-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Dc4G6ThNTikMLA2bqsWbQ5lt8qtVqNDJBEw0Fqz14/FOXv6dPOm3A7kxpVYR5lOF PmIfD77VUxGxdeIMFw4ktA== 0000351710-98-000011.txt : 19981123 0000351710-98-000011.hdr.sgml : 19981123 ACCESSION NUMBER: 0000351710-98-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 DATE AS OF CHANGE: 19981120 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GBC BANCORP CENTRAL INDEX KEY: 0000351710 STANDARD INDUSTRIAL CLASSIFICATION: 6022 IRS NUMBER: 953586596 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10731 FILM NUMBER: 98753293 BUSINESS ADDRESS: STREET 1: 800 W. 6TH STREET STREET 2: 15TH FLOOR CITY: LOS ANGELES STATE: CA ZIP: 90017 BUSINESS PHONE: 2139724172 MAIL ADDRESS: STREET 1: 800 W. 6TH ST STREET 2: 15TH FL CITY: LOS ANGELES STATE: CA ZIP: 90017 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 Quarterly Report Under Section 13 or 15(d) of The Securities Exchange Act of 1934 For Quarter Ended September 30, 1998 Commission file number 0-16213 --------- GBC BANCORP - - ------------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) California 95-3586596 - - ------------------------------------------------------------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 800 West 6th Street, Los Angeles, California 90017 - - ------------------------------------------------------------------------------ (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code 213/972-4174 -------------- - - ------------------------------------------------------------------------------ Former name address and former fiscal year, if changed since last report. Indicate by check mark whether the registrant (1) has 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, 14,162,898 shares issued and outstanding as of September 30, 1998. TABLE OF CONTENTS PART I - FINANCIAL INFORMATION........................................... Item 1. Financial Statements........................................... Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................... PART II - OTHER INFORMATION............................................... Item 1. Legal Proceedings.............................................. Item 2. Changes In Securities.......................................... Item 3. Default Upon Senior Securities................................. Item 4. Submission Of Matters To A Vote Of Securities Holders ......... Item 5. Other Information.............................................. Item 6. Exhibits And Reports On Form 8-K............................... PART III - SIGNATURES..................................................... PART I - FINANCIAL INFORMATION GBC BANCORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
September 30, December 31, (In Thousands) 1998 1997 - - ------------------------------------------------------------------------------ ASSETS Cash and Due From Banks $ 30,070 $ 32,519 Federal Funds Sold and Securities Purchased Under Agreements to Resell 137,500 108,000 Securities Available for Sale at Fair Value (Amortized Cost of $613,407 and $640,791 at September 30, 1998 and December 31, 1997, Respectively) 621,626 643,660 Securities Held to Maturity (Fair Value of $62,481 and $58,169 at September 30 1998 and December 31, 1997, Respectively) 62,293 58,045 Loans and Leases 751,116 638,829 Less: Allowance for Credit Losses (17,410) (16,776) Deferred Loan Fees (5,788) (4,448) ------------- ------------- Loans and Leases, Net 727,918 617,605 Bank Premises and Equipment, Net 5,498 5,709 Other Real Estate Owned, Net 6,803 7,871 Due From Customers on Acceptances 7,463 11,768 Real Estate Held for Investment 7,365 8,360 Accrued Interest Receivable and Other Assets 16,251 15,900 ------------- ------------- Total Assets $ 1,622,787 $ 1,509,437 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Non-Interest Bearing Demand $ 156,446 $ 149,616 Interest Bearing Demand 266,874 218,729 Savings 83,086 96,340 Time Certificates of Deposit of $100,000 or More 585,672 595,077 Other Time Deposits 287,989 232,070 ------------- ------------- Total Deposits 1,380,067 1,291,832 Subordinated Debt 38,843 38,745 Acceptances Outstanding 7,463 11,768 Accrued Expenses and Other Liabilities 26,071 20,769 ------------- ------------- Total Liabilities 1,452,444 1,363,114 Stockholders' Equity: Common Stock, No Par or Stated Value; 40,000,000 and 20,000,000 Shares Authorized at September 30, 1998 and December 31, 1997, Respectively; 14,162,898 and 6,995,049 Shares Outstanding at September 30, 1998 and December 31, 1997, Respectively $ 56,067 $ 53,314 Accumulated Other Comprehensive Income 4,754 1,654 Retained Earnings 109,522 91,355 ------------- ------------- Total Stockholders' Equity 170,343 146,323 ------------- ------------- Total Liabilities and Stockholders' Equity $ 1,622,787 $ 1,509,437 ============= =============
See Accompanying Notes to Consolidated Financial Statements GBC BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended September 30, September 30, (In Thousands, Except Per Share Data) 1998 1997 1998 1997 - - ----------------------------------------------------------------------------------------- INTEREST INCOME Loans and Leases, Including Fees $ 20,237 $ 15,951 $ 54,689 $ 46,921 Securities Available for Sale 10,132 9,505 30,418 26,594 Securities Held to Maturity 1,129 917 3,796 1,681 Federal Funds Sold and Securities Purchased under Agreements to Resell 1,843 1,812 5,311 5,882 Other 1 4 7 4 ---------- ---------- ---------- ---------- Total Interest Income 33,342 28,189 94,221 81,082 INTEREST EXPENSE Interest-Bearing Demand 2,001 1,379 5,169 3,856 Savings 535 747 1,778 2,310 Time Certificates of Deposit of $100,000 or More 7,684 7,528 23,306 21,616 Other Time Deposits 3,611 2,373 10,047 6,444 Federal Funds Purchased and Securities Sold under Repurchase Agreements 2 10 18 12 Subordinated Debt 870 886 2,611 1,684 ---------- ---------- ---------- ---------- Total Interest Expense 14,703 12,923 42,929 35,922 Net Interest Income 18,639 15,266 51,292 45,160 Provision for Credit Losses - - - 1,000 ---------- ---------- ---------- ---------- Net Interest Income after Provision for Credit Losses 18,639 15,266 51,292 44,160 NON-INTEREST INCOME Service Charges and Commissions 1,633 1,532 4,731 4,298 Gain on Sale of Loans, Net 344 56 368 130 Other 258 187 721 472 ---------- ---------- ---------- ---------- Total Non-Interest Income 2,235 1,775 5,820 4,900 NON-INTEREST EXPENSE Salaries and Employee Benefits 5,015 4,238 13,674 12,039 Occupancy Expense 727 701 2,213 2,109 Furniture and Equipment Expense 523 464 1,524 1,337 Other Real Estate Owned Expense, Net 51 481 490 960 Other 1,853 1,409 5,078 4,460 ---------- ---------- ---------- ---------- Total Non-Interest Expense 8,169 7,293 22,979 20,905 Income before Income Taxes and Extraordinary Item 12,705 9,748 34,133 28,155 Provision for Income Taxes 4,827 3,402 12,781 9,605 Net Income before Extraordinary ---------- ---------- ---------- ---------- Item 7,878 6,346 21,352 18,550 Extraordinary Item: Early Extinguishment of Debt, Net of Taxes of $353,000 - (488) - (488) ---------- ---------- ---------- ---------- Net Income $ 7,878 $ 5,858 $ 21,352 $ 18,062 ========== ========== ========== ========== Basic Earnings Per Share: Net Income before Extraordinary Item $ 0.56 $ 0.46 $ 1.51 $ 1.36 Extraordinary Item - (0.03) - (0.03) ---------- ---------- ---------- ---------- Net Income $ 0.56 $ 0.43 $ 1.51 $ 1.33 ========== ========== ========== ========== Diluted Earnings Per Share: Net Income before Extraordinary Item $ 0.55 $ 0.44 $ 1.48 $ 1.32 Extraordinary Item - (0.03) - (0.03) ---------- ---------- ---------- ---------- Net Income $ 0.55 $ 0.41 $ 1.48 $ 1.29 ========== ========== ========== ==========
See Accompanying Notes to Consolidated Financial Statements GBC BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For Three Months Ended For Nine Months Ended September 30, September 30, (In Thousands) 1998 1997 1998 1997 - - ------------------------------------------------------------------------------------- Net Income $ 7,878 $ 5,858 $ 21,352 $ 18,062 ---------- ---------- ---------- ---------- Other Comprehensive Income, Net of Tax: Change in Unrealized Gains on Securities Available for Sale, Net of Tax, During the Period 2,216 1,583 3,100 978 ---------- ---------- ---------- ---------- Other Comprehensive Income 2,216 1,583 3,100 978 ---------- ---------- ---------- ---------- Comprehensive Income $ 10,094 $ 7,441 $ 24,452 $ 19,040 ========== ========== ========== ==========
