-----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, TD7o5WE6UX2pDy763RWVSvGx1+MYVaEOVmjH8b9tmw2PSJ2mvkKYQIPAWjxEYi5K spQ7ELyU/nvMPYgWxb/RKw== 0000351710-99-000005.txt : 19991117 0000351710-99-000005.hdr.sgml : 19991117 ACCESSION NUMBER: 0000351710-99-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GBC BANCORP CENTRAL INDEX KEY: 0000351710 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [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: 99755089 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, 1999 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 Identification incorporation or organization) 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, 11,501,819 shares issued and outstanding as of September 30, 1999. 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) 1999 1998 - ----------------------------------------------------------------------------- ASSETS Cash and Due From Banks $ 39,102 $ 27,514 Federal Funds Sold and Securities Purchased Under Agreements to Resell 8,500 101,000 Securities Available for Sale at Fair Value (Amortized Cost of $743,079 And $721,000 at September 30, 1999 and December 31, 1998, Respectively) 734,508 724,172 Securities Held to Maturity (Fair Value of $1,403 and $24,677 at September 30, 1999 and December 31, 1998, Respectively) 1,441 24,616 Loans and Leases 921,969 788,945 Less: Allowance for Credit Losses (19,545) (19,381) Deferred Loan Fees (5,030) (5,914) ------------- ------------- Loans and Leases, Net 897,394 763,650 Bank Premises and Equipment, Net 5,462 5,656 Other Real Estate Owned, Net 9,112 6,885 Due From Customers on Acceptances 8,762 7,249 Real Estate Held for Investment 5,946 7,034 Other Investments 8,859 1,333 Accrued Interest Receivable and Other Assets 10,790 11,715 ------------- ------------- Total Assets $ 1,729,876 $ 1,680,824 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Demand $ 174,798 $ 149,397 Interest Bearing Demand 311,460 280,294 Savings 79,830 81,051 Time Certificates of Deposit of $100,000 or More 688,473 599,669 Other Time Deposits 212,657 270,492 ------------- ------------- Total Deposits 1,467,218 1,380,903 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 15,000 - Borrowings from the Federal Home Loan Bank 50,000 35,000 Subordinated Debt 38,974 38,876 Acceptances Outstanding 8,762 7,249 Liability on Securities Awaiting Settlement - 30,178 Accrued Expenses and Other Liabilities 21,716 25,588 ------------- ------------- Total Liabilities 1,601,670 1,517,794 Stockholders' Equity: Common Stock, No Par or Stated Value; 40,000,000 Shares Authorized ; 11,501,819 and 13,711,998 shares Outstanding at September 30, 1999 and December 31,1998, Respectively $ 56,990 $ 56,303 Accumulated Other Comprehensive Income (4,976) 1,829 Retained Earnings 76,192 104,898 ------------- ------------- Total Stockholders' Equity 128,206 163,030 ------------- ------------- Total Liabilities and Stockholders' Equity $ 1,729,876 $ 1,680,824 ============= =============
See Accompanying Notes to Consolidated Financial Statements GBC BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
For The Three Months Ended For The Nine Months Ended September 30, September 30, (In Thousands, Except Per Share Data) 1999 1998 1999 1998 - -------------------------------------------------------------------------------------------------------------- INTEREST INCOME Loans and Leases, Including Fees $ 20,887 $ 20,237 $ 58,652 $ 54,689 Securities Available for Sale 11,745 10,132 34,027 30,418 Securities Held to Maturity 26 1,129 423 3,796 Federal Funds Sold and Securities Purchased under Agreements to Resell 460 1,843 2,471 5,311 Other 1 1 3 7 ---------- ---------- ---------- ---------- Total Interest Income 33,119 33,342 95,576 94,221 INTEREST EXPENSE Interest Bearing Demand 2,032 2,001 5,419 5,169 Savings 481 535 1,332 1,778 Time Certificates of Deposits of $100,000 or More 7,865 7,684 22,435 23,306 Other Time Deposits 2,362 3,611 7,832 10,047 Federal Funds Purchased and Securities Sold under Repurchase Agreements 43 2 68 18 Borrowings from the Federal Home Loan Bank 620 - 1,736 - Subordinated Debt 870 870 2,611 2,611 ---------- ---------- ---------- ---------- Total Interest Expense 14,273 14,703 41,433 42,929 Net Interest Income 18,846 18,639 54,143 51,292 Provision for Credit Losses 1,500 - 3,500 - ---------- ---------- ---------- ---------- Net Interest Income after Provision for Credit Losses 17,346 18,639 50,643 51,292 NON-INTEREST INCOME Service Charges and Commissions 1,987 1,633 5,434 4,731 Gain on Sale of Loans, Net 9 344 120 368 Gain on Sale of Fixed Assets - - 22 - Other 164 258 379 721 ---------- ---------- ---------- ---------- Total Non-Interest Income 2,160 2,235 5,955 5,820 NON-INTEREST EXPENSE Salaries and Employee Benefits 5,026 5,015 14,461 13,674 Occupancy Expense 818 727 2,391 2,213 Furniture and Equipment Expense 452 523 1,522 1,524 Net Other Real Estate Owned (Income) Expense (579) 51 (805) 490 Other 1,713 1,853 5,237 5,078 ---------- ---------- ---------- ---------- Total Non-Interest Expense 7,430 8,169 22,806 22,979 Income before Income Taxes 12,076 12,705 33,792 34,133 Provision for Income Taxes 4,584 4,827 12,719 12,781 ---------- ---------- ---------- ---------- Net Income $ 7,492 $ 7,878 $ 21,073 $ 21,352 ========== ========== ========== ========== Earnings Per Share: Basic $ 0.64 $ 0.56 $ 1.65 $ 1.51 Diluted $ 0.62 $ 0.55 $ 1.62 $ 1.48 __________ __________ __________ __________
See Accompanying Notes to Consolidated Financial Statements GBC BANCORP & SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated Other Total Common Stock Retained Comprehensive Comprehensive Stockholders' (In Thousands, Except per Share Amounts) Shares Amount Earnings Income(Loss) Income Equity ----------------------------------------------------------------------------- Balance at December 31, 1997 13,990 $ 53,314 $ 91,355 $ 1,654 $146,323 - ---------------------------- Comprehensive Income Net Income for the year - - 28,142 - $ 28,142 28,142 -------- Other Comprehensive Income,Net of Tax Net Changes in Securities Valuation Allowance - - - 175 175 175 -------- Comprehensive Income $ 28,317 ======== Stock Options Exercised 187 1,375 - - 1,375 Tax Benefit-Stock Options Exercised - 1,614 - - 1,614 Stock Repurchase (465) - (10,386) - (10,386) Cash Dividend- $.30 per Share - - (4,213) - (4,213) ------------------------------------------- --------- Balance at December 31, 1998 13,712 $ 56,303 $104,898 $ 1,829 $163,030 - ---------------------------- ====== ======== ======== ======== ======== Comprehensive Income Net Income for the Nine Months - - 21,073 - $ 21,073 21,073 Other Comprehensive Income (Loss), Net of Tax Net Changes in Securities Valuation Allowance - - - (6,805) (6,805) (6,805) --------- Comprehensive Income $ 14,268 ======== Stock Options Exercised 52 451 - - 451 Tax Benefit-Stock Options Exercised - 236 - - 236 Stock Repurchase (2,263) - (46,782) - (46,782) Cash Dividend- $0.24 per Share - - (2,997) - (2,997) ------------------------------------------- --------- Balance at Sept. 30, 1999 11,502 $ 56,990 $ 76,192 $ (4,976) $128,206 - ------------------------- ====== ======== ======== ========= ========
Disclosure of Reclassification Amount:
For the Nine Months For the Year Ended Sept.30, 1999 Ended Dec.31, 1998 ------------------- ------------------ Net Change of Unrealized Holding (Losses) Gains Arising During Period, Net of Tax (Benefit) Expense of $(4,939) and $172 in 1999 and 1998, Respectively $ (6,805) $ 237 Less: Reclassification Adjustment for Gains Included in Net Income, Net of Tax Expense of: $0 and $45 in 1999 and 1998, Respectively - (62) ------------------- ------------------ Net Change of Unrealized (Losses) Gains on Securities Net of Tax (Benefit) Expense of $(4,939) and $127 in 1999 and 1998, Respectively $ (6,805) $ 175 ========== ==========
