies and a program to reasonably ensure compliance with the requirements for establishing accounts with a W-8 tax-exempt status is to be developed and implemented. Improvements in the documentation and testing of the interest rate risk model are also called for. Management believes that all of the improvements set forth in the MOU can be complied with.

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

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

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 and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.

Accounting for the allowance for credit losses involves significant judgments and assumptions by management which have a material impact on the carrying value of net loans; management considers this accounting policy to be a critical accounting policy. The judgments and assumptions used by management are based upon the evaluation of the loan portfolio, the economic environment, historical loan loss experience, collateral values and assessments of borrowers' ability to repay, as described in "Allowance for Credit Losses".

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

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 diluted earnings per share, for the corresponding period of 2001. The $4,064,000 decrease is the result of a reduction of $5,980,000 of non-interest income due primarily to the absence of gain on sale of securities available-for-sale. Net interest income was $578,000 less and the provision for credit losses was lower by $500,000 in 2002 compared to 2001.

For the nine months ended September 30, 2002, there was a net loss of $5,216,000, a decrease of $31,132,000, compared to the net income of $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 per share for the nine months ended September 30, 2001, includes $0.42 relating to the cumulative effect of a change in accounting principle. The decrease in net income was primarily due to a $49,364,000 increase of the provision for credit losses 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, the annualized 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, the ROA 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 office was closed. New York-originated loans totaling $38 million remain outstanding as of September 30, 2002. These loans are being managed by officers in the Los Angeles office. The costs of the termination of the New York leases are included in the financial statements in accordance with SFAS No. 147. Other costs related to the closure are considered immaterial.

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

For the quarter ended September 30, 2002 and 2001, net interest income before the provision for credit losses decreased $578,000 or 2.54%, from $22,760,000 to $22,182,000. The decline was due primarily to the decrease of the net interest margin which declined to 3.61% from 4.28%. The 67 basis point decline of the net interest margin was partially offset by a $327.8 million 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 the corresponding quarter of a year ago. The decrease was primarily related to the decline of the yield on earning assets. For the quarter ended September 30, 2002 and 2001, the yield was 5.77% and 7.36%, respectively. The 159 basis point decline is primarily due to the reduction of the prime rate of interest and the decision to sell $206.2 million of securities available-for-sale in the second quarter of 2002. For the quarter ended September 30, 2002 and 2001, the daily average prime rate of interest was 4.75% and 6.57%, representing a reduction of 182 basis points. The yield on loans and leases declined to 6.87% from 8.23% for the quarter ended September 30, 2002 and 2001, respectively. The 136 basis point decline is primarily a function of the prime rate movement. While the Company has a loan portfolio that is approximately 75% prime-rate driven, $321 million of the commercial and real estate loans have floor rates. Because of the continuing decline of the prime rate of interest, as of September 30, 2002, $285 million of these loans have reached their floor rates thereby insulating the Company from further erosion of yield on loans and leases. The yield on securities declined to 5.16% from 6.69% for the quarter ended September 30, 2002 and 2001, respectively, a decline of 153 basis points. The decline of the yield on securities was the result of the sales of $206.2 million book value of securities available-for-sale with a weighted average yield of 6.43%. The proceeds received of $216.3 million were reinvested at lower yields. In addition, with the lower rates of interest, the Company has experienced higher levels of pre-payments which also have been reinvested at lower yields. The yield on federal funds sold and securities purchased under agreements to resell declined 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 prime rate.

The impact of the declining yields on interest income was partially offset by a $327.8 million growth of average interest earning assets to $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 $97.2 million, $154.1 million and $76.5 million for loans and leases, investment securities and federal funds sold and securities purchased under agreements to resell, respectively. As a result of the composition of this growth the percentage of average loans and leases to total average earning assets declined from 52.2% to 49.2%. Loans and leases is the highest yielding of the company's earning assets. Also as a result of the composition of the growth of average earning assets, the percentage of federal funds sold and securities purchased under agreement to resell to total average earning assets increased to 6.8% from 4.3%. Federal funds sold and securities purchased under agreement to resell are the lowest yielding of the Company's earning assets. The impact of the above was 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 the corresponding quarter of a year ago. The decrease was due primarily to the decline of the cost of funds. For the quarter ended September 30, 2002, the cost of 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 bearing deposits decreased to 2.15% from 3.57% for the quarter ended September 30, 2002 and 2001, respectively.