See Accompanying Notes to Consolidated Financial Statements GBC BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, (In Thousands) 1998 1997 - - ------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net Income $ 21,352 $ 18,062 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation 947 890 Net Amortization/(Accretion) of Premiums/Discounts on Securities 363 (196) Accretion of Discount on Subordinated Notes 98 22 Writedown on Real Estate Held for Investment 995 995 Provision for Credit Losses - 1,000 Provision for Losses on Other Real Estate Owned - 150 Amortization of Deferred Loan Fees (2,396) (1,676) Gain on Sale of Loans (368) (130) Gain on Sale of Other Real Estate Owned (114) (126) Gain on Sale of Bank Premises and Equipment - (21) Loans Originated for Sale - (30,479) Proceeds from Sale of Loans Originated for Sale 368 27,562 Net Decrease in Accrued Interest Receivable and Other Assets (2,601) (18) Net Increase in Accrued Expenses and Other Liabilities 6,591 4,053 Other, Net 19 (3) ---------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 25,254 $ 20,085 ========== ========== INVESTING ACTIVITIES: Purchases of Securities Available for Sale (244,275) (404,880) Proceeds from Maturities of Securities Available for Sale 271,123 300,446 Purchases of Securities Held to Maturity (50,090) (48,947) Proceeds from Maturities of Securities Held to Maturity 46,015 11,285 Net Increase in Loans and Leases (108,818) (9,897) Proceeds from Sale of Other Real Estate Owned 2,453 1,786 Capitalized Costs of Other Real Estate Owned (370) (368) Purchases of Bank Premises and Equipment (756) (734) Proceeds from Sale of Bank Premises and Equipment - 21 ---------- ---------- NET CASH USED BY INVESTING ACTIVITIES $(84,718) $(151,288) ---------- ---------- FINANCING ACTIVITIES: Net Increase in Noninterest Bearing Demand, Interest-Bearing Demand and Savings Deposits 41,721 20,555 Net Increase in Time Certificates of Deposit and Other Time Deposits 46,514 61,218 Proceeds from Issuance of Subordinated Notes - 38,690 Redemption of Subordinated Note - (15,000) Cash Dividend Paid (2,962) (2,306) Proceeds from Exercise of Stock Options 1,242 3,015 ---------- ---------- NET CASH PROVIDED BY FINANCING ACTIVITIES $ 86,515 $ 106,172 ---------- ---------- NET CHANGE IN CASH AND CASH EQUIVALENTS 27,051 (25,031) Cash and Cash Equivalents at Beginning of Period 140,519 187,009 ---------- ---------- Cash and Cash Equivalents at End of Period $ 167,570 $ 161,978 ========== ========== Supplemental Disclosures of Cash Flow Information: Cash Paid During This Period Interest $ 42,540 $ 35,932 Income Taxes (Amount net of $1,426 of tax refunds plus interest) 3,538 3,780 ========== ========== Noncash Investing Activities: Loans Transferred to Other Real Estate Owned at Fair Value $1,036 $ 4,060 Loans to Facilitate the Sale of Other Real Estate Owned 137 715 ========== ==========
See Accompanying Notes to Consolidated Financial Statements GBC Bancorp and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - - ------------------------------------------------------- In the opinion of management, the unaudited consolidated financial statements of GBC Bancorp and its subsidiaries (the "Company") as of September 30, 1998 and the three and nine months ended September 30, 1998 and 1997, reflect all adjustments (which consist only of normal recurring adjustments) necessary for a fair presentation. Operating results for the three and nine months ended September 30, 1998, are not necessarily indicative the results that may be expected for the full year ending December 31, 1998. In the opinion of management, the aforementioned consolidated financial statements are in conformity with generally accepted accounting principles. Earnings Per Share - - ------------------- Basic earnings per share is determined by dividing net income 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. Earnings per share for the three-month and nine-month periods ended September 30, 1997 have been restated to reflect a 2 for 1 stock split to shareholders of record on April 30, 1998 and issued and distributed on May 15, 1998. Consolidated Statements of Cash Flows - - -------------------------------------- Cash and cash equivalents consist of cash and due from banks, and federal funds sold and securities purchased under agreements to resell. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF ---------------------------------------- FINANCIAL CONDITION AND RESULTS OF OPERATIONS ---------------------------------------------- OVERVIEW - - --------- Net income for the third quarter of 1998 was $7,878,000, or $0.55 diluted earnings per share, compared to $5,858,000 or $0.41 diluted earnings per share, for the corresponding period of 1997. The third quarter of 1997 included an after tax extraordinary charge of $488,000 incurred upon an early extinguishment of debt. Excluding this extraordinary charge, net income for the third quarter of 1997 was $6,346,000, or $0.44 diluted earnings per share. The increase in net income was due to an increase in net interest income and non-interest income, and the absence of an extraordinary charge, partially offset by an increase of non-interest expense. 1998 was favorably impacted by the repayments in full of two performing loans, one of which was a restructured debt. The repayments resulted in the recognition of $1,458,000 of pretax interest income, $1.7 million of recoveries to the allowance for credit losses, and the reduction of $7.0 million of restructured loans. For the nine months ended September 30, 1998, net income totaled $21,352,000, an increase of $3,290,000, or 18.2%, from the $18,062,000 earned during the corresponding period of 1997. Diluted earnings per share for the nine months ended September 30, 1998 was $1.48 compared to $1.29 for the same period of 1997. Excluding the 1997 extraordinary charge discussed above, net income was $18,550,000, or $1.32 diluted earnings per share. The increase in net income was primarily due to an increase in net interest income, the absence of a provision for credit losses, higher non-interest income, and the absence of an extraordinary charge, partially offset by higher non-interest expense. As of September 30, 1998, record high levels were achieved for loans and leases, for total assets and stockholders' equity. For the quarter ended September 30, 1998 and 1997, the annualized return on average assets ("ROA") was 1.94% and 1.60%, respectively, and the annualized return on average stockholders' equity ("ROE") was 18.9% and 17.5%, respectively. For the nine months ended September 30, 1998 and 1997, the ROA was 1.81% and 1.73%, respectively. For the nine months ended September 30, 1998 and 1997, the ROE was 18.1% and 19.4%, respectively. On September 17, 1998,the Board of Directors authorized a stock repurchase program of up to 1.4 million shares of the Company's stock. No shares were purchased as of September 30, 1998 but as of November 13, 1998, 368,600 shares had been repurchased and will be reflected in the financial results of the fourth quarter and thereafter. Recent Developments - - -------------------- During 1998, significant disruptions to certain financial markets in Asia have continued. Although the Company engages in international trade financing, the majority of the business involves imports and all of the Company's loans are denominated in U.S. dollars. The Company has no foreign loans in its loan portfolio as of September 30, 1998. The primary source of prepayment for substantially all of the Company's loans is from the cash flows generated from the borrowers' operations, which are located within the United States. There could be adverse financial impacts on individual borrowers as they adjust their businesses to the changes caused by the financial disruptions, but at this time, management believes that negative impacts, if any, should not be significant. On November 13, 1998, GBC Bancorp announced that a borrower with an outstanding loan balance of $12.6 million has informed its subsidiary bank, General Bank, that it intends to file for bankruptcy proceedings. Accordingly, General Bank has placed these loans on non-accrual. These loans are collateralized by a first deed of trust on a commercial property with an appraised value of $8.0 million as well as other assets of the borrower, including equipment with a book value exceeding $10 million. An updated estimate of the value of the collateral, together with the credit evaluation of the rest of the loan portfolio, will be performed as usual at year-end to determine the adequacy of the allowance for credit losses. However, it is possible that a provision for credit losses of some amount may have to be recorded in the fourth quarter of 1998. RESULTS OF OPERATIONS - - ---------------------- Net Interest Income-Quarterly Results - - -------------------------------------- For the quarters ended September 30, 1998 and 1997, net interest income before the provision for credit losses was $18,639,000 and $15,266,000, respectively, representing an increase of $3,373,000, or 22.1%. The components explaining this increase are discussed below. Total interest income for the quarter ended September 30, 1998 was $33,342,000, representing a $5,153,000, or 18.3%, increase over the corresponding quarter of a year ago. The increase was due to both the growth of $182.9 million, or 13.2%, of average interest earning assets and a 36-basis points increase in the yield on average earning assets from 8.09% during the third quarter in 1997 to 8.45% in the corresponding quarter of 1998. The increase of average interest earning assets was comprised primarily of loan growth of $120.4 million. There was also a $60.3 million and $2.1 million growth of the securities portfolio and federal funds sold and securities purchased under agreements to resell, respectively. The 36-basis point increase in the yield on earning assets from the third quarter of 1997 to the corresponding quarter of 1998 was primarily the result of the repayment of the two performing loans and the recognition of $1,458,000 of interest income recoveries. Excluding the $1,458,000 of the interest income recoveries, the yield on interest earning assets for the third quarter of 1998 would be 8.08%, a 1-basis point decline from the corresponding year ago period of 1997. The decline is due to reductions of the yield in both the securities and the loan and lease portfolios. The impact of these yield declines was partially offset by an increase of the percentage of average loans and leases to total average interest earning assets. For the quarter ended September 30, 1998, average loans and leases represented 46.8% of total average interest earning assets compared to 44.3% for the corresponding period of a year ago. Average loans and leases for 1997 excludes $13.0 million of loans to depository institutions. There were no loans to depository institutions outstanding during 1998. Loans and leases represents the highest yielding interest earning asset. Total interest expense for the quarter ended September 30, 1998 was $14,703,000, representing a $1,780,000, or 13.8%, increase over the corresponding quarter of a year ago. The increase was due to both a growth of $120.8 million of average-interest bearing liabilities, and an increased cost of funds. For the quarter ended September 30, 1998, the cost of funds was 4.60% compared to 4.47% for the corresponding period of a year ago. This increase was primarily the result of an increase in the rates paid on interest-bearing deposits, which increased from 4.30% to 4.46% for the quarters ended September 30, 1997 and 1998, respectively. With the exception of savings deposits whose average balance declined in the third quarter 1998 compared to third quarter 1997, the rates paid on all interest-bearing deposits increased. In addition, the increase in the average amount of subordinated debt increased interest expense. For the quarters ended as indicated, the average balance and the cost of funds for subordinated debt and the Bank's deposit products were as follows:
For the Quarter Ended September 30, 1998 1997 ------------------------------------- Interest-bearing demand - Average balance 276,119 235,426 Rate 2.88% 2.32% Savings - Average balance 81,676 108,893 Rate 2.60% 2.73% Time certificates of deposit: of $100,000 or more - Average balance 584,159 574,481 Rate 5.22% 5.20% Other time deposits - Average balance 288,046 191,886 Rate 4.97% 4.90% Subordinated debt - Average balance 38,821 36,770 Rate 8.96% 9.64%
In addition, upward pressure on the rates paid on deposits was exerted as a result of the increased percentage of average time certificates of deposit to average total interest-bearing deposits. This percentage was 70.9% and 69.0% for the quarters ended September 30, 1998 and 1997, respectively. Time certificates of deposit represent the most costly deposit product for the Bank. The net interest spread is defined as the yield on interest earning assets less the rates paid on interest-bearing liabilities. For the three months ended September 30, 1998 and 1997, the net interest spread increased to 3.85% from 3.62%, respectively. The increase in the spread is primarily the result of the interest income recoveries discussed above. Excluding the interest income recoveries of $1,458,000, the net interest spread is 3.48% for the three months ended September 30, 1998. The 14-basis point decrease is primarily due to the increased cost of funds as explained above. The net interest margin is defined as the annualized difference between interest income and interest expense divided by average interest earning assets. For the three months ended September 30, 1998 and 1997, the net interest margin was 4.73% and 4.38%, respectively. The increase in the spread is primarily the result of the interest income recoveries discussed above. Excluding these recoveries, the net margin for the three months ended September 30, 1998 was 4.36%, down two basis-points from the corresponding period of a year ago. Net Interest Income - Year-to-Date Results - - ------------------------------------------- For the nine months ended September 30, 1998, net interest income before the provision for credit losses was $51,292,000, representing a $6,132,000, or 13.6%, growth over the corresponding period of a year ago. Total interest income for the nine months ended September 30, 1998 was $94,221,000 compared to $81,082,000 for the corresponding period of a year ago. The $13,139,000, or 16.2%, increase is primarily the result of an increase in both the balance of average interest earning assets and to a lesser extent in the yield on average interest earning assets. Average interest earning assets increased to $1,525.5 million for the nine months ended September 30, 1998 from $1,322.5 million for the corresponding period of a year ago, representing a $203.0 million, or 15.4%, increase. The growth was represented by increases of $127.9 million and $90.8 million in the securities and loan and lease portfolios, respectively, partially offset by $15.7 million decrease of federal funds sold and securities purchased under agreements to resell. The yield on average earning assets increased six basis points to 8.26% for the nine months ended September 30, 1998 from 8.20% for the corresponding period of a year ago. However, as was the case for the quarterly net interest discussion above, when interest income recoveries of $1,458,000 are excluded, the 1998 yield decreased compared to 1997. A resulting 7-basis point decline was due to yield decreases of all categories of earning assets. This was partially offset by an increase of the percentage of average loans and leases to total average interest earning assets. For the nine months ended September 30, 1998 and 1997, average loans and leases as a percentage of total average interest earning assets were 45.5% and 43.4%, respectively. The 1997 average loans and leases included $28.6 million of loans to depository institutions which has been factored out for the above computation. The Bank had no outstanding loans to depository institutions during 1998. Total interest expense for the nine months ended September 30, 1998, was $42,929,000 compared to $35,922,000 for the corresponding period of a year ago. The increase of $7,007,000, or 19.5%, was due to an increase in the average balance of interest bearing deposits and an increase in the cost of funds. For the nine months ended September 30, 1998 and 1997, the average balance of interest bearing deposits was $1,247.2 million and $1,109.1 million, respectively, an increase of $138.1 million, or 12.5%. The majority of this increase was represented by the growth of the average balance of time certificates of deposit from $745.2 million for the nine months endedg September 30, 1997 to $863.3 million for the nine months ended September 30, 1998, representing $118.1 million, or 15.9% increase. Of this growth, average public funds accepted from the State of California accounted for $88.3 million, thereby representing the majority of growth in time certificates of deposit. For the nine months ended September 30, 1998 and 1997, the cost of funds increased by 27-basis points to 4.60% from 4.33%, respectively. The increase continues as the result primarily of both the increased percentage of total average interest bearing deposits represented by time certificates of deposits and the increased rates paid on all categories of interest bearing deposits with the exception of saving deposits. For the nine months ended September 30, 1998 and 1997, average time certificates of deposit as a percentage of total average interest-bearing deposits were 71.5% and 68.6%, respectively. Time certificates of deposit represent the most costly deposit product for the Bank. In addition, interest expense increased as a result of the increase in the average amount of subordinated debt by 74%, albeit at a reduced rate of interest. The average balance and the rates paid on deposit categories and subordinated debt for the nine months ended September 30, 1998 and 1997 were as follows:
1998 1997 -------------------------- Interest-bearing demand - Average balance 256,495 227,653 Rate 2.69% 2.26% Savings - Average balance 88,176 113,576 Rate 2.70% 2.72% Time certificates of deposit: of $100,000 or more - Average balance 593,351 565,040 Rate 5.25% 5.11% Other time deposits - Average balance 269,971 180,168 Rate 4.98% 4.78% Subordinated debt - Average balance 38,789 22,336 Rate 8.98% 10.05%
For the nine months ended September 30, 1998 and 1997, the net interest spread declined to 3.66% from 3.87%, respectively, representing a 21-basis point decrease. The compression of the spread is primarily the result of the interest-bearing liabilities as discussed in the above paragraphs, partially offset by the $1,458,000 of interest income recoveries. Excluding these recoveries, the net interest spread for 1998 was 3.53%. For the nine months ended September 30, 1998 and 1997, the net interest margin was 4.50% and 4.57%, respectively, representing a 7-basis point decline. Excluding the interest income recoveries, the net interest margin was 4.37%, representing a 20-basis point decline from the corresponding nine month period of a year ago. Provision for Credit Losses - - ---------------------------- For the quarters ended September 30, 1998 and 1997, there was no provision for credit losses. Net recoveries were $1.9 million for the quarter ended September 30, 1998 and was primarily due to the repayment of the loans mentioned previously. For the nine months ended September 30, 1998, there was no provision for credit losses compared to $1,000,000 for the same period of 1997, a decrease of $1,000,000. Year-to-date net recoveries were $0.6 million compared to $2.2 million of net charge-offs for the corresponding period of a year ago. The absence of a provision for credit losses reflects management's assessment of the adequacy of the allowance for credit losses. 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 borrower's ability to repay, and estimates of potential future losses. Please refer to further discussion under "Allowance for Credit Losses," in the following sections. Non-Interest Income - - -------------------- Non-interest income for the quarter ended September 30, 1998 totaled $2,235,000, representing a $460,000, or 25.9%, increase compared to $1,775,000 for the quarter ended September 30, 1997. The increase was primarily the result of the transfer and sale of the Bank's mortgage loan servicing portfolio for a pretax amount of $338,000. Such amount is included as gain on sale of loans, net. In addition, service charges and commissions increased $101,000 for the quarter ended September 30, 1998 as compared to the quarter ended September 30, 1997 which resulted from the increased commissions on commercial and standby letters of credit issuance. For the nine months ended September 30, 1998, non-interest income totaled $5,820,000 representing a $920,000, or 18.8%, increase compared to $4,900,000 for the nine months ended September 30, 1997. Other income increased $249,000 primarily due to the interest received on a tax refund in the first quarter of 1998. Increases in service charges and commissions and on gain on sale of loans were for the reasons explained above. Non-Interest Expense - - --------------------- For the quarter ended September 30, 1998, non-interest expense was $8,169,000, representing an $876,000, or 12.0%, increase over 7,293,000 for the corresponding period of a year ago. Salaries and employee benefits accounted for $777,000 of the increase due to an increase of salaries, an increase of the incentive compensation which is based on pretax earnings, and the accrual of compensation based on a 1998 employment agreement. Other expense increased $444,000, or 31.5%, due to increased legal fees, professional services expense and various other expense categories. The increase to other expense was partially offset by a $430,000 decrease in other real estate owned ("OREO") expense, net. The decline was due to the absence of a provision for OREO losses and a reduction of OREO holding expenses. For the nine months ended September 30, 1998, non-interest expense was $22,979,000 representing a $2,074,000, or 9.9% increase over the $20,905,000 reported for the corresponding period of a year ago. The reason for the increase is explained above. For the nine months ended September 30, 1998, the Company's efficiency ratio, defined as non-interest expense divided by the sum of net interest income plus non-interest income, declined to 40.2%, comparing favorably to 41.8% for the corresponding period of 1997. Provision for Income Taxes - - --------------------------- For the quarter ended September 30, 1998 and 1997, the provision for income taxes was $4,827,000 and $3,402,000, respectively, representing effective tax rates of 38.0% and 34.9%. For the nine months ended September 30, 1998 and 1997, the provision for income taxes was $12,781,000 and $9,605,000, representing effective tax rates of 37.4% and 34.1%, respectively. The increase in the effective tax rates for the three month and nine month periods ended September 30, 1998 compared to the corresponding periods of a year ago is primarily due to the growth of pre-tax income while the low income housing tax credit remained constant. Extraordinary Item - - ------------------- During the quarter ended September 30, 1997, the Company incurred an $841,000 prepayment for the early extinguishment of debt. This amount, net of taxes of $353,000, is included in the consolidated statements of income as an extraordinary item for the three and nine months ended September 30, 1997. There have been no extraordinary items during the nine months ended September 30, 1998. FINANCIAL CONDITION - - -------------------- Total assets as of September 30, 1998 were $1,622.8 million, an increase of $113.4 million from total assets of $1,509.4 million as of December 31, 1997. The increase was the result of an $88.2 million growth of deposits that was invested primarily in loans and leases. As of September 30, 1998, loans and leases totaled $751.1 million compared to $638.8 million as of December 31, 1997, a growth of $112.3 million, or 17.6%. Loans - - ------ The $112.3 million loan growth was mainly due to increases of $65.2 million and $53.3 million in the commercial and construction loan portfolios, respectively. The commercial loan growth was primarily in the trade financing area which increased $54.5 million reflecting the growth in international trade and new customer relationships. 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:
September 30, 1998 December 31, 1997 -------------------------------------------------------- (DOLLARS IN THOUSANDS) Amount Percentage Amount Percentage - - ------------------------------------------------------------------------------------ Commercial $ 298,474 39.74% $ 233,309 36.52% Real Estate - Construction 143,846 19.15% 90,560 14.18% Real Estate - Conventional 271,743 36.18% 276,350 43.26% Installment 48 0.01% 54 0.01% Other Loans 21,439 2.85% 23,993 3.75% Leveraged Leases 15,566 2.07% 14,563 2.28% -------------------------------------------------- Total $ 751,116 100.00% $ 638,829 100.00% ==================================================
Non-Performing Assets - - ---------------------- A certain degree of risk is inherent in the extension of credit. Management has credit policies in place to minimize the level of loan losses and non-performing loans. The Company performs a quarterly assessment of the credit portfolio to determine the appropriate level of the allowance; included in the assessment is the identification of loan impairment. A loan is identified as impaired when it is probable that interest and principal will not becollected according to the contractual terms of the loan agreement. Loan impairment is measured by estimating the expected future cash flows and discounting them at the respective effective interest rate or by valuing the underlying collateral. The Company has a policy of classifying loans (including impaired loans) which are 90 days past due as to principal and/or interest as non- accrual loans unless management determines that the fair value of underlying collateral is substantially in excess of the loan amount or other circumstances justify treating the loan as fully collectible. After a loan is placed on non-accrual status, any interest previously accrued, but not yet collected, is reversed against current income. A loan is returned to accrual status only when the borrower has demonstrated the ability to make future payments of principal and interest as scheduled, and the borrower has demonstrated a sustained period of repayment performance in accordance with the contractual terms. Interest received on non-accrual loans generally is either applied as principal reduction or reported as recoveries on amounts previously charged-off, in accordance with management's judgment as to the collectability of principal. The following table provides information on the Company's past due loans, non-accrual loans, restructured loans and other real estate owned, net, as of the dates indicated:
(IN THOUSANDS) September 30, 1998 December 31, 1997 - - ----------------------------------------------------------------------------- Loans 90 Days or More Past Due and Still Accruing $ 1,088 $ 2,778 Non-accrual Loans 12,359 9,834 ---------- ---------- Total Past Due Loans 13,447 12,612 Restructured Loans 11,188 20,323 ---------- ---------- Total Non-performing Loans 24,635 32,935 Other Real Estate Owned, Net 6,803 7,871 ---------- ---------- Total Non-Performing Assets $ 31,438 $ 40,806 ========== ==========
Total non-performing assets decreased to $31.4 million, as of September 30, 1998, from $40.8 million, as of December 31, 1997, representing a $9.4 million, or 23.0%, reduction. The net decrease was primarily due to the pay-off of $7.0 million of restructured loans in the third quarter of 1998. Loans 90 days or More Past Due and Still Accruing - - -------------------------------------------------- As of September 30, 1998, this category of loans is comprised of two credits. It is anticipated that both loans will be paid off in full in the near future. Non-Accrual Loans - - ------------------ As of September 30, 1998, non-accrual loans totaled $12.4 million, an increase of $2.6 million from December 31, 1997, but a reduction from first and second quarter levels in 1998. The following table breaks out the Company's non-accrual loans by category as of the dates indicated:
(IN THOUSANDS) September 30, 1998 December 31, 1997 - - ---------------------------------------------------------------------- Commercial $ 9,330 $ 5,957 Real Estate- Construction 335 455 Real Estate- Conventional 2,689 3,414 Other Loans 5 8 ---------- --------- Total $ 12,359 $ 9,834 ========== =========
Of the $12.4 million of non-accrual loans, $3.0 million are collateralized by real property with appraisal value considerably in excess of the carrying value of the loans, thus providing substantial protection against the loss of principal. The increase in those non-accrual loans classified as commercial is primarily in the trade financing portfolio. These loans are collateralized by a variety of business assets and the Bank does not anticipate any significant losses. The following table analyzes the change in non-accrual loans during the nine months ended September 30, 1998:
(IN THOUSANDS) - - ------------------------------------------------------- Balance, December 31, 1997 $ 9,834 Add: Loans placed on non-accrual 12,281 Less: Charge-offs (1,851) Returned to accrual status (1,690) Repayments (5,179) Transfer to OREO (1,036) ---------- Balance, September 30, 1998 $ 12,359 ==========
Restructured Loans - - ------------------- The balance of restructured loans as of September 30, 1998 was $11.2 million compared to $20.3 million as of December 31, 1997, representing a $9.1 million, or 44.8% decrease. As indicated previously, the decline was primarily due to the pay-off of $7.0 million of restructured loans during the third quarter. A loan is categorized as restructured if the original interest rate on such loan, the repayment terms, or both, are modified due to a deterioration in the financial condition of the borrower. Restructured loans may also be put on non-accrual status in accordance with the Bank's policy of classifying loans which are 90 days past due as to principal and/or interest. Restructured loans which are on non-accrual status are not included in the balance of restructured loans. As of September 30, 1998, one restructured loan totaling $685,000 was on non-accrual status. As of September 30, 1998, restructured loans excluding the one non-accrual loan consisted of 11 loans compared to 15 loans as of December 31, 1997. The weighted average yield of the restructured loans was 10.00% as of September 30, 1998. There are no commitments to lend additional funds on any of the restructured loans. Other Real Estate Owned - - ------------------------ As of September 30, 1998, other real estate owned, net of valuation allowance of $2.0 million, totaled $6.8 million, representing a decrease of $1.1 million, or 13.9%, from the net balance of $7.9 million, net of valuation allowance of $2.1 million, as of December 31, 1997. As of September 30, 1998 and December 31, 1997, OREO consisted of 20 properties and 17 properties, respectively. The outstanding OREO properties are all physically located in the Bank's market area. They include single family residences, condominiums, commercial buildings, and land. Seven properties comprise the land category of OREO. The Company does not intend to develop these properties; rather, it will sell the land undeveloped. The following table sets forth OREO by property type as of the dates indicated:
(IN THOUSANDS) September 30, 1998 December 31, 1997 - - ----------------------------------------------------------------------------- PROPERTY TYPE Single-Family Residential $ 474 $ 380 Condominium 1,090 2,598 Multi-Family Residential - 220 Land for Residential 3,715 3,715 Land for Commercial 15 - Land for Agriculture - 15 Retail Facilities 3,509 3,003 Less: Valuation Allowance (2,000) (2,060) --------- --------- Total $ 6,803 $ 7,871 ========= =========
Impaired Loans - - --------------- A loan is identified as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the loan agreement. Loan impairment is measured by estimating the expected future cash flows and discounting them at the respective effective interest rate or by valuing the underlying collateral. Of the $5.5 million of outstanding impaired loans as of September 30, 1998, $1.6 million are included in the balance of restructured loans and are performing pursuant to the terms and conditions of the restructuring. The following table discloses pertinent information as it relates to the Company's impaired loans as of the dates indicated:
(IN THOUSANDS) September 30, 1998 December 31, 1997 - - ------------------------------------------------------------------------------ Recorded Investment with Related Allowance $ 5,476 $ 16,095 Recorded Investment with no Related Allowance - 1,022 --------- ---------- Total Recorded Investment 5,476 17,117 Specific Allowance on Impaired Loans 665 1,544
The average balance of impaired loans before the allowance was $13.3 million for the nine months ended September 30, 1998 and $22.4 million for the year ended December 31, 1997. For the nine months ended September 30, 1998 and 1997, interest income recognized on impaired loans was $233,000 and $1,304,000, respectively. Of the amount of interest income recognized during the nine months ended September 30, 1998 and 1997, no interest was recognized under the cash basis method. Management cannot predict the extent to which the current economic environment, including the real estate market, may continue to improve or worsen, or the full impact such environment may have on the Bank's loan portfolio. Futhermore, as the Bank's primary regulators review the loan portfolio as part of their routine, periodic examinations of the Bank, their assessment of specific credits may affect the level of the Bank's non- performing loans. Accordingly, there can be no assurance that other loans will not be placed on non-accrual, become 90 days or more past due, have terms modified in the future, or become OREO. Allowance for Credit Losses - - ---------------------------- As of September 30, 1998, the balance of the allowance for credit losses was $17.4 million, representing 2.32% of outstanding loans and leases. This compares to an allowance for credit losses of $16.8 million as of December 31, 1997, representing 2.63% of outstanding loans and leases, respectively. The table below summarizes the activity in the total allowance for credit losses (which amount includes the specific allowance on impaired loans) for the nine months ended as indicated below:
(IN THOUSANDS) September 30, 1998 September 30, 1997 - - ----------------------------------------------------------------------------- Balance, Beginning of Period $ 16,776 $ 16,209 Provision for Credit Losses - 1,000 Charge-offs (1,829) (4,207) Recoveries 2,463 1,960 Net Recoveries (Charge-offs) 634 (2,247) Balance, End of Period $ 17,410 $ 14,962