See Accompanying Notes to Consolidated Financial Statements GBC BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Month Ended September 30, - ---------------------------------------------------------------------------------------------------- (In Thousands) 1999 1998 - --------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net Income $ 21,073 $ 21,352 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation 942 947 Net Amortization/(Accretion) of Premiums/Discounts on Securities 1,037 363 Accretion of Discount on Subordinated Notes 98 98 Writedown on Real Estate Held for Investment 1,087 995 Provision for Credit Losses 3,500 - Provision for Losses on Other Real Estate Owned 900 - Amortization of Deferred Loan Fees (3,454) (2,396) Gain on Sale of Loans - (368) Gain on Sale of Other Real Estate Owned (2,302) (114) Gain on Sale of Fixed Assets (22) - Proceeds from Sales of Loans Originated for Sale - 368 Net Decrease in Accrued Interest Receivable and Other Assets (6,601) (2,601) Net (Decrease)/ Increase in Accrued Expenses and Other Liabilities (29,112) 6,591 Other, Net 348 19 ----------- ----------- NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES $ (12,506) $ 25,254 ----------- ----------- INVESTING ACTIVITIES: Purchases of Securities Available for Sale (256,267) (244,275) Proceeds from Maturities of Securities Available for Sale 233,103 271,123 Purchases of Securities Held to Maturity - (50,090) Proceeds from Maturities of Securities Held to Maturity 23,224 46,015 Net Increase in Loans and Leases (142,249) (108,818) Proceeds from Sales of Other Real Estate Owned 7,954 2,453 Capitalized Costs of Other Real Estate Owned (322) (370) Purchases of Premises and Equipment (870) (756) Proceeds from Sales of Bank Premises and Equipment 27 - ----------- ----------- NET CASH USED BY INVESTING ACTIVITIES $ (135,400) $ (84,718) ----------- ----------- FINANCING ACTIVITIES: Net Increase in Demand, Interest Bearing Demand and Savings Deposits 55,346 41,721 Net Increase in Time Certificates of Deposits 30,969 46,514 Net Increase in Federal Funds Purchased and Securities Sold Under Agreements to Repurchase 15,000 - Borrowings from the Federal Home Loan Bank 15,000 - Stock Repurchase Program (46,782) - Cash Dividend Paid (2,990) (2,962) Proceeds from Exercise of Stock Options 451 1,242 ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES $ 66,994 $ 86,515 ----------- ----------- NET CHANGE IN CASH AND CASH EQUIVALENTS (80,912) 27,051 Cash and Cash Equivalents at Beginning of Period 128,514 140,519 ----------- ----------- Cash and Cash Equivalents at End of Period $ 47,602 $ 167,570 =========== =========== Supplemental Disclosures of Cash Flow Information: Cash Paid During This Period for: Interest $ 41,405 $ 42,540 Income Taxes $ 11,363 $ 3,538 =========== =========== Noncash Investing Activities: Loans Transferred to Other Real Estate Owned at Fair Value $ 8,772 $ 1,036 Loans to Facilitate the Sale of Other Real Estate Owned 313 137 =========== ===========
See Accompanying Notes to Consolidated Financial Statements GBC Bancorp and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - ------------------------------------------------------ In the opinion of management, the consolidated financial statements of GBC Bancorp and its subsidiaries (the "Company") as of September 30, 1999 and the three and nine months ended September 30, 1999 and 1998, reflect all adjustments (which consist only of normal recurring adjustments) necessary for a fair presentation. 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 average number of shares of common stock outstanding, while diluted earnings per share is determined by dividing net income by the average number of shares of common stock outstanding adjusted for the dilutive effect of common stock equivalents. The following table discloses for the periods indicated the average number of shares of common stock outstanding and the average number of shares of common stock outstanding adjusted for the dilutive effect of common stock equivalents for the basic and diluted earnings per share computations, respectively:
Three Months Ended Nine Months Ended September 30, September 30, (In Thousands) 1999 1998 1999 1998 __________________________________________________ Basic 11,772 14,161 12,740 14,131 Diluted 12,012 14,431 12,984 14,434
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 1999 was $7,492,000 or $0.62 diluted earnings per share, compared to $7,878,000, or $0.55 diluted earnings per share, for the corresponding period of 1998. The $386,000 or 4.90%, decrease was mainly the result of a $1,500,000 provision for credit losses, partially offset by both an increase of net interest income and a decrease of non-interest expense. There was no provision for credit losses for the corresponding quarter a year ago. The $0.07, or 12.7%, increase of the diluted earnings per share was the result of stock repurchases of 2,728,000 shares in the fourth quarter of 1998 and in 1999. For the nine months ended September 30, 1999, net income totaled $21,073,000, a decrease of $279,000, or 1.3%, from the $21,352,000 earned during the corresponding period of 1998. Diluted earnings per share for the nine months ended September 30, 1999 were $1.62 compared to $1.48 for the same period of 1998. The decrease in net income was primarily due to an increase in the provision for credit losses offset by higher net interest income, higher non-interest income and decreased non-interest expense. The $0.14, or 9.5%, increase of diluted earnings per share is for the reason explained above. As of September 30, 1999, record high levels were achieved for total assets, loans and leases, and for total deposits. For the quarter ended September 30, 1999 and 1998, the annualized return on average assets ("ROA") was 1.72% and 1.94%, respectively, and the annualized return on average stockholders' equity ("ROE") was 22.2% and 18.9%, respectively. The ROE for 1999 was bolstered by the stock repurchases referenced above. For the nine months ended September 30, 1999 and 1998, the ROA was 1.66% and 1.81%, respectively, and the ROE was 18.7% and 18.1%, respectively. The Company has filed applications with the relevant regulatory authorities to establish a full service branch operation of General Bank in the state of Washington. Management estimates the branch will be in place by early in the year 2000. RESULTS OF OPERATIONS - --------------------- Net Interest Income-Quarterly Results - ------------------------------------- For the quarter ended September 30, 1999 and 1998, net interest income before the provision for credit losses was $18,846,000 and $18,639,000, respectively, representing an increase of $207,000, or 1.1%. The components explaining this increase are discussed below. Total interest income for the quarter ended September 30, 1999 was $33,119,000, representing a $223,000, or 0.7%, decrease from the corresponding quarter of a year ago. The decrease was due to a 60 basis points decrease in the yield on average earning assets from 8.45% during the third quarter in 1998 to 7.85% in the corresponding quarter of 1999, partially offset by a $108.0 million increase of average interest earning assets. The 60 basis point