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

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Only the rates paid for savings (the least significant deposit product from a dollar volume point of view) reflected an increase from 1.04% to 1.16%. The rates paid on time certificates of deposit of $100,000 or more and other time deposits declined 175 basis points and 187 basis points, respectively.

Partially offsetting the impact of a reduction of the rates paid on interest bearing deposits was an increase of average interest bearing deposits. For the quarter ended September 30, 2002 average interest bearing deposits were $1,659.5 million compared to $1,548.5 million for the corresponding period of a year ago, representing a $111.0 million, or 7.17%, increase. The increase was represented by all deposit categories except for time certificates of deposits of $100,000 or more and other time deposits. The decline of time certificates of deposit of $100,000 or more was mainly the result of the non-renewal of $125 million of deposits from the State of California on various dates during the third quarter of 2002. Interest bearing demand reflected the largest increase growing $193.3 million, or 53.9%.

The increase of average borrowings from the Federal Home Loan Bank ("FHLB") had the impact of increasing interest expense from both a volume and rate perspective. The average FHLB borrowings was $333.2 million and $132.1 million for the quarter ended September 30, 2002 and 2001, respectively.

The increase in borrowings from the FHLB as a percentage of average interest bearing liabilities partially offset the impact of the decline of 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 of interest bearing liabilities excluding deposits, was 4.60% and 5.83% for the quarter ended September 30, 2002 and 2001, respectively. This compares to rates paid on interest bearing deposits of 2.15% and 3.57%, for the quarter ended September 30, 2002 and 2001, respectively. Besides the borrowings from the FHLB, interest bearing liabilities other than deposits include federal funds purchased and securities sold under repurchase agreement and subordinated debt.

The net interest spread, defined as the yield on earning assets less the rates paid on interest-bearing liabilities, decreased 40 basis points to 3.17% for the quarter ended September 30, 2002, from 3.57% for the corresponding period of a year ago. The decline is due to the differential of the reduction of the cost of funds compared to the reduction of the yield on earning assets.

The net interest margin, defined as the annualized difference between interest income and interest expense divided by average interest earning assets, 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 the net interest margin was primarily due to the decline of the net interest spread and a reduction of the percentage of average interest-earning assets funded by non-costing sources. For the quarter ended September 30, 2002 and 2001, this percentage declined to 17.1% from 18.3%, respectively.

For the nine months ended September 30, 2002, net interest income 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. The growth was achieved due to an increase of average earning assets partially offset 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 a year ago. The $7,205,000, or 6.1%, decrease is primarily related to the decline of the yield on earning assets. For the nine months ended September 30, 2002 and 2001, the yield was 6.07% and 7.92%, respectively. The 185 basis point decline is primarily due to the reduction of the prime rate of interest. For the nine months 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 and leases declined to 6.86% from 8.96% for the nine months ended September 30, 2002 and 2001, respectively. The 210 basis point decline is primarily a function of the 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 decline of 135 basis points. The yield on federal funds sold and securities purchased under agreements to resell declined to 1.84% from 4.51% for the nine months ended September 30, 2002 and 2001, respectively, mirroring the decline of the above-referenced average prime rate.

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

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

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

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

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

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

For the nine months ended September 30, 2002 and 2001, the net interest margin was 3.90% and 4.42%, respectively, representing a 52 basis point decrease. The decline of the margin was the result of the reduced spread and a reduction of the percentage of average interest-earning assets funded by non-costing sources. For the nine months ended September 30, 2002 and 2001, this percentage declined to 17.2% from 19.0%, respectively.