As of September 30, 1998, the allowance represents 70.7% and 141% of non- performing loans and of non-accrual loans, respectively. As of December 31, 1997, the allowance represented 50.9% and 171% of non-performing loans and of non-accrual loans, respectively. On a quarterly basis, management reviews all criticized credits as identified both internally and by outside sources, including the Bank's regulators. Specific allocations of a required allowance are made based on these reviews, as well as on the historical loss experience of criticized credits. In addition, a percentage of non-criticized credits is also computed for purposes of the allowance requirement. The sum of these two allocations is compared with the actual recorded allowance for adequacy. Based on management's quarterly review as of September 30, 1998, management believes no provision for credit losses was necessary. Management believes that the allowance for credit losses is adequate to cover known and inherent losses related to loans and leases outstanding as of September 30, 1998. Securities - - ----------- The Company classifies its securities as held to maturity or available for sale. Securities classified as held to maturity are those that the Company has the positive intent and ability to hold until maturity. These securities are carried at amortized cost. Securities that could be sold in response to changes in interest rates, increased loan demand, liquidity needs, capital requirements or other similar factors, are classified as securities available for sale. These securities are carried at fair value, with unrealized gains or losses reflected net of tax in stockholders' equity. As of September 30, 1998, the Company recorded net unrealized holding gains of $8,219,000 on its available for sale portfolio and the inclusion as a separate component of stockholders' equity of $4,763,000, representing the net unrealized holding gains, net of tax. The amortized cost, gross unrealized gains, gross unrealized losses and fair value of securities at September 30, 1998 and December 31, 1997 were as follows:
Gross Gross (In Thousands) Amortized Unrealized Unrealized Fair September 30, 1998 Cost Gains Losses Value - - -------------------------------------------------------------------------------------- Securities Held to Maturity U.S. Government Agencies $ 62,267 $ 188 $ - $ 62,455 Collateralized Mortgage Obligations 26 - - 26 ----------------------------------------------------- Total Securities Held to Maturity $ 62,293 $ 188 $ - $ 62,481 ===================================================== Securities Available for Sale U. S. Treasuries $ 1,866 $ 7 $ - $ 1,873 U.S. Government Agencies 87,713 399 - 88,112 Mortgage Backed Securities 45,682 576 - 46,258 Corporate Notes 3,000 - - 3,000 Collateralized Mortgage Obligations 250,854 2,519 - 253,373 Asset Backed Securities 209,732 4,648 - 214,380 Auction Preferred Stock 8,499 - - 8,499 Other Securities 6,061 70 - 6,131 ----------------------------------------------------- Total Securities Available for Sale $ 613,407 $ 8,219 $ - $ 621,626 ===================================================== Gross Gross (In Thousands) Amortized Unrealized Unrealized Fair December 31, 1997 Cost Gains Losses Value - - -------------------------------------------------------------------------------------- Securities Held to Maturity U.S. Government Agencies $ 58,003 $ 124 $ - $ 58,127 Collateralized Mortgage Obligations 42 - - 42 ----------------------------------------------------- Total Securities Held to Maturity $ 58,045 $ 124 $ - $ 58,169 ===================================================== Securities Available for Sale U. S. Treasuries $ 6,889 $ 11 $ - $ 6,900 U.S. Government Agencies 220,205 187 - 220,392 Mortgage Backed Securities 57,167 326 - 57,493 Corporate Notes 9,006 175 - 9,181 Collateralized Mortgage Obligations 188,092 460 - 188,552 Asset Backed Securities 135,263 1,710 - 136,973 Auction Preferred Stock 18,500 - - 18,500 Other Securities 5,669 - - 5,669 ----------------------------------------------------- Total Securities Available for Sale $ 640,791 $ 2,869 - $ 643,660 =====================================================
There were no sales of securities available for sale or held to maturity during the nine months ended September 30, 1998 and 1997. Deposits - - --------- The Company's deposits totaled $1,380.1 million as of September 30, 1998, representing an $88.3 million, or 6.8%, increase from total deposits of $1,291.8 million as of December 31, 1997. The growth for the nine months ended September 30, 1998, was primarily due to increases in other time deposits, which grew $55.9 million, or 24.1%. Also, interest-bearing demand deposits reflected an increase of $48.1 million, or 22.0%. During this same period savings deposits decreased $13.3 million, or 13.8%. The balance of time certificates of deposit of $100,000 or more decreased $9.4 million from December 31, 1997. Included in the September 30, 1998 balance of this deposit category is $93 million of deposits from the State of California, up $15 million from December 31, 1997. Eliminating this $15 million increase, time certificates of deposit of $100,000 or more declined $24.4 million as of September 30, 1998 compared to December 31, 1997. As of September 30, 1998, there were no brokered deposits outstanding. The Company believes that the majority of its deposit customers have strong ties to the Bank. Although the Company has a significant amount of time certificates of deposit of $100,000 or more having maturities of one year or less, historically, the depositors have generally renewed their deposits upon maturity. The maturity schedule of time certificates of deposit of $100,000 or more, as of September 30, 1998, is as follows:
(IN THOUSANDS) - - ------------------------------------------------- 3 Months or Less $ 324,985 Over 3 Months Through One Year 258,027 Over One Year through 5 Years 2,660 Total $ 585,672
Subordinated Debt - - ------------------ Subordinated debt is comprised of a $40 million public offering 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 by the Company. The discount is amortized as a yield adjustment over the 10-year life of the notes. Capital Resources - - ------------------ As of September 30, 1998, stockholders' equity totaled $170.3 million, an increase of $24.0 million, or 16.4%, from $146.3 million as of December 31, 1997. The increase was due to net income of $21.4 million, less cash dividends declared to stockholders of $3.2 million, plus the net change in the securities valuation allowance, net of tax, of $3.1 million, plus the exercise of stock options and related tax benefits of $2.7 million, for the nine months ended September 30, 1998. On September 17, 1998, the Board of Directors authorized a stock repurchase program of up to 1.4 million shares of the Company's stock. No shares were purchased as of September 30, 1998, but as of November 13, 1998, 368,600 shares had been repurchased and will be reflected in the financial results of the fourth quarter and thereafter. Capital ratios for the Company and for the Bank were as follows as of the dates indicated:
Well-Capitalized September 30, December 31, Standards 1998 1997 - - ---------------------------------------------------------------------------------- GBC Bancorp - - ------------ Tier 1 Leverage Ratio 5% 10.26% 9.58% Tier 1 Risk-Based Capital Ratio 6% 12.51% 13.57% Total Risk-Based Capital Ratio 10% 16.71% 18.47% General Bank - - ------------- Tier 1 Leverage Ratio 5% 9.34% 8.78% Tier 1 Risk-Based Capital Ratio 6% 11.40% 12.45% Total Risk-Based Capital Ratio 10% 12.65% 13.71%