decrease in the yield on earning assets from the third quarter of 1998 to the corresponding quarter of 1999 was primarily the result of lower yields on all categories of earning assets. The most notable reduction was the yield on loans and leases, which declined 160 basis points. Several factors contributed to the decline of the loan yield, as follows: O The third quarter, 1998 included $1,458,000 of loan interest recoveries due to repayments in full of two loans. Excluding this recovery, the third quarter 1998 loan yield would have been 79 basis points lower. O A $28.8 million increase of average non-accrual loans in the third quarter of 1999 as compared to the third quarter, 1998. O A lower average prime rate of interest during the third quarter of 1999. The average prime was 8.10% and 8.50% for the third quarter of 1999 and 1998, respectively. This factor also contributed to the reduced yields on the Company's other categories of interest earning assets. The effect of the decline of the yield on loans and leases and other earning assets was partially mitigated by an increase in the percentage of average accruing loans and leases to total average earning assets. For the three months ended September 30, 1999 and 1998, average accruing loans and leases comprised 51.7% and 46.4%, respectively, of total average earning assets (excluding non-accrual loans). Loans and leases represent the highest yielding interest earning assets. Total interest expense for the quarter ended September 30, 1999 was $14,273,000, representing a $430,000, or 2.9%, decrease from the corresponding quarter of a year ago. The decrease was due to the reduction of the cost of funds, partially offset by a $122.9 million increase of average interest bearing liabilities. For the quarter ended September 30, 1999, the cost of funds was 4.07% compared to 4.60% for the corresponding period of a year ago. This decrease was the result of a decrease in the rates paid on all interest bearing deposits, which decreased from 4.46% to 3.89% for the quarters ended September 30, 1998 and 1999, respectively. For the quarters ended as indicated, the average balance and the rates paid for the deposit products of General Bank (the "Bank") were as follows:
For the Quarter Ended September 30, 1999 1998 ----------------------------------- Interest bearing demand - Average balance $ 309,884 $ 276,119 Rate 2.60% 2.88% Savings - Average balance 85,612 81,676 Rate 2.23% 2.60% Time certificates of deposit: of $100,000 or more - Average balance 683,823 584,159 Rate 4.56% 5.22% Other time deposits - Average balance 220,502 288,046 Rate 4.25% 4.97%
The most significant impact was the 65 basis point decline in the rates paid on time certificates of deposit. Average time certificates of deposit constituted 69.6% and 70.9% of total average interest bearing deposits for the quarter ending September 30, 1999 and 1998, respectively. The 57 basis point reduction of the rates paid on interest bearing deposits was slightly offset by an average $50 million of borrowings from the Federal Home Loan Banks ("FHLB") with an average rate in the quarter of 4.85%. There were no borrowings outstanding with the FHLB during the 3 months ended September 30, 1998. 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, 1999 and 1998, the net interest spread was 3.78% and 3.85%, respectively. The 7 basis point decline is due to the reasons 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, 1999 and 1998, the net interest margin was 4.47% and 4.73%, respectively. In addition to the reasons explaining the compression of the net interest spread, the net interest margin was also negatively impacted by the decline of average equity as a result of the stock repurchase programs to which reference has been made above. Net Interest Income - Year-to-Date Results - ------------------------------------------ For the nine months ended September 30, 1999, net interest income before the provision for credit losses was $54,143,000, representing a $2,851,000, or 5.6%, growth over the corresponding period of a year ago. Total interest income for the nine months ended September 30, 1999 was $95,576,000 compared to $94,221,000 for the corresponding period of a year ago. The $1,355,000, or 1.4%, increase is the result of an increase in the balance of average interest earning assets. Average interest earning assets increased to $1,650.9 million for the nine months ended September 30, 1999 from $1,525.5 million for the corresponding period of a year ago, representing a $125.4 million, or 8.2%, increase. The growth was represented by increases of $32.0 million and $150.5 million in the securities and loan and lease portfolios, respectively, partially offset by $57.1 million decrease of federal funds sold and securities purchased under agreements to resell. The yield on average earning assets decreased 52 basis points to 7.74% for the nine months ended September 30, 1999 from 8.26% for the corresponding period of a year ago. The yields on all categories of earning assets declined with the most notable reduction being the yield on loans and leases which declined from 10.54% to 9.29%. The following are the major reasons explaining the 125-basis point decline of the loan yield and are similar to the explanations for the quarterly comparison above. O 1998 included the $1,458,000 of loan interest recoveries received in the third quarter. Excluding the impact of this recovery the 1998 yield for loans and leases would have been 28 basis points lower. O 1999 included a $25.6 million increase of non-accrual loans as compared to the comparable period of 1998. O A reduced average prime rate of interest during 1999 compared to 1998. The average prime was 7.87% and 8.50% for the nine months ended September 30, 1999 and 1998, respectively. This factor also contributed to the reduced yields on the Company's other categories of interest-earning assets. The impact of the above was partially offset by an increased percentage of average accruing loans and leases to total average earning assets (excluding non-accrual loans). For the nine months ended September 30, 1999 and 1998, this ratio was 50.0% and 45.0%, respectively. Total interest expense for the nine months ended September 30, 1999, was $41,433,000 compared to $42,929,000 for the corresponding period of a year ago. The decrease of $1,496,000, or 3.5%, was due to a 51 basis point decline in the cost of funds from 4.60% to 4.09%, partially offset by an increase in average interest bearing liabilities. All categories of interest-bearing deposits reflected rate decreases thereby contributing to the 55 basis point decline of the rates paid on interest-bearing deposits. The largest decrease of rates paid was in time deposits which declined 62 basis points. Time deposits represent the Company's largest deposit product comprising on an average 70.4% and 71.5% of average interest bearing deposits for the nine months ended September 30, 1999 and 1998, respectively. The average balance and the rates paid on deposit categories for the nine months ended September 30, 1999 were as follows:
1999 1998 -------------------------- Interest bearing demand - Average balance $ 292,864 $ 256,495 Rate 2.47% 2.69% Savings - Average balance 82,253 88,176 2.17% 2.70% Time certificates of deposit of $100,000 or more - Average balance 651,713 593,351 Rate 4.60% 5.25% Other time deposits - Average balance 238,522 269,971 Rate 4.39% 4.98%