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

For the nine months ended September 30, 2002 and 2001, the provision for credit losses was $63,164,000 and $13,800,000, respectively. Net charge-offs for the nine months ended September 30, 2002 were $58.8 million compared to $7.7 million for the same period of 2001. Of the $59.1 million of gross charge-offs in 2002, $46.2 million were loans originated by the New York loan production office and $5.4 million was associated with a syndicated shared national credit.

The amount of the provision for credit losses is determined by management and is based upon the quality of the loan portfolio, management's assessment of the economic environment, evaluations made by regulatory authorities, historical loan loss experience, collateral values, assessment of borrowers' ability to repay, and estimates of probable known and inherent future losses. Please refer to the discussion "Allowance for Credit Losses", following.

Non-interest income for the quarter ended September 30, 2002 totaled $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 primarily due 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 a paid-off construction loan. In addition, there was an increase from expense from other investments of $583,000 recorded in the third quarter of 2002 compared to the same quarter of a year ago. Expense from other investments is based on recording under the equity method the income or loss as reported by the partnerships of which GBC Venture Capital is a limited partner and the Trust ("AFT") in which the Bank holds a 10% beneficial interest. For the quarter ended September 30, 2002 and 2001, losses resulting from the partnerships of GBC Venture Capital were $904,000 and $694,000, respectively. In the 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 account revenue compared to the corresponding period of a year ago.

For the nine months ended September 30, 2002, non-interest income totaled $10,541,000 representing a $3,347,000, or 24.1%, decrease compared to $13,888,000 for the nine months ended September 30, 2001. Non-interest income decreased primarily due to the increase of expenses from other investments of $5,028,000 during the nine months ended September 30, 2002 plus the absence of non-interest fee income of $1,600,000 from a paid-off construction loan. For the nine months ended September 30, 2002 and 2001, losses resulting 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 the nine months ended September 30, 2002 and 2001, the financial results were $(3,394,000) and $299,000, respectively. Offsetting the above was an increase in the gain on sale of available-for-sale securities of $5,200,000.

Trading account revenue is income earned on securities classified as trading account securities. The Company's subsidiary, GBC Venture Capital ("VC"), receives equity securities which it holds as trading securities primarily from two sources: a distribution from venture capital funds in which it invests and the exercise of warrants acquired through the lending operations of General Bank, its affiliate. The recognition of fair value and ultimate disposition of these securities results in trading account revenue.

For the three months ended September 30, 2002, non-interest expense 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 expense includes the change in fair value of the Company's derivatives which are accounted for under Statement of Financial Accounting Standards No.133. (See also " Cumulative Effect of a Change in Accounting Principle", following.) For the quarter ended September 30, 2002 and 2001, the decline of the fair value of derivatives was approximately the same. The $318,000 of non-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 from salaries and employee benefits and an increase of $87,000 from net other real estate owned income. The decrease of salaries and employee benefits was the net result of a reduced incentive expense (resulting from reduced pre-tax earnings) partially offset by increased salary expense due to an increase of employees. As of September 30, 2002 and 2001, there was 408 and 356 full-time equivalent personnel, respectively. The increase of net other real estate owned income is the result of the sale of other real estate owned ("OREO") in the third quarter resulting in a $101,000 gain. Gain / loss on sale of OREO is included with expense related to OREO and classified as non-interest expense.

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

For the quarter ended September 30, 2002, the Company's efficiency ratio, defined as non-interest expense excluding the change of fair value of derivatives divided by the sum of net interest income plus non-interest income less trading revenue and income (loss) from venture capital fund investments and gain on sale of securities available-for-sale, increased to 38.1% from 34.2% for the corresponding year-ago period.