Liquidity and Interest Rate Sensitivity - - ---------------------------------------- Liquidity measures the ability of the Company to meet fluctuations in deposit levels, to fund its operations and to provide for customers' credit needs. Asset liquidity is provided by cash and short-term financial instruments which include federal funds sold and securities purchased under agreements to resell, unpledged securities held to maturity maturing within one year and unpledged securities available for sale. These sources of liquidity amounted to $672.8 million, or 41.5% of total assets, as of September 30, 1998, compared to $696.3 million, or 46.1% of total assets, as of December 31, 1997. To further supplement its liquidity, the Company has established federal funds lines with correspondent banks and three master repurchase agreements with major brokerage companies. In August, 1992, the Federal Home Loan Bank of San Francisco ("FHLB") granted the Bank a line of credit currently equal to 25 percent of assets with terms up to 360 months. As of September 30, 1998, the Company has no borrowing outstanding under this financing facility with the FHLB. Management believes its liquidity sources to be stable and adequate. As of September 30, 1998, total loans and leases represented 54.4% of total deposits. This compares to 49.5% as of December 31, 1997. The liquidity of the parent company, GBC Bancorp, is primarily dependent on the payment of cash dividends by its subsidiary, General Bank, subject to the limitations imposed by the Financial Code of the State of California. For the nine months ended September 30, 1998, General Bank declared $3.2 million of cash dividends to GBC Bancorp. Derivatives - - ------------ As of September 30, 1998 and December 31, 1997, there were no derivative financial instruments outstanding. As of September 30, 1997, the amount of derivative financial instruments outstanding was $1 million. "Gap" Measurement - - ------------------ While no single measure can completely identify the impact of changes in interest rates on net interest income, one gauge of interest rate sensitivity is to measure, over a variety of time periods, contractual differences in the amounts of the Company's rate sensitive assets and rate sensitive liabilities. These differences, or "gaps," provide an indication of the extent that net interest income may be affected by future changes in interest rates. However, these contractual "gaps" do not take into account timing differences between the repricing of assets and the repricing of liabilities. A positive gap exists when rate sensitive assets exceed rate sensitive liabilities and indicates that a greater volume of assets than liabilities will reprice during a given period. This mismatch may enhance earnings in a rising rate environment and may inhibit earnings when rates decline. Conversely, when rate sensitive liabilities exceed rate sensitive assets, referred to as a negative gap, it indicates that a greater volume of liabilities than assets will reprice during the period. In this case, a rising interest rate environment may inhibit earnings and declining rates may enhance earnings. "Gap" reports originated as a means to provide management with a tool to monitor repricing differences, or "gaps," between assets and liabilities repricing in a specified period, based upon their underlying contractual rights. The use of "gap" reports is thus limited to a quantification of the "mismatch" between assets and liabilities repricing within a unique specified timeframe. Contractual "Gap" reports cannot be used to quantify exposure to interest rate changes because they do not take into account timing differences between repricing assets and liabilities, and changes in the amount of prepayments. As of September 30, 1998, there was a cumulative one-year negative "gap" of $467.7 million, compared to a one-year negative gap of $462.7 million as of December 31, 1997. The following table indicates the Company's interest rate sensitivity position as of September 30, 1998, and is based on contractual maturities. It may not be reflective of positions in subsequent periods:
0 to 90 91 to 365 Over 1 Year Over Non-Interest (In Thousands) Days Days to 5 Years 5 Years Earning/Bearing Total - - -------------------------------------------------------------------------------------------------------------------------------- Earning Assets: Securities Available for Sale $ 38,255 $ 11,876 $ 72,301 $ 499,194 $ - $ 621,626 Securities Held to Maturity - - 41,323 20,970 - 62,293 Federal Funds Sold & Securities Purchased Under Agreement to Resell 137,500 - - - - 137,500 Loans and Leases (1) (2) 545,088 18,623 90,026 85,020 - 738,757 Non-Earning Assets (2) - - - - 62,611 62,611 ----------- ----------- ----------- ----------- ------------- ------------- Total Assets $ 720,843 $ 30,499 $ 203,650 $ 605,184 $ 62,611 $ 1,622,787 Source of Funds for Assets: Deposits: Noninterest Bearing Demand $ - $ - $ - $ - $ 156,446 $ 156,446 Interest-Bearing Demand 266,874 - - - - 266,874 Savings 83,086 - - - - 83,086 TCD'S Under $100,000 118,336 167,736 1,917 - - 287,989 TCD'S $100,000 and Over 326,812 256,200 2,660 - - 585,672 ----------- ----------- ----------- ----------- ------------- ------------- Total Deposits $ 795,108 $ 423,936 $ 4,577 $ - $ 156,446 $ 1,380,067 ----------- ----------- ----------- ----------- ------------- ------------- Subordinated Debt $ - $ - $ - $ 38,843 $ - $ 38,843 Other Liabilities - - - - 33,534 33,534 Stockholders' Equity - - - - 170,343 170,343 ----------- ----------- ----------- ----------- ------------- ------------- Total Liabilities and Stockholders' Equity $ 795,108 $ 423,936 $ 4,577 $ 38,843 $ 360,323 $ 1,622,787 =========== =========== =========== =========== ============= ============= Interest Sensitivity Gap $ (74,265) $(393,437) $ 199,073 $ 566,341 $ (297,712) Cumulative Interest Sensitivity Gap $ (74,265) $(467,702) $(268,629) $ 297,712 $ - Gap Ratio (% of Total Assets) -4.6% -24.2% 12.3% 34.9% -18.3% Cumulative Gap Ratio -4.6% -28.8% -16.6% 18.3% 0.0% (1) Loans and leases are before unamortized deferred loan fees and allowance for credit losses. (2) Nonaccrual loans are included in non-earning assets.
Effective asset/liability management includes maintaining adequate liquidity and minimizing the impact of future interest rate changes on net interest income. The Company attempts to manage its interest rate sensitivity on an on-going basis through the analysis of the repricing characteristics of its loans, securities, and deposits, and managing the estimated net interest income volatility by adjusting the terms of its interest-earning assets and liabilities, and through the use of derivatives as needed. Market risk - - ------------ Market risk is the risk of financial loss arising from adverse changes in market prices and interest rates. The Company's market risk is inherent in its lending and deposit taking activities to the extent of differences in the amounts maturing or degree of repricing sensitivity. Adverse changes in market prices and interest rates may therefore result in diminished earnings and ultimately an erosion of capital. Since the Company's profitability is affected by changes in interest rates, management actively monitors how changes in interest rates may affect earnings and ultimately the underlying market value of equity. Management monitors interest rate exposure through the use of three basic measurement tools in conjunction with established risk limits. These tools are the expected maturity gap report, net interest income volatility and market value of equity volatility reports. The gap report details the expected maturity mismatch or gap between interest earning assets and interest bearing liabilities over a specified timeframe. The expected gap differs from the contractual gap report shown earlier in this section by adjusting contractual maturities for expected prepayments of principal on loans and amortizing securities as well as the projected timing of repricing non-maturity deposits. The following table shows the Company's financial instruments that are sensitive to changes in interest rates categorized by their expected maturity, as of September 30, 1998:
0 to 90 91 to 365 Over 1 Year Over (In Thousands) Days Days to 5 Years 5 Years Total - - ---------------------------------------------------------------------------------------------------------- Interest-sensitive Assets: Securities Available for Sale $ 120,220 $ 118,560 $ 346,183 $ 36,663 $ 621,626 Securities Held to Maturity 12,153 50,140 - - 62,293 Federal Funds Sold & Securities Purchased Under Agreement to Resell 137,500 - - - 137,500 Loans and Leases (1) 545,088 18,623 90,026 85,020 738,757 ----------- ----------- ----------- ----------- ------------- Total Interest-earning Assets $ 814,961 $ 187,323 $ 436,209 $ 121,683 $ 1,560,176 =========== =========== =========== =========== ============= Interest-sensitive Liabilities: Deposits: Interest-Bearing Demand $ 13,903 $ 41,714 $ 211,257 $ - $ 266,874 Savings 4,155 12,463 66,468 - 83,086 Time Certificates of Deposit 441,727 427,357 4,577 - 873,661 ----------- ----------- ----------- ----------- ------------- Total Deposits $ 459,785 $ 481,534 $ 282,302 $ - $ 1,223,621 ----------- ----------- ----------- ----------- ------------- Subordinated Debt $ - $ - $ - $ 38,843 $ 38,843 ----------- ----------- ----------- ----------- ------------- Total Interest-sensitive Liabilities $ 459,785 $ 481,534 $ 282,302 $ 38,843 $ 1,262,464 =========== =========== =========== =========== ============= (1) Loans and leases are net of non-accrual loans and before unamortized deferred loan fees and allowance for credit losses.