Borrowings from the Federal Home Loan Bank (the "FHLB") averaged $47.5 million during the nine months ended September 30, 1999. There was no average balance during the nine months ended September 30, 1998. These funds represent advances under an existing line of credit and have replaced the reduced equity base resulting from the stock repurchases as discussed previously. The rates paid on the FHLB borrowings of 4.82% for the nine months ended September 30, 1999 partially offset the 55 basis point decline of the rates paid on interest-bearing deposits. For the nine months ended September 30, 1999 and 1998, the net interest spread declined to 3.65% from 3.66%, respectively, representing a 1 basis point decrease. A 52 basis point decline of the yield on earning assets was offset by a 51 basis point decline in the cost of funds. For the nine months ended September 30, 1999 and 1998, the net interest margin was 4.38% and 4.50%, respectively, representing a 12 basis point decline. The decline of the margin is primarily the result of the decline of average equity as a result of the stock repurchases. Provision for Credit Losses - --------------------------- For the quarter ended September 30, 1999, the provision for credit losses was $1,500,000. There was no provision for credit losses for the corresponding quarter of a year ago. For the nine months ended September 30, 1999, there was $3,500,000 provision for credit losses. There was no provision for credit losses for the corresponding period of a year ago. The current year's provision reflects the growth of the loan portfolio, the increase of non-accrual loans and increased net charge-offs. Loans and leases were $922.0 million and $789.0 million, as of September 30, 1999, and December 31, 1998, respectively. Non-accrual loans were $45.4 million and $20.8 million as of September 30, 1999 and December 31, 1998, respectively. Net charge-offs were $1.0 million and $3.3 million for the three and nine month periods ended Sept. 30, 1999. This compares to net recoveries of $1.9 million and $0.6 million for the corresponding periods of 1998. 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 potential future losses. Please refer to the discussion "Allowance for Credit Losses", following. Non-Interest Income - ------------------- Non-interest income for the quarter ended September 30, 1999 totaled $2,160,000, representing a $75,000, or 3.4%, decrease compared to $2,235,000 for the quarter ended September 30, 1998. While service charges and commissions increased $354,000 due to increased commissions on standby and commercial letters of credit reflecting the increased activity of the Bank's International department, this increase was more than offset by reduced gain on sale of loans, net (during the third quarter of 1998 the Company sold its mortgage loan servicing portfolio for a pre-tax amount of $338,000) and the cessation of an escrow business. The Bank's escrow subsidiary was closed in the first quarter of 1999. For the nine months ended September 30, 1999, non-interest income totaled $5,955,000 representing a $135,000, or 2.3%, increase compared to $5,820,000 for the nine months ended September 30, 1998. Non- interest income increased primarily due to the commission income from letter of credit related transactions as discussed above. Partially offsetting the increase was the cessation of the escrow business and the reduced gain on sale of loans, net, as discussed above. Non-Interest Expense - -------------------- For the three months ended September 30, 1999, non-interest expense was $7,430,000, representing a $739,000, or 9.0%, decrease from $8,169,000 for the corresponding period of a year ago. The decline was primarily due to the net gains on sale of other real estate owned ("OREO") that are included as a reduction of OREO incurred expenses. For the three months ended September 30, 1999, net gains on the sale of OREO were $1,582,000, representing a $1,491,000 increase from $91,000 for the corresponding period of a year ago. The effect of this increase was partially offset by a $900,000 addition to the valuation allowance for the Company's OREO properties. For the quarter ended September 30, 1999, and 1998, the Company's efficiency ratio, defined as non-interest expense divided by the sum of net interest income plus non-interest income, was 35.4% and 39.1%, respectively. For the nine months ended September 30, 1999, non-interest expense was $22,806,000 representing a $173,000, or 0.8% decrease from the $22,979,000 reported for the corresponding period of a year ago. The decline was primarily due to the net other real estate owned (income) expense decline of $1,295,000 which included net gains on sale of OREO of $2,302,000 compared to $114,000 for the corresponding period of the prior year. This was partially offset by the $900,000 increase to the OREO valuation allowance discussed above. Partially offsetting the $1,295,000 decrease of net other real estate owned expense was a $787,000, or 5.8% increase of salaries and employee benefits. The increase is primarily the result of the accrual for deferred compensation for the Company's chairman and chief executive officer. For the nine months ended September 30, 1999, the Company's efficiency ratio declined to 38.0%, comparing favorably to 40.2% for the corresponding period of 1998. Provision for Income Taxes - -------------------------- For the quarter ended September 30, 1999 and 1998, the provision for income taxes was $4,584,000 and $4,827,000, respectively, representing effective tax rates of 38.0%. For the nine months ended September 30, 1999 and 1998, the provision for income taxes was $12,719,000 and $12,781,000, representing effective tax rates of 37.6% and 37.4%, respectively. The effective tax rates compare favorably to a combined statutory rate of 42.0% primarily due to a low income housing tax credit to which the Company is entitled. Through September 30, 1999 and 1998, this tax credit was $1,485,000 and $1,547,000, respectively. FINANCIAL CONDITION - ------------------- As of September 30, 1999, the Company achieved balance sheet records as follows: ** Total assets of $1,729.9 million, up $23.0 million, or 1.3%, from $1,706.9 million, as of June 30, 1999. ** Total loans and leases of $922.0 million, up $73.1 million, or 8.6%, from $848.9 million, as of June 30, 1999. ** Total deposits of $1,467.2 million, up $29.9 million, or 2.1%, from $1,437.3 million, as of June 30, 1999. Stockholders' equity was $128.2 million, down $24.3 million from $152.5 million as of June 30, 1999 and $34.8 million, from $163.0 million as of December 31, 1998. The decline is the result of the Company's stock repurchase programs which reduced retained earnings by $46.8 million in 1999. Loans - ----- The $133.0 million loan growth from year-end 1998, was mainly due to increases of $87.6 million and $46.5 million in the commercial and real estate loans portfolios, respectively. The commercial loan growth was primarily in the trade financing area which increased $82.8 million reflecting a continued growth in international trade and new customer relationships. During the third quarter of 1999, loans and leases increased $73.1 million, or 8.6%. The loan production offices in New York and Seattle contributed a significant portion of the growth. 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 as of the dates indicated:
September 30, 1999 December 31, 1998 (In Thousands) Amount Percentage Amount Percentage - -------------------------------------------------------------------------- Commercial $ 396,813 43.04% $ 309,198 39.19% Real Estate-Construction 192,089 20.83% 177,737 22.53% Real Estate-Conventional 296,040 32.11% 263,869 33.45% Installment 15 N/A 37 N/A Other Loans 20,591 2.24% 22,302 2.83% Leveraged Leases 16,421 1.78% 15,802 2.00% ---------------------------------------------- Total $ 921,969 100.00% $ 788,945 100.00% ============================================== N/A = Percentage less than 0.01
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 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. The Company has a policy of classifying loans (including an impaired loan) 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, according to management's judgment as to the collectability of principal. The following table provides information with respect to 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 30,1999 December 31,1998 - ---------------------------------------------------------------------- Loans 90 Days or More Past Due and Still Accruing $3,400 $780 Non-Accrual Loans 45,398 20,790 Total Past Due Loans 48,798 21,570 Restructured Loans 8,809 10,440 Total Non-Performing Loans 57,607 32,010 Other Real Estate Owned, Net 9,112 6,885 Total Non-Performing Assets $66,719 $38,895 - ----------------------------------------------------------------------
Total non-performing assets increased to $66.7 million, as of September 30, 1999, from $38.9 million, as of December 31, 1998, representing a $27.8 million, or 71.5%, increase. The increase is primarily due to the increase of non-accrual loans, in general, and one construction loan, in particular, as discussed below. Loans 90 days or More Past Due and Still Accruing - ------------------------------------------------- As of September 30, 1999, there is one credit in this category of loans for the amount of $3.4 million. This loan is well collateralized and in the process of collection. Non-Accrual Loans - ----------------- As of September 30, 1999 non-accrual loans totaled $45.4 million, an increase of $24.6 million from year-end 1998 and an increase of $4.4 million from June 30, 1999. The increase from December 31, 1998 is primarily due to a $30.9 million construction loan for a casino in Las Vegas. The loan is collateralized by a first trust deed on the building, second trust deeds on an associated hotel and on a RV park, and by a first trust deed on undeveloped land. There also was a take- out commitment from another financial institution to pay off the loan at the end of construction. As of September 30, 1999, this particular loan remains in bankruptcy proceedings. Excluding this credit, non- accrual loans would be less than year-end, 1998 levels. The increase of non-accrual loans from June 30, 1999 to September 30, 1999 was primarily the result of a $4.8 million construction loan for a tract of single family homes in Southern California. The loan to collateral value ratio is low and there is considered sufficient value for the full recapture of principal, interest and expenses. The following table breaks out the Company's non-accrual loans by category as of the dates indicated:
- ------------------------------------------------------------------ (IN THOUSANDS) September 30, 1999 December 31, 1998 - ------------------------------------------------------------------ Commercial $ 8,981 $ 19,202 Real Estate- Construction 35,694 277 Real Estate- Conventional 723 1,309 Other Loans - 2 Total $ 45,398 $ 20,790 - ------------------------------------------------------------------
Of the $45.4 million of non-accrual loans, $36.4 million are collateralized by real property with appraisal value considerably in excess of the carrying value of the loans, providing substantial protection against the loss of principal. This amount includes the casino construction loan discussed above. The following table analyzes the change in non-accrual loans during the nine months ended September 30, 1999:
- ------------------------------------------------- (IN THOUSANDS) - ------------------------------------------------- Balance, December 31, 1998 $ 20,790 Add: Loans placed on non-accrual 47,756 Less: Charge-offs (4,225) Returned to accrual status (4,644) Repayments (5,492) Transfer to OREO (8,787) Balance, September 30, 1999 $ 45,398 - -------------------------------------------------
Restructured Loans - ------------------ The balance of restructured loans as of September 30, 1999 was $8.8 million compared to $10.4 million as of December 31, 1998, representing a $1.6 million, or 15.4% decrease. As indicated previously, the decline was primarily due to the pay-off in full of $1.4 million of restructured loans during the second quarter of 1999. 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 a non-accrual status in keeping with the Bank's policy of classifying loans which are 90 days past due as to principal and/or interest. Restructured loans which are non- accrual loans are not included in the balance of restructured loans. As of September 30, 1999, three restructured loans totaling $581,000 were on non-accrual status. As of September 30, 1999, restructured loans excluding the three non-accrual loans consisted of ten loans compared to eleven loans as of December 31, 1998. The weighted average yield of the restructured loans was 9.86% as of September 30, 1999. There are no commitments to lend additional funds on any of the restructured loans. Other Real Estate Owned - ----------------------- As of September 30, 1999, other real estate owned ("OREO"), net of valuation allowance of $2.0 million, totaled $9.1 million, representing an increase of $2.2 million, or 31.9%, from the net balance of $6.9 million, net of valuation allowance of $2.0 million, as of December 31, 1998. As of September 30, 1999 and December 31, 1998, OREO consisted of 12 properties and 22 properties, respectively. One of the 12 properties comprising the September 30, 1999 balance is a manufacturing facility representing the primary collateral on a $12.6 million loan which became non-accrual in the fourth quarter, 1998. Net of valuation allowance this property has a carrying value of $7.7 million as of September 30, 1999 which is considered fair value based on appraisals and other criteria of property valuation. 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:
- ---------------------------------------------------------------------- September 30, December 31, - ---------------------------------------------------------------------- (In Thousands) 1999 1998 - ---------------------------------------------------------------------- Property Type - ------------- Single-Family Residential $ 96 $ 752 Condominium - 485 Land 1,194 3,621 Retail Facilities 1,287 4,027 Industrial Facilities 8,550 - Less: Valuation Allowance (2,015) (2,000) --------------------------------- Total $ 9,112 $ 6,885 ========= =========
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 $49.8 million of outstanding impaired loans as of September 30, 1999, $3.6 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) Sept. 30,1999 Dec. 31,1998 - -------------------------------------------------------------------- Recorded Investment with Related Allowance $ 43,528 $ 20,746 Recorded Investment with no Related Allowance 6,257 1,519 Total Recorded Investment 49,785 22,265 Allowance on Impaired Loans 4,713 3,250 - --------------------------------------------------------------------