For the nine months ended September 30, 2002, non-interest expense 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 the change of fair value of derivatives, non-interest expense was $27,793,000 for the nine months ended September 30, 2002 compared to $26,052,000 for the corresponding nine months of a year ago. The $1,741,000 increase was primarily due to increases of $504,000 and $917,000 for occupancy expense and furniture and equipment expense, respectively. The increase of furniture and equipment expense was primarily due to implementation of a new accounting system for the Company's international transactions and the associated expensing of implementation costs. As of September 30, 2002, the net increase in fair value of derivatives from December 31, 2001 was $111,000. This compares to a decline of $7,401,000 as of September 30, 2001 from the value of the derivatives on January 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 is other professional services expense which increased $1,570,000. As was the case with the quarterly comparison, there were increased problem loans and the REIT consulting fees. Also, for the nine months ended September 30, 2002 professional services included costs relating to the Liberty Bank acquisition. Partially offsetting the increase of other professional service expense for the nine months ended September 30, 2002 and 2001 were reductions of low income housing expense, legal settlement costs and net operating losses. For the nine months ended September 30, 2002 and 2001, the Company's efficiency ratio (as defined above) was 36.0% and 35.2%, respectively.

For the quarter ended September 30, 2002 and 2001, the provision 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 ended September 30, 2002, there was no state tax provision. For the quarter ended September 30, 2001, the effective state tax was 2.90% compared to a statutory rate of 10.84%. The low state tax rate was due to the formation of GB Capital Trust II as a Bank subsidiary in the third quarter of 2001.

For the nine months ended September 30, 2002, the tax benefit was $3,659,000 and assumes a 35% federal income tax rate and a low income housing tax credit. This compares to a tax provision of $11,862,000 for the corresponding nine months of a year ago representing an effective tax rate of 36.1%. For the nine months ended September 30, 2002, there was no state tax benefit assumed. For the nine months ended September 30, 2001, the effective state tax was 6.54% compared to a statutory rate of 10.84%. The reduced state tax rate was due to the reason as described in the above paragraph.

On January 1, 2001, the Company adopted SFAS No. 133. On that date a transition adjustment of $8,561,000 was recorded. The transition adjustment is presented net of tax in the amount of $4,962,000 as a cumulative effect of a change of accounting principle in the Company's statement of income for the nine months ended September 30, 2001.

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

Stockholders' equity decreased to $205.7 million as of September 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 for the nine months ended September 30, 2002 and the payment of cash dividends, partially offset by the net increase of the securities available-for-sale valuation.

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

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 due to growth of $102.5 million in the conventional real estate portfolio. Real estate construction loans also increased $32.9 million. Partially offsetting the above growth was the decline in commercial loans of $65.2 million. The decline is represented by a reduction in the borrowing of the Company's existing customers 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, as discussed in a previous section.

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

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As of September 30, 2002, included in the commercial loans is approximately $275 million of trade finance loans. While imposition of the Taft Hartley Act has suspended the work stoppage, the west coast dock dispute may have affected some of these borrowers, as it stopped imports and exports into southern California. In addition, a backlog continues to exist. Management cannot determine the negative impact on the loan portfolio at this time. Service charges and commissions, which is included in non-interest income, will also be affected by the dispute, as it includes letter of credit commissions and wire transfer fees that will be reduced during the period of the dispute and backlog. Such commissions and fees totaled $0.8 million in the 3^rd quarter, 2002.

The two largest concentrations in commercial loans continue to be the apparel/textile industry and the computer/electronic goods industry (excluding early-stage technology companies). The approximate amounts of commercial loans for these two industry segments as of September 30, 2002 are $54 million and $61 million, respectively. There are approximately $40 million of loans to early stage high technology companies.

Also included in commercial loans are five credits that are participations in facilities to Indian casinos that are construction loans to be repaid under a mini-perm facility from the cash flow of the casinos. The total commitments were $43.5 million as of September 30, 2002 and the total loans outstanding were $32.2 million. The Bank does not intend to participate in additional casino loans.

As indicated above, conventional real estate loans and real estate-construction loans reflected an increase of $102.5 million and $32.9 million, respectively. The following table sets forth the breakdown by type of collateral for construction and conventional real-estate loans as of September 30, 2002 and December 31, 2001:

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