Expected maturities of assets are contractual maturities adjusted for projected payment based on contractual amortization and unscheduled prepayments of principal as well as repricing frequency. Expected maturities for deposits are based on contractual maturities adjusted for projected rollover rates and changes in pricing for non-maturity deposits. The Company utilizes assumptions supported by documented analysis for the expected maturities of its loans and repricing of its deposits and relies on third party data providers for prepayment projections for amortizing securities. The actual maturities of these instruments could vary significantly if future prepayments and repricing differ from the Company's expectations based on historical experience. The Company uses a computer simulation analysis to attempt to predict changes in the yields earned on assets and the rates paid on liabilities in relation to changes in market interest rates. The net interest income volatility and market value of equity volatility reports measure the exposure of earnings and capital respectively, to immediate incremental changes in market interest rates as represented by the prime rate change of 100 to 200 basis points. Market value of portfolio equity is defined as the present value of assets minus the present value of liabilities and off balance sheet contracts. The table below shows the estimated impact of changes in interest rates on net interest income and market value of equity as of September 30, 1998:
Net Interest Market Value of Change in Interest Income Volatility Portfolio Equity Volatility Rates (Basis Points) September 30, 1998 (1) September 30, 1998 (2) - - -------------------------------------------------------------------------------------- +200 5.13% -10.64% +100 3.19% -4.48% -100 -7.99% 1.22% -200 -15.62% 2.55% (1) The percentage change in this column represents the change in net interest income for 12 months under various rate scenarios. (2) The percentage change in this column represents the change in net portfolio equity value of the Bank under various rate scenarios.
The Company's primary objective in managing interest rate risk is to minimize the adverse effects of changes in interest rates on earnings and capital. In this regard the Company has established internal risk limits for net interest income volatility given a 100 and 200 basis point decline in rates of 10% and 15% respectively, over a twelve-month horizon. Similarly, risk limits have been established for market value of portfolio equity volatility in response to a 100 and 200 basis point increase in rates of 10% and 15%, respectively. Although the Company's net interest income volatility as of September 30, 1998, given a hypothetical 200-basis point decline of interest rates, was in excess of the Company's policy, management has decided to not enter into any hedging contracts because of the current volatility in money market rates and the uncertainty of the actual repricing of the Company's assets and liabilities. On September 30, 1998, the Federal Reserve Bank (the "FRB") announced a reduction of 25-basis points in the federal funds rate. Again, on October 15, 1998, the FRB reduced the federal funds rate by 25-basis points and dropped the discount rate from 5.00% to 4.75%. The decline of short-term rates affects immediately the yield of approximately $680 million of the Company's earning assets as of September 30, 1998. In addition, there is an increasing rate of prepayments of the Company's securities that will be reinvested in lower yields based on current money market conditions. Partially offsetting these reductions in interest income will be a reduction of interest expense due to lower rates paid on the Company's time certificates of deposit, which totaled $874 million as of September 30, 1998, and on other interest-bearing deposits. Although the net interest income of the Company in the future will be affected by many variables, including the amount of loan growth in the future, loan pricing, future changes in money market conditions, and asset/liability sensitivity, management expects that the immediate effect of the above changes will be a decline in the net interest spread. Year 2000 - - ---------- The Company's main software systems have been licensed from large vendors who have provided certifications of year 2000 compliance. Tests have confirmed such compliance for these main software systems. Certain ancillary systems that operate on personal computers are also licensed and the vendors have informed the Company that releases conforming to year 2000 requirements will be received this year. The Bank has budgeted $100,000 of expenses related to Year 2000 compliance. Expenses to date have been approximately $18,000. Personal computers including hardware and software that are not in compliance will be replaced or modified by June, 1999. Total expenses are expected to be under the budgeted amount. Management believes that there are no material risks to the Company from its computer systems related to the Year 2000. Certain operations, such as payroll and the administration of the Company's 401(k) plan, are outsourced to outside companies. The Company has obtained certification of their Year 2000 compliance. Management believes that there are no material risks to the Company from its outsourced operations related to the Year 2000. The Company has sent questionnaires to selected borrowers representing more than 70% of the outstanding credit commitments by dollar volume at the time of the mailing. Approximately 89% of the answers to the questionnaires had been received as of September 30, 1998. The answers were reviewed, and it has been determined that approximately 33% of the responses represent varying degrees of concern. In that group, twenty credits with loan commitments of $157 million at September 30, 1998, have been identified as having potentially adverse impact on credit quality if Year 2000 issues are not addressed. Those credits will be placed on the "Watch" list to ensure high visibility and ongoing monitoring by Bank management if the concerns are not addressed in a timely manner. Year 2000 compliance will be a factor in all credit decisions and in the specific allocations of a required allowance for credit losses. Management believes the Year 2000 does represent an area of potential risk for credit losses, but also believes the risk is manageable. However, credit losses could be realized by the Company due to Year 2000 problems affecting the businesses of borrowers. The amount of such losses would be a function of the value of the collateral associated with the individual credits. Whether such potential losses would require an additional provision for credit losses would be determined in conjunction with the normal quarterly analysis of the adequacy of the allowance for credit losses. Forward-Looking Statements - - --------------------------- Certain statements contained herein, including, without limitation, statements containing the words "believes," "intends," "expects" and words of similar import, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economics and business conditions in those areas in which the Company operates; demographic changes; competition; fluctuations in interest rates; changes in business strategy or development plans; changes in governmental regulation; credit quality; and other factors referenced herein, including, without limitation, under the captions Provision for Credit Losses, Non-Performing Assets, Allowance for Credit Losses, Market Risk Liquidity and Interest Rate Sensitivity, and Recent Developments. Given these uncertainties, the reader is cautioned not to place undue reliance on such foward-looking statements. The Company disclaims any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. Recent Accounting Developments - - ------------------------------- Accounting for Derivative Instruments and Hedging Activities Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities," ("SFAS No. 133"), establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency denominated forecasted transaction. The accounting for changes in fair value of a derivative, that is gains and losses depends on the intended use of the derivative and the resulting designation. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Initial application of SFAS 133 must be as of the beginning of an entity's fiscal quarter; on that date, hedging relationships must be designated anew and documented pursuant to the provisions of SFAS 133. SFAS 133 is not to be applied retroactively to financial statements of prior periods. Management does not believe that there will be a material adverse impact on the financial position or results of operations of the Company upon adoption of SFAS 133. Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise Statement of Financial Accounting Standards No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise" ("SFAS No. 134") amends SFAS No. 65, "Accounting for Certain Mortgage Banking Activities," which establishes accounting and reporting standards for certain activities of mortgage banking enterprises and other enterprises that conduct operations that are substantially similar. SFAS No. 134 requires that after the securitization of mortgage loans held for sale, the resulting mortgage-backed securities and other retained interests should be classified in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," based on the company's intent to sell or hold the investment. SFAS No. 134 is effective for the first fiscal quarter beginning after December 15, 1998. Implementation of SFAS 134 will not have a material adverse effect on the Company's financial condition or results of operations. PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS - - -------------------------- The Bank is a defendant in various lawsuits arising from the normal course of business. No material legal proceedings to which the Registrant or its subsidiaries is a party have been initiated or terminated during the quarter ended September 30, 1998. There have been no significant developments in any material pending legal proceedings involving the Registrant or its subsidiaries during this same quarter. Item 2. CHANGES IN SECURITIES - - ------------------------------- There have been no changes in the securities of the Registrant during the quarter ended September 30, 1998. 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 holders during the quarter ended September 30, 1998. 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: A form 8-K was filed on October 29, 1998 under items 4 and 7 for the change in the registrant's certifying accountant. PART III - SIGNATURES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GBC Bancorp (Registrant) Dated: November 16, 1998 s/ Li-Pei Wu ------------------------ ------------------------- Li-Pei Wu, Chairman and Chief Executive Officer Dated: November 16, 1998 s/ Peter Lowe ------------------------ -------------------------- Peter Lowe, Executive Vice President and Chief Financial Officer EX-27 2
9 YEAR DEC-31-1998 JAN-01-1998 SEP-30-1998 30,070 0 137,500 0 621,626 62,293 62,481 751,116 17,410 1,622,787 1,380,067 0 33,534 38,843 0 0 56,067 114,276 1,622,787 54,689 39,525 7 94,221 40,300 2,629 51,292 0 0 22,979 34,133 21,352 0 0 21,352 1.51 1.48 4.50 12,359 1,088 11,188 0 16,776 1,829 2,463 17,410 17,410 0 0
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