The increase from year-end in the recorded investment of impaired loans is due primarily to the $30.9 million casino construction loan and the $4.8 million tract home construction loan as discussed above. The average balance of impaired loans before the allowance was $45.9 million for the nine months ended September 30, 1999 and $13.5 million for the twelve months ended December 31, 1998. For the nine months ended September 30, 1999 and 1998, interest income recognized on impaired loans was $499,000 and $233,000, respectively. Of the amount of interest income recognized during the nine months ended September 30, 1999 and 1998, 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. Furthermore, 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, 1999, the balance of the allowance for credit losses was $19.5 million, representing 2.12% of outstanding loans and leases. This compares to an allowance for credit losses of $19.4 million as of December 31, 1998, representing 2.46% 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 month periods ended as indicated:
- -------------------------------------------------------------------------- (IN THOUSANDS) September 30, 1999 September 30, 1998 - -------------------------------------------------------------------------- Balance, Beginning of Period $ 19,381 $ 16,776 Provision for Credit Losses 3,500 - Charge-offs (5,684) (1,829) Recoveries 2,348 2,463 Net Recoveries (Charge-offs) (3,336) 634 Balance, End of Period $ 19,545 $ 17,410 - --------------------------------------------------------------------------
As of September 30, 1999, the allowance represents 33.9% and 43.1% of non-performing loans and of non-accrual loans, respectively. As of December 31, 1998, the allowance represented 60.6% and 93.2% of non-performing loans and of non-accrual loans, respectively. The decline of these ratios is due to the increase of non-accrual loans as discussed above. The amount of the provision for credit losses is that required to maintain an allowance for credit losses that is adequate to cover probable credit losses related to specifically identified loans as well as probable credit losses inherent in the remainder of the loan and lease portfolio. Management evaluates the loan portfolio, the economic environment, historical loan loss experience, collateral values and assessments of borrowers' ability to repay in determining the amount of the allowance for credit losses. The allowance is based on ongoing, quarterly assessments of the probable estimated losses inherent in the loan and lease portfolio, and to a lesser extent, unused commitments to provide financing. The Company's methodology for assessing the appropriateness of the allowance consists primarily of the use of a formula allowance. This formula allowance is calculated by applying loss factors to outstanding loans and leases and certain unused commitments, in each case based on the internal risk rating of such loans, pools of loans, leases or commitments. Changes in risk rating of both performing and nonperforming loans affect the amount of the formula allowance. Loss factors are based on the Company's historical loss experience and may be adjusted for significant factors that, in management's judgement, affect the collectibility of the portfolio as of the evaluation date. Loss factors are described as follows: - Problem graded loan loss factors represent percentages which have proven accurate over time. Such factors are checked against and supported by migration analysis which tracks loss experience over a five-year period. - Pass graded loan loss factors are based on the approximate average annual net charge-off rate over an eight-year period. - Pooled loan loss factors (not individually graded loans) are based on probable net charge-offs. Pooled loans are loans and leases that are homogeneous in nature, such as residential mortgage loans and small business loans. Management believes that the allowance for credit losses is adequate to cover known and inherent losses related to loans and leases outstanding as of September 30, 1999. 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, 1999, the Company recorded net unrealized holding losses of $8,571,000 on its available-for-sale portfolio. Accumulated other comprehensive income has been reduced by $4,967,000 representing the net unrealized holding loss, net of tax. The amortized cost, gross unrealized gains, gross unrealized losses and fair value of securities at September 30, 1999 and December 31, 1998 were as follows:
- ------------------------------------------------------------------------------------ Gross Gross (In Thousands) Amortized Unrealized Unrealized Fair September 30, 1999 Cost Gains Losses Value - ------------------------------------------------------------------------------------ Securities Held to Maturity - --------------------------- U.S. Government Agencies $ 1,432 $ - $ (38) $ 1,394 Collateralized Mortgage Obligations 9 - - 9 ------------------------------------------------- Total Securities Held to Maturity $ 1,441 $ - $ (38) $ 1,403 ================================================= Securities Available for Sale - ----------------------------- U.S. Government Agencies $ 39,032 $ 30 $ - $ 39,062 Mortgage Backed Securities 147,200 - (3,829) 143,371 Corporate Notes 49,984 - (342) 49,642 Collateralized Mortgage Obligations 227,789 - (2,900) 224,889 Asset Backed Securities 272,921 - (2,302) 270,619 Other Securities 6,153 772 - 6,925 ------------------------------------------------- Total Securities Available for Sale $ 743,079 $ 802 $ (9,373) $ 734,508 =================================================
Gross Gross (In Thousands) Amortized Unrealized Unrealized Fair December 31, 1998 Cost Gains Losses Value - ------------------------------------------------------------------------------------ Securities Held to Maturity - --------------------------- U.S. Government Agencies $ 24,594 $ 61 $ - $ 24,655 Collateralized Mortgage Obligations 22 - - 22 ------------------------------------------------- Total Securities Held to Maturity $ 24,616 $ 61 $ - $ 24,677 ================================================= Securities Available for Sale - ----------------------------- U.S. Treasuries $ 1,859 $ 3 $ - $ 1,862 U.S. Government Agencies 59,604 171 - 59,775 Mortgage Backed Securities 72,799 408 - 73,207 Corporate Notes 34,925 - (1) 34,924 Collateralized Mortgage Obligations 246,026 621 - 246,647 Asset Backed Securities 257,638 1,970 - 259,608 Commercial Papaer 39,860 - - 39,860 Other Securities 8,289 - - 8,289 ------------------------------------------------- Total Securities Available for Sale $ 721,000 $3,173 $ (1) $ 724,172 =================================================
There were no sales of securities available for sale or held to maturity during the nine months ended September 30, 1999 and 1998. Other Investments - ----------------- The balance of other investments as of September 30, 1999 of $8.8 million is primarily comprised of the purchase of a 10% interest in a limited partnership. The partnership is involved with the leasing of aircraft. Deposits - -------- The Company's deposits totaled $1,467.2 million as of September 30, 1999, representing an $86.3 million, or 6.3%, increase from total deposits of $1,380.9 million as of December 31, 1998. The growth for the nine months ended September 30, 1999, was primarily due to increases in time certificates of deposit of $100,000 or more, which grew $88.8 million, or 14.8%. Also, interest bearing demand reflected an increase of $31.2 million, or 11.1%. The growth of these deposit categories was partially offset by a $57.8 million, or 21.4% decline of other time deposits. As of September 30, 1999 and December 31, 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 deposits of $100,000 or more having maturities of one year or less, historically, the depositors have generally renewed their deposits upon maturity. Accordingly, the Company believes its deposit source to be stable. The maturity schedule of time certificates of deposit of $100,000 or more, as of September 30, 1999, is as follows:
- ---------------------------------------------------- (IN THOUSANDS) - ---------------------------------------------------- 3 Months or Less $ 365,819 Over 3 Months Through 6 Months 202,002 Over 6 Months Through 12 Months 119,851 Over 12 Months 801 - ---------------------------------------------------- Total $ 688,473 - ----------------------------------------------------
Other Borrowings - ---------------- As of September 30, 1999, the Company has three sources of outstanding borrowings. 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 at date of issuance. The discount is amortized as a yield adjustment over the 10-year life of the notes. The Bank has obtained advances from the Federal Home Loan Bank of San Francisco (the "FHLB") totaling $50.0 million. The advances are under an existing line of credit whereby the FHLB has granted the Bank a line of credit equal to 25 percent of its assets. The following relates to the four outstanding advances as of September 30, 1999:
Maturity Amount Fixed Rate of Interest -------- ------ ---------------------- Nov. 1, 2000 $25,000,000 4.53% Jan. 31, 2001 10,000,000 5.19% Apr. 30, 2001 10,000,000 4.92% July 15, 2002 5,000,000 5.61%
The total outstanding of $50 million of advances as of September 30, 1999 has a composite fixed rate of interest of 4.85%. As of September 30, 1999, the Bank had $15.0 million outstanding of federal funds purchased. The rate of interest paid on the federal funds purchased was 5.75% . Capital Resources - ----------------- As of September 30, 1999, stockholders' equity totaled $128.2 million, a decrease of $34.8 million, or 21.3%, from $163.0 million as of December 31, 1998. During 1999, a total of $46.8 million was spent on the repurchase of shares of the Company stock. These repurchases represented the completion of a 1.4 million share repurchase as authorized by the Board of Directors on September 17, 1998, and the repurchase of 1.3 million shares pursuant to the Dutch Auction self- tender program announced in the second quarter of 1999 and completed in the current quarter. Capital ratios for the Company and for the Bank were as follows as of the dates indicated:
- -------------------------------------------------------------------- Well-Capitalized Sept. 30, Dec. 31 Standards 1999 1998 - -------------------------------------------------------------------- GBC Bancorp Tier 1 Leverage Ratio 5% 7.69% 9.75% Tier 1 Risk-Based Capital Ratio 6% 8.82% 11.06% Total Risk-Based Capital Ratio 10% 12.65% 14.98% General Bank Tier 1 Leverage Ratio 5% 9.24% 9.49% Tier 1 Risk-Based Capital Ratio 6% 10.62% 10.77% Total Risk-Based Capital Ratio 10% 11.87% 12.02% - --------------------------------------------------------------------
For the nine months ended September 30, 1999, the ratio of the Company's average stockholders' equity to average assets was 8.9%. For the year ended December 31, 1998, this ratio was 10.0%. The decrease of the ratio is mainly the result of the stock repurchases. 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 $604.8 million, or 35.0% of total assets, as of September 30, 1999, compared to $666.7 million, or 39.7% of total assets, as of December 31, 1998. 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, 1999, the Company has $50 million outstanding under this financing facility representing 2.9% of total assets. Management believes its liquidity sources to be stable and adequate. As of September 30, 1999, total loans and leases represented 62.8% of total deposits. This compares to 59.1% and 57.1% as of June 30, 1999 and December 31, 1998, respectively. During the third quarter of 1999, loans and leases increased $73.1 million, or 8.6%. The liquidity of the parent company, GBC Bancorp ("GBC"), is primarily dependent on the payment of cash dividends by its subsidiary, General Bank, (the "Bank") subject to the limitations imposed by the Financial Code of the State of California. For the nine months ended September 30, 1999, the Bank declared cash dividends of $19.0 million to GBC Bancorp. A $16 million cash dividend in the 3rd quarter was used to partially fund GBC's stock repurchase. "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, 1999, there was a cumulative one-year negative "gap" of $618.2 million, compared to a one-year negative gap of $448.2 million as of December 31, 1998. The following table indicates the Company's interest rate sensitivity position as of September 30, 1999, and is based on contractual maturities. It may not be reflective of positions in subsequent periods:
September 30,1999 INTEREST SENSITIVITY PERIOD ----------------------------------------------------------------------------- 0 to 90 91 to 365 Over 1 Year Over Non-Interest (In Thousands) Days Days to 5 Years 5 Years Earning/Bearing Total - ----------------------------------------------------------------------------------------------------------------- Earning Assets Securities Available for Sale $ 14,896 $ 10,420 $ 70,251 $ 638,941 $ - $ 734,508 Securities Held to Maturity - - 1,432 9 - 1,441 Federal Funds Sold & Securities Purchased Under Agreement to Resell 8,500 - - - - 8,500 Loans and Leases (1) (2) 633,817 20,271 98,642 123,841 - 876,571 Non-Earning Assets (2) 108,856 108,856 --------- -------- -------- ---------- -------------- ----------- Total Assets $657,213 $30,691 $170,325 $ 762,791 $ 108,856 $1,729,876 --------- -------- -------- ---------- -------------- ----------- Source of Funds for Assets: Deposits: Demand - N/B $ - $ - $ - $ - $ 174,798 $ 174,798 Interest Bearing Demand 311,460 - - - - 311,460 Savings 79,830 - - - - 79,830 TCD'S Under $100,000 112,807 99,379 471 - - 212,657 TCD'S $100,000 and Over 365,819 321,853 801 - - 688,473 --------- --------- -------- ---------- -------------- ----------- Total Deposits $869,916 $421,232 $ 1,272 $ - $ 174,798 $1,467,218 --------- --------- -------- ---------- -------------- ----------- Federal Funds Purchased & Securities Sold Under Agreement to Resell $ 15,000 $ - $ - $ - $ - $ 15,000 Borrowings from the Federal Home Loan Bank - - 50,000 - - 50,000 Subordinated Debt - - - 38,974 - 38,974 Other Liabilities - - - - 30,478 30,478 Stockholders' Equity - - - - 128,206 128,206 --------- --------- -------- ---------- -------------- ---------- Total Liabilities and Stockholders' Equity $884,916 $421,232 $51,272 $ 38,974 $ 333,482 $1,729,876 --------- --------- --------- ---------- -------------- ---------- Interest Sensitivity Gap ($227,703) ($390,541) $119,053 $ 723,817 ($224,626) Cumulative Interest Sensitivity Gap ($227,703) ($618,244) ($499,191) $ 224,626 - Gap Ratio (% of Total Assets) -13.2% -22.6% 6.9% 41.8% -12.9% Cumulative Gap Ratio -13.2% -35.8% -28.9% 12.9% 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, 1999:
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 $ 29,982 $ 88,112 $ 490,182 $ 126,232 $ 734,508 Securities Held to Maturity 1,441 - - - 1,441 Federal Funds Sold & Securities Purchased Under Agreements to Resell 8,500 - - - 8,500 Loans and Leases (1) 633,817 20,271 98,642 123,841 876,571 ----------- ------------ ------------ ------------ ----------- Total Interest-earning Assets $ 673,740 $ 108,383 $ 588,824 $ 250,073 $1,621,020 ----------- ------------ ------------ ------------ ----------- Interest-sensitive Liabilities: Deposits: Interest Bearing Demand $ 10,902 $ 32,705 $ 206,452 $ 61,401 $ 311,460 Savings 2,661 7,983 53,220 15,966 79,830 Time Certificates of Deposit 478,626 421,232 1,272 - 901,130 ----------- ------------ ------------ ------------ ----------- Total Deposits $ 492,189 $ 461,920 $ 260,944 $ 77,367 $1,292,420 ----------- ------------ ------------ ------------ ----------- Federal Funds Purchased & Securities Sold Under Repurchased Agreements $ 15,000 $ - $ - $ - $ 15,000 Borrowing from FHLB - - 50,000 - 50,000 Subordinated Debt - - - 38,974 38,974 ----------- ------------ ------------ ------------ ----------- Total Interest-sensitive Liabilities $ 507,189 $ 461,920 $ 310,944 $ 116,341 $1,396,394 ----------- ------------ ------------ ------------ -----------
(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, 1999:
Net Interest Market Value of Change in Income Portfolio Equity Interest Volatility Volatility Rates (Basis September 30, September 30, 1999 Points) 1999 (1) (2) +200 -3.60% -12.70% +100 -2.10% -6.70% -100 -0.90% +6.00% -200 -3.70% +8.60%
(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 colume represents the change in net portfolio equity value of the Bank under variouse 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. On June 30, 1999 the Federal Reserve Bank (the "FRB") announced an increase of 25 basis points in short-term rates. Again, on August 24, the FRB increased short-term rates by 25 basis points and also raised the discount rate from 4.50% to 4.75%. The increase of short- term rates affects immediately the yield of approximately $627 million of loans and $8.5 million in overnight fed funds sold as of September 30, 1999. In addition, securities expected to mature or re-price during the current quarter totaling $31.5 million are expected to be re-invested at higher yields. Offsetting these increase in interest income, however, are increases in interest expense due primarily to higher rates paid on the Company's time certificates of deposit which comprise 69.7% of total interest bearing deposits as of September 30, 1999. There is a delay in the increased rates paid on time certificates of deposit due to a four-month average maturity of these deposits. 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 conform to Year 2000 requirements. The Bank has budgeted $100,000 of expenses related to Year 2000 compliance. Expenses to date have been approximately $66,000. 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. Non-information technology systems are expected to function well in Year 2000 and beyond. The Company has requested written certification for Year 2000 compliance from the utilities companies and the telecommunications companies and has received acknowledgement from each company that they are on target with Year 2000 compliance. A Business Resumption Plan (the "Plan") is in place including a back-up site for data processing in the event of failure of the Bank's mainframe computer. In the unlikely event that the testing and certification procedures of the Bank utilized software did not discover a problem, the Bank has in place manual processing procedures that have been tested which would be followed until correction of the software problem by the Bank's vendors. The Company has sent questionnaires to selected borrowers representing more than 70% of outstanding credit commitments by dollar volume at the time of the mailing. All questionnaires have now been received and reviewed. The questionnaire review process, along with ongoing oversight, has resolved all issues where potential adverse impact on credit quality would have been a factor had Year 2000 issues not been addressed. One credit with a commitment of $3 million has been judged "not sure" in its ability to ensure Year 2000 compliance, and one credit of $0.5 million has a Year 2000 analysis still pending. These credits have been placed on the "Watch" list to ensure high visibility and ongoing monitoring. Any borrowers unable to confirm Year 2000 compliance in a timely manner will be evaluated to ensure an adequate specific allocation to the allowance for credit losses. Year 2000 compliance is 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 a borrower's businesses. 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," "should", "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, Liquidity and Interest Rate Sensitivity, Market Risk, and Recent Accounting Developments. Given these uncertainties, the reader is cautioned not to place undue reliance on such forward-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 - ------------------------------ Disclosure about Segments of an Enterprise and Related Information - ------------------------------------------------------------------ In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and Related Information". This statement establishes standards for the way public business enterprises are to report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. SFAS 131 supersedes SFAS 14, "Financial Reporting for Segments of a Business Enterprise", but retains the requirement to report information about major customers. SFAS 131 is effective for financial statements for periods beginning after December 15, 1997. Management and the Board of Directors do not utilize profit center reporting to manage the organization. Therefore, segment reporting will not be disclosed. 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 was originally scheduled to be effective for all fiscal quarters of fiscal years beginning after June 15, 1999. However, the FASB recently issued SFAS 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No.133 " which amended the effective date of the application of SFAS 133 to be effective for all fiscal quarters of fiscal years beginning after June 15, 2000. 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. PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS - ------------------------- In the normal course of business, the Company is subject to pending and threatened legal actions. Management believes that the outcome of such actions will not have a material adverse effect on the Company's financial condition or results of operations. Item 2. CHANGES IN SECURITIES - ------------------------------ There have been no changes in the securities of the Registrant during the quarter ended September 30, 1999. 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, 1999. Item 5. OTHER INFORMATION - -------------------------- There are no events to be reported under this item. Item 6. EXHIBITS AND REPORTS ON FORM 8-K - ----------------------------------------- a) Exhibits: None. b) Reports on Form 8-K: None. PART III - SIGNATURES SIGNATURES Pursuant to the requirements of the Securities Exchange 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 12, 1999 s/Li-Pei Wu -------------------- ----------------------- Chairman and Chief Executive Officer Dated: November 12,1999 s/Peter Lowe -------------------- ----------------------- Executive Vice President and Chief Financial Officer EX-27 2
9 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 39,102 0 8,500 0 734,508 1,441 1,403 921,969 19,545 1,729,876 1,467,218 15,000 30,478 88,974 0 0 56,990 71,216 1,729,876 58,652 36,921 3 95,576 37,018 41,433 54,143 3,500 0 22,806 33,792 21,073 0 0 21,073 1.65 1.62 4.38 45,398 3,400 8,809 0 19,381 5,684 2,348 19,545 19,545 0 